Asia’s Halting Halftime Heft
The Emerging Asia block was roughly in line with the Morgan Stanley Capital International benchmark 9% gain in the first half, while lagging Europe and Latin America and distant from early year euphoria on overcoming growth, debt and trade issues. China “A” shares led with an over 30% jump, followed by the Philippines and Thailand, respectively up 12% and 15%. India, Indonesia, Korea and Taiwan advanced single-digits between 3-9%, while Malaysia was flat and Pakistan was the big loser, down 17%. In the frontier rung, Bangladesh (+3%) and Vietnam (+8%) were positive, and Sri Lanka shed almost 10%.
Investors positioning for the rest of the year looked to the Japan G-20 summit for signals, with relief that further Washington tariff and currency retaliation against China in particular is on hold with resumed talks. Elections are over in India, Indonesia and Thailand with the status quo prevailing, amid opposition challenges over vote manipulation and broader business and financial community economic policy doubts. Capital spending is weaker after a long period of tech and manufacturing expansion, despite monetary pauses or easing in the region following the US Federal Reserve’s stance. The latter shift may stall bank and non-bank deleveraging after rapid credit growth still outstripping gross domestic product increases, as the second half ambivalent outlook avoids worst case scenarios but lacks macro and structural inspiration.
Chinese May data reported industrial output and fixed investment up 5%, and retail sales 9%, on an annual basis, but the second quarter private-sector Beige Book cited only “modest improvement.” Its shadow bank lending measure was the highest on record, with Beijing relying on this channel for smaller non-state firms after the Baoshang Bank collapse froze the negotiated certificate of deposit market. These borrowing costs 5% above traditional sources raise financial sector risk, according to the research. A central bank survey at the same time confirmed falling loan demand from the previous quarter, with Hong Kong’s Bank of East Asia separately revealing a “worsening real estate portfolio” in major mainland cities. Overlapping fears were underscored when giant developer Evergrande rescued second tier Shengjing Bank with a capital injection, doubling its ownership stake to 35%.
Local government monthly bond issuance also was at a multi-year peak of RMB 900 billion, as Fitch Ratings found fifteen delayed repayments in 2018 and brokerage CICC estimated that operating income covers just 40% of obligations over the next year. The foreign exchange body SAFE warned of a 12% rise last year in external debt to almost $2 trillion on Chinese company US dollar borrowing. The Yuan threatened to breach 7/dollar, as authorities resorted to new local currency bond issuance in Hong Kong to stave off the prospect. With Presidents Xi and Trump agreeing to reopen negotiations in Osaka, fund managers are now focused on the specific currency elements of a future pact that could serve as a template for resolving neighboring country frictions under US Treasury Department “monitoring.”
India was removed from that list, but is likewise a Trump administration trade target with a $30 billion surplus as it ended duty-free entry preference under a longstanding garment export program. On a New Delhi visit, Secretary of State Mike Pompeo declared that bilateral reciprocity was in sight with wider local access promised by his Indian counterpart. Despite Prime Minister Modi’s resounding re-election, GDP growth was at a 5-year low the last quarter at less than 6%, with questionable methodology in official statistics suggesting even worse performance. The central bank could come under even greater strain to tow the government line with the renewed mandate, as another senior representative resigned after the benchmark interest rate was cut. The upcoming budget will preview any fresh fiscal consolidation or structural reform for a skeptical domestic and foreign investor audience. The combined state and federal deficits are around 9% of GDP, equal to net household savings, and the Reserve Bank will likely again be asked to cough up “excess reserves” to plug the gap. However the non-bank financial sector is in rough shape following the collapse of a blue-chip participant, adding to mainstream state lender woes the authorities have been slow to tackle. Domestic mutual funds have shied away from nonbanks aggravating their liquidity crunch, as the overriding allocation theme for the last six months of 2019 is to split the crisis-confidence difference.