90 seconds at 9 am: China under long-term pressure

Stocks slip; eyes on US Fed and RBNZ; China faces huge budget pressures; TTIP gets a push; UST 10yr yield 1.90%; oil down, gold up; NZ$1 = 68.5 US¢, TWI-5 = 71.5

26th Apr 16, 7:23am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news China is facing some enormous policy challenges.

But first, although New Zealand and Australian markets were closed yesterday, the rest of the world was in business. Equities are broadly lower; Singapore (-1.4%), Hong Kong (-0.8%), Shanghai (-0.4%) and Tokyo (-0.7%) all posted losses to start the week, and Wall Street is down -0.3% so far in mid-afternoon trade.

This is a week where both the US Fed and the RBNZ will make rate policy decisions. No changes rate are expected from either. But the US situation seems better than many analysts expected at this point in the year. And New Zealand policy makers must be counting down the eight months to when the low oil prices will have washed through the inflation data and they have a chance to see rising prices. Cutting rates recently has had no effect on the currency but it does exacerbate the rise in asset (housing) prices. Looking through low current inflation seems to be the favoured approach.

In the US, Ford has revealed it sees itself as a tech company now, and it expects Google and Apple are going to build cars. They also see that by 2020 some cities may have banned vehicles used by private drivers. This is an insider signaling a huge change ahead in 'mobility'.

China is admitting its ambitious 'One Belt, One Road" offshore investment program - basically designed to create export demand for its products - is incurring larger losses than anticipated. The pivot away from an 'investment-led' economy to a 'consumption-led' one is going to be a more rocky road than expected. Cutting excess capacity is a difficult challenge due to an insufficient social safety net in the face of a rise in unemployment, and the problem of how to deal with shrinking state-owned assets due to mothballed production facilities is growing.

Another major budget pressure on China is its aging population. It is now looking at replacing its pay-as-you-go state pension system (like NZ's NZ Super) with individual earner accounts (like KiwiSaver). The move is being forced because the current system "is hardly able to deal with the aging population". China is getting old before it got wealthy.

In Europe, an effort is being made to speed up the drifting negotiations of their TTIP trade negotiations. The successful conclusion and public revealing of the detail over the TPPA provides a road map for how this deal can be done - and undermines the fears of those opposed. But old Europe is full of vested interests who have much to lose from open trade so the task will need real leadership. (TTIP is the Transatlantic Trade and Investment Partnership, the TPPA is the TransPacific Partnership Agreement.)

In New York the benchmark UST 10yr yield opened today at 1.89% and is now at 1.90%. China's wholesale rates are up too on market expectations their improving economy means no more stimulus.

The oil price has fallen today to just under US$43/barrel in the US, while Brent is now just under US$45/barrel.

The gold price has risen US$11 to US$1,239/oz.

And finally today, the NZ dollar opens at about the same level we were at this time last week, now at 68.5 US¢, at 88.8 AU¢, and at 60.8 euro cents. The TWI-5 index is now at 71.5 and still in the range it has been in all year.

If you want to catch up with all the local changes yesterday, 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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23 Comments

by Penguin | 26th Apr 16, 8:16am 1461615401

People have talked about China as the growth engine of the world for years but their population is due to peak in next 13 years and will become a country of retirees. I think it will have deflationary pressures across all asset classes. Our young will then have massive debt and falling house prices. Our governments will have massive unserviceable debt. Not good.

Just to put it into some form of context. In 2015 only around 15% of the Chinese population was over 60. In just 4 years time that figure will be close to 40%.

by sharetrader | 26th Apr 16, 7:59am 1461614357

yes but like all governments they can only see until the next election and set policies accordingly. case in point not continuing to fund the Cullen fund.
as for the OCR I think they will drop as the government is putting pressure on the RB and they will cave.
as for more rules for housing they will be to limp and to late

by CJ099 | 26th Apr 16, 10:20am 1461622822

Yes it's very much a global thing, those who are in a position to snap up property investments to help secure their retirement funds for the future. So not surprising that Asia's Non Resident Investors are hoovering up as much property as they can off shore.

I was just reading a recent article on a UK property investment website, where retirees are struggling to make ends meet without extra income for rental property.

http://www.martinco.com/news/2016/04/18/retirees-would-struggle-without…

And as the OCR and interest rates drop here, NZ Retirees will face the same problem.

Quote from article: "Steve Wilkie, managing director at Responsible Equity Release, said: "For many pensioners, having a buy-to-let property has been a life saver in this low interest environment. While their savings have languished, earning very little interest, and pension income has been hit hard by falling share prices, property income has remained strong".

But as usual Governments will only put in restrictions on their own citizens, not on the Non Resident Investors who seem to be the major driving force behind our massively over inflated property prices.

by Penguin | 26th Apr 16, 8:19am 1461615573

Due to the demographics in China they have had to become a service based economy.

by Stephen Hulme | 26th Apr 16, 8:33am 1461616428

But old Europe is full of vested interests who have much to lose from open trade so the task will need real leadership

Tell me, what are the "open trade" deals NZ negotiated with the US that amount to more than a few $billions after many years?

The TPPA could add an extra $2.7 billion to GDP by 2030 (that's a rise of 0.9%).

by Roger Witherspoon | 26th Apr 16, 8:55am 1461617731

This is unusual:
http://www.telegraph.co.uk/personal-banking/mortgages/banks-will-reach-…

Basically, banks are starting to charge more for loans to compensate for lack of interest on funds on deposit with the central bank. Could be a sea change.

by Stephen Hulme | 26th Apr 16, 9:10am 1461618655

The law of unintended consequences.

