Representational image: iStock
Representational image: iStock

The MSCI Asia Index was up 30% in US dollar terms through the third quarter, as China “A” shares matched the uptick and the broader China category rose 10% above that level to outperform Korea as a close second with a 32% gain. In contrast, India (+22%) faded as the BRIC darling, with investment fund data showing sudden inflows into Russia,  one of the few main emerging market losers this year with heavily discounted price-earnings ratio against India’s 20 times average. Asean’s trio of Indonesia, Malaysia and the Philippines were ahead 12-15%, while Vietnam on the separate frontier gauge did slightly better (+18%). Going into October’s Communist Party Congress financial markets took in stride another sovereign ratings agency downgrade by Standard & Poor’s following Moody’s, and a 2% renimbi slide during September as previous currency shorting restrictions were loosened. They reflected the “breathe easy” advice from the China Beige Book, which seeks to track grassroots private sector commercial and banking activity, as that source also warned of a “potentially darker 2018 story” with corporate and financial sector damage no longer contained by smooth event holding imperatives.

The manufacturing PMI reading was over 52 in September, the highest in five years as companies borrowed heavily over the quarter with “nose-diving” rates postponing deleveraging, according to national statistics

The manufacturing PMI reading was over 52 in September, the highest in five years as companies borrowed heavily over the quarter with “nose-diving” rates postponing deleveraging, according to national statistics. For the Golden Week holiday, the central bank unveiled a targeted reserve requirement cut for small business and agriculture lending, which will inject an estimated RMB 700 billion into the sectors next year. Corporate debt reportedly fell in the second quarter for the first time since 2011, but only 1% to 166% of GDP, as state enterprise liability/asset ratios improved by the same negligible amount to 60% with officials still vowing stricter control. Consumer credit for property, which doubled through August over the full-2016 total, was in regulators’ sights in another attempt to slow mortgage growth after 100 cities introduced speculative curbs the past year. International investors were unfazed by the move as the real estate frenzy continues, with increased commercial and residential prices in standard surveys. However, they took notice when top developer Country Garden’s offshore dollar bonds were slashed to “BB-,” as S&P pointed out that they were subordinated in the debt structure with scant recovery value in case of default. Fitch Ratings added to worries by predicting a period of local government bond distress now that centrally-directed rollover operations are complete, since municipalities and provinces fail to generate cash flow to cover even reduced payment loads.

Inflation, with the producer and consumer numbers at 6.5% and almost 2%, respectively, spurted in August as urban fixed investment was up just 8% year-to-date, the slowest pace since the Asian financial crisis two decades ago. Monetary expansion was likewise down to single digits during the month, but still outruns GDP growth as the official measure does not capture myriad shadow channels. On the heels of an announcement of a $2 billion global bond issue designed to demonstrate confidence after the sovereign downgrades, foreign investors also tripled their holdings of higher-yield bank certificates of deposit actively traded in formal and informal markets and used as collateral for speculative transactions escaping scrutiny. Ping An Securities cautioned that home price decline will badly hurt 40% of banks, as Deutsche Bank added that mid-tier joint stock units derived one-fifth of their revenue from fees on credit cards, where loans surged 30% in the first half. Even the “safe” state owned-giants get 20% of funding from short-term sources, mainly wealth management products and interbank lines, which could be “market dislocation triggers,” according to Fitch.

Disappointed Asean punters have looked to a possible main index promotion in Vietnam, but MSCI ruled it out in its latest review when Chinese “A” shares were marginally included to propel their upswing. A key sticking point for Vietnamese stocks is lingering company majority foreign ownership prohibitions despite an announced relaxation for “non-sensitive” industries. Despite overseas openings by listed asset managers like Dragon Capital, the authorities have yet to clarify the rules as they also try to tighten insider trading enforcement. Partial stake state bank and enterprise privatizations may meet demand in the meantime, as the government tries to pare steep fiscal deficits and keep public debt under a 65% of GDP legal ceiling, unblocking an expected rating upgrade opposite China’s trajectory.

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.