The Emerging Asia component tied Europe and beat Latin America on the core Morgan Stanley Capital International Index through May with a 20% gain, as all nine markets except new frontier market graduate Pakistan and Thailand were up double digits. China’s composite gauge and India rose the same 20%, as A shares could incrementally enter after MSCI’s end-June review and India’s national tax unification will go ahead despite slower 6% growth. Korea was the big winner at 27% on President Moon Jae-in’s post-election rally coinciding with good earnings from dominant listing Samsung.

Indonesia, Malaysia and the Philippines lagged in the 10-15% range, as investors soured on the Jakarta governor’s race, ethnic and religious tensions offsetting sovereign ratings boost to investment grade. Malaysian Prime Minister Najib Rezak drew criticism for another round of bumiputra affirmative action policies to secure his political base despite the economic costs and distortions, while Philippine President Rodrigo Duterte faced both an International Court of Justice complaint for drug dealer killings and a Muslim insurgency outbreak in his home southern island of Mindanao. Into the half year, the China-India-Korea “big three” have also triggered momentum with overdue moves to tackle banking weakness and runaway corporate and household debt, but sustaining it may be difficult in coming months with tough cleanup choices alongside global trade and monetary shifts that may no longer be as benign.

Philippine President Rodrigo Duterte faced both an International Court of Justice complaint for drug dealer killings and a Muslim insurgency outbreak in his home southern island of Mindanao

Chinese growth is on track to meet the IMF’s 6.5% forecast incorporating weaker consumption, exports and housing. The PMI manufacturing gauge was steady at 51 in May, with retail sales and property investment again up 10% in April. Consumer inflation was 1%, and foreign reserves rose $20 billion to over $3 trillion as the state foreign exchange body declared demand and supply in “basic balance.” Central bank hard currency sales were at a 2-year low in April as it was widely believed to have intervened in the offshore market, ushering in slight yuan appreciation against the dollar. These operations picked up in May with Moody’s dramatic one-notch sovereign ratings downgrade, citing high corporate leverage and contingent debt to meet economic targets. The marks for 25 state enterprises were slashed in turn, as the rater posted medium-term growth in the 5% range. The Finance Ministry called the move “absolutely groundless,” as bank stocks, in particular, continued to lose value with the benchmark lending rate hike and shadow banking squeeze begun in the first quarter. “A” share sentiment was dented, with gains lagging the broad China MSCI component, as the provider admitted “lots of issues” still blocking index entry on the same day as the Moody’s decision.

Trust loans and bankers’ acceptances fell by three-quarters in April compared to March, as the bank regulator put system high-yield unmonitored wealth management products at a whopping RMB 30 trillion. The G-20’s Financial Stability Board chided authorities for the lack of detailed wealth management product data through 2105 as it prepared an annual shadow banking survey. According to experts, the short-term instruments are mostly linked to housing and commodity prices and concentrated in small and medium-sized lenders that already face “negative liquidity shocks” to funding, in Moody’s view. The bond yield curve has inverted, with steeper cost for immediate rather than long-term paper, in part due to these concerns as corporates have to refinance $130 billion in debt by year-end, with onshore issuance down 80% in January-April from the corresponding 2016 period. To stimulate foreign appetite in the local market and to rebut protectionist charges, Beijing agreed to a wider opening for US securities firms by mid-July, but the steps may not change either foreign investor participation or Trump administration combative perception.

Three years into his term, Indian Prime Minister Narendra Modi may also finally be facing the severity of bank woes and non-banking sector underdevelopment, as 6% first quarter growth at a two-year low still outstripped 5% credit expansion. Corporate profits are at a 15-year bottom, below 3% of GDP, as state fiscal deficits also covered by bank borrowing swell above the same 3% threshold the central government separately pledges to uphold. Finance Minister Arun Jaitley has given the central bank additional authority to break the logjam over the industry’s double-digit bad loan ratio, despite a new insolvency law and the spread of dedicated distressed asset funds. Damage may leave an estimated capital hole 10 times the government’s $10 billion allocation, and equity markets may not be able to absorb it as the region braces for such blows.