90 seconds at 9 am: China's heavy hand used again

US car loan trouble; Canada house sales fall; China GDP data impresses; China stops loans to one large investor; South Korea lifts minimum wage; UST 10yr yield at 2.31%; oil down, gold up; NZ$1 = 73.2 US¢, TWI-5 = 76.7

18th Jul 17, 7:24am by David Chaston

Here's my summary of the key events overnight that affect New Zealand, with news China has moved against one of its largest private companies and their international buying spree.

But first in the US, delinquencies on American sub-prime car loans are rising quickly. The focus is on this because of a court case involving Fiat-Chrysler and Spanish banking giant Santander. No-one is suggesting this type of lending will cause another global financial crisis (there just isn't the scale), but the type of lending practices that got the world into trouble in 2008 with mortgages is evident in these car loans, some of which are failing and now subject to lawsuits.

Across the border to the north, data out for June real estate sales shows a sharp cooling, especially in the volumes sold. Canadian national home sales dropped -6.7% from May to June, and that is -11.4% below the same month last year. Listings rose, but only slightly. And the national average sale price actually edged up +0.4% in June to NZ$543,100 even though that level is down -10% since April. (There are wide variations in prices in Canada across their regions.)

China has released some impressive economic data for June and the second quarter. According to official statistics, China's economy grew at a +6.9% rate which was slightly above expectations. And retail sales were up a very impressive +11%, also higher than what markets were anticipating, and was the highest since December 2015. The data released for industrial production was strong too.

The data saw commodities like copper rise and which is now up +7% in seven weeks.

And just how serious the Chinese authorities are in stopping wasteful outbound investment was highlighted yesterday when they stepped in and forced banks to stop lending to one of their major private companies which as been on an overseas buying spree. It was not HNA this time, however. But it was a move that spooked Chinese equity markets with the Shanghai index down -1.4% on the day.

In South Korea, where the GDP per capita is +9% higher than for New Zealand, they are raising their minimum wage. But it has been unusually low, and the new rate is just 6,030 won or NZ$7.34 per hour. Our adult minimum wage is more than double that at NZ$15.75/hour.

In New York, the UST 10yr yield has started the week slightly lower at 2.31%.

The price of oil is down just slightly today and is now at just on US$46 a barrel, while the Brent benchmark is now just on US$48.50.

The price of gold is up by another +US$5 at US$1,233/oz.

And the Kiwi dollar is marginally lower today at 73.2 USc. But we are unchanged on the cross rates at 93.8 AU¢, and at 63.8 euro cents. As a result the TWI-5 index will start today at 76.7.

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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36 Comments

by Groen_mamba | 18th Jul 17, 7:38am 1500320300

Cracks are showing up everywhere now:
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=118…
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=118…

by Fritz | 18th Jul 17, 9:33am 1500327232

Yep a cbd overbuild crash is right before our eyes

by unaha-closp | 18th Jul 17, 9:53am 1500328385

Overbuilding in Auckland is not a factor.

by Fritz | 18th Jul 17, 9:58am 1500328723

Correct if viewed in aggregate builds across the region.
Potentially very incorrect if viewed in terms of a very distinct submarket like the cbd.
I wouldn't touch the cbd with a bargepole. If international student numbers dry up (it has happened before) rents will go south.

by unaha-closp | 18th Jul 17, 11:16am 1500333391

You're not describing an overbuild crash, don't label Auckland's problems as something as harmless as an overbuild crash.

Auckland's inflated costs made building here a low margin activity. In Auckland there has been no overbuild, definitely. Brisbane, Melbourne and Sydney have built in their cbd about 200-400% faster than Auckland. Aussies will someday soon suffer simple overbuild crashes and their rents will fall dramatically. Auckland's rents will stay high.

Then the fun starts, Aussie cities will attract business with low rents in modern buildings. Auckland will lose business with high rents and old buildings. Aussie cities will continue to enjoy lower building costs, Auckland will continue to have elevated land and construction costs (the 20 year Unitary Plan is to have high costs). Disparity in competitiveness between Auckland and everywhere will increase for the next 20 years.

