IMF's China review warns on dangers of unsustainable debt-based growth; Taiwan's export rise extends; US backs down on tech tax; US jobs shrink; UST 10yr at 1.10%; oil and gold up; NZ$1 = 72.4 USc; TWI-5 = 73.6

IMF's China review warns on dangers of unsustainable debt-based growth; Taiwan's export rise extends; US backs down on tech tax; US jobs shrink; UST 10yr at 1.10%; oil and gold up; NZ$1 = 72.4 USc; TWI-5 = 73.6

Here's our summary of key economic events over the weekend that affect New Zealand, with news of important transitions underway, even as current conditions remain troubling.

At the end of last week, equity markets everywhere rose to new record highs as investors looked past the political unrest in Washington, now just a sideshow, secure in the knowledge this is just 'reaction' and the real long term event happened in Georgia. There was a red-to-blue transition that will likely be repeated in coming years in neighbouring states. Safe haven investments like US Treasuries and gold sold off, with yields rising sharply. Investors expect the incoming US Administration will pass bigger fiscal stimulus and infrastructure spending plans, and get an effective vaccine program underway.

Meanwhile, the IMF says China's economic growth will rebound +7.9% in 2021 after dipping to +1.9% in 2020, and then expand in the +5% range over the following 15 years.

But more importantly, they are calling out the slow pace of structural reform in China and its reliance on debt and Beijing stimulus for this growth. They report that central government debt will grow to +113% of GDP by 2025 and that ignores provincial and local government debt. The IMF implores than to shift away from growth based on massive infrastructure projects, to one driven by consumer demand and supported by a much better social safety net system.

The IMF said China needs to find a way to wind down problem banks, and it warns of the 'decreasing quality' of Chinese corporate debt. Foreign investors are also becoming wary of yuan bonds.

China has reported rising foreign exchange reserves, now up to US$3.217 tln as at the end of December 2020 and almost +2% higher in a year. These reserves are now at a five year high.

Chinese authorities are succeeding in holding iron ore and coal prices from rising further, but they are not managing to get them lower following the recent sharp run up. However they are also not succeeding in getting key imported food commodity prices from their sharp rises, which are continuing. And this is despite sharp falls in local pork prices recently.

Taiwan's export prowess continued in December with another +12% year-on-year rise and boosting their trade surplus to +US$5.8 bln for the month. Helping that was a slowdown in their imports.

The US has reversed its threat to impose tariffs on France in retaliation for France's digital services tax on the tech giants.

And staying in the US, non-farm payrolls fell in December in an unexpectedly disappointing result. Analysts had expected a +100,000 rise but in fact they fell -140,000. It is a backsliding of the minor economic recovery that took place over their summer and autumn. But markets aren't worried; there is an opportunity for 2021 to be the year of a considerable bounce-back, thanks to monetary and fiscal stimulus that will be more flexible and forthcoming after January 20, the delayed effects of buoyant markets over the last few months, and above all the expectations of widespread coronavirus vaccination. Whether that opportunity converts into reality is a major question. 'Reality' has been in short supply in the US over the past four years.

In December 2020 there were 8.9 mln fewer people employed than in December 2019. Their participation rate was 61.5%, and down from 63.3% a year ago. And all this happened while their working aged population grew by more than +1 mln people. Average wage rates rose but that is only because job losses were hardest in low-paid employment, removing them from the averaging calculation.

Still, for many Americans, debt is the answer to financial constraints. The Fed released its consumer 'credit' (debt) data for November and that was +4.6% higher than for November 2019. It rose +$20.1 bln in just one month after falling an average of -US$3.7 bln/month from March to October. To be fair, credit card balances (revolving debt) are still declining and have fallen -US$120 bln so far in 2020 (they rose +US$28 bln in the same 11 month period in 2019.) What is rising fast are personal loans, up +US$112 bln in 2020 so far, compared to +$131 bln in the equivalent period in 2019. Much of this will be car loans, but certainly not all.

Canada also recorded a sharp fall in employment in December. A fall was expected there, but the -63,000 was far larger than expected and wiped out the +62,000 November gain.

