90 seconds at 9 am: China banks avoid full provisioning

US economy grows faster; CETA signed; Iceland goes right; China's biggest banks short-provision; ECB gets QE space; UST 10yr yield holds at 1.85%; oil down, gold up; NZ$1 = 71.6 US¢, TWI-5 = 75.8

31st Oct 16, 7:28am by David Chaston

Here's my summary of the key events over the weekend that affect New Zealand, with news some big China banks are avoiding making key loan provisions.

But first, the American economy grew at an annual rate of +2.9% in the third quarter of 2016 according to data released over the weekend. This was up from the +1.4% pace in the June quarter and is the fastest pace in two years. This higher pace came from an upturn in private inventory investment, an acceleration in exports, a smaller decrease in state and local government spending, and an upturn in federal government spending. These were partly offset by smaller growth in personal consumption, and a larger increase in imports.

Also over the weekend, Canada and the EU signed their free trade agreement. There were a few bumps along the way. And, a much-debated trade deal between the European Union and the United States is not dead and negotiations will continue with the new American administration after November's elections, the EU Trade Commissioner said on Saturday.

In Iceland, there has been much enthusiasm lately for the prospects of the anti-establishment Pirate Party winning their election or being a king-maker. But in the end it looks like Icelandic voters have gone the other way and handed the government to a centre-right party. (A centre-right leader has also been elevated to prime minister in Spain.)

Two of China’s biggest banks, ICBC. and China Construction Bank are testing their regulator’s tolerance by protecting profits at the expense of bad-loan provisions. Both are active in New Zealand and both lend on residential property here. Both reported loan-loss coverage ratios below a Chinese regulatory minimum of 150% of existing nonperforming loans when they disclosed third-quarter earnings. Both are state owned. Neither is facing any sanction. The prize is large for them. For example, in south China's Guangdong province easy credit and strong expectations of price rises, boosted sales of commercial and residential property by more than +50% year on year to US$170 bln, the provincial real estate association said.

In Europe, the rise in yields last week has had an interesting effect on the ECB. At these new higher levels, the ECB is now able to buy more than US$0.6 tln in bonds as part of its QE program.

Here at home, it will be a big day of data releases. Not only are there many debt statistics due out this afternoon, this morning we will be reporting building consent data, and early afternoon it will be business confidence levels.

In New York, the UST 10yr yield is still at its new recent high of 1.85%.

The US benchmark oil price is down today and now under US$49 a barrel, while the Brent benchmark is now under US$50 a barrel.

The gold price is up slightly at US$1,276/oz.

The New Zealand dollar is a touch higher, now at 71.6 US¢. On the cross rates it is higher too at 94.2 AU¢, and against the euro at 65.2 euro cents. The NZ TWI-5 index is now at 75.8.

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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7 Comments

by Stephen Hulme | 31st Oct 16, 8:56am 1477857365

But first, the American economy grew at an annual rate of +2.9% in the third quarter of 2016 according to data released over the weekend. This was up from the +1.4% pace in the June quarter and is the fastest pace in two years.

Hmmmmmm...

Of the purported 2.86% growth (remember: Q/Q),0.83% was due to Net Exports, while 0.61% was the positive contribution of Net Private Inventories growing again. Without those two, GDP was just 1.42% and continuing the same low trend of the past year.

The change in Net Private Inventories was exceedingly small, however, where in Q2 they shrank by $15 billion in Q3 they expanded by not quite $10 billion. For GDP, what counts is the second derivative or the distance between the rates of change from each quarter. In the tabulation for the statistic it was significant that inventories didn’t shrink again whereas for the actual economy this is splitting hairs after years where “growth” had depended on significant inventory accumulation.

As far as exports, the difference this quarter as compared to the prior quarters of the “rising dollar” is perhaps a bit less ridiculous as inventories, but only in the sense of the raw numbers. Exports did increase by a noticeable if still relatively small amount, of which the vast majority of that number was, as ZeroHedge points out, soy beans alone. It isn’t quite the economic revival that it might at first appear.

The reason is largely that US imports continue to be stuck, meaning US demand for goods (and services) from the rest of the world has not changed one bit in almost two years’ time. But because we sent more soy beans abroad due to, apparently, a poor South American harvest, the apparent contribution of Net Exports altogether is unusually large. In reality, it is economically insignificant, demonstrating clearly how GDP is put together to be the most charitable view of the economy. Read more

by murray86 | 31st Oct 16, 9:32am 1477859524

Smoke and mirrors Stephen. I like your subtlety.

by dtcarter | 31st Oct 16, 10:52am 1477864378

So if growing and exporting soya beans doesnt count as 'significant' economic activity, what does?

Should nz be ignoring our second largest export, dairy, when analysing GDP figures?

Would zero hedge et al, be ignoring a drop in GDP, and talking up the economy, when it caused only by a drop in insignificant agricultural exports?

All seems rather selective to me.

by Boatman | 31st Oct 16, 9:28am 1477859339

Hiding your doubtful debts , or not adequately providing for them is the worst sign of bad risk management in banking

The first risk comes from jittery depositors who could cause a run on the bank , the second risk is where inter-bank lending dries up , which is more serious for the whole system .

The second , is by non-disclosure the truth is unknown , so there is no way of knowing if the problem is getting bigger ( worse )

This will not end well if it gets out of hand .

by head_down_bum_up | 31st Oct 16, 10:48am 1477864127

There may be a sacrificial lamb or 2, but in the end, govt will bail out. They have in the past and they will in the future. We are doomed to repeat the same mistakes until fundamentals are changed.

by OpenPensionResolutn | 31st Oct 16, 12:08pm 1477868902

Train-wreck Chinese banks cook books to continue delusions of limitless growth and unbounded wealth.
New paradigm!

Sound familiar?

Seems "Capitalism" and "Communism" aren't so different after all. Let's all hold hands and sing.

by Andrewj | 31st Oct 16, 2:54pm 1477878870

The Medusa system, named after the mythical Greek monster with snakes instead of hair, had one main purpose: to vacuum up vast quantities of internet data at an astonishing speed.
https://theintercept.com/2016/10/23/endace-mass-surveillance-gchq-gover…