Holiday briefing: Demographics drives China

US minimum wages up, retail strong; China struggles with fx controls, housing policy; Brazil monster trade surplus; ASIC calls out bank cultures; UST 10yr 2.45%; oil stable, gold down; NZ$1 = 69.4 USc, TWI = 76.3

3rd Jan 17, 8:27am by David Chaston

Here's a special holiday update of some key events and data you may want to know about today.

Firstly in the US, the push is on to raise their minimum wage levels, with twenty states pushing through increases on January 1. The top minimum wage is now in Washington DC at US$12.50/hr (NZ$18.00) and Washington State and Massachusetts at US$11.00/hr (NZ$15.50/hr). The Federal minimum is US$9/hr (NZ$13/hr). For comparison, New Zealand's minimum wage is NZ$15.25/hr.

Very strong online orders and last-minute shoppers helped American retailers make up for a slow start to their holiday-shopping season, fueling hopes that higher wages, the rising stock market, and lower food and gas prices prompted Americans to spend more this year. Estimates from retail research firms suggest sales growth in the holiday shopping period could be the best in years.

China's manufacturing sector expanded at a weaker than expected pace in December, with growth slowing from the previous month. And that is from the official survey. The unofficial Caixin PMI survey is not out yet. Their much bigger services sector's growth is slowing too.

China's foreign exchange regulator said that it will step up scrutiny on individual foreign currency purchases and strengthen punishment for illegal money outflows, but the US$50,000 annual individual quota will remain unchanged.

And, today's China factoid relates to its urbanisation rate. Currently 56.1% of the 1.376 bln population lives in urban centres. That is 772 mln people, and in just four more years is expected to hit 872 mln. In other words, China is adding the population of Australia to its towns and cities every year (or an 'Auckland' every 4 weeks). This urbanisation will be a powerful and long term driver of economic activity, even if they manage to stabilise their population growth, which is slowing quickly. (For comparison, New Zealand is 87% urbanised.)

This is what makes it so difficult to control China's housing markets. It is a diverse market that has complicated, structural problems. Bubbles in big cities have much to do with financial leverage, whereas oversupply in third- and fourth-tier cities is a reflection more of the the lukewarm economy in those areas.

Brazil posted its biggest trade surplus ever in 2016 as imports plunged amid the country’s worst economic recession on record. The country had a surplus for the year of US$47.7 bln. That beats the record of US$46.5 bln set ten years ago, which was powered by commodity - especially iron ore - exports.

In Australia, the head of banking regulator ASIC, Greg Medford, has warned that parts of the Aussie banks are failing to get the message about the need to live up to community expectations. "I think the problem is that by the time it gets to the middle it's white noise. Many big banks have subcultures … and the problem is breaking through," he told The AFR. "Every single board is focused now on culture. They now know that getting a good culture is not about employing an army of compliance people, it's actually about making sure you've got the right people and setting the tone from the top. But the hardest thing for many of them is to recognise if you've got a subculture that is in conflict with the values you want to drive as an organisation. Stop saying it's a few bad apples. At some point you've got to look at the damn tree and say, what's wrong with us as an organisation? That's what I am saying to these guys."

In New York, the UST 10yr yield is down again today, now at 2.45%.

The US benchmark oil price is now just under US$54 a barrel, while the Brent benchmark is just under US$57.

The gold price is slightly lower, down -US$5 and is now at US$1,151/oz.

The New Zealand dollar is pretty much unchanged and still at 69.4 USc. On the cross rates it is stable at 96.6 AU¢, and 66.3 euro cents. The TWI-5 is still at 76.3.

Bitcoin kicked off the new year by jumping above US$1,000 for the first time in three years, a 125% climb in 2016 - which just shows how far it had fallen and how volatile it has been.

Finally, notice how quickly the country is drying off. It is a trend worth watching. And as a heads-up, we have another dairy auction tomorrow. The futures market suggests we should expect a softer outcome.

The easiest place to stay up with event risk over the holiday period is by following our Economic Calendar here »

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34 Comments

by bw | 3rd Jan 17, 9:30am 1483389050

Just another opinion, of course.
"Fears of a 'massive' global property price fall amid 'dangerous' conditions and market slow-down"
'Countries such as Canada, New Zealand and Sweden had all seen rapid increases in house prices over the past few years. While many of these countries have already introduced policies designed to reduce financial stability risks, including forcing buyers to find larger deposits and imposing borrowing limits a house price crash would also reduce household spending.'
http://www.telegraph.co.uk/business/2017/01/02/fears-massive-global-pro…

by Tom Joad | 3rd Jan 17, 5:07pm 1483416464

But that bubbly looking brown line on the graph is not an opinion it's a fact.

