The Morgan Stanley Capital International emerging Asia result lagged other regions and the 3.5% core benchmark gain through May, although China “A” shares stayed up almost 25% with more entries scheduled for June, and India finished ahead 7.5% on Prime Minister Narendra Modi’s stunning reelection margin. Indonesia’s President Joko Widodo won his own second term by 10% but counting delays and the campaign’s muted economic reform agenda brought flat market performance. Korea and Malaysia were both slightly negative, as they were hurt in the electronic export supply chain tariff and security battle between Beijing and Washington.

Vietnam, on the MSCI frontier list, was second place overall with a 9.5% advance as low-cost China sourcing diverted there but was a surprise addition to the US Treasury Department’s May currency policy report amid rumors it could be branded a “manipulator” subject to import retaliation. India was removed but lost duty free access nonetheless under a separate Trump administration determination, as Asia generally gears up for bilateral trade and financial confrontation, worsening growth and banking sector prospects.

The Treasury review acknowledged China’s reduced direct intervention, as the yuan fell 2.5% in May for the worst drop in almost a year, but called state controls and subsidies “unfair practice.” Foreign institutional investors sold RMB 50 billion during the month, and the foreign exchange body criticized banks and individuals for trying to circumvent capital outflow measures as they contain depreciation near 7/dollar. In months of tariff negotiations with Washington, Beijing has reportedly pledged exchange-rate restraint, and the anti-competitive devaluation stance will again be scrutinized at the late June G-20 summit in Japan.

Treasury staff tightened the trade and current account surpluses and intervention frequency formulas so that Malaysia, Singapore and Vietnam joined the “monitoring” roster, still excluding Europe and Latin America emerging markets. They urged Chinese officials to avoid preferred credit and off-budget steps that “distort yuan value,” and instead embrace broader non-tariff barrier and financial services access reforms at the center of bilateral talks. The 6.5% growth target may already be slipping as the official manufacturing purchasing managers index dipped below 50, with the export component off for 12 months in a row.

According to government think-tanks, the debt/gross domestic product ratio rose 5% in the first quarter to 250%, and Fitch Ratings predicted household debt above disposable income next year. The Asian Development Bank described housing stoked by loose monetary policy as similar to Japan’s bubble from the 1990s leading to “lost decades,” as national prices rose double digits on an annual basis through April.  The failure of tiny Inner Mongolia-based Baoshang Bank reinforced gloom, with Standard & Poor’s citing credit risks to other “aggressive small to midsize banks” amid an underfunded formal deposit insurance scheme.

The Treasury Department survey dismissed Korea, as its goods surplus did not meet the minimum $20 billion threshold with higher US fuel and chemical sales, and won intervention was negligible in recent months

The Treasury Department survey dismissed Korea, as its goods surplus did not meet the minimum $20 billion threshold with higher US fuel and chemical sales, and won intervention was negligible in recent months. Seoul has a new strategy of domestic demand stimulus and labor market change to offset external swings, now potentially exacerbated with resumed Northern belligerence from missile tests. Stock market valuations are low for the region with poor corporate governance scores at the main chaebol listings, but Samsung’s earnings outlook is mired in shrinking smartphone sales and technology glitches. India faded from Treasury monitoring since none of the three eligibility criteria apply, after the ruling BJP party secured a lower-house majority outright before allies strengthened the landslide.

Prime Minister Modi refrained from heated rhetoric and gloating over the opposition Congress party in his repeat swearing in, as the business and financial community awaits further fiscal and state banking cleanup strides. Foreign investors plowed over $50 billion into local debt and equity in the first term, but quarterly growth slipped below China’s, and the collapse of a big non-bank lender underscored the urgency of thorough government and private intermediary overhaul. Indonesia’s Jokowi in his post extension also faces a mixed track record – failing to raise growth to the promised 7%, while tallying foreign direct investment and infrastructure improvements including the Jakarta subway opening before the election. The Bank of Central Asia and other state-owned listings still dominate the stock exchange, with private sector capital raising often confined to its own remote archipelago according to analysts.