US bank profits up; China house buyers shift; German sentiment slips; Mexico growth rolls on; Aussie dairy realigned; techs pay more tax in Aust.; UST 10yr yield at 2.22%; oil unchanged, gold down; NZ$1 = 72.8 US¢, TWI-5 = 75.4

Here's my summary of the key events overnight that affect New Zealand, with news of a deeper perspective of Chinese house-buying demand. They haven't pulled back, they have just shifted focus.

But first in the US, bank profits are continuing to grow. They rose +10.7% to US$48 bln in the second quarter from a year earlier. There is little sign yet that the long heralded challenge from the tech world, and other disintermediators, is posing any challenge to modern banks. And the big banks are said to be much less reliant on the type of wholesale funding linkages that helped accentuate the GFC.

A new survey by investment bank UBS is casting a different light on Chinese buyer demand in offshore property markets. Their six-monthly UBS Evidence Lab: China housing survey doesn't really see demand by customers out of China falling, just shifting. 'Animal spirits' are increasingly behind the re-acceleration in Chinese housing demand," the survey says. "Expectations of higher prices were behind 30% of all purchases in the last 12 months and the reason for two-thirds of buyers purchasing earlier than they planned. The proportion of consumers expecting price declines is at record lows. Higher domestic leverage has also helped fuel housing sales, making credit tightening there more effective than before. Currency risk is an important driver, but not local taxes intended to deter them. In fact, more than two-thirds of respondents said tighter controls would not put them off buying overseas. In most markets the Chinese buyers of residential property abroad tended not to use local banks for financing, and 56% of buyers from China buy with offshore property with cash. Australia and New Zealand are no longer favoured because gains are higher back home and in other markets such as Thailand. But a quarter of Chinese buyers purchase residential property and hold it empty as an investment, and a further 45% buy as an investment that they rent out, so are unlikely to be affected by higher local surcharges on foreign buyers. Buying for family reasons tends to push financial considerations to the background, the survy says.

In Germany, economic sentiment slipped in August. While it is still positive, this slippage come in the middle of their national election campaign.

Mexico, which is in a tough renegotiation of its NAFTA Agreement with the US and Canada, posted its 16th consecutive quarter of economic growth in the June quarter as strong services output compensated for sluggish industrial production. GDP was up +3.0% year-on-year.

In Malaysia, a planned large bank merger between AMMB and RHB has been called off. This sets back ANZ's opportunity to sell down its 24% stake in AMMB. It's back to the drawing board for ANZ which has been working to unwind the Mike Smith Asia-pivot strategy.

In Australia, their major dairy company released full financial year data yesterday and that came with a surprise. Murray Goulburn will struggle to maintain the title of 'Australia's biggest', with its milk intake forecast to sit equal with New Zealand-owned rival Fonterra. Announcing its full year financial results, they revealed its milk intake had dropped nearly -22% from the previous financial year to 2.7 bln litres, and was expected to drop even further over the coming season to 2 bln litres, a level Fonterra is expected to jump up to, partly on the back of the Murray Gouldburn losses of farmer support.

And staying in Australia, the head of their tax office told a Parliamentary inquiry that the world's biggest tech companies are now declaring an AU$7 bln more in sales in Australia every year, that prior to their now profit shifting policies which means they are paying twice, triple and even five times the amount of tax they were previously. They announced that Apple had had a five-year audit and no flaws were uncovered. Microsoft however has just reached an out-of-court settlement with the ATO. But Google, Facebook and IBM confirmed they were still being audited.

In New York, the UST 10yr yield is a little higher today, now at 2.22%.

The price of oil is marginally higher today US$47.50 a barrel, while the Brent benchmark is still at US$51.50.

The price of gold is lower, down -US$5 to US$1,286/oz.

And the Kiwi dollar will start lower today at 72.8 US. On the cross rates we are also lower at 92.1 AU¢, and at 62.1 euro cents. As a result that puts the TWI-5 index at 75.4.

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

Re Chinese buyers: I am sceptical of UBS' conclusion. There have been a lot of purchases made by Chinese buyers in Australia (and some in New Zealand) where the buyer has purchased off the plans, paid their deposit and has been unable to settle and has had to walk away. A buyer doesn't do that unless they have to, especially when the value of the property they are walking away from is at least as high as when they purchased. Foreign income being excluded by AU/NZ banks may have played some part.

Also, the volume of cash outflow from China dropped off a cliff when restrictions were introduced, is that because on that day everyone decided domestic property was a buy all of a sudden? No.

See early 2016 and late 2016;
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/ipTqD1CWAECA/v6/-1x-1.png

China still driving with one foot on the accelerator and one foot on the brake. The engine is hot, the brakes are hot, the vehicle is slowing.

A survey by UBS ?? Gee Surveying Chinese is flawed from the start
Chinese culture dictates you do not offend
Making a pleasant answer up is nicer than saying anything negative.
Follow the $$ not the survey question results
To compound the cultural aspect Chinese are generally also extremely savvy They are not going to reveal their true thoughts either

Not so sure about that - the Chinese I have dealt with in RE have no issues whether they offend a seller with a lowball offer.

