90 seconds at 9 am: China business sentiment improves

US CPI stirs; China quits for UST to support yuan outflows; China confidence up with more loans; BofJ to reassess; 3hr grilling for AU bank CEOs; UST 10yr yield at 1.70%; oil and gold down; NZ$1 = 72.7 US¢, TWI-5 = 76.3

19th Sep 16, 7:09am by David Chaston

Here's my summary of the key events over the weekend that affect New Zealand, with news of improving business sentiment in China.

But first, American consumer prices rose more than expected in August as healthcare costs recorded their biggest gain in more than 30 years, and there was a sustained increase in rents and insurance. Excluding food and energy, prices are up +2.3% over the year. Stirring inflation will be welcomed by the Fed policy makers when they meet this week. Signs of American inflation will also influence the bond markets.

China's holdings of US Treasuries fell in July to the lowest level in more than three years, as the world's second-largest economy pares its foreign-exchange reserves to support the yuan. China is the biggest foreign holder of American government debt at $US1.27 tln in bonds, notes and bills in July, down $US22 bln from the prior month, in the biggest drop since 2013. The holdings by Japan, the largest holder after China, rose $US6.9 bln to $US1.20 tln. Domestic holdings of this debt are the biggest proportion, with 52% or almost US$7 tln. China's claim is a bit less than 10%, likewise by Japan.

Confidence among Chinese entrepreneurs has picked up for the second quarter running, according to the People's Bank of China. Their survey showed business confidence was +2.2% higher than in the second quarter. Factory output and retail sales grew faster than expected in August, on the back of a strong housing market and government infrastructure spending.

The bank also released new loan data and that is higher too. New loans grew more than expected in August but were still dominated by housing lending. The monthly total grew to almost +950 bln yuan (+NZ$195 bln), compared with July’s total of +460 bln yuan. Markets had expected and increase of +750 bln yuan (+NZ$155 bln).

Across the border in Hong Kong, a "mad scramble" is going on in their property markets. Hong Kong’s property market is up by +35% in volume in the first two weeks of this month, according to industry experts.

In addition to major assessment announcements from both the Fed and the RBNZ this week, the Bank of Japan is also due to report. This one actually may be more interesting that the other two, because market speculation suggests they may try something quite new - policy settings to specifically target the overall yield curve, rather than just the official interest rate. They certainly need to do something different. But the problem for the Japanese is that such moves just look like they are running out of bullets to deal with structural deflation.

In Australia, the AFR reports that the CEOs of the four major Aussie banks will be grilled for three hours each in front of an Australian parliamentary inquiry. The hearings will be in the first week of October, a non-sitting week for Parliament because it's their school holidays.

In New York the UST 10yr yield is unchanged today at 1.70%.

The oil price will start the week lower, with the US benchmark price now just on US$43 a barrel, while the Brent benchmark is now just under US$46 a barrel.

The gold price is also lower, now at US$1,306/oz.

The New Zealand dollar will open lower as well, at 72.7 US¢, and on the cross rates it is at 97 AU¢, and 65.1 euro cents. The TWI index is now at 76.3.

If you want to catch up with all the local changes on Friday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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22 Comments

by David George | 19th Sep 16, 7:31am 1474227106

Auckland's ten times income housing looks almost sane compared to the mania in China. How does 70 times income appeal, no wonder these folk think we're a bargain.
Housing in major cities in China has seen price hikes over the last year that resemble the famous Dutch "Tulip Fever" bubble of 1637, according to new research by economic consultancy firm Longview Economics.

"I think what's going on in China is troubling ... some of the valuations there are really quite extraordinary," Chris Watling, the CEO of Longview Economics, told CNBC Thursday. "We've double checked these numbers about seven times, because I found them quite hard to believe."

The firm's research found that only San Jose in the Silicon Valley is more expensive than Shenzhen. The Chinese city has seen prices rise 76 percent since the start of 2015, with the acceleration beginning in April 2015 as the country's stock market was nearing its peak. The situation in Beijing and Shanghai is similar, albeit less extreme, the company states.

