Here's our summary of key economic events overnight that affect New Zealand, with news the world's largest property developer is to be dismembered and liquidated.
First up today, while you may already know the headline, we must note that Evergrande has been forced into liquidation by a Hong Kong court. While this may not strictly qualify as a 'surprise' it is still a very big deal, for a number of reasons. First it is a spectacular crash-to-earth by a very well connected company - one that rapidly lost favour. Second, it heightens the risk of all other Chinese large property developers, some of whom (like Country Garden) may have assumed there would be bailouts underpinning their industry. And third, it shows Hong Kong courts are now under the direct control of Beijing, handing down verdicts in big sensitive cases in the way Beijing wishes to signal. President Xi is not happy with his billionaire 'friends'. One reason he will be livid is that Evergrande has liabilities to others of over US$300 bln. Unless there is some sort of rescue package, it is hard to see how there won't be a cascading impact. After all, US$300 bln is 1.7% of China's 2023 GDP.
Sadly for China, this won't be a quick crash from which everyone can pick themselves up and carry on. It will be a slow lingering process from here. Evergrande claims assets of US$240 bln, but that valuation must be very suspect. If China dumps on international creditors in this case, it will accentuate the de-risking pullback underway.
And we should also perhaps note that the share price of EV maker BYD took a tumble yesterday (-4%) missing profit forecasts despite massive sales gains, and a big jump in profit from a year ago. Shareholders have been highly sceptical about the investment prospects of the company recently, making down its share price by -36% over the past year. Also weaker than expected were international sales of its vehicles; it has strength in the Chinese domestic markets however.
Meanwhile in the US, the Dallas Fed factory survey contracted rather sharply in January, falling to its lowest level in eight months, basically on weak order levels. This is a sentiment survey in the heart of America's oil patch.
Across the Pacific, Taiwan's consumer sentiment rose and has now reached its highest level since March 2022. For them the pleasing thing about this survey was that improvement came across the board. The resolution of their Presidential election clearly helped.
Singapore's producer prices ended up -1.1% lower in December than in the same month a year earlier capping a full 12 months of declines. Singapore does go through these producer deflation periods on a regular basis, but the last one (apart from the pandemic) was back in 2015-2016. The current one might only have lasted half that time however.
In contrast to China, India claimed that it will grow at a 7%+ rate for the next few years. It says "the strength of the financial sector and other recent and future structural reforms" ensure growth at a fast clip. But independent observers are more sceptical that the official confidence.
In Finland, they have just had a presidential election, a serious and civilised affair. A 'conservative' (for Finland) ex-prime minister won of the first round, beating out an independent Green candidate. The key issues weren't economic however, rather focused on its new role as a NATO front-line border state, spooked by the Ukraine invasion. But neither candidate won outright so there will be a runoff election in two weeks.
The UST 10yr yield starts today at 4.10% and down -4 bps from this time yesterday. The key 2-10 yield curve inversion is unchanged at -22 bps. Their 1-5 curve inversion has stayed little-changed, now by -77 bps. And their 3 mth-10yr curve inversion is slightly deeper at -127 bps. The Australian 10 year bond yield is now at 4.18% and down -6 bps from yesterday. The China 10 year bond rate is unchanged at 2.51%. The NZ Government 10 year bond rate is up +4 bps at 4.78%.
Wall Street has opened its week little-changed with the S&P500 up a mere +0.1% in late Monday trade. But it is still hovering near its record high. Overnight, European markets were also little-changed. Yesterday Tokyo ended its Monday session up +0.8% and that was followed by Hong Kong with a similar rise. But Shanghai went the other way, dropping -0.9%. The ASX200 ended its Monday session up +0.3% and that was mirrored this side of the Tasman with the NZX50 also up +0.3% in light trade.
The price of gold will start today up another +US$8/oz from yesterday at just on US$2027/oz.
Oil prices are down -US$1 at just over US$77/bbl in the US while the international Brent price is now just over US$82/bbl.
