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US new home sales jump; Chinese banks face liquidity stress; Aussie banks face capital demands; Aust pension risks; UST 10yr yield at 2.42%; oil lower, gold up; NZ$1 = 70.4 US¢, TWI-5 = 75.3

US new home sales jump; Chinese banks face liquidity stress; Aussie banks face capital demands; Aust pension risks; UST 10yr yield at 2.42%; oil lower, gold up; NZ$1 = 70.4 US¢, TWI-5 = 75.3
24th Mar 17, 7:29am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news of bank liquidity issues in China, and potentially Australia.

But first, sales of new American single-family home rose to a seven-month high in February. This is a counterpoint to sluggish sales of pre-owned homes and rising mortgage rates. New-beats-used in this market. the median price for a new-build American home is US$296,200 (NZ$421,000).

In China, the recent default by a few banks to make settlements in their interbank market is about to be followed up by an even larger liquidity test. Most banks have rushed to use negotiable certificates of deposit, which are short-term bond-like loans with durations of one month to one year. The amounts outstanding are huge and a liquidity crunch is approaching fast. Only the central bank can bail this situation out; but if they do they are just ignoring an inevitable truth - that credit growth is out of control. At some point they will face up to the unsustainability.

In Australia, prudential regulator APRA is apparently mulling significant changes to the way banks calculate their own risk weightings. They may get especially tough on weightings for investor lending although all risk weightings are expected to rise under their direction. One analyst calculated the additional capital needs for each major bank for a 10 bps rise in these weightings and that amounted to AU$5.3 bln. However APRA is contemplating much, much more than a +10 bps rise - maybe as much as a doubling - which could require up to AU$40 bln in new capital. New Zealand bank subsidiaries are already paying for tighter APRA rules, and this new move could impact us here as well, as the big Aussie banks scramble to raise these vast amounts of new capital.

And staying in Australia, a new report shows that sharply declining rates of home ownership will mean that public age pensions may need to be hiked substantially just to cover basic housing costs of the elderly. Governments have assumed most retirees will have a paid-off home as a key asset. But without that and on-going costs of rising rents, the housing component of basic pension provisions will drive rapidly rising demands for higher transfers. The amounts are going to be very large.

In New York, the UST 10yr yield is up a little today and is now at 2.42%.

Oil prices are unchanged at US$48 for the US benchmark, while the Brent benchmark is under US$50.50 a barrel.

The gold price down -US$2 to US$1,246/oz.

And the New Zealand dollar starts today at the same level it was at this time yesterday at 70.4 USc. On the cross rates the Kiwi dollar is at 92.2 AU¢, and against the euro is at 65.2 euro cents. The NZ TWI-5 index is at 75.3.

If you want to catch up with all the 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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24 Comments

by  Stephen Hulme  |  24th Mar 17, 8:32am 1490297536

Only the central bank can bail this situation out; but if they do they are just ignoring an inevitable truth - that credit growth is out of control. At some point they will face up to the unsustainability.

I don't think so.

Viewing Chinese money from the perspective of the eurodollar, and the sometimes clear tradeoffs that are presented by it, we find a consistent pattern but one that offends mainstream sensibilities on a range of subjects. The constant through it all has been the general ineffectiveness of whatever China’s central bank does to assemble its “neutral” stance, though not for lack of trying. If there is one thing Chinese monetary officials have done since last February it was to print RMB in a way in which Ben Bernanke could only have dreamed. And like the Fed, because the PBOC has done so it is just assumed that it all must have worked, because why wouldn’t it?

It’s a question I answered in anticipation almost exactly three years ago now, quite some time before the “rising dollar” ever became a thing:

What all this data shows, as opposed to conjecture about the supernatural powers of central banks, is that yuan’s devaluation may be directly tied to dollar shortages. In fact, as I argue here, it is far more plausible that a dollar shortage (showing up as a rising dollar, or depreciating yuan) is forcing the PBOC to allow a wider band in order that Chinese banks can more “aggressively” obtain dollars they desperately need. Worse than that, the PBOC itself cannot meet that need with its own “reserve” actions without further upsetting the entire fragile system. Read more

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by  Roger Witherspoon  |  24th Mar 17, 10:31am 1490304711

The idea that the PBOC is even more desperate than their clueless peers seems to fit with this article:
http://www.interest.co.nz/bonds/86647/economist-warns-capital-controls-…

Andrew Hunt, fears China’s latest tightening of capital controls has gone a step too far and could cause inflation to soar.

I found the idea of rising inflation in China causing rising inflation in the US rather intriguing. Does it fit with your view of the mechanisms at play?