Auckland is perhaps going to have a 20 year economic contraction.

by Fritz | 18th Jul 17, 11:50am 1500335457

I agree on your call on an economic contraction in Auckland. I see a lot of momentum shifting to Waikato / BOP

by Fritz | 18th Jul 17, 11:53am 1500335616

Cbd rents are heavily reliant on international students and people on work visas. Several things could result in numbers dropping significantly. That would affect rentals. It has happened before and can happen again

by RickStrauss | 18th Jul 17, 11:33am 1500334385

And one thing that could affect these international student numbers is the PTE sector being held to robust standards. At the moment they still get away with a lot.

by sharetrader | 18th Jul 17, 7:59am 1500321542

I am yet to be convinced a minimum wage works as intended,
on the one hand too high and employers find other ways of getting the work done
to low and the state steps in with welfare.
also as you raise it does it not force all other wages up as a consequence then prices rise to compensate for the increased cost over time negating any advantage

by RickStrauss | 18th Jul 17, 9:53am 1500328391

Minimum wage is something you ideally shouldn't need. Supply and demand should work.

However, having no minimum wage is not going to work that well in an environment where the government and some businesses are working hand over fist to bring in as many low-paid labourers as they can, as this negates the above - at least as far as not impoverishing locals goes.

by KH | 18th Jul 17, 10:38am 1500331080

Exactly right Rick. Stop bringing in people to compete with our low paid locals. The wages of our lower paid citizens would go up, and it would remove the need for the government to be involved. Reducing the numbers of people who need government subsidy would be a great thing. Higher wages in that sector would have great effects in health, and not least for those in business when customers with more cash would be good to see.
And yes it would put pressure on business and the shape of some activity would inevitably change. As an employer I would still be prepared to face that challenge.

by bw | 18th Jul 17, 8:02am 1500321742

"In South Korea...they are raising their minimum wage... the new rate is just 6,030 won or NZ$7.34 per hour. Our adult minimum wage is more than double that at NZ$15.75/hour."
And why is our minimum double that of SK? Because no one would be able to live from $7.34 p/h given the fixed costs built into our society, and the biggest of those - in any form - is housing. We have unwittingly driven ourselves into a place where from which there is no painless escape. It's only a matter of who gets hurt, and how badly.....

by nymad | 18th Jul 17, 8:54am 1500324893

Be careful assuming which way causation flows, in this case.
It isn't necessarily that high prices cause high minimum wages.

by Stephen Hulme | 18th Jul 17, 10:21am 1500330112

Today Bloomberg reports on a quarterly survey conducted and prepared by the National Association for Business Economics. Their results show, no surprise, the number of firms reporting trouble hiring workers has risen this year.

"Many economists expect the jobs market to start putting pressure on wages and inflation, though that phenomenon has yet to fully materialize".

To make matters worse, for the study rather than the economy, basic economics (small “e”) is just ignored in favor of “the unemployment rate can’t be wrong.”

“When you cannot bring in the workforce you need, it’s going to affect your sales and affect your profits,” Jankowski said.

Spoken like a true economist. What business in existence would let a shortage “affect your sales and affect your profits?” That’s utter nonsense, for any firm that is facing such a situation would immediately correct it by paying a market-clearing wage. Unlike fantasyland Economics, there is such a thing at every level. To believe otherwise is to live in a land of regressions and unquestioned allegiance to the BLS definition of the labor force.

by Uninterested | 18th Jul 17, 8:02am 1500321756

You sound surprised that the min wage in Sth Korea is low when compared in NZ dollar terms, but it all depends on what the local taxes are and what it can buy.

by gooki | 18th Jul 17, 9:17am 1500326274

Cost of living is lower. In downtown Seoul, you can sit down at a popular local restaurant to a good meal for two, and beer for $25NZD. What's the price in Auckland? 4x that.

by Fritz | 18th Jul 17, 11:03am 1500332617

Despite the lower minimum wages, median gross household income is about US $5 k more than NZ

by Stephen Hulme | 18th Jul 17, 8:13am 1500322404

As CS' strategist Andrew Garthwaite writes, "one of the major features of the US equity market since the low in 2009 is that the US corporate sector has bought 18% of market cap, while institutions have sold 7% of market cap."

