Emerging Asia stock markets mirrored the almost 4% Morgan Stanley Capital International core index gain through September, and equaled Latin America and beat Europe performance, with China “A” shares up 28% the runaway leader. The main China component rose 5% and the Philippines, Taiwan and Thailand increased in the 5-10% range. India was barely positive (+1%) and Indonesia was fractionally negative, while Korea (-2%), Malaysia (-7.5%) and Pakistan (-17%) were losers. On the frontier rung, the regional advance was double at 9%, as big weighting Vietnam (+12%) offset 5% drops in Bangladesh and Sri Lanka.
The Asian Development Bank (ADB) noted that Vietnam and Bangladesh experienced double-digit export jumps with the US-China trade war, as it cut this year’s economic growth forecast to below 5.5% with underlying electronics cycle “sharp contraction.” The ADB expects weaker trade and investment into 2020, as the International Monetary Fund predicted a 1% global growth setback and new head Kristalina Georgieva pledged to tackle the slump to “minimize crisis risk.” Global fund trackers reinforced gloom with a $25-billion emerging market equity outflow total, as surveys pointed to Hong Kong’s and non-banks’ respective drags in China and India as asset class overhangs.
Chinese August data showed slack in industrial production, retail sales and fixed investment, with producer prices deeper into near 1% deflation. The Bank for International Settlements’ triennial foreign exchange study had the yuan share of global trading unchanged at 4%. Formal foreign institutional investment quotas were lifted despite one-third being unused, with international reserves frozen at $3.1 trillion. Fitch Ratings projects gross domestic product growth below 6% next year, despite record total social financing from January-August over RMB 15 trillion.
Standard & Poor’s again sounded the alarm on local government debt, with almost RMB 4 trillion to be repaid by 2021. Dealogic, monitoring cross-border mergers and acquisitions, revealed that Chinese companies had already divested $40 billion in overseas assets through August, versus $32 billion for all of 2018. New home prices were up in only 55 of 70 cities, a six-month low, with widespread property developer layoffs. After one hundred days of protests, Moody’s downgraded Hong Kong’s outlook to negative as reserves fell $15 billion to $430 billion, the most in two decades.
Foreign direct investment for the year was $9 billion, a 3% rise, and the official manufacturing PMI gauge was under 50 in September. In the balance of payments the combined current and capital account surpluses were matched in the $130 billion “errors and omissions” outflow, signaling strong underground money flight. The private sector-oriented Beige Book described the third quarter as particularly hard for retail and services, as “shadow banking” like bond issuance registered a period peak as the chief funding channel. The Finance Ministry relaxed commercial bank bad loan provisioning requirements, as the central bank warned that regional players were “overstretched” and shareholders would face the consequences as it reported one-tenth of 4,500 lenders at high distress risk, comprising 5% of system value. Researcher FT/Wind estimated a capital shortage in most stock-exchange listed banks, as rumors circulated in Washington that the Trump administration was considering US investor portfolio curbs as a negotiating lever.
Indian growth similarly disappointed in the April-June quarter at 5%, as ratings agencies cited “precipitous private consumption decline” that will not be overcome by a surprise 10% corporate income tax reduction. They argue structural reforms are still missing to improve competitiveness and business sentiment, and that the break will hike the fiscal deficit above target to 4% of GDP. Fitch puts the combined state and central government gap at 7% at year-end, even after the central bank was forced to transfer record reserves. It has been in easing mode with another recent 25-basis point move to just over 5% in the benchmark rate, but household confidence remains soft amid overlapping real estate and financial sector crises following the collapse of non-bank giant ILFS. According to local consultants stalled residential projects now total $65 billion, and analysts believe the banking system bad loan ratio is again heading toward 15% on damage from housing specialist ties. Listed Yes Bank was caught in the vortex, as share value was almost wiped out with its affirmation of a speculative shadow franchise under harsh investor glare.