China ‘A’ share shove may not register
After a year of hype after MSCI agreed to add a first wave of yuan-denominated Chinese “A” shares to its core emerging-market index, more than 200 big companies will go in at the end of May at a fractional half-a-percent weighting.
The change barely affects overall country and universe allocation even as investment houses predict billions of dollars in new passive investor inflows over time, and the big bank, property-developer, and consumer-goods listings have already been accumulated more cheaply through the Hong Kong Connect or New York or London channels.
The index provider warned as well of poor corporate oversight in the group, with more than one-third receiving the bottom “CCC” mark in environment, social and governance (ESG) ratings.
With entry, domestic retail investors will continue to dominate trading and inject volatility as the asset class generally experiences a sudden bout with higher global dollar and interest rates.
Original projections also called for mainland China, with a 2% foreign-investor share, to divert money from rival large markets like India and South Korea, where participation is 10-20 as much. However, these destinations have maintained traction despite slight year-to-date losses and their own banking and corporate governance doubts, as focus on elections and summits stole thunder from months of regional “A” share headlines.
Beijing’s trade spats with Washington escalated over the period, with the United States initially insisting on a US$200 billion trade-deficit reduction and banning business with telecommunications giant ZTE, before backtracking and outlining less onerous goals and restrictions.
The two sides agreed their overlapping commercial and diplomatic issues were “relatively big,” as the International Monetary Fund predicted a 0.5-percentage-point drop in Chinese GDP growth in a “war” scenario and managing director Christine Lagarde cited broader confidence and supply-chain threats.
China’s export orders were down in April for the first time since 2016, as the manufacturing Purchasing Managers’ Index (PMI) stuck around a marginally positive 51-plus.
In the first quarter, consumption contributed more than three-quarters of China’s growth, as public fixed-asset and private investment continued to slow to a high-single-digit pace.
Real-estate and retail sales dipped and consumer and producer inflation was in the 2-3% range. In April, foreign reserves fell to a six-month low of $3.1 trillion with currency adjustments, and China’s central bank emphasized “important financial risks” in its monetary report despite leading state-lender profits rising by 5%.
The banking sector’s overall slice in total social financing was almost 90%, a post-financial-crisis peak, with the shadow finance crackdown soon to tighten rules on an estimated $4.5 trillion in wealth-management products.
Bond defaults offered further caution as 10 companies suspended $2 billion in payments the first quarter, and local borrowing rates touched 6% as Chinese institutional investors shied away from dollar-denominated offshore issues.
The squeeze occurred as the Chinese Finance Ministry again eased terms for local-government bond flotation, doubling maturities to 20 years in an attempt to roll over the 4 trillion yuan load calculated in 2017.
Liquidity jitters were not confined to the capital markets, as financial-technology titan Ant Financial, with more than $250 billion in assets, cut daily cash withdrawals. The blow followed the US Treasury Department’s rejection of its proposed takeover of MoneyGram over privacy, reciprocity and economic -security objections.
Upsets in India
Foreign investors in India have been preoccupied with upsets there rather than geographically rebalancing portfolios, as the rupee dived below 65 to the dollar on net capital outflows, magnified by banking scandals on top of the declared $130 billion bad-debt total as of March.
Dozens of executives were charged in a $2 billion guarantee fraud at Punjab National Bank, whose share price halved, and construction and borrower defaults by power companies remain understated.
External debt at 40% of gross domestic product, almost half short-term, is also a sign of vulnerability, analysts believe. The current-account deficit may revert to the Taper Tantrum era of 2% of GDP when the country was classified with the “Fragile Five,” as the cost of imported oil now exceeds $70 a barrel.
Exports continue to shrink as a portion of the economy despite Prime Minister Narendra Modi’s “Make in India” drive, as new national tax-compliance efforts and overseas-worker visa curbs act as drags.
On the election front, with his party’s convincing victory in Karnakata state, policies are unlikely to shift as Modi bids for a second term, which is likely to repeat the optimism-disappointment cycle prominent in big Asian markets this year.