Asia’s Fleeting Triumph Trundle
Emerging Asia core stock markets outperformed Europe and Latin America ones in 2017 with a 40% gain, above the benchmark MSCI index 35% advance, with Pakistan’s over 25% drop the sole loser. China “A” shares jumping almost 50% as they prepare for a larger weighting were the main turnaround story and driver, followed closely by South Korea’s 45% shaking off the North’s bellicosity to herald the new administration’s chaebol and consumer debt cleanup. India was next at 35%, ahead of ASEAN markets where Thailand led (+30%) and Indonesia, Malaysia and the Philippines finished in the 20-25% range.
Among frontier exchanges Vietnam’s 60% surge was more than double the index, while Sri Lanka was flat and Bangladesh rose 15%. The universal upswing was supported by headline GDP growth and earnings exceeding expectations, and positive trade and capital flows overcoming gloom from US and Western government protectionist sentiment and incremental monetary tightening. However on entering 2018 banking and foreign investment clashes in regional linchpin China again weighed on the outlook, while fund managers positioning for more selective returns began to dissect neighbors’ underlying economic and financial system diversification and overhaul in view of political and practical limitations.
China’s December official manufacturing PMI was over 51, but masked a meager 5% rise in private fixed asset investment, a one-year low. Both the local and offshore renimbi were up 7% against the dollar in 2017, but the foreign exchange body SAFE started the new year with stricter individual bank card holder caps on domestic and overseas dollar withdrawals, with the latter set at $15,000 annually. The National Development and Reform Commission in turn issued a directive mandating on-line registration of all cross-border deals above $300 million, and requiring approval for “sensitive” media and defense-related transactions regardless of size. The capital exit crackdown was coupled with foreign investor overtures, including temporary tax exemption for “favored” sector allocations such as in mining and technology in response to President Trump’s global corporate tax cut. The Commerce Ministry promised to speed financial services opening after a bilateral summit agreement , but the banking regulator still will not allow international ownership of domestic units over 20% for a single shareholder and 25% generally. Washington signaled its disappointment with access by refusing the proposed Ant Financial takeover of MoneyGram on reciprocity and national security grounds, as the Treasury Department’s CFIUS panel flagged account piracy and cyber-espionage potential.
The Central Economic Work Conference met to endorse the “Xi-nomics” mix of progress and stability and the medium term 6.3% growth target, as state-owned forms announced double-digit profit increases for the year. However the private sector China Beige Book pointed to retail industry revenue and cash-flow weakness which will delay “old economy” displacement, especially as commodity sector companies such as steel once more ramp up capacity and production contradicting previous pledges. Central bank head Zhou in his message vowed to maintain prudent monetary policy, as big state lenders were poised to enjoy an interest windfall from a 2% available reserve requirement cut around the Lunar New Year, which will not apply to smaller competitors whose shares plunged. The Finance Ministry offered its own mixed signals in describing the “illusion” of Beijing continuing to absorb local government debt, which reached $2.5 trillion in November, as over half of current bond issues roll over old obligations under the existing program.
Korea’s 10% currency appreciation against the dollar topped the region, and it was the only country to raise interest rates to try to slow accumulation of personal debt now the highest in the OECD. India reprised 6.5% growth in the last quarter but worse 5% inflation came with it, and Prime Minister Modi’s ruling coalition lost ground in his home state of Gujarat and now faces a dedicated opposition Congress Party with Rahul Gandhi officially elected leader. In ASEAN Indonesia moves into 2018 split between prominent infrastructure building forays abroad, with state company issues of rupiah-denominated “Komodo bonds,” and religious and anti-corruption infighting at home, with President Jokowi’s key ally the parliamentary speaker facing graft charges. Vietnam managed successful IPOs, most recently of a popular brewery, but has struggled with corporate debt placement. It may soon tap the Asian Development Bank for help in a snapshot of Emerging Asia’s uneven financial market path despite 2017’s linear rally.