At some point you would think the ECB would realize that rather than negative rates being “stimulus” they are just as likely if not more so to be deflationary and depressive. Then again, the Bank of Japan has been at it for more than a quarter century and everything they repeat is still called “stimulus” no matter how obvious the lack of results or the repeated incidences of harm. The more it becomes clear that central bankers will not stop themselves (and nobody seems even close to discussing the possibility of making them stop) the more global businesses of all sizes will increasingly have to devote resources to living under these conditions, hardening exactly all the wrong sorts of habits and priorities. Read more

by MortgageBelt | 26th Apr 16, 8:46am 1461617204

Do we know definitively, through quantitative research, that ( since 2010) lower interest rates have actually 'caused' higher house prices? Correlation is not causation.
E.g. Outlier: provincial housing which has only just started lifting in the last 9 months - otherwise has been flat all the way through lower interest rates.

by Stephen Hulme | 26th Apr 16, 9:33am 1461619983

Bernanke knew this much:

Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy.

Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors' expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about "tail" risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors. Read more

by iconoclast | 26th Apr 16, 9:49am 1461620961

quote - Such signaling can also increase household and business confidence

One can just see all those who lost everything in the sub-prime crisis feeling confident

Millions of households have been taken off the board for the next 2 generations

by Stephen Hulme | 26th Apr 16, 9:49am 1461620942

There has always been something off about the housing rebound from the depths of the crash. It was, of course, aided in good part by various QE’s that had the effect of skewing marginal benefits of the housing recovery to “investors” and especially institutional investors with the best, cheapest access to credit. From a cycle perspective, the great bubble ended in 2006 with record home ownership that didn’t last, with those marginal homes now in institutional hands largely being rented out to those that no longer own. Read more

by iconoclast | 26th Apr 16, 9:44am 1461620668

The name of the game has always been borrowing to invest in inflation and capital gains. As there has been no serious uplift in prices in the regions outside Auckland the provincials were hardly going to borrow to invest in nothing, regardless of the cost of money

by frazz | 26th Apr 16, 8:57am 1461617871

In other news in a dramatic shift in position, John Key is threatening to apply a land tax to foreign-based house buyers if there is evidence they are pushing up New Zealand house prices - and it could apply to Kiwis abroad. After rubbishing the idea that foreign buyers are a problem John Key guts instinct thinks that data due out in 3 weeks will prove there is no issue. Now over to the weather desk
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=116…

by Penguin | 26th Apr 16, 9:25am 1461619506

The most sensible solution would to introduce a land tax for all and then passport holders and residents would get exemptions. It would have the benefit of gathering revenue from the shonky corners.

by O.Farr-Kinnell | 26th Apr 16, 9:53am 1461621238

With the ability of banks, equity traders, retailers etc. to use "real time data", it begs the question why the Land Transfer Registery cannot do it, so it is updated constantly. But I guess that would not give time to massage statistics into the desired result.

by Penguin | 26th Apr 16, 10:03am 1461621811

It is crazy really. What it really needs as well is the beneficial owner to be disclosed on the deeds so there is full traceability. It has just been introduced in the UK and is easy to implement.

by iconoclast | 26th Apr 16, 10:43am 1461624214

They know
You would be suprised just how automated govt departments are and how much they know

Motor vehicles and registrations, and Warrants-of-Fitness. All done on-line real-time

My experience
As a recent returnee from AU after a life-time away, applied to IRD for a number, got the response within half an hour - even got a phone call - they still had me on file - no new number required. Then, at a local medical clinic they wanted some obscure ID number for ID purposes in some central Health System data-base which I knew nothing about. Yep, sure enough, there I was. Very old address. Got very long memories they have

by Stephen Hulme | 26th Apr 16, 9:00am 1461618057

Another major budget pressure on China is its aging population. It is now looking at replacing its pay-as-you-go state pension system (like NZ's NZ Super) with individual earner accounts (like KiwiSaver). The move is being forced because the current system "is hardly able to deal with the aging population". China is getting old before it got wealthy.

Norway faces a similar predicament.

Norway increased withdrawals from the nation’s wealth fund again in March, running ahead of estimates made by the central bank just two months ago.

At the faster pace, full-year withdrawals would top an estimate of 80 billion kroner given in February by the central bank governor, who oversees the $860 billion fund. Read more

Just as: Bond investors are taking bigger risks than ever before - A half-percentage point increase would wipe out $1.6 trillion Read more

by Penguin | 26th Apr 16, 9:05am 1461618322

In principle I'm not against a land tax against foreign investors( not NZ passport holders). In fact finally a positive development.The problem is identifying whether a property is owned by an overseas investor? We only have data for a few months.

by ex agent | 26th Apr 16, 9:06am 1461618417

Looks like JK is finally on the warpath. If the RB get involved also in the Auckland market it will get interesting.

by Joe Public | 26th Apr 16, 9:12am 1461618743

Frazz & ex agent good reporting !!! .

Interest.co.nz surely JK's comments are news worthy for a country where house prices is topic number 1 ?
Looking forward to seeing the full write up and fingers crossed National actually do something.

by sharetrader | 26th Apr 16, 10:19am 1461622740

also what about the aussie election is now going to be fought on neg gearing, it will be interesting to watch the arguements, yesterdays own goal by the government was interesting and in bad taste

by Stephen Hulme | 26th Apr 16, 10:38am 1461623894

Real estate props up the country. About 65 percent of Australian bank loans are mortgages and property comprises 55 percent of the nation’s household wealth, according to Bloxham, who previously researched housing for the central bank. The household debt-to-income ratio rose to 186 percent in 2015 from 167 percent in 2011. Read more

An absolutely appalling disclosure of sub-optimal national risk management practice - where are the regulators hiding and who paid them off? - it's time to stop the lunatics from running the asylum into the ground.