I know everyone has been expecting inflation to suddenly emerge for a long time now, but, on the basis that pendula do swing, maybe it is about to roar back to life, apparently from nowhere?

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by  dictator  |  24th Mar 17, 10:44am 1490305478

I found that article to be an interesting theory.

On the ground China needs a lot of capital investment in productive activities. Seeing how undercapitalised many farms are amazed me. The Government wants the rich investors to invest in China, but the investors don't want to and have been investing offshore where they can. To an extent why would they want to invest in the stock market and property bubbles with a lack of regulation in place. Many company directors will cut and run with the money at a certain point assuming their company actually operated profitably.

If they do keep the yuan inside the country the money needs to go somewhere. Will it be spent, invested in market bubbles or go into productive investment? Hard to say.

The capital controls don't necessarily make changes to Chinese zombie companies that will turn them profitable, or pay their workers higher wages. The concept of inflation requires Chinese companies to increase profit margins and trigger inflationary changes. It may happen but it would take a big push from the top that doesn't seem to have happened yet.

There is an alternative scenario where the inflation doesn't happen and the Government goes for stability by maintaining things as they are. Really a lot is riding on the CCP.

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by  Boatman  |  24th Mar 17, 11:15am 1490307302

So could this cause a run on Chinese Banks ?

Somehow I doubt it .

Because the Banks are all State owned ( or majority owned ) the State can simply print more money to meet customers demand for cash withdrawals ?

Or am I missing something here ?

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by  dictator  |  24th Mar 17, 11:21am 1490307673

A bank run is unlikely as the Government would just tell everyone not to participate. If there was a queue outside a bank the police would probably be brought in to break up the "protest"/illegal gathering over x number of people.

You are correct in that they would just print more money or buy financial assets with printed money. Their central bank currently owns 90% of the stock market.

Two scenarios in short form are they would take action to trigger inflation which would be a good move to reduce the real value of their massive debts, or to keep kicking the can along hoping that nothing else goes wrong. Either way it's a Government decision and all we can do is watch.

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by  Roger Witherspoon  |  24th Mar 17, 11:26am 1490307983

In my somewhat muddled view, I think the Chinese have been running a massive scam for many years by engineering a current account surplus via recirculating dollars out of the country as fast as they come in. This has suited the Yanks as it's easier to export dollar debts than goods, particularly if you get to decide on an interest rate that suits you. The BIS even have a paper about how China and Germany engineer their current account surpluses. Basically, they cheat, but the Yanks do like killing people in other countries and it's an expensive business, so they haven't really complained too much.

These things work for a while, but eventually they hit a limit and the process reverses. So the Chinese dictatorship still has to print oodles of dosh to keep the masses quiet but now they can no longer sterilise it - hey presto, double digit inflation, just like we had in the seventies.

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by  Stephen Hulme  |  24th Mar 17, 11:34am 1490308489

Did the PBOC ever sterilise fabricated RMB issued in exchange for forfeited USD export receipts funding the US budget deficit, with dollars privately borrowed by US citizens to fund the imports in the first instance?

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by  Roger Witherspoon  |  24th Mar 17, 12:24pm 1490311454

Well put. To answer your rhetorical question - no, but it looked like they did to the Chinese lower caste.

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by  dictator  |  24th Mar 17, 12:09pm 1490310586

A plausible scenario with inflation so high people's heads will spin trying to deal with it. There's a possible future with a lot of pain.

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by  positivelywallstreet  |  24th Mar 17, 12:44pm 1490312674

I guess we have seen all this before trading with Russia and the Middle East from memory.
Brings a new meaning to the expression "Free Trade"

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by  Stephen Hulme  |  24th Mar 17, 8:52am 1490298755

RE APRA:

Higher risk weightings designed to slow the rate of property price growth being considered by the regulator may require banks to hold up to $40 billion in additional capital against loans to property investors, weighing heavily on return on equity and bank profits.

The risk weighting for home loans is currently 25 per cent regardless of whether the loans are for owner occupiers or higher risk property investors.

Around two dollars of regulatory capital protecting $100 of fabricated mortgage debt is not enough to discharge banks' liability to payout loans. As it is banks merely reclassify their liabilities originating from loan contracts from what should be an ‘accounts payable’ item to ‘customer deposit’ Read more

The RBNZ, without prior recourse to citizens concerns, legally presumes to haircut customer deposits to meet missing capital cover in the event of a mark down in property collateral values.

Who works for whom?