"Housing in some of the tier 1 cities is more expensive than it is in London, which I think itself is on a bubble, Watling added. "The (stock) market exploded to the upside and then crashed dramatically. That money had to go somewhere, so it washed around the system ... so a lot of it has gone into housing."
The analysis suggests that the typical home in Shenzhen costs approximately $800,000. Watling said that the house-income ratio in Shenzhen is now running at 70 times, compared to around 16 times in somewhere like London.
http://www.cnbc.com/2016/09/15/china-tulip-fever-sees-house-prices-skyr…

by sharetrader | 19th Sep 16, 7:55am 1474228547

this will end same way as their sharemarket crash, its the same mentality and it will be interesting to see if it stays contained in china.
in theory it should do being a restricted market to outsiders

by David George | 19th Sep 16, 8:13am 1474229639

Agreed but the pressure on the likes of Auckland will become even more intense.
You really do have to wonder where it will all end with this easy money policy creating these frightening asset bubbles everywhere you look. Obviously some are more extreme than others but the whole thing is completely unprecedented and highly dangerous. There was a link posted up on the weekend by Joe Public saying how concerned the BIS (Bank of International Settlements) were but seems like the central banks are determined to "whistle past the grave". Perhaps they don't even know what they're doing.
http://www.telegraph.co.uk/business/2016/09/18/bis-flashes-red-alert-fo…

by Boatman | 19th Sep 16, 8:57pm 1474275430

Indeed , things are way too unstable , and there has to be an unpleasant adjustment , its called a recession

by Fritz | 19th Sep 16, 9:05pm 1474275931

I know someone very much in the know who thinks Chinese investors / developers are getting some jitters around Auckland for a few reasons. Who knows whether that will result in a significant pull out of Auckland property.
Time will tell.

by macbet | 20th Sep 16, 10:26am 1474323967

When Irish property crashed the first thing people did is offload the holiday apartments in Croatia and Spain. They couldn't offload fast enough. It's not a parallel to China but it can get irrational pretty quickly on the way down as well as on the way up.

by David George | 19th Sep 16, 3:00pm 1474254015

Just reflecting on that crazy 70 times income housing price. If you started work at age 15, worked for seventy years, retired at 85 and spent nothing on food or clothing or transport or anything you would be able to save enough to buy the average house in Shenzhen. Congratulations!

by Roger Witherspoon | 19th Sep 16, 7:47am 1474228056

healthcare costs recorded their biggest gain in more than 30 years, and there was a sustained increase in rents and insurance

Quite why the fact that the extractive/parasitic classes are on a roll should be an excuse to put interest rates up escapes me. Presumably to keep the Deplorables, ie the workers and middle classes, in their place.

by Stephen Hulme | 19th Sep 16, 10:04am 1474236286

In reality it won't make a lot of collective difference, except to the abused end user.

For the fifteenth consecutive month dating back to November 2014, the US CPI remained less than 1.5%. While this was supposed to be the year where “transitory” effects of oil prices as well as “other” factors dissipated, only in January has the full CPI been above 1.1%. Much like the PCE Deflator, the Fed’s preferred inflation gauge, there is no acceleration evident, with calculated inflation sticking at around 1% compared to around 0% last year. Thus, if there were any “transitory” factors, they would only explain about half of the Fed’s target failure.

The persisting inability of the Federal Reserve (or any global central bank) to achieve its most basic mandate (as it is sees it) is in sharp contrast to the period from just before the Great Recession. During the height (depths?) of the housing bubble, calculated inflation rates either the CPI or PCE Deflator were consistently above the 2% policy target – even when and after Alan Greenspan had raised the federal funds rate considerably. It is quite good evidence on both sides of the GR that the Federal Reserve was and remains more a spectator than a powerful monetary agent while also arguing that the Great Recession was therefore no recession. Read more

by sharetrader | 19th Sep 16, 7:51am 1474228290

billions of dollars not collected by the IRD because of cashies
https://www.tvnz.co.nz/one-news/new-zealand/growing-blackmarket-in-reno…

by head_down_bum_up | 19th Sep 16, 8:06am 1474229210

What?

Andrew Stott from Inland Revenue says it's "the tradesperson breaking the law - the tradesperson is responsible for paying taxes on their income," while for the consumer "it's not illegal to pay cash - it's just silly"

Why does it matter how you pay? And the quality of a trades person doesn't depend on payment method. Either they are an LBP or not. If they are not, then you (supposedly) run the risk no matter how you pay them.

