Welcome to our weekly EM Watch, where we examine Emerging Markets (with a particular focus on China) through the lens of Western investors.

It’s been a rough month for anything linked to China, including industrially sensitive commodities. According to one of the most reliable live gauges of Chinese energy demand—the Singapore Gasoil-Dubai Crude Crack Swap—we are still on a slippery slope toward weaker demand from China.

We have observed early signs of stabilization in China’s pollution data, which may indicate some level of stability at lower levels of industrial output. However, we have also seen a further decrease in the probability of rising inflation and increasing liquidity in China following the early influx of PBoC liquidity this summer.

The prevailing trend in China remains negative—down for growth, inflation, and liquidity—which sharply contrasts with the growing consensus that the EM cycle is decoupling from the DM cycle. China is certainly not an example of this trend.

So, is it even feasible to expect DM rates to diverge from EM rates in such a scenario? Let’s take a closer look.

Chart 1a: A live gauge of the Chinese/Asian energy demand is weakening