The only true increase in aggregate corporate cash flows over the last ten years was when businesses in the US were starting in November 2008 (when systemic liquidity was at its worst) for six months cutting an average of 700k jobs each and every month. It has been a lesson that stayed learned largely because monetary policy has done nothing to alleviate liquidity pressures (proven by more than just 2011), preferring instead the attempted manipulation of sentiment.

Spare cash is, from the view inside of boardrooms, better either hoarded or “invested” in share repurchases. Committing to expansion is under these circumstances (liquidity preferences) the highest risk scenario, meaning high risk and little expected return. Thus, the world remains stuck in liquidity preferences no matter what – at least until someone actually and directly addresses the real monetary problem. Read more

Hence,

What the “low interest rates justify high valuations” mantra has really done is to ensure that all asset classes are now priced at levels that are likely to generate dismal returns in the coming years. The chart below shows our best estimate of 12-year prospective nominal total returns on a conventional portfolio mix invested 60% in the S&P 500 Index, 30% in Treasury bonds, and 10% in Treasury bills. The red line shows actual subsequent 12-year returns on this mix. The current estimate is only about 1% annually, with the Treasury bond and T-bill components responsible for virtually all of that return, as the expected return on the S&P 500 component is close to zero. Read more

by Boatman | 18th Jul 17, 9:11am 1500325903

Please remind me , whats the urban definition of Insanity ?

You would have thought American Banks would have learnt all about lending money to people who cannot afford to repay and then trading the loans in a "package" between each other .

In this game of pass-the-turd-in-a-parcel ended up in the hands of the US Taxpayer last time.

And the sub-prime used car market has had warning bells ringing for a few years now, so you would have thought the authorities would have curbed or at least regulated the practices .

by unaha-closp | 18th Jul 17, 9:58am 1500328736

American Banks have learnt the risky practices have no risk as the American taxpayer will bail out any losses.

by RickStrauss | 18th Jul 17, 10:48am 1500331723

The finest tradition of capitalism: privatise the profits and socialise the losses.

by dictator | 18th Jul 17, 10:05am 1500329124

The financial sector in the US seems unregulated compared anywhere else. The practices are changed somewhat but when the securitised car loans explode we will found out who was depending either on the income, using them as collateral or have margin calls triggered. Who knows what pending train wreck is in the financial sector.

by moneyphobe | 18th Jul 17, 9:55am 1500328502

36 MULVANEY CRESCENT, HENDERSON
https://www.trademe.co.nz/property/insights/address/Auckland/Henderson/…
low estimate 690 sold for 692

12 TAINUI ROAD, TITIRANGI
https://www.trademe.co.nz/property/insights/address/Auckland/Titirangi/…
sold in May 2015 for 655
low 640
Sold for 657
Prices are really starting to drop

by zorba - old | 18th Jul 17, 10:08am 1500329305

700K for 350 sq metres, bordered by the railway line and Waitemata rugby ground on one side, and Swanson Rd on the other - no thanks..

by dtcarter | 18th Jul 17, 10:24am 1500330274

Great indoor outdoor flow.... for your cars! Garage takes up more space than the single living area, lol.

by mspace | 18th Jul 17, 10:35am 1500330906

Well it is West Auckland - got to have room for your classic Holden, your modern Holden ute, and the project Holden you're going to get around to fixing up some day...

by two otherguys | 18th Jul 17, 10:30am 1500330635

Second one, Tainui Road, built in 1940's house? or shack?
Size 70 sqm with fibro-cement cladding
Land size 1580 sqm
Built in the 1940's would (probably) be asbestos cement sheeting
Has to be a pull-down, subdivide into 3 and redevelop
Land Value only @ $415 per sqm
Cost of disposal of asbestos sheeting

by scarfie | 18th Jul 17, 10:24am 1500330263

David, what in your opinion does have the scale to cause another financial crisis? What sort of figure do you see as a threshold? Do you believe that since 2008 leverage in the system has increased, or decreased? And what effect to you think leverage has on the scale you envisage could cause a crisis?

by David Chaston | 18th Jul 17, 10:56am 1500332214

In 2007 just prior to the GFC the US had about $14.8 tln in mortgage debt. Of this about US$1.2 tln was sub prime junk that failed.