Moreover, that's for the whole of NZ. I suspect Auckland alone would look way scarier.

by profile | 3rd Jan 17, 9:02pm 1483430535

Yeah cracker of a chart that - kiwis doing harder and faster and anyone else.

by Stephen Hulme | 3rd Jan 17, 10:03am 1483391013

Hmmmm...

It’s reasonable to posit that U.S. lending conditions have become the loosest since (at least) 2007, helping to explain the strength in auto and home sales along with the general economy. It’s worth noting that the 2016 U.S. fiscal deficit rose a third to $587 billion, or 3.2% of GDP. Revenues increased 1%, while spending jumped 5%

As of the end of Q3, the U.S. economy was on track for the strongest Credit growth since 2008. Q3 seasonally-adjusted and annualized (SAAR) Non-financial Credit growth reached $2.679 TN (about $2.375 TN SAAR over three quarters) the strongest expansion since 2007’s record $2.503 TN. Household mortgage Credit has been expanding the most rapidly since 2007. M2 “money” supply increased over $900bn in 2016, expanding about 8.0%. Clearly, U.S. rates have been held way to too low for way too long.

Ultra-loose finance was a global phenomenon. According to the Financial Times, global debt issuance reached an all-time high $6.60 TN, surpassing 2006’s record. Global corporate issuance was up 8% from 2015 to $3.60 TN. The year supported the view that things tend to get crazy near the end of epic Bubbles. Read more

Moreover, US citizens' economic fortunes may not be as good as Obama claims. Read more

by Stephen Hulme | 3rd Jan 17, 10:46am 1483393619

Is this our reality?

“130,000 of the 468,000 French farmers are barely making 350 euros a month! More and more of them see no end of this crisis, which has crippled our dairy production, pork- and cattle-growing sectors, and have to quit,” Vandal complained. Read more

by Andrewj | 3rd Jan 17, 11:35am 1483396542

French farmers are doing it tough but they have lot of good land. Money is in rapeseed for ethanol purchased by the EU but not much else.
who want to fight the trend?

http://finviz.com/futures_charts.ashx?t=ZW&p=m1

https://www.bloomberg.com/news/articles/2016-10-06/russia-upends-world-…
http://www.world-grain.com/articles/news_home/Features/2016/06/Trading_…

by Ted Stanton | 3rd Jan 17, 10:50am 1483393852

Sydney and Melbourne still have rising housing market prices with all the imposed taxation,stamp duty and bank restrictions.
Auckland will follow suite with price rises from February because we have record Immigration, no stamp duty, limited capital gains tax after two years, and we have a desired city, rated a top International city.

by CJ099 | 3rd Jan 17, 11:06am 1483394816

There's a big difference between Cities in Oz and Auckland, they have much more business infrastructure and growth, where Auckland business infrastructure is tiny in comparison. And yes we have high immigration but were not attracting the highly skilled or even the wealthy due to low salaries etc.

So who do you think will be able to afford our massively over priced property? And look at Auckland's rental market it's already maxed out, we all know that so not much point in investing in rental property in Auckland.

by NissanGTR | 3rd Jan 17, 2:16pm 1483406174

Who you ask? Chinese.

Every single one of the 1.4 billion are trying to get out of China, whether it is to the US, Canada, UK or Aus.

We only need a small portion to want to come here to completely out price Kiwis.

And then you have India.

by CJ099 | 3rd Jan 17, 5:42pm 1483418561

Yes well the Chinese have really started to clamp down on capital flight and overseas investment, that's why our housing market has switched in to a starting to slide downward direction.

by NissanGTR | 3rd Jan 17, 7:23pm 1483424609

Their capital control won't have an effect at all.

There is always a way to get money out.

by CJ099 | 3rd Jan 17, 9:28pm 1483432107

I think that you'll find that they actually are, why do you think all the Auckland auctions are producing such poor results since November 2016? The answer is; it's when China announced that it was cracking down on Shadow Banking and capital flight. Look at TradeMe, see the difference in the number of properties going to auction.

by NissanGTR | 4th Jan 17, 8:37am 1483472243

[Racist rant removed. Final warning. Ed]

by Zombie ponzi | 3rd Jan 17, 9:41pm 1483432870

The capital controls are having an effect. Lots of off the plan apartments sold in Australia bought by Chinese are not settling because they can't get the cash out or get local finance.

