China-India’s Big Bet Boomerang

China after adding MSCI Index “A” shares plunged into the negative column for a greater loss than India into the first half close, as the Washington-based Institute for International Finance reported $12 billion in major market stock and bond outflows in May, two thirds  from Asia. The World Bank updated its 4.5% emerging economy GDP growth forecast to warn of “considerable downside risks” in trade, fiscal and monetary policy and geopolitics, and projected around the same annual expansion through end-decade. Fund tracker EPFR tallied respective equity and fixed income foreign investor inflows through May at $50 billion and $20 billion, off 2017’s frenzied pace. In private equity, industry association EMPEA 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 UN’s 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 G-7 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/barrel. China remained locked with Washington in a bilateral commercial and technology dispute with mirror image countermeasures, as the IMF predicted growth slowdown to 5.5% over the next five years with a “high quality” consumption-led shift that will shake up the current share listing range.

The Fund predicts 6.6% growth this year, and the manufacturing PMI index remains positive over 50 despite only a 6% fixed asset investment increase from January-May, the slowest in almost three decades. Retail sales rose 8% in May, the worst showing in fifteen years, and the import was double the export uptick. 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 dollar. To encourage further allocation the foreign exchange regulator eased qualified foreign investor repatriation and lock-up periods, as the securities overseer worked to launch a Shanghai-London Stock Connect over the coming months.

Banks are reportedly in line for initial public offering approvals 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 their “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 RMB 20 trillion is due over the next twelve 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’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 imported oil costs sent inflation toward 5%, as the central bank incrementally lifted rates despite an overall neutral stance. After $4 billion in portfolio outflows through May, the Reserve Bank governor embarked on an international media campaign citing medium term liquidity drain from the unwinding of Federal Reserve Treasury bond purchases. 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 fintech and inclusion are jointly promoted by the government and private sector, with the aim of rivaling Chinese competitors under sudden investor and regulatory scrutiny in these areas to their short-term disadvantage.

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