The latest global compilation of COVID-19 data is here. The global tally is rising faster, now at 89,892,000 and up +1.5 mln in two days. We are heading for 100 mln within two weeks mainly because the UK variant is taking off worldwide now. It is still very grim in Russia (+22,000 overnight), the UK (+55,000), and South Africa (+22,000). Global deaths reported now exceed 1,931,000 and surging +26,000 in two days as death rates rise everywhere.

But the largest number of reported cases globally are still in the US, which rose +545,000 over the past two days for their tally to reach 22,735,000. The US remains the global epicenter of the virus. The number of active cases rose overnight and is now at 8,957,000 and that level is up +291,000 in just two days, so more new cases than recoveries again by a substantial margin. Their death total is up to 382,000 however (+7000). The US now has a COVID death rate of 1150/mln, sadly comparing with the disastrous UK level (1196).

In Australia, their Sydney-based community resurgence is back under control although officials are on high alert over the risks from the UK variant which is starting to show up in the community. That takes their all-time cases reported to 28,595, and +48 more cases over the weekend with most in managed isolation. But 314 of these cases are 'active' (+11). Reported deaths are unchanged at 909.

The UST 10yr yield will start today up another +2 bps at just over 1.12%. Their 2-10 rate curve is still at +98 bps, their 1-5 curve is also still at +38 bps, and their 3m-10 year curve is holding too at +103 bps. The Australian Govt 10 year yield is unchanged at 1.10%. The China Govt 10 year yield is also unchanged at 3.22%, and the New Zealand Govt 10 year yield completes the unchanged lineup at 1.07%.

The price of gold took a big tumble in New York near the end of last week but at the market close it had rallied slightly to finish up +US8/oz to be now at US$1850/oz.

Oil prices are slightly firmer again today at just over US$52.50/bbl in the US, while the international price are +US$1 firmer at just over US$56/bbl. Rig counts are rising faster now.

And the Kiwi dollar is virtually unchanged at 72.4 USc today. Against the Australian dollar we are softish at 93.2 AUc. Against the euro we are still at 59.2 euro cents. That means our TWI-5 is now at 73.6.

The bitcoin price has dipped below the US$40,000 level today, and still volatile. It has now fallen to US$39,369 and -2.0% lower than where we left it on Saturday. The bitcoin rate is charted in the exchange rate set below.

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

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43 Comments

Outgoing US Secretary of State announces USA will now normalise its diplomatic relationship with Taiwan in that it will dispense with the existing “self imposed” limitations. CCP reaction yet to be voiced. Cannot have been an overnight policy decision but nonetheless hardly makes the wicket less sticky for the incoming administration.

So many toys to be thrown out of the cot, so little time...

Well Trump's base is rapidly losing faith in him since he instantly threw them under the bus after they deludedly stormed the US Capitol Hill to feed his ego. Some still to think he's a billionaire when reality is, that he's just very much in debt. Even more so when he leaves office which is what he's so frightened of.

All the more reason why he should be impeached for a second time, so he can't collect his very generous pension which is in the region of around $219,200 per year ($300k NZD) + free medical, office and staff. He also won't able to run for President ever again (Hopefully they'll ban his family too)!

MSNBC Trump supporters are criticizing his handling of deadly Capitol Hill riots. https://www.msnbc.com/msnbc/watch/trump-supporters-are-criticizing-his-h...

this is just emotive , if you look at what Trump did, say in the Middle East it's very impressive. One of his problems was the GOP never got behind him and took advantage of the majority they had.
They left him to face an unjustified onslaught of false accusations from the MSM, who felt they new best and the rest f the country was full of morons. Well those morons can bite and probably will. Theres a good reason Antifa don't riot in the south.

Trump has changed politics in the USA, the Democrats better watch their backs.

Andrewj,

Does 'impressive' include Iran?

11
up

I think America is wrong on Iran but Iran is the mortal enemy of Israel, and the Jewish lobby is strong in the USA. I also think Obama was wrong on Iran, Syria,Libya and so on.

Big picture stuff that many fail to grasp unfortunately, AJ

Bit of a Gulf wagon circle, like in the old westerns. Egypt, Jordan,Oman, Bahrain, UAE, Kuwait, Saudi Arabia and now Qatar back in the fold. With Israel now within the linkage of that, are they now a better fit with the “good” guys team, rather than the less, let’s say, trustworthy team.

