International Monetary Fund Managing Director, Christine Lagarde. Photo: Reuters/Jacky Naegelen
International Monetary Fund Managing Director, Christine Lagarde. Photo: Reuters/Jacky Naegelen

China, after the MSCI Index began including “A” shares, plunged into the negative column for a greater loss than India toward the close of the first half, as the Washington-based Institute for International Finance reported US$12 billion in major emerging-market stock and bond outflows in May, two-thirds  from Asia.

The World Bank updated its 4.5% forecast for emerging-economy GDP growth to warn of “considerable downside risks” in trade, fiscal and monetary policy and geopolitics, and projected around the same annual expansion through the end of the decade.

Fund tracker EPFR tallied equity and fixed-income foreign-investor inflows through May at $50 billion and $20 billion respectively, off 2017’s frenzied pace.

In private equity, EMPEA (Emerging Markets Private Equity Association) reported low $7 billion first quarter fundraising, although Asia was the preferred region.

The European Central Bank contributed to pullback sentiment with its declaration to end bond-buying by year-end. Meanwhile Japan committed to ultra-loose liquidity through 2019, with inflation still less than 1% and private consumption flagging.

International Monetary Fund managing director Christine Lagarde reinforced caution in a speech on “damaged” business confidence, while the United Nations’ Trade and Development Agency noted flat foreign direct investment in the developing world as the overall figure dropped almost 25% to $1.5 trillion in 2017.

Emerging-market observers at the Group of Seven meeting in Canada were aghast at the unleashing of retaliatory tariffs within the group as a harbinger of fuller-scale export and supply-chain chokeholds, as energy import costs also spiked with oil at $75 a barrel. China remained locked in a bilateral commercial and technology dispute with the US with mirror-image countermeasures, as the IMF predicted growth slowdown to 5.5% in China over the next five years with a “high quality” consumption-led shift that will shake up the current share listing range.

China GDP growth forecast at 6.6%

The IMF predicts 6.6% growth in China’s gross domestic product this year, and the manufacturing Purchasing Managers Index remains positive, over 50, despite only a 6% increase in fixed-asset investment from January through May, the slowest in almost three decades.

Retail sales rose 8% in May, the worst showing in 15 years, and the import uptick was double that of exports. Producer price inflation topped 4% on higher world commodity values as reserves are steady above $3 trillion, and the yuan was one of the few emerging-market currencies to stay firm against the US dollar.

To encourage further allocation, China’s foreign-exchange regulator eased qualified foreign-investor repatriation and lock-up periods, as the securities overseer works to launch a Shanghai-London Stock Connect over the coming months.

Chinese banks are reportedly in line for approvals of initial public offerings to mobilize $15 billion in capital as they again dominate total social financing, while property developers have started to trade at discounts to book value as 40 second- and third-tier cities announced new speculative crackdowns.

The Paris-based Organization for Economic Cooperation and Development in a separate analysis pointed to Chinese banks’ “mounting refinancing needs until 2020,” with traditional bank lending unlikely to fill the gap. A dozen listed companies have already defaulted on bonds as an estimated 20 trillion yuan ($3.1 trillion) is due over the next 12 months, according to information source Wind. With the crunch, ratings agencies Standard & Poor’s and Fitch revealed plans to establish fully owned Chinese arms to meet demand after two decades in joint ventures.

India growth to outdo China

India’s growth will surpass China’s at 7.3% this fiscal year, after a first-quarter reading nearly half a point higher on strong public-sector spending. However, costs of imported oil sent inflation toward 5%, as the central bank incrementally lifted interest rates despite an overall neutral stance.

After $4 billion in portfolio outflows through May, the governor of the Reserve Bank of India embarked on an international media campaign citing a medium-term liquidity drain from the unwinding of purchases of US Federal Reserve Treasury bonds. Moody’s Ratings in turn expects the fiscal deficit to stick at 3.5% of GDP, and the current-account hole to worsen to 2.5%.

State-owned banks remain a sore spot after $130 billion in bad loans were declared in Q1 under stricter norms, which require big borrower resolution plans within 180 days and possible implementation of new bankruptcy procedures.

With the corporate mess, lenders are trying to bolster retail business, where financial technology and inclusion are jointly promoted by the government and the private sector, with the aim of rivaling Chinese competitors under sudden investor and regulatory scrutiny in these areas to their short-term disadvantage.

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.