The Kiwi dollar starts today at just on 61.1 USc and up +20 bps from yesterday. Against the Aussie we are unchanged at 92.7 AUc. Against the euro we are up nearly +½c at 56.5 euro cents. That all means our TWI-5 starts today at 70.1 and up +20 bps from yesterday.
The bitcoin price starts today firmer yet again. It is now at US$43,177 which is up +2.1% from this time yesterday. Volatility over the past 24 hours has been moderate at just on +/- 2.0%.
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51 Comments
China has such a world of pain coming from collapsing property developers, the losses cannot be Nationalised, ouchy ouch.
So far it's been very slow-moving.
About right for this part of the economic cycle. Maybe slightly retarded due to all the near-free money handed out during covid. But normal service is resuming.
It's like watching a train wreck in slow motion. The first time you see it, it appears slow as you're wildly expectant of what will happen. Watch it again and again and it gets boring. Once it gets too boring, you stop really paying attention and it seems to speed up. Economic cycles are much the same. Watch too closely and nothing seems to be happening. Watch once a month and the pattern becomes clearer.
Will the mighty NZ property market be untouched by external events, such as China’s property ponzi going tits up?
I stand to be corrected but I believe our market is more like a dinghy bobbing up and down in the wake of supertankers.
Mainstream narratives have worked hard to shape the idea of ‘property prices can only go up,’ as though the whole NZ edifice is solid. However there seems to be a significant amount of desperation creeping in… it’s almost as if an entire industry is reliant on the spruiking. What it looks like to me is the beginning of phobos.
Capitulation comes after fear.
Whilst I'm not claiming that the NZ property market is in great shape, I think the repercussions from the property troubles in China onto NZ, will be very minimal. If the NZ property market worsens, it will be on its on merits, or rather, lack thereof.
Mmmm, not so sure Yvil. NZ Herald reporting that the activity of Chinese property developers in NZ and Aus is ‘shrivelling up’, as I predicted. Big retrenchment is occurring. It ‘*may* only have a minor impact. It also may not.
Fair point, but I would say that activity from ALL property developers in NZ is "shrivelling up", and that this is simply due to the difficulty in making a profit in a time when construction costs soar and prices stagnate. I still doubt that it is very correlated to the property crash in China.
Agree that local market factors are a big part of it. But availability of Chinese finance is also a significant factor
You raise a worthy point Yvil. There are of course the unintended consequences of a property crash in China, such as reduced trade affecting our economy… but also on the other hand capital to safe havens. All very tricky to unravel.
Funny you should say that.
I bought the family home in 2002. The time of the Asian economic woes. Most people thought (led by NZ's bank economists) that our housing market would be largely unaffected. They were wrong. I made a wildly low cash offer for the house and was prepared to go up by 33% to secure it. I got it at my offer of $370k. Now worth above $2.5m or so I'm told.
The world is even more 'connected' now than it was in 2002. And remember that the bank economists will be singing the same tune now as they were then (for obvious reasons). Negative market sentiment creates considerable 'economic friction'. And the negative market sentiment is spreading globally among the upper echelons of finance. When Lehrman's went down, many were saying, "Oh well. It's just one bank. And not the biggest either." Similar comments went on for months as the dominoes fell.
There are an awful lot of Chinese people leaving, trying to leave, or at least get their money out of the country. You tell me.
I'm not disagreeing that little old NZ is exposed. I do think it's not a simple equation tho.
lots of money exiting China is Singapore bound
and a potential impact here is less log sales to China so a further softening of the timber market = a positive for building costs here
Maybe. Maybe not.
They can just leave the trees in the ground and wait. (How much debt they carry may force some tree deaths though.)
Will the mighty NZ property market be untouched by external events, such as China’s property ponzi going tits up?
The experts at my water cooler reckon Nu Zillun is isolated from China, in terms of property anyway. Ours is run on the ol' supply and demand; but China's was run on an unsustainable Ponzi and demographics. Ashley Church would have seen this coming.