The latest May 2017 US Fed data shows the overall level of mortgage debt is about US$14.2 tln - still lower than a decade ago.

Today, total US car loans total US$1.2 tln. It is a bit of a guess/estimate as to the level of sub-prime car loans at present, but some think it could be as high as US$600 bln but most suggest about US$300 bln.

More importantly, the holders of this junk are less likely to be systemically important institutions. Santander is not systemically important for the US (although it may be for Europe. It almost certainly is for the UK).

Steve Eisman has flagged junk car loans as a problem, but even he doesn't think failure here will cause the same problem as mortgages did in 2008. He says borrowers in the US default on mortgages before they default on credit cards. And they default on credit cards before car loans.

Lending standards have dropped for US car loans, but it is not quite the free-for-all of a decade ago. “At the height of subprime mortgages, the standard was, ‘can you breathe?’ It never got that bad in subprime auto. They definitely checked your pulse.”

Of course, I don't know what will cause the next financial crisis. But I don't think it will be US car loans. More likely to be something out of China, I suspect. When? It could be some way off yet - although still probably in Janet Yellen's lifetime :)

by scarfie | 18th Jul 17, 11:05am 1500332728

Hey I really appreciate that you can pull the data just like that. Alt media has their own faults, over dramatising being one. A few facts help to keep perspective.

by rastus1 | 18th Jul 17, 12:11pm 1500336693

My read is that the flow on effect is the concern.

General Motors Co (GM.N) shares fell 2.9 percent while Ford Motor Co (F.N) slid 4.3 percent and Fiat Chrysler Automobiles NV's U.S.-traded (FCHA.MI)(FCAU.N) shares tumbled 4.2 percent.

"The U.S. auto industry faces multiple challenges. Sales are slipping and vehicle inventory levels have risen even as carmakers have hiked discounts to lure customers. A flood of used vehicles from the boom cycle are increasingly competing with new cars"

http://www.reuters.com/article/us-usa-autos-sales-idUSKBN17Y1OA

by ham n eggs | 18th Jul 17, 12:39pm 1500338365

Yeah i agree - the car industry is an important part of keeping the debt ponzi ticking over...so a sales turnover grid lock spreads a nasty virus back through the chain

by Stephen Hulme | 18th Jul 17, 10:33am 1500330811

Canada’s hottest housing market is definitely cooling down.

Total home sales in Greater Toronto dropped to 5,977 in June, the lowest level since 2010 and down 15.1 percent from the month prior, data from the Canadian Real Estate Association show. Average prices are down 14.2 percent since March -- the fastest 3-month decline in the history of the data back to 1988 -- while the ratio of sales to new listings sits at its lowest level since 2009. Read more

by Fritz | 18th Jul 17, 11:06am 1500332774

It won't happen here. NZ is different.

by Gummy Bear Hero | 18th Jul 17, 1:43pm 1500342211

TOP news for Kiwi kids ... hold the presses , ed !

... Gareth Morgan has promised all 18 - 23 years olds a guaranteed $ 200 / week .... a part of his Universal Benefit programme ...

At the very least , Dr M. is coming out with original thinking ,,,, giving us something to ponder ..

by Alter Ego | 18th Jul 17, 7:40pm 1500363629

If I keep on having kids, I will be a well kept man....when in my dotage.

But I will need a multi-bedroom house...and a lot of sex...food for thought.

Free money is not to be sneezed at.....and all for the pleasure of keeping Mr Morgan happy, I will always have a smile on my face.

My kids can donate half. They can stop working, it is all a wonderful pipe-dream.

I should have had a lot more kids, it would have been a pleasure. But as I had to pay 70cents in the dollar tax, when I was working, it seemed to be a chore. To ever work...any more as I was often shagged out...so I stopped.

I am so glad the tax laws are changing...can my kids get this benefit...living abroad, I would then advise my kids to move overseas to a much "Cheaper Place" than NZ...and all for the turn of a screw.

Or a nut jobs...TOP that....Gummy.