Citi: AI widens emerging-market growth gaps as China’s PMIs weaken

Why is AI widening emerging-market gaps?

Citi believes US-led AI capital spending has driven upward revisions to growth forecasts for economies including Taiwan, South Korea and Vietnam, even as the technology cycle has slowed from its previously breakneck pace.
Most non-AI emerging markets face tighter financing conditions without a corresponding boost from AI demand. Citi also believes China’s investment- and production-focused policies are adding pressure to traditional manufacturing; supply shocks and competition for capital could make emerging-market spreads more vulnerable and central banks more hawkish, in turn challenging growth and debt positions.

Samsung Electronics and SK hynix reported strong third-quarter 2026 results and provided guidance on long-term agreements for 2027–2028. Citi believes this reinforces its view that chips are driving South Korea’s economic expansion and monetary tightening, with growth spilling over into other sectors.
South Korea’s goods trade surplus in October was 42.5 billion US dollars, down from 50 billion US dollars in September but still above market and Citi expectations; exports rose 93.7% year on year, up from 83.7% in September.
Citi expects South Korea’s current account surplus to average 22.8% of GDP in 2026–2028, above the 4.2% average in 2016–2025, and to support long-term appreciation of the won. The bank expects the US dollar to fall to 1270 won over the next 6–12 months; if the exchange rate quickly falls below the 1250–1300 range, South Korea’s foreign exchange authorities and National Pension Service may enter the market to buy dollars.

Taiwan’s preliminary third-quarter 2026 GDP rose 14.4% year on year, well above expectations, as AI-driven expansion spread beyond semiconductors and servers to a wider range of sectors.
AI infrastructure and advanced-process capacity drove capital formation up 26.4% year on year, contributing 6.3 percentage points to GDP growth; net exports contributed 4.9 percentage points and private consumption 2.3 percentage points.
Citi raised its GDP growth forecasts for 2026 and 2027 to 13.0% and 9.6%, respectively, citing factors including high order backlogs and Taiwan’s position in the AI hardware supply chain. Meanwhile, core inflation above 2%, sticky services inflation and tight funding conditions lead the bank to expect three central bank rate hikes of 12.5 basis points each starting in December 2026.

China’s manufacturing PMI fell to 49.3 in October, with production and new orders returning to contraction; the non-manufacturing PMI also fell below 50, and construction weakened again. Citi believes holiday disruptions and demand brought forward to September may have amplified the decline, but broad-based weakness indicates that cyclical stabilization remains fragile.
Citi maintained its forecast for China’s GDP to grow 4.6% year on year in both the fourth quarter and full year of 2026. It also believes rising property-sector headwinds, weak consumer confidence and slowing new-economy momentum make a policy shift in 2027 more necessary; the year-end Politburo meeting and Central Economic Work Conference could provide the earliest signals.
After the People’s Bank of China shifted its main policy rate from the 7-day reverse repo rate to the overnight reverse repo rate, the interest rate corridor moved down 15 basis points. Citi views this as an adjustment following the resetting of the anchor, rather than an actual rate cut, and expects no corresponding reduction in the loan prime rate in November; rate cuts are more likely in 2027.

The Bank of Japan held its policy rate steady as expected, but its decision to accelerate ETF sales was unexpected and sent a somewhat hawkish signal. The central bank raised its inflation forecast for fiscal 2027, citing factors including a renewed rise in oil prices.
Citi continues to expect the Bank of Japan to raise rates in December 2026, followed by quarterly hikes through mid-2027, with the policy rate ultimately reaching 2%.