Anyway.
Hugh Hendry thinks the unease surrounding China's property bubble is well-founded. It says it reminds him of that last runup in the Dow Jones 1927-29. Big difference now is that $60 trillion is on the line.
I'm surprised you don't listen to the water cooler crew more often. I don't expect any effects to be honest, after all aren't China on the "other team" ? For all I know there could be a sudden exodus of dodgy money out of China into a booming property market....welcome to New Zealand.
Grasping at straws there a bit. Straw houses that is.
For all I know there could be a sudden exodus of dodgy money out of China into a booming property market....welcome to New Zealand.
They follow your train of thought to a tee.
China made the mistake of trying to Empire. It came too late to the party - and India is even later; no chance whatsoever.
And India making the common mistake of citing 'strength of the financial sector' - which is precisely nothing.
The main issue I have ever had with your arguments and those of others such as Hagans, is that if we find alternative sources of energy, you’ll be proven wrong and business as usual will continue despite the externalities.
It’s quite possibly one of the biggest ‘if’s’ that humanity has ever contested with.
Jean-Marc Jancovici stated that we reached peak oil in 2008. Regardless of how right or wrong he may be, I do agree that energy ought to be discussed more in relation to our civilization.
We humans built our modern civilisation upon the near total reliance on non-renewable energy sources. It’s quite possibly the most stupid thing we have ever collectively done as a species.
Worth repeating
"...We humans built our modern civilisation upon the near total reliance on non-renewable energy sources. It’s quite possibly the most stupid thing we have ever collectively done as a species...."
I live rurally. Most of the time around the neighbourhood I can hear 4-5 oil powered machines producing our food.
To be exported 1/2 way around the world , so we can import stuff from 1/2 way around the world.
good article by Damian Grant on stuff about this .
“I live rurally. Most of the time around the neighbourhood I can hear 4-5 oil powered machines producing our food.”
Same here. I grow salad greens intensively for a living. Much work is done by my own labour such as harvesting by hand (compared to wheat or spuds being harvested by machines.)
Nevertheless my output would be terrible without cheap energy to bring in soil amendments, irrigation, manufacture of insect netting etc. Take the soil amendments as a specific example. If I didn’t have a huge truck deliver compost to me, nor any cheap blood and bone fertiliser available, I’d have to divest in growing leguminous cover crops, or having animals graze portions of the land in order to maintain/ameliorate soil quality. Thus my revenue would be diminished.
The mixed cropping neighbour makes several passes a year with a tractor before a harvest is complete. The energy used per calorie is enormous, when compared with historical norms.
We humans would be in so much trouble without access to cheap energy.
Is it stupid? as a species we wouldnt be 8 billion strong without the use of FF or necessarily the top dog - and thats not saying that this is a good outcome for the planet but it has been good for our species
150 years ago FF wasnt a thing and like lots of change we now recognise the negative impacts and externalities. However when I was a kid FF was considered a boon for many reasons and still is. That there is a downside is also now understood even if not agreed.
It is entirely possible that in another 150 years the FF era will be studied in universities, as part of our history, and people will have other issues to deal with that we can not even imagine (although history suggest greed and incompetent leadership will still be around)
BAU runs up against multiple, cascading other Limits, very soon anyway. That's what the Limits to Growth was all about - it's just that energy is the linch-pin of all linch-pins.
Exponential, dissipative and entropy are the keywords.
Moral of the story: high debt will come back to bite you at some point in time..
We are a nation of high personal debt, so keep some pads ready..
Yes Dgm. It strikes me when the term "Property Investor" is used. When the activity really has been "borrow and hope".
While that has worked in recent years it can also bite. Might be already.
To me "invest" means devoting resource you actually own fully.
It’s like when you go to the horse races and they say over the loud speaker that the race is about to begin, please complete your investments now.
Different corporate activity but Evergrande as a harbinger, seems to have the same attributes & connotations and likely consequences as Enron in the USA prior 2008. An upside down pyramid of interlocking debt, had the wobbles, then toppled.