These are the wrong people to be targeting IRD.

by David George | 19th Sep 16, 8:21am 1474230087

What a joke. Did you catch the part where the Asian "tradesman" says " if Kiwi come here the price go right up"

by Ngrrk | 19th Sep 16, 3:55pm 1474257300

This was talked about on RNZ today and the upper estimate of tax evasion in NZ was 9 billion dollars. The obvious question is surely why are there not more resources being thrown into this? 30 million dollars was the estimate for welfare fraud but there are significantly more resources available to catch those involved in this.

by head_down_bum_up | 19th Sep 16, 4:09pm 1474258149

Was that estimate all tax evasion in NZ or just tax evasion via cash jobs to fix a bathroom? Since tax records began or just over last financial year? Because 9B is a very very big tax number.

by Ngrrk | 19th Sep 16, 4:49pm 1474260576

All tax evasion. The known figure was apparently 1 billion but estimates ranged from 5-9 billion

by sharetrader | 19th Sep 16, 5:23pm 1474262580

the cash society in NZ is a lot bigger now, and very open not the old mate of mate will do a week ender on the side for you.
have been offered the same as the video do the fence for cash this much if you want to pay GST this much
and for an amount that made me very uncomfortable

by sharetrader | 19th Sep 16, 8:02am 1474228937

Germany could be headed for new leadership due to the population not being listened to over immigration
http://www.cnbc.com/2016/09/18/merkel-suffers-drubbing-in-berlin-vote-d…

by Stephen Hulme | 19th Sep 16, 9:40am 1474234821

China's holdings of US Treasuries fell in July to the lowest level in more than three years, as the world's second-largest economy pares its foreign-exchange reserves to support the yuan.

Maybe the PBOC is in the market to make money and has better near term uses for it's US TBill hoard than lamely sitting on it? And it may suit to let Japanese banks pass those swapped USD to end user Chinese banks?

A dollar-based investor needs just a few steps to turn Japanese three-month bill returns positive.

To buy the bill, yielding negative 0.24 percent, a fund manager can borrow yen, lending dollars in return. As part of that agreement, they’d pay the three-month yen London Interbank Offered Rate -- now at about negative 0.02 percent -- and receive dollar Libor -- at 0.82 percent.

But the trade becomes especially lucrative because of the basis spread on the cross-currency swap, which determines the cost to convert payments from one currency to another. The swelling appetite for dollars has led that spread to roughly double in the past year, to 64 basis points, or 0.64 percentage point, close to a 2011 high. The dollar lender also receives that amount.

All in, the dollar-hedged yield on three-month Japanese bills is 1.24 percent, near the highest in at least five years, Bloomberg data show.

The People’s Bank of China holds $3.2 trillion of currency reserves, the world’s largest hoard, and about 60 percent of that is in dollars. That makes the central bank a strong candidate to enter into this kind of trade.

“Their dollar reserves are sitting in U.S. Treasury bills, making whatever returns, but they can get much more than that lending the dollars,” said Peter Stella, a Falls Church, Virginia-based consultant who spent 25 years at the International Monetary Fund, leading the central-banking and monetary and foreign-exchange-operations divisions from 2005 to 2009. Read more

by Ergophobia | 19th Sep 16, 1:36pm 1474248995

And the BIS don't think all is going so swimmingly for the Communist Chinee Tryrants: http://www.bbc.com/news/business-37403363

by Stephen Hulme | 19th Sep 16, 2:31pm 1474252313

They (BIS) also posted a comprehensive dissection of cross currency basis swaps entitled: Covered interest parity lost: understanding the cross-currency basis - read article - worth a look.

by Ergophobia | 21st Sep 16, 12:11pm 1474416718

Fascinating SH. I recall being taken aback, early 2009 I think, when the US Federal Reserve and Dept. Of Treasury dropped the, hitherto mandatory, requirement for periodic mark-to-market tests of banks balance sheet assets. Any linkage here I wonder?

by Boatman | 19th Sep 16, 8:55pm 1474275346

We are really staring down a barrel in the world economy , and things are way out-of-sync .

We all need to go back to basics .............

Take care of your health
Eat healthy foods
Get regular exercise
Live frugally and carefully
Save for a rainy day
Reduce debt
Sleep well