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by  Henry_Tull  |  24th Mar 17, 9:26am 1490300814

Who works for whom?

Shall we take a look?

Commonwealth Bank chief executive Ian Narev says a royal commission into the banking sector could undermine it to such an extent that the industry would no longer be able to support job creation through its lending.

Mr Narev told a parliamentary hearing on Tuesday that a royal commission would hit confidence among overseas lenders upon whom Australian banks rely for funds.

Those funds, Mr Narev said, are what banks loan out to "create the economic activity that will create jobs".

"The message that the convening of a royal commission would send about policymakers over the last decade, regulators over the last decade, bank management and governments over the past decade would not be positive for the industry, would not be positive for strength and would not be positive for the perception of our industry as unquestionably strong," Mr Narev told MPs.

http://www.smh.com.au//breaking-news-business/royal-commission-could-co…

Oh I wish it were fake news!

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by  murray86  |  24th Mar 17, 10:32am 1490304736

Is this CEO actually admitting that it is all just a house of cards, teetering on a precipice? All the more reason that regulators need to step in, lock it down and hold more than a few people personally accountable.

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by  David George  |  24th Mar 17, 10:49am 1490305772

Nothing to see here, move along.
Of course it's all about jobs and economic activity say the banks. Yeah Right!

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by  Kate  |  24th Mar 17, 11:52am 1490309560

And doubly infuriating is his repeated acknowledgement of "... over the last decade".

But I suppose what is good about it is that the reasonably small set of individuals ultimately responsible are still alive, still personally enriched by their fiduciary failures and still available for prosecution.

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by  dictator  |  24th Mar 17, 10:29am 1490304599

The risk weighting of 25% is very low. Even here 35%-40% is used, although I think that it should be 100% at least.

All these low risk weightings do is heavily leverage bank profits to fund strippers and drug consumption by the bankers. Of course when things go wrong the banks will be leveraged to the point of destruction. The RBA is responsible for that absurdly low risk weighting.

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by  Stephen Hulme  |  24th Mar 17, 11:20am 1490307655

The risk weighting of 25% is very low. Even here 35%-40% is used, although I think that it should be 100% at least.

Check this table posted by Gareth Vaughan - New Zealand's weighted average risk weight is 28.3%. Read more

Even100% risk weightings offer up a piddling $8-$10 capital cover for every $100 of created mortgage debt.

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by  dictator  |  24th Mar 17, 11:26am 1490307984

There are exceptions that allow going below the target but no matter what it's just not good enough.

I also suggested at least 100% more would be great. Having $8 per $100 would be great compared with less than $2 in Australia and $2.26 here. If the bank won't allow me to put down a 2% deposit on a house or a margin loan for shares, then why should the bank be exempt from the same assessment?

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by  Boatman  |  24th Mar 17, 11:08am 1490306906

HSBC is not referred to as the Laundromat Bank by investment Bankers for no reason

Here's an extract from the Asia Times piece

"Several of China’s state-controlled banks, as well as HSBC’s Hong Kong branch, have allegedly processed hundreds of millions of US dollars from a vast money-laundering operation run by Russian criminals with links to the Russian government and the spy agency FSB.

Documents obtained by the Organized Crime and Corruption Reporting Project show that at least US$20 billion was moved out of Russia between 2010 and 2014 in a vast criminal operation called “The Global Laundromat”.

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by  Stephen Hulme  |  24th Mar 17, 11:27am 1490308033

And no jail time for executives is ever demanded by the supposedly outraged authorities - at best no guilty plea fines paid by the respective bank shareholders.

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by  kiwichas  |  24th Mar 17, 12:31pm 1490311870

And staying in Australia, a new report shows that sharply declining rates of home ownership will mean that public age pensions may need to be hiked substantially just to cover basic housing costs of the elderly. Governments have assumed most retirees will have a paid-off home as a key asset. But without that and on-going costs of rising rents, the housing component of basic pension provisions will drive rapidly rising demands for higher transfers. The amounts are going to be very large.
Sounds like NZ, can't keep on kicking that can down the road for much longer...Anybody listening??

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by  RickStrauss  |  24th Mar 17, 3:11pm 1490321504

That certainly suggests a need to means test the pension. Why on earth increase payments to landed investors as well as to those in need, and saddle it all on the young renters? That's just crazy...whatever happened to social welfare being given on the basis of need?

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by  Alter Ego  |  28th Mar 17, 11:35am 1490654150

https://www.facebook.com/warnerbrosuk/videos/1358174670915547/

One way to ensure your Pension is satisfactorily protected.??...as it should be, but not by any National Govt.

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