I think of capital controls as a bit like having a road speed limit - put it in place and some will stop speeding, add speed cameras and a few less will, put a large fleet of patrol cars on the road and even less will speed. Of course some people will chance it and speed anyway, but a lot less. Yes there are still some tricks like over invoicing or strapping cash to your body or dividing $50k each between a lot of family members - but it is getting harder and it will keep getting harder I think.

by NissanGTR | 3rd Jan 17, 10:52pm 1483437150

It's too late. See my other post above.

We've hit critical mass. All you need is a few family members and your 50k USD per year and there you go a $2m house in Remuera.

by Zachary Smith | 4th Jan 17, 9:46am 1483476410

If you had a lot of money and you wanted to emigrate to the West and the West was willing to take you it would be rather annoying if your home country held your money hostage. I remember in the old days under Muldoon being restricted in how much money you could take on holiday and thinking that was pretty dumb.
In some ways this restriction acts as a sort of iron or bamboo curtain. It may even stimulate people's desire to emigrate as it is a significant human rights issue when you think about it.
Then when you think about it some more not having enough money to emigrate could be classed as a human rights issue too.
Furthermore allowing rich foreign people to buy up all the property so that locals can no longer afford it is also a human rights issue.
Many human problems are intractable.

by CJ099 | 4th Jan 17, 10:09am 1483477787

If you read through David's links (See above article), I think you'll find that they're being very stringent about their capital controls. Here's yet another article that sums up what's happening fairly well.

China Bolsters Capital Controls Ahead of Trump Presidency
http://www.voanews.com/a/china-bolsters-capital-controls-ahead-of-trump…

by Stephen Hulme | 3rd Jan 17, 10:51am 1483393893

As of January 1, 2017, the experiment in "basic income" has officially begun, with Finland becoming the first country in Europe to pay its unemployed citizens the guaranteed monthly sum of 560 euros ($587), in a "unique social experiment which is hoped to cut government red tape, reduce poverty and boost employment." Read more

by Patricia | 3rd Jan 17, 11:47am 1483397261

How they can call that a BI let alone a UBI I do not know. It is a type of unemployment benefit of a very measly amount. It is doomed to fail. A UBI is when a country gives all its citizens an income that they can live on, with it being indexed to inflation and wages. The only advantage of this proposal is it continues once they start some sort of work. In societies where work is precarious then how can they live on such an amount. A proper form of UBI should be started here in a small town, say Kataia, and give all people over the age of 16 the same amount as Superannuitants get. Then observe what happens in that little town. I would predict that it would blossom.

by sharetrader | 3rd Jan 17, 12:22pm 1483399331

I agree it is an experiment that needs to be done, also need to eliminate all other payments to make it true direct and indirect (housing supplements, tax rebates, including housing)
it needs to run for 25 years to see the effects, there will be people that wont work, without supplements will they survive.
will those working and getting extra be better off or will inflation(especially housing) eat away with the increased money flow.
will wages stagnant as employers not need to pay more, will more jobs be created, will people become more entrepreneurial as they have a safety net or will it work in the opposite
will people settle for a better job that suits them or work life balance as they don't need to strive to earn the maximum
a lot of questions, the problem will be no real experiment will and can be run as politicians will do whats needed for votes

by Stephen Hulme | 3rd Jan 17, 11:44am 1483397098

The second half of 2016 has been a turbulent one for orthodox monetary economics. If you listen to what is being said (meaning the literature) it is being completely rewritten. Central banks have given up on QE not because they think it didn’t work, but because they have been forced to conclude that it couldn’t have ever worked. In other words, the FOMC at long last has embraced the eurodollar futures market.

Mechanically, the Fed now hopes for a best case scenario where they can “normalize” short-term interest rates to a high of perhaps 3%. That is nowhere near normal, of course, which is entirely the point, money as well as economy. It is a scenario that eurodollar futures have been moving toward for just about ten years, all the while dragging the FOMC kicking and screaming into this dark of depression. The whole idea of normal has been redefined to the eurodollar market’s view of it, not the FOMC’s.