But Saudi is the odd man out.

Aye, but while they are tilting against Iran in Yemen, they are more in than out.

The US has bullied Iran through several presidencies now, so nothing new really

That drone strike was impressive.

Don't agree with much of that at all. But I do agree "Trump has changed politics in the USA". Georgia is the real long-term signal. Trump's stupidity hastened a demographic swing in the South and the Republicans better change tack quick or they will be assigned to the dustbin. The next to switch will be North Carolina, which only needs 40,000 votes to go blue. Then Texas will switch in one or two election cycles, needing a swtich of less than 300,000. What the Republicans are missing is that the the population moves into Southern states are all coming from Democratic areas and that is having a multiplying impact. Forget the local "deplorables"; they will never change. But they will be overwhelmed by a quickening inflow of educated and intelligent workers moving in for the jobs and lifestyle.

"False accusations of the MSM" is just code for not wanting to face facts, as uncomfortable as they may be. Relying on news from partisan propagandists takes people down blind alleys and when you can't acknowledge what is real, you tend to make mistakes and do things that in the end undermine your 'cause'.

What Trump did in the Mid-East is far from impressive - it is regressive, and will take a lot of work to make right. The worst part is that, with Bibbi, he has undermined Israel for another generation. But then, extremists like them are all theater, ignoring resolutions, so hardly a surpise.

Nobody stormed anything. The protesters were let in, welcomed by police and security, and took selfies with the police. The rest is TDS at it's most hilarious.

All the talk on MSM is of a coup...but the sitting president has been impeached, de-platformed and possibly will be impeached again. It appears to me that the coup is happening but not the way it's being reported.

they must be terrified of him

Think they were more terrified of having him outside of the tent, doing the proverbial. The party of the elephant now has a rogue elephant in the elephant’s tent. Four years for the GOP to regather and reform. Did so after Nixon, can be done again? Jeb Bush, back to normalcy platform, would be my pick.

For all the harm they have done, the Trump administration has done some good (although some may be hard to find), but if they do do this it is overdue. Taiwan deserves to be treated as it truly is, a sovereign, independent nation. And the threat to it by China should also be treated as it is, a threat on that nation. If China made the same moves against Korea or Japan the world would be in an uproar, but against Taiwan....?

Biden will go soft on China and choose Russia as the enemy allowing China to invade Taiwan.

Gonna ride this wave of stimulus money right into the beach.

Hope that wave doesn't take us to the rocks.

If we hit rocks, I hope they're made of gold.

Thats going to be the ride of your life as they cannot turn it off..

Ima big fan of Jeremy Grantham. This is a great article.

“The one reality that you can never change is that a higher-priced asset will produce a lower return than a lower-priced asset. You can’t have your cake and eat it. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both – and the price we pay for having this market go higher and higher is a lower 10-year return from the peak.”

So, don't wait for the Goldmans and Morgan Stanleys to become bearish: it can never happen. For them it is a horribly non-commercial bet. Perhaps it is for anyone. Profitable and risk-reducing for the clients, yes, but commercially impractical for advisors. Their best policy is clear and simple: always be extremely bullish. It is good for business and intellectually undemanding. It is appealing to most investors who much prefer optimism to realistic appraisal, as witnessed so vividly with COVID. And when it all ends, you will as a persistent bull have overwhelming company. This is why you have always had bullish advice in a bubble and always will.'
https://www.gmo.com/americas/research-library/waiting-for-the-last-dance...

Heaps of wisdom in that linked article Aj..... The old boy knows what he is writing about... A must read.

The "bubble" word is used so often here ( interest.co ) , in regards to house prices, that is has kinda lost its meaning/scariness. .

If you look at Aj's link to Charles Hugh Smith from yesterday and look at the fine print in the graphic for financial assets as a portion of GDP, well it exclused real estate.

Their best policy is clear and simple: always be extremely bullish. It is good for business and intellectually undemanding. It is appealing to most investors who much prefer optimism to realistic appraisal, as witnessed so vividly with COVID. And when it all ends, you will as a persistent bull have overwhelming company. This is why you have always had bullish advice in a bubble and always will.

