Emerging Asia outperformed both the core Morgan Stanley Capital International gauge and other regions in the first quarter with an 11% jump, mainly due to the 30% surge in China “A” shares, the best result in five years. All other components were in the mid- to high-single-digit range, with Malaysia the sole loser, with a less than 1% decline.

India and Indonesia averaged a 5% gain as investors awaited the outcome of April national elections, while Thailand was up 6.5% as party haggling may persist over the next government’s formation, with the military again set to dominate through surprising voter support. Vietnam (+13%) led frontier markets, on actual and perceived trade diversion there from the deep US-China tiff, while Bangladesh (+7%) survived the failure of an Islamic bank and Sri Lanka was barely positive, with its International Monetary Fund program extended another year.

Pakistan (+7.5) may rejoin the frontier list informally as it negotiates another IMF arrangement following Chinese and Gulf credits, with possible temporary capital controls to hoard foreign reserves.

China

The China share bump, including 18% in the basic and Hong Kong-listed category, can be attributed to higher stock and bond index weightings, early-year currency and growth stabilization, and a pause in export and foreign direct investment disputes with Western partners, but underpinnings are shaky.

The Asian Development Bank (ADB) before its annual meeting, which underscored the extent of commercial and diplomatic hostilities with Venezuela as a test case as Washington pressed for participation by the opposition led by Juan Guaidó, slashed its forecast for Asia regional GDP expansion to 5.8% this year. It cited uncertainty over global trade policy, as the World Trade Organization predicted just 3% increased volume, and “sharper slowdowns” in China and other major countries as overriding risks.

The National People’s Congress reiterated China’s 6-6.5% growth target, as the official Purchasing Managers’ Index topped the neutral 50 mark in March, despite export orders down for the 10th month in a row. In January and February, industrial output and retail sales rose 5% and 8% respectively, while mobile-phone and car purchases plunged 15%.

Fixed-asset investment as the long-standing driver was up by just over 5%, and unemployment reached that same level for a two-year peak.

The yuan strengthened 2% against the US dollar over the quarter, as analysts now believe the previous presumed drop to 7 is unlikely, especially if a currency understanding features in an eventual tariff deal with the administration of US President Donald Trump. The Chinese central bank reported reserves at a six-month high of $3.1 trillion in February, and affirmed a “bigger market role” in exchange-rate determination.

Of the $20 billion in foreign stock-market inflows in the first two months, $17 billion came through the Hong Kong Connect, and MSCI expects the pace to continue with an $80 billion “A” share allocation by year-end.

However, at the Communist Party of China gathering, Premier Li Keqiang revealed that three-quarters of the country’s provinces had lowered their growth goals, as the Chinese Academy of Social Sciences (CASS) think-tank estimated that broad public debt from the central and local governments and state enterprises approached 150% of gross domestic product.

The separate private-sector Beige Book found that first-quarter corporate borrowing was the steepest since 2013, and called bank deleveraging claims “laughable.” Former central bank head Zhou Xiaochuan, who held the post until the 2008 financial crisis, warned that lessons on excess debt from Japan’s “lost decade” have not been absorbed. Total social credit, including from shadow sources, is still advancing at a 10% annual clip, as onshore and offshore bond defaults begin to spread to also hurt equity values.

India

India’s 7% climb lagged the MSCI benchmark’s 9.5% before the mid-April election kickoff, and the ruling coalition led by the Bharatiya Janata Party (BJP) may not win a majority, according to early readings. The ADB kept its growth forecast above 7% for this year, as the Indian central bank downgraded its 2019-20 forecast slightly to 7.2%.

Consumer price inflation was 2.5% in February, allowing a 25-basis-point interest-rate cut before the polls.

The rupee mirrored the yuan with a 2% first-quarter uptick versus the dollar, with the current-account deficit hovering at 2.5% of GDP.

Fitch maintained its lowest investment-grade sovereign rating, but urged fiscal consolidation, bank cleanup and faster structural reform in a presumed second term for Prime Minister Narendra Modi. That lasting formula is in order for the Asian equity rally to continue, in contrast to the flickering confidence to date.