The Chinese and Indian stock markets, both with MSCI index losses through May, looked in vain for positive momentum from top-level bilateral meetings with the US as the annual Strategic and Economic Dialogue (SED) ended in Beijing this week and Indian Prime Minister Modi visited Washington for nuclear and commercial talks.

The SED exercise is a decade old and may not be renewed as US presidential candidates vow tougher currency, trade and investment stances. The outgoing Treasury Secretary, Jack Lew, veered from previous exchange rate criticism by calling on mainland counterparts for more financial policy and statistical transparency, and curbs on “damaging and distorting” industrial overcapacity.

Chinese officials were reassured that yuan valuation was no longer an overriding issue, but fired back on steel sector buildup as the legacy of the post-2008 crisis stimulus Washington originally applauded. Both the American and EU Chambers of Commerce in Beijing also piled on complaints about access restrictions and delays, and demanded that the “negative” list of seventy prohibited business areas be further winnowed. Executives from the former group expressed skepticism that a formal bilateral investment treaty was a near-term possibility, and fund managers could not find any structural Dialogue underpinning for restored confidence to reverse this year’s heavy outflow trend.

Benjamin Franklin U.S. 100 dollar banknotes and a Chinese 100 yuan banknote with the late Chinese Chairman Mao Zedong are seen in this file picture illustration. January 21, 2016. REUTERS/Jason Lee/Files

PBOC touts market reform

The PBOC tried to quash currency disputes indefinitely with an “unceasing commitment” to market reform and flexibility, as a Reuters poll projected 2.5 % depreciation this year with resumed dollar Federal Reserve interest rate hike strength. Yuan internationalization hype also faded as the unit fell from fourth to sixth place on the SWIFT payment network’s trade settlement tally.

The manufacturing PMI was again flat in May, but foreign investors monitoring the Beijing discussions, now more sensitive to debt and financial sector than growth topics, cited disturbing signals. A proposed Singapore group purchase of  Internet lender WeBank was refused, as Goldman Sachs calculated that 2015 credit creation was 20% understated according to the “total social financing” definition excluding huge swathes of off-balance sheet shadow banking. True bad loan ratios using international standards are currently put at 15-20%, with real estate company leverage at 200%, twice the 2008 level, European bank Natixis commented.

China loan cleanups weigh

Ratings agencies recently shining the light on uncontrolled corporate debt have also revived warnings about local government burdens, following record bond issuance of 2 trillion yuan the past quarter under Beijing’s long-term refinancing program. Their load was already 90% of GDP at the end of 2015, and came to 180% of revenue, Standard & Poor’s reported. Provincial authority, state enterprise, property, and big four and mid-tier commercial bank cleanups could reach trillions of dollars, with an unknown amount at risk in unregulated wealth management products, analysts believe, and the Economic Dialogue’s scant focus on the global ramifications beyond headline scripted exchanges deepened unease.

U.S. Treasury Secretary Jack Lew (L), U.S. Secretary of State John Kerry (C) and China’s State Councilor Yang Jiechi talk after the closing ceremony of the 8th round of U.S.-China Strategic and Economic Dialogues in Beijing, China June 7, 2016. REUTERS/Damir Sagolj

Modi in DC

India’s Prime Minister Modi, on his second anniversary in office, got a warmer US government and business reception, in contrast to his earlier pariah status as a local rabble-rouser denied a visa. He set out to defend his diplomatic and economic record in a speech to Congress with claims that India has returned to the world stage after reported first quarter 8% growth outpacing China.

However, the new data methodology met with widespread doubt, with confidence indicators at odds with breakneck expansion. Foreign direct investment has been a bright spot, jumping 30% in the last fiscal year to $40 billion, concentrated on the tech sector despite industry openings in insurance and retailing.

The PM admitted that land and labor reforms were stuck at the federal level and would be decided by the states, where the ruling BJP party sway is mixed. The upper house of parliament has also scuttled his effort to impose a national unified sales tax, and fund managers are upset that short-term capital gains exemption was removed through Mauritius offshore domicile.

As with China, the banking resolution debate was largely mute despite passage of a new bankruptcy law. Non-performing loans are at 15% and central bank head Rajan, who advised “major surgery,” could soon be stripped of tools as his term ends.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.

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