90 seconds at 9 am: Regulators stir

90 seconds at 9 am: Chinese loosen bank lending regs; Americans to tighten bank commodity trading; OECD tackles tax evasion; Japan endorses Abenomics; NZ$1 = US$0.792, TWI = 75.2

22nd Jul 13, 8:43am by David Chaston

Here's my summary of the key news overnight in 90 seconds at 9 am, including news of big regulatory announcements.

But first, obviously the big weekend news is the swarm of continuing earthquakes in central New Zealand. This will dominate the news here this week. We have a separate story where you can record your experiences.

Elsewhere, China has moved to deregulate a key control over its banks, its lending rate, allowing them to offer lower rates. The next reform, deregulating the savings rate will be harder, but is expected at some time.

One consequence may be that Chinese banks may now need huge new amounts of capital. Chinese bank reform will unlikely be a smooth process.

American regulators also signaled over the weekend that they are looking to 'review' (and tighten) how banks trade in commodity markets.

Apparently, huge new fines are imminent for some key banks on how they have manipulated some commodity markets. Fine settlements have been growing in this area, and JP Morgan Chase is facing a massive sanction. More on this in Top 10.

Early data out for US June home sales indicates that they climbed to their highest level in nearly four years.

And Japan, the Government has won voter endorsement in upper house elections. This clears the way for a more aggressive 'Abenomics' program.

And finally, Finance ministers from the G20 group of leading nations formally backed an OECD plan over the weekend to tackle international tax evasion and avoidance. That same meeting backed 'growth' over 'austerity'.

Before trading starts this week it is uncertain how the latest earthquakes will affect our currency, but the NZ dollar starts the week at 79.2 USc, 86.5 AUc its highest since November 2008, and the TWI is at 75.2.

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4 Comments

by Roger Witherspoon | 22nd Jul 13, 10:38am 1374446322

An explosive (if complex) piece from Ambrose here:

http://www.telegraph.co.uk/finance/china-business/10191759/China-risks-…

David, I see that the NZ GDP deflator has also turned negative:

http://www.treasury.govt.nz/economy/mei/archive/pdfs/nzecp-charts-feb13…

http://www.stats.govt.nz/browse_for_stats/economic_indicators/GDP/Gross…; table 23 and 24

I gather the GDP deflator is one way of measuring economy wide inflation. Can anyone explain what this all means?

It looks like we have deflation of -0.4% across the economy, and inflation of 0.7% in consumer prices. If this is true, then the real value of our debts just went up by 0.4%.

by Brendon | 22nd Jul 13, 11:19am 1374448775

And read this comment.

"The difficulty in making comparisons to Japan is that the Chinese, faced with this overcapacity, is now manifesting itself in capital flight - almost 25% of many sectors in California real estate purchases are Chinese money." Otsuka Duojinshi Today 05:21 PM

It makes you wonder if Key has backed the wrong horse? Is China more trouble than it is worth?

by scarfie | 22nd Jul 13, 11:31am 1374449461

Roger I will repeat a post of mine from yesterday because it may be pertinent to you question. You may answer mine :-)

Someone check my reasoning here. Hopefully someone with an intimate knowledge of money flows such as Stephen Hulme.

"We are getting large numbers of cash buyers, so what effect does this have on the money supply and interest rates? 73% of New Zealands money supply is debt against residential housing. Since the money supply expands when people take out a loan from the bank then housing is the massively dominant method for that expansion. It isn't actually the New Zealand Bank that creates the money is my understanding, that is done offshore necessitating borrowing at an interest rate and the subsequent conversion to New Zealand currency. Once on the NZ Banks ledger it can then be leveraged. So housing is money if you like.

If a non-resident buyer makes a purchase then it is hightly likely that a local mortgage is retired. The leverage that applies to that money is unwound which contracts the money supply. That means less money required from offshore, so low demand means low interest rates.

The offshore buyer does expand the money supply also and there is also a purchase of NZ currency, but the money doesn't get leveraged and has no effect on interest rates.

Seems to me the overall effect on the NZ economy from non resident buyers is to contract it and that eventually the housing bubble will correct itself without any interference, trouble is it takes the economy with it."

by Roger Witherspoon | 22nd Jul 13, 12:45pm 1374453952

Yes, well my own view on this is that NZ has survived since 1840 on the "export" of land. I think you are seeing the same phenonemon, basically new money coming into the country and buying existing assets. So some of the house sales in Auckland are sort of export like in character. I've not come across anyone more qualified who has looked at this but it is certainly a key part of the Nelson economy - people move here and buy an existing asset (house or land) and then spend money they brought with them improving it (renovation or new house). This keeps the locals in employment whilst the building work lasts.

There may not be anything wrong in this, but something seems a bit ungrounded, like where is the ongoing cash flow to service the asset going to come from. Immigration is a bit like tourism, useful under certain conditions, and highly destructive under others.