Sadly for China, this won't be a quick crash from which everyone can pick themselves up and carry on. It will be a slow lingering process from here. Evergrande claims assets of US$240 bln, but that valuation must be very suspect. If China dumps on international creditors in this case, it will accentuate the de-risking pullback underway.
DISCUSSION: CHINA, DYNAMICS, & COMPOUNDING People think statically abt things dynamic. A tiny difference in growth compounds (just as with invts). This means that one needs a miracle for China, India, & S-E Asia to not run the world economy (and accordingly, geopolitics) in 1-2 decades! Over my adult lifetime, I saw China's GDP experience a 30 fold multiplication, while the US 3x, Europe so-so, etc. Past 15 y, US 1.8x, China >3x, India ~2x Europe ~0 (Constant $, some variations PPP) Link
No, it doesn't need a miracle.
Merely that there be physical limits.
Exponential growth - if not 100% disassociated with things physical - will always run into physical limits sooner than those indulging in said growth, think.
Re US :
.3.1%—post-WW2 real growth 1.6%—post-GFC real growth The “most significant economic story of our lifetimes…” As per @DavidBahnsen
in “Our Japanese Economy” (National Review, 11-Sep-2023) #TheSilentDepression Link
There are physical limits, but there are no limits to progress, innovation, efficiency, and expansion of the human mind (for most people).
Political limits.
"...At current nuclear power levels Canada’s 64,000 tons “nuclear fuel waste” can provide Ontario with noncarbon energy for over 5,000 years. Its reuse avoids the emission of 430 billion tons of CO2 while generating electricity worth $60 trillion at 10-cents/kWh today. That’s a cool $4 million per Ontarian, a treasure trove."
https://www.thestar.com/opinion/contributors/how-ontario-can-transform-…
That's good (for you, Yvill).
Last I recall, you made a fairly ignorant comment - that we could get by on high-entropy energy. Please do some research, before making such statements.
(An easy verification of your incorrectness, is that no animal eats it own feces. Indeed, we find the very thought, repulsive. The reason is entropy, via evolution; only those individuals which rejected such action, survived to breed. The reason is that there isn't enough low-entropy (high-quality) energy contained; we've already used it in our muscles and lost it as low-grade heat as we did work. Yet you advocate? Essentially that.
Come on fella - learning time. You might have gone to an august institution, but you still have much to learn.
:)
Elephants eat their own faeces, to add to the beneficial bacteria in their digestive systems. We humans will be finding out a lot more about our own gut bacteria and its relation to diseases in the future.
"An easy verification of your incorrectness, is that no animal eats it own feces"
Maybe you're not as "all-knowing" as you think PDK, perhaps you want to do some reading yourself. There are many herbivores that eat their own feces, I remember as a child, my hamster and my pet rabbit did eat their own feces. There are others too.
"And with humanity’s emissions driving up the earth’s temperature and the frequency of extreme weather, insurers are pulling back on the cover they offer."
This can't be right, Profile keeps telling us climate change and the mitigations are all a big fuss about nothing.
https://www.stuff.co.nz/climate-change/350161472/insurance-wont-cover-2…
agnostium,
Profile is a smart guy, with a highly sceptical mindset and I pay attention to his posts, but he does appear to have a blind spot when it comes to climate change. There is a very good book, The Intelligence Trap by David Robson and it explains very clearly how very intelligent people can go astray in their thinking. In the introduction it looks at someone calling himself Kary. he suspects he was abducted by aliens, is a believer in astrology and denies that AIDS is related to the HIV virus. A nutcase, but wait, this is in real life Kary Mullis, awarded the Nobel Prize for his invention of the polymarese chain reaction. The question is then asked, could his great intellect have also made him incredibly stupid? The book goes on to deal with that and other questions. well worth a read.
They said Galileo was wrong....
Perhaps wean yourself off Stuff and read the AR6 and some peer reviewed research papers.