I never understood why people are 'offended' by what they consider low ball offers. They don't have to accept the offer. If they bring their property to the market the offers they get are the market. They get to choose the best one for them.

I don't get offended if I want to buy a house but I think they are asking too much.

I think UBS is more trustworthy than any NZ bank

Speaking like you know everything about the Chinese *YAWN*

They announced that Apple had had a five-year audit and no flaws were uncovered. And what did NZ uncover? Consumer electronics giant Apple paid no income tax to Inland Revenue over the past decade despite selling billions of dollars worth of iPhones and iPads to New Zealanders. The revelations about Apple's local tax bill - in addition to international concerns about its use of havens such as Ireland - have sparked concerns a recently announced government crackdown on multinational tax avoidance may not go far enough. Read more

up
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It is NZ culture not to offend companies who turn over more than $10M per annum.

Quantitative easing, which saw major central banks buying government bonds outright and quadrupling their balance sheets since 2008 to $15 trillion, has boosted asset prices across the board. That was the aim: to counter a severe economic downturn and to save a financial system close to the brink. Little thought, however, was put into the longer-term consequences of these actions.

From 2008 to 2015, the nominal value of the global stock of investable assets has increased by about 40 percent, to over $500 trillion from over $350 trillion. Yet the real assets behind these numbers changed little, reflecting, in effect, the asset-inflationary nature of quantitative easing. The effects of asset inflation are as profound as those of the better-known consumer inflation. Read more

In most markets the Chinese buyers of residential property abroad tended not to use local banks for financing, and 56% of buyers from China buy with offshore property with cash. Australia and New Zealand are no longer favoured because gains are higher back home and in other markets such as Thailand. But a quarter of Chinese buyers purchase residential property and hold it empty as an investment, and a further 45% buy as an investment that they rent out, so are unlikely to be affected by higher local surcharges on foreign buyers.

exactly

So what do we think the 25% of Chinese buyers purchasing property, leaving them empty (a Capital Gains based investment) will do, if the property markets looks to be experiencing a serious correction? Will they sell? And if so, how many empty homes will be released back to the NZ native buyer?

And interesting to hear that the Chinese investor no longer sees attractive gains to be had in Australia and NZ when so many housing bulls remain in the comments section of this website. What do the interest.co.nz property bulls know that the Chinese investor does not? Or what does the Chinese investor recognise that the property bull appears blind to or in denial of?

It would be interesting to know when most of this property was bought by the Chinese. If the majority was bought between the end of 2015 and the beginning of 2016 I would think that they are waiting for the 'bright line test' of two years, which was introduced on 1 October 2015, to expire and we might see these properties come on to the market this summer. I would hazard a guess that this would then become a torrent if Labour gets in. They have already managed to get their money out of China so there would be no reason to keep it in an investment losing money, maybe they will turn their attention to commercial property.

Correct. Most of the smart money made its way in 2014/2015, which pushed up the prices astronomically. Chinese bought in droves, expect them to do a big sell off in droves. You may be right about the bright line test, so I wouldn't be surprised if we get around 20k listings of Auckland Property on TradeMe around November 2017 / December 2017 to get out of the bright line test. Of course our dummy real estate agents will blame it on post-Election, but do you really think the Chinese care about NZ elections?

Those who bought in 2014/2015 will want to get out quick, and may still make some money (even with falling house prices). Those who bought in 2016/2017 will sell at a reduced rate, but as I keep saying 50% of something is better than 100% of nothing.

Stop dwelling on the Chinese. They only contributed to less than 3% of the overall house sales.

Course they did, I've got a bridge I can sell you as well...

3% is rubbish and you know it. You are however correct in some respects there are also large amounts of offshore Singaporeans who have purchased property here for investment purposes.

Joke of the election season :)

HONG KONG (Reuters) - China's largest state-owned commercial banks are raising billions to fund investment under Beijing's "Belt and Road" drive, people close to the matter said, bolstering ambitions to revive Silk Road trade routes and internationalize the yuan.

The fundraising comes less than a week after the government said it would strengthen regulation to reduce risk for domestic firms investing abroad and curb "irrational" Belt and Road investment.

The government is increasingly scrutinising international investment after some big-money deals in recent years. Private spending on overseas mergers and acquisitions has since slumped in countries other than those targeted by the Belt and Road initiative, where investment for 2017 hit $33 billion this month. Read more

If the headline and have an article "China house buyers shift"

It means someone was lying.

Each and every kiwi knew even the real estate agent when talk in private would accept but ...............yeah except the people who can act as they did not and do not want to act for vested interest.

Think and Vote.

Should Nick's Myth even be involved in ruinning our country?

Hi Interest.co
It would be great if you could interview or ask the agency Key2 a few questions. They seems to specialise in putting together packages of property developers, land owners and builders. I think this would give a better insight into the new build situation than just having reports from the main agencies like Barfoots. Also I wonder about their compliance under the REAA's duty of disclosure of financial interests (though I have no idea how all of this works, it seems a bit muddled to me and it would be wonderful to have it explained)

The behavior of the Chinese is now intriguing the inhabitants of Springfields globally and the dream of a benevolent Chinese investor buying their suburban patch for a king's ransom is burning and vivid. Even at the height of their bubble, the Japanese never caused such excitement, but those were different times. There's something desperate about seeing entire countries behaving like naive street hookers to attract some of the lucre, much of which we have no idea as to its origins.

