Photo: iStock
Photo: iStock

First-quarter Asian core emerging stock market performance mirrored the MSCI index’s benchmark 1% gain, but lagged Latin American counterparts, after early year expectations to again take the regional crown. China was up 2% and India and Indonesia fell 7%, while in Asean Malaysia and Thailand rose 7%-plus in contrast and the Philippines dropped over 10%. Korea lost 1% and Taiwan spurted 5%, and Pakistan was the roster leader ahead 10% after 2017’s bottom ranking. It outpaced frontier market neighbor Sri Lanka, (+4%) but was behind Vietnam, which topped the combined group with a 17% jump. Headline economic fundamentals and currency values remain solid, but investors have started to weigh the drag from global liquidity pullback and trade confrontation, and domestic bank deleveraging and political tension. The period underscored that 2017’s universal upswing will no longer apply, and that the first half could prove rocky and tip toward overall decline as these internal and external capital flow and structural risks linger.

March ended with China and the US caught in a cycle of equal agricultural and industrial good tariff retaliation and threatened tighter investment rules. Beijing accused Washington of self-inflicted wounds since its exports at 20% of GDP are half the proportion they were a decade ago, and analysts calculate that even an across the board charge on all American shipments would barely dent growth. The bilateral trade surplus increased in nominal terms to $55 billion in January-February despite 3% renminbi appreciation, and equities skidded on the likely “Made in China 2025” high-tech access crackdown that may soon drive the Trump administration agenda. The official PMI reading was over 51 for the month, and the private sector Beige Book hailed “strikingly consistent” good results outside commodities and property. Retail sales and fixed investment rose almost 10%, and producer price inflation was under 4%, indicating excess capacity restraint. While relations soured with the US, Australia inked a new currency swap line, and to buoy securities sentiment local bonds were added to Barclay’s flagship Global Index with a 5% weighting in 2019, which could eventually trigger $250 billion in foreign investor inflows, according to estimates.

International regulators issued dire warnings on Chinese financial sector stress, with the Bank for International Settlements raising a “code red” alert on credit outstripping economic growth

At the same time international regulators issued dire warnings on Chinese financial sector stress, with the Bank for International Settlements raising a “code red” alert on credit outstripping economic growth, and the IMF’s Financial Stability Board calling China’s 15% of the world’s $7 trillion in shadow banking a “systemic risk.” The People’s Congress upgraded the frontline Economic and Financial Affairs group to a commission to “work decisively” on stricter capital adequacy and disclosure to “eliminate arbitrage,” and it will also unveil an official digital currency as crypto-alternatives are uprooted. The US-educated deputy central bank governor assumed the top post, and insurance industry oversight responsibility as well, under a “restructuring” President Xi Jinping designed under stronger Communist Party guidance. The gathering urged faster local government and state enterprise deleveraging amid reports that household debt too may become worrisome in the 25% of GDP range if peer-to-peer lending is counted. The Big Four banks reported better profits, with mortgage lines climbing 20%, but enthusiasm was muted since second-tier competitor flight was a driving force.

India’s net foreign investor monthly inflows slumped to $1 billion with state banks there also under scrutiny following the revelation of a $2 billion scandal at Punjab National Bank, number two by assets, and a $3.5 billion restating of bad loans at leader State Bank of India. The government’s $30 billion recapitalization plan is in jeopardy as the central bank and finance ministry fought over supervisory duty, overshadowing a return to 7% growth and 5% inflation. South Korea is in its own free trade fight with the US as they prepare for a top-level summit with the North, with Seoul agreeing to expand auto imports and consult on currency issues, repeating a mechanism in the proposed Trans-Pacific Partnership. Elsewhere, Malaysian Prime Minister Najib Rezak has finally called elections on an infrastructure and social spending platform undermining fiscal discipline, with low-cost residential loans likewise swelling household debt. Pakistan is a contrarian surprise after forced devaluation on a balance of payments squeeze, as investors bet on China and Gulf donor rather than IMF rescue as the conventional wisdom is revisited for the entire region.

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.