Normalised New Zealand natural Disaster insurance losses: 1968–2019
"More frequent losses due to extreme weather, notably storms of tropical, sub-tropical and extra-tropical origin, when combined and after adjusting for changing societal factors, show no trend over the record length."
https://www.tandfonline.com/doi/full/10.1080/17477891.2021.1905595
I wonder what the results would be if the timeframe was 1974-2023?
Profile this isnt what people want to hear - it doesnt match the chicken little narrative :-)
but reinforces that we are paying via insurance cost increases for global losses
The insurance industry doesn't give a shit about what Profile and other "reckons" want to believe/get paid to say because they listen to scientific consensus and will adjust premiums based on risk. Climate change = real = much higher likelihood of extreme weather events = higher risk of damage to property = higher premiums to cover potential loses.
The insurance industry loves climate cry babies. Are you paid by the insurance industry to load the Interest comment stream with doom and gloom? I note you completely ignore the peer review paper and go with Stuff who, umm, profit from insurance companies filthy lucre. Climate change porn and useful idiots = reinsurance profits.
"2023 to date has proven to be a much better year for both investors and issuing companies.”
Pennay went on to explain, “Investors have benefited from catastrophe bond returns greater than anything experienced in over 20 years. Secondary spreads tightened as the principal losses associated with Hurricane Ian failed to materialize in a significant way, resulting in mark-to-market gains.
...“The catastrophe bond market’s growth in 2023 has been welcomed by insurers, reinsurers and governments who have sought to complement their risk transfer program with ILS.
“With the ILS market now in its third decade, its ability to bounce back and grow during a time of economic uncertainty and increasing natural catastrophe frequency, is a true testament to its resiliency and overall value proposition to all stakeholders.”
https://www.artemis.bm/news/aon-higher-cat-bond-returns-fuel-investor-a…
Oil prices are down -US$1 at just over US$77/bbl in the US while the international Brent price is now just over US$82/bbl.
Amazing when you realise US oil output is soaring despite the number of rigs not recovering to pre-pandemic levels.
We're at an interesting time in the economic cycle.
Many economies are still showing growth. People are talking about a soft landing. And everyone is predicting central bank rates will come down. This optimism is about right for this part of the cycle.
There is a reason that recessions usually follow inverted rate curves. While everyone has looking at results that were 'created' by investment 24-48 months ago, not too many can see what investment has been made - more importantly, hasn't been made - in the last 12-24 months when central bankers announced they were on the war path. Worse, most don't realise that this same optimism has kept the basket cases from failing. And when they fail, the dominoes start tumbling.
And now - thanks to central bank actions through covid - we have lots of corporate debt that was fixed at very low rates rolling over onto more 'normal' pricing, to say nothing of private debt rolling over. Many businesses like to avoid bad news before Christmas. But after Christmas it comes out. And at this stage of the cycle there tends to be a steady stream of it.
Welcome to the next part of the economic cycle. (It's not the nice part. This is the part where we see central banks continue to doll out the medicine when it is no longer required.)
It ISN'T part of a cycle
It is a linear, exponentially expanding, extraction-based, ponzi.
And yet - within it - there are economic cycles.
There are few straight lines in nature. (Crystals form them, but not much else.)
No - you mistake the relativity; the scale.
The share-market 'crash' of '29, happened with 2 billion people on the planet, consuming much less energy
https://ourworldindata.org/energy-production-consumption
Take a good look at the first graph - and compare the amount of energy going into the system (and thus the amount of work being done) in, say, 1987.
Your 'cycles' are oscillations on the way up a cliff, see? The question, from that graph, is obvious - what happens when the vertical levels-off, and/or trends down? The tremors on the way up, are irrelevant in terms of the macro - physical - problem we face. Mere noise.
Great post Chris.
Boeing-Boeing...
"Former Boeing employees warn production defects ignored by company and US aviation regulator put passengers at risk"
https://www.abc.net.au/news/2024-01-30/boeing-737-max-production-defect…
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