Sound like Bitcoin proponents here?

Thanks for the link AJ, a great article indeed. Unlike many others who predict a crash, J Grantham has the courage to put a (rough) timeframe on his stock market crash prediction.

In regard to treasuries and gold, is this a case of sell the news and buy the dip? Surely democrat policy (govt borrowing to spend ) is doing to send interest rates back down from their highs within in the long term downward trend.

Can interest rates really go lower? Negative rates do not achieve any positive outcomes.

And just being picky - your comment "democrat policy (govt borrowing to spend )" is somewhat biased? Are there any Governments, left or right, who are not borrowing to spend these days? It is more about where they are spending surely? Right wing american policy provides socialism for the wealthy, left wing - socialism for the people.

Another way of looking at the trend is what Audaxes says, halving. How many times can interest rates halve from here? Who says we have to actually go negative, and not just add decimal points? I said last year that I don't expect the reserve currency can go negative.

Yes you are likely quite correct about government, my prediction for interest rates/debt creation based on (M.V)+i=P.Q is not political, only how it is created and where it is spent. For now the creating has mostly been in private hands, but I suspect we saw in Covid spending the turning point. My comment is more a response to Davids comment about the reaction in asset classes to a change of party, which doesn't make sense with what you say either.

Fair enough, I agree with David and essentially the premise of your point in that asset prices currently are nonsensical. But there is a part of me, and I think many will share this feeling, that feels that it would have been nice to have the spare cash, and be of sufficient a gambler to risk money say on Bit coin. When I took my break for Christmas/New Year on 18 December, BTC was around US$19 - 20k, just three weeks later it's dropping back from US$40K??!!!!

But there is no way I have enough money to run that risk and nor am I sufficiently clairvoyant to know just when to bail and make the most of it.

When btc and Tesla burst the panic will begin. These two showcase the madness.

No mention of property Rastus? - well I hope you have stocked up because its going to be a long wait ....buckle in as might get bumpy

I imagine most are betting the RBNZ + Govt will save property at all costs

looks like it might have started

I am confident there will be a credit crisis in China. I suspect it may not be far away. But who knows when, 2022 has been my pick for a couple of years.

Fritz... Ive just finished reading a book about Japan.. Basically says that Japans banking system is run by the Ministry of finance , who pretty much dictate policy. https://www.amazon.com/Japans-Policy-Trap-Deflation-Japanese/dp/08157022...'s%20Policy%20Trap%20points%20to,of%20the%20dollar%2C%20or%20both.

One of the big differences is that unlike the western Banking system, ( which exist to make profit), japanese Banks are not profit focused. They exist to make loans to Business , at the policy direction of the MOF.... they exist to serve the MOF..
( Nothing democratic about this system )

I'm thinking China has followed the Japanese Model of mercantilist export growth..
I dont think they will have a banking crisis , in the same way the West will/is/has... China will continually bail out its banks , to serve whatever its policy direction is, in regards to growth etc...?? ( will probably do it in a ruthless way, that impoverishes many ).
Easy to look at China thru a "western capitalist lens"......but doing so , and investing based on that , might be risky !

just my view...

You must have watched ' Princes of the yen' on you tube?

The Tesla Model 3 has claimed the top spot for car registrations for December 2020, overtaking the region’s most popular gas-powered cars, new data from the Society of Motor Manufacturers and Traders shows.

'As a Model 3 owner, my personal favorite Tesla tidbit is that its market cap, now over $600 billion, amounts to over $1.25 million per car sold each year versus $9,000 per car for GM. What has 1929 got to equal that? Any of these tidbits could perhaps be dismissed as isolated cases (trust me: they are not), but big-picture metrics look even worse.'

Grantham , from my link this morning

So UK data, in the biggest car purchase decline year (-29%) since mid WW2, petrol vehicles getting banned soon, with sales incentives. Tesla monthly sales are often achieved by wait-list orders being fulfilled. Surprising if there wasn't an up-tick.
Me, I tow and travel, so my weekend coromandel trip to remote locations could not have happened with a Tesla. I did a day trip with a colleague to Whangarei in their Model 3, he had to withdraw from events during the day to recharge enough to (just) get us home again. A bit pointless from my perspective.