Bill Dudley’s petulant reduction in 2007 was that the FOMC set money rates, not the eurodollar market. In reality, the eurodollar market proved monetary policy wasn’t actually money, and that it was reactive to what had already happened. As I put it earlier this month when they voted:

That leaves the second rate hike after all that has happened, and more so what didn’t (2016 was supposed to have been a remarkable economic improvement over 2015), projecting recovery that is in no way faithful to the word – nor, I am sure, what the mainstream is still claiming about it. The FOMC just added its two cents (in the format of idle, useless bank reserves, of course) that it agrees 15 months of contraction in IP is by these orthodox definitions as good as the Fed can make it, the new baseline trend for the US economy. Despite all the wreckage that remains after almost a decade of clearly broken promises, including how malaise has infected so far as to break out in social and political unrest, they are done. Read more

by Roelof | 3rd Jan 17, 1:10pm 1483402256

QE was essentially about lowering long term interest rates.... and in that regard it has been very successful

by Stephen Hulme | 3rd Jan 17, 4:37pm 1483414667

Lower for longer term interest rates forecast a lack of business opportunities that normally demand intense borrowing to finance such endeavour and hence a rate premium return for those willing to underwrite them and forgo the expected returns. Read more

by Roelof | 3rd Jan 17, 9:38pm 1483432726

One has to wonder about the forecasting efficacy of long term interest rates when all the Big Central Banks are manipulating long term rates.... So much so , that some European companies managed to borrow money at -ve rates... Don't u think..?? Central Banks have muddied the waters.... in regards to the information transmission mechanism of prices , that changes in long term rates, should provide...

by MortgageBelt | 3rd Jan 17, 9:24pm 1483431853

The environment is still lower for longer, its just that just recently there has been a small wriggle room opportunity for banks to tweak rates slightly higher. Probably not an ongoing medium term trend.

by Stephen Hulme | 4th Jan 17, 10:47am 1483480061

From JPM.

“True Believer” central banks have created unprecedented distortions in government bond markets. Bond purchases and negative policy rates by the ECB and Bank of Japan led to negative government bond yields. Whatever their benefits may be, they also resulted in profit weakness and stock price underperformance of European and Japanese banks. The poor performance of European and Japanese financials was a driver of lower relative equity returns in both regions in 2015/2016. Read more

by Penguin | 3rd Jan 17, 3:52pm 1483411971

Singapore gets top marks for deflating their housing market whilst maintaining a healthy economy.
They have done it progressively over last 7 years. It did take time to take effect.
Similar curbs are in place over here but we are 3 years behind.

https://www.bloomberg.com/news/articles/2017-01-03/singapore-home-price…

I have no doubt things are starting to peak out here although strong migration will keep prices elevated for a while yet.

by NissanGTR | 3rd Jan 17, 4:09pm 1483412989

We need to fix the housing market, reduce immigration and BAN anyone from getting the pension unless they have worked a min. 25 years.

Vote NZ First. #NATEXIT

by PocketAces | 3rd Jan 17, 4:27pm 1483414066

Oh well there goes the option for one parent to stay at home to raise kids or to perhaps care for aged parents. Wrong, the pension is and should remain universal for NZers but much, much tighter restrictions for immigrants in terms of how long they have lived here before picking it up.

by NissanGTR | 3rd Jan 17, 5:57pm 1483419439

yes, that is what I meant.

by Stephen Hulme | 3rd Jan 17, 5:00pm 1483416027

Because they can?

by profile | 3rd Jan 17, 9:00pm 1483430435

"While Canadians complain about inflated real estate prices, try buying a home in Shanghai.

A two-bedroom unit in “Wonderful Place,” a complex of highrise towers in the city’s northeast, has no closets, a galley kitchen, a minuscule balcony crammed with clothing racks and an extra fridge in the living room. While the grounds boast trimmed lawns and burbling fountains — the area is marketed as a “21st-century eco-friendly knowledge-oriented garden district” — the home is run-of-the-mill. But the cost is not. It is listed for $2 million (Canadian)."

https://www.thestar.com/news/world/2016/12/23/canadas-real-estate-boom-…

by MortgageBelt | 3rd Jan 17, 9:41pm 1483432907

Love the property advertising: In a recent trip o'seas a roadside sign "Notice how these homes bestow your life with various hues of happiness".

by CJ099 | 3rd Jan 17, 9:49pm 1483433349

Yes they're a difficult one to track but this is what was happening back in September: BBC article: Pigeon lofts and tulip fever: What is going on in China’s property markets?
http://www.bbc.com/news/business-37482407

But now it's a much different case at least for offshore investment. China is clamping down on their debt (Read David's article links for more info) and it is mostly down to Mr Trumps election promises. They can't risk their trade currency to running out of control.