Asian shares’ jilted January jolt
The Emerging Asia group was up 5% on the benchmark MSCI index in January on positive performance across-the-board, including in previously shunned China “A” shares, as the region initially sloughed off Washington trade and currency confrontation pending further action.
Trump administration cabinet members, after TPP withdrawal, continued to criticize alleged exchange rate manipulation, import barriers and geopolitical aggression from the mainland and neighbors without articulating policy responses, as early year signs suggested solid growth despite louder banking system and private debt warnings. Korea was the surprise leader with a 7.55% gain, while Indonesia was barely in the plus column at the opposite extreme.
India was up 2% behind China (+4.5%), and for Malaysia, Thailand and the Philippines only the last was ahead more than the 5% average. As the first quarter unfolds the tougher US stance could become more evident to slow the common advance, but investors have also elevated economic and financial sector reform and stability questions on the allocation agenda in a departure from Asia’s prolonged “safe haven” status, which remained intact throughout periodic scares the past five years.
China is at the top of the worry list as 2016 GDP growth came in at 6.7%, a two-decade low, with trade volume off in a replay of the immediate post-crisis aftermath. Although consumption is now two-thirds of output according to official statistics, urban fixed investment has been an overriding driver and its pace slowed to single digits. Producer prices jumped over 5 percent in December in a sharp break from previous deflation, and the spurt may increase the difficulty of overcapacity slimming in steel and other industries that have also been ordered to restructure debt. Securities market inflows that month were US$10 billion, but capital outflows totaled US$320 billion for the year as reserves dipped below US$3 trillion in January, forcing authorities to further tighten controls on bank cross-border transfers.
Consensus Yuan depreciation forecasts are in the 5% range for 2017, and outbound direct investment is expected to decrease after a decade of 30% annual growth. The central bank continues to guide both onshore and offshore rates, and intervention has brought overnight liquidity squeezes as government bond yields rise.
The bad loan ratio has worsened to 2% by local standards, but normal and shadow credit each jumped around 15 percent last year, twice as fast as economic expansion in a disconnect long flagged by the BIS and other bodies as a crisis harbinger. Banks have not kept up with market rebound which may soon also be in peril with the reopening of the IPO pipeline to relieve state company funding pressure, with hundreds of new listings to go ahead, according to consulting firm Deloitte.
India may be past the worst of the demonetization effect which sent the PMI reading under 50 late last year, as auto sales key to consumption tumbled double-digits. Housing transactions were at a “complete standstill” in the last quarter, an industry survey commented, as Prime Minister Modi promised additional steps against “black money” in advance of big March state elections.
Consumer inflation improved to 5% on reduced food expense and set the stage for rate easing before banks’ liquidity windfall from note confiscation that should otherwise lower borrowing costs. However the infusion could cover the true system bad loan hole estimated at 15% under stricter classification norms. The new central bank governor was reportedly not informed about the demonetization strategy, and to many analysts he is also ambivalent about regulatory reinforcement.
Indonesia’s Finance Minister upset foreign investors when she suspended research and dealing house JP Morgan for “irresponsible” sell recommendations. It changed its outlook after the action with growth and fiscal policy largely on track, as non-resident ownership of local government debt held steady at around one-third. However the Minister, who was greeted triumphantly as a no-nonsense technocrat upon return to government in mid-2016, may have depleted the goodwill reserve with the harsh move on the heels of her overstatement of the revenue take from tax amnesty.
Korean stocks continued their upswing after a 5% spike last year, as presidential impeachment and chaebol executive arrests from an influence peddling scandal raised hopes of crony capitalism regime change. Nonetheless lower growth and currency trends against the dollar are set into 2017, with the region as a whole due to experience such pendulum swings in fundamental and sentiment indicators over the coming months.