[Chinese]Expectations of higher prices were behind 30% of all purchases in the last 12 months

This is an interesting figure because it suggests that 70% of purchasers are buying for reasons other than expectations of capital gain. This is something that I have mooted before and that is these buyers are wanting to buy in countries where the social conditions are attractive and stable.

Also in the news toaday, NZ comes in second, just behind Iceland, in the World's most peaceful rankings list. Up from 4th in 2016.

https://en.wikipedia.org/wiki/Global_Peace_Index

Garbage. It doesn't suggest anything related to the motivations for buying property. You're either grasping for content for a poorly constructed troll or doing it deliberately.

J.C, your hysterical overreaction to my fairly reasonable comment suggests to me that you are holding onto some cherished belief of your own about Chinese buyer's motivation. It's not all about money, it's about buying into a piece of the West. There could be a number of reasons for this, status, a bolt hole, education opportunities for the kids and so on. To accuse that comment of trolling is bizarre. The article plainly states only 30% gave capital gain as their primary motivation.

Zachary, unless they're moving here imminently or are already resident/citizens, I really couldn't give a monkey's why they're buying it. They could be buying it to store cheese in for all I care, fact is they shouldn't be allowed to, a government's responsibility is to its people, not the sensibilities of an overseas speculator. Housing is out of control and overseas money has exacerbated the problem.

If I were to look to understand buyer motivation, I would need research, not an internet troll posting Wiki entries with no evidence or research related to buyer motivations.

It seems you are concerned by the implications of my suggestion. NZ's move from 4th to 2nd safest country in the world is significant.It's not just a Wikipedia article and anyway Wikipedia is a fine resource. Your attitude is so last decade. It makes us the safest English speaking country in the world thus making our real estate and lifestyle very attractive. There are more things playing out here than just financial investments. Have you taken a look outside recently?
I know many Chinese who have come here and taken a financial loss to do so with job prospects and so on.

Money Laundering. 70%.

Being disingenuous as usual. The statistic quoted can only really apply the past 12 months. Unfortunately we don't have statistics for previous years. The lower expectation of capital gain may have more to do realization that the market is changing than " 70% of purchasers are buying for reasons other than expectations of capital gain". The statistics that are presented suggest that 70% of houses are bought for investment purposes (25% + 45%). That suggest that only 30% are bought for other reasons (whatever they may be).

The prime reason that I believe that the Chinese purchase assets outside China is because China offers no safe haven assets. The Communist Party will change the law on a whim ( as witnessed by the changing of the incorporation documents of company's as reported a couple of days ago). This does not create stability or certainty in the financial markets in China. Safe haven assets are generally considered US Treasury Bonds , gold and the like.

While property may be considered a safe haven asset by some , as has been demonstrated in the past house prices do go backwards considerably. Additionally it would be naive to believe that the Chinese are not aware of the sentiment in the local markets to investment (real or imagined) and it's effects.

As to the comment about New Zealand being peaceful - I'm sure an island in the middle of the ocean is peaceful as well - but it doesn't mean you would want to live there.

BadRobot, I assume you are accusing me of being disingenuous. Honestly I found that 30% figure to be quite fascinating. Surely the 70% that bought for reasons other than capital gain appears to support a contention that I have often made here, that is, if you offer for sale real estate in the most peaceful and secure parts of the English speaking West you're going to find plenty of eager buyers, especially in the gateway cities and their satellites.
What has island in the middle of the ocean got to do with anything? We have an international airport frequently serviced by inexpensive twin-engined wide bodied jets.

Well one thing is for sure the spending party is very much over!

China’s PBoC Announces An Army of Over 400,000 To Prevent Money Laundering
https://betterdwelling.com/chinas-pboc-announces-an-army-of-over-400000-...

Article: Missing Chinese Tycoon’s Tomorrow Holdings Puts Investments up for Sale
http://www.theepochtimes.com/n3/2265162-missing-chinese-tycoons-tomorrow...

I went to a meeting where a girl from Zimbabwe was speaking. She was from a poor native family and had migrated here.
She got on the housing ladder and was doing veruy well with several houses and was giving investment advice to other interested in real estate.
So when I asked where she got her first deposit being a single mother and all, she said she borrowed against her Mitsubishi Pajero, so I asked how she afforded her expensive car, and she said she financed it. So the next question was how did the bank give you security against an already encumbered car and she said they never asked.

So I was interested that a bank was so lax and also that they were obviously ignoring basic lending requirements to lend into the housing market, subprime NZ style.

Which comes back to the requirement to create money as debt, to make up for the poor performance of the productive sector, partly due to high costs, driven by government

...I would be very surprised if the bank never asked. It's certainly possible...but I'm more familiar with forms requiring disclosure of outgoings etc. as well as incomes and assets.

Yes, it didn't sound plausible to me either. What bank lends money for a deposit - and for the mortgage on the house as well. Nah, something a miss in the story, me thinks.