90 seconds at 9 am: Debt sees China's credit rating downgraded

S&P downgrades China's credit rating due to its credit growth; BoJ keeps interest rates on hold; RBA governor says he can't do much more to boost economic growth; UST 10yr yield at 2.26%; oil stable, gold down; NZ$1 = 73.1 US¢, TWI-5 = 75.3

22nd Sep 17, 8:11am by Jenée Tibshraeny

Here's my summary of the key events overnight that affect New Zealand.

S&P has downgraded China’s credit rating, largely due to its debt. Lowering its sovereign credit rating from AA- to A+, the agency says “prolonged” credit growth in China has “increased its economic and financial risks”. It says the government’s efforts to “rein in corporate leverage” could stabilise things in the medium term, but it believes credit growth will remain at a risky level over the next few years. China’s outlook remains “stable”, as its economy is expected to keep performing well.

The Bank of Japan has kept interest rates on hold as expected. It has also maintained a loose pledge to keep buying bonds, diverting from the US central bank’s plan to steadily pull back from these crisis-era measures.

Reserve Bank of Australia governor, Philip Lowe, says a rise in global interest rates doesn't have any automatic implications for Australia. Interestingly, he also says there's not much more he can do to boost the economy. He says monetary policy can help stabilise the economy and make for a more predictable investment climate, but has "little influence on the economy's potential growth rate".

European Central Bank president, Mario Draghi, says those in the euro zone shouldn't look to monetary policy to tackle bubbles. He says financial and business cycles can become de-synchronised in a low inflation environment, and monetary policy is not the right instrument to address these financial imbalances.

New data shows manufacturing conditions in the US's mid-Atlantic have accelerated this month, suggesting an economy picking up steam. The Philadelphia Federal Reserve's manufacturing index has risen to a reading of 23.8, a three-month high, from 18.9 in August.

In New York, the UST 10yr yield has risen since this time yesterday to 2.26%.

The price of crude oil is stable at just under US$51 a barrel, while the Brent benchmark is just over US$56.

The price of gold is down again to US$1,293/oz.

The New Zealand dollar has fallen a little to 73.1 US cents. It’s up to 92.1 AU¢, and down to 61.3 euro cents. The TWI-5 index is at 75.3.

All eyes are on the New Zealand and German elections this weekend.

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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33 Comments

by Boatman | 22nd Sep 17, 8:33am 1506026032

If the wheels were to ever come off the Chinese economy , it would make the 1997 Asian Banking Crisis look like a minor incident in comparison

by Alter Ego | 22nd Sep 17, 8:47am 1506026832

Why do yuh thunk Chinese have been laundering money into New Zealand....They can see the writing on the Great Wall of China...Perhaps?.

by Stephen Hulme | 22nd Sep 17, 9:11am 1506028265

In New York, the UST 10yr yield has risen since this time yesterday to 2.26%.

A trend not reinforced by yield curves and metal prices.

by Andrewj | 22nd Sep 17, 9:25am 1506029131

Had confirmed by two people now, the Chinese are in HB with 1.2 billion to invest in orchards. What will become of us?
Meanwhile, Brady's research paper outlined China's policy of "soft influence" and political and business relationships including former Prime Minister John Key's Parnell house sale in September to a Chinese buyer.

"The property was sold for $20 million, well above market rates for the area, to an undisclosed Chinese buyer," Brady said.
https://www.stuff.co.nz/business/97090218/Chinese-owned-Ashburton-dairy…

by Didge | 22nd Sep 17, 9:52am 1506030756

One can forsee a future where many many more New Zealanders starve. Would our Chinese residents then be able to go home?

by Ngrrk | 22nd Sep 17, 9:53am 1506030829

Are we really this stupid? I fear the answer to that is yes

by two otherguys | 22nd Sep 17, 10:03am 1506031439

Simon Says ... all together now ... 1,2,3

It is staged, carefully managed, manicured, choreographed

The collective silence. How come they come to the same decision at the same time
Witness yesterday the MSM, newspapers and television news, did not report the release of the record sustained inflow of migrants

Has to be the tap on the shoulder

by Smalltown | 22nd Sep 17, 10:54am 1506034440

Ngrrk - No one ever lost money by going long on the stupidity of Kiwis.

Witness the non political political Moronsville protest. Lloyd D gave us a great insight into the thinking of farmers by saying they are now in a great place as they no longer dump all the household rubbish in the river. Oh - and shoot the lightbulbs as they bob away down river. - I think Muldoon was very wrong on his famous Aust emigration IQ comment

by kiwimm | 22nd Sep 17, 10:29am 1506032992

I thought they would be more interested in the Spy Valley vineyard in Marlborough

by Cowpat | 22nd Sep 17, 10:37am 1506033476

Andrewj, with all due respect to Ms Bradys paper she appears to have little idea about Kuangchi Science and relationships with Shanghai Pengxin. Launching a rocket into space may bring readers to the newspaper, but sadly that is not a true reflection oft the activities of Kuangchi science, and related party share transactions and transfers among a number of Chinese companies listed in Hong Kong , Shanghai and Shenzhen. Martin Jetpack was suspended on August 30, after failing to lodge annual reports. On September 20, Kuangchi which has basically overseen its ( not unexpected ) demise as controlling
shareholder has put up 10 million NZD funding, following a 17.6 million writedown in intangible assets. The 10 million is repayable 1 year to the controlling shareholder. Intangible assets are in accounting, subjective and in reality, Martin has nil value. Martin has 9.7 million in the bank end June, this will simply offset Kuangchi's recent funding.The only question, why would John Key sign papers allowing the Chinese, any unfettered access to our airspace. Kuangchi was until recently a manufacturer of paper gifts, Shanghai Pengxin, originally a Chinese housebuilder and recent NZ dairy farmer, and Pengxin International a Congolese copper miner.

by Kate | 22nd Sep 17, 12:02pm 1506038544

The only question, why would John Key sign papers allowing the Chinese, any unfettered access to our airspace.

What papers are you referring to? Who are the parties to the papers/contract? Is that agreement in the public domain? Would really be interested in a link if there is one.

You're right, Brady's conference paper only makes a passing reference - I assumed the 'test' referred to was a one-off thing - not "unfettered access".

PS Oh, my gosh - I hadn't read aj's link until now. Eeeks.

by Kate | 22nd Sep 17, 12:34pm 1506040487

Followed a few links in looking at this. Interesting comments from Gary Romano, ex-CEO of Hunan Dakang;

"It was an opportunity to understand the Chinese mentality and how they approach things."

What he discovered was a different way of doing things.

"The whole ethos of transparency we have in this country ….the business environment there is quite different. Not right or wrong. Just different. For them as they want to do more outward investment just understanding about connecting with the local community and acting responsibly – not just interacting with the business community but the wider community – has been a learning experience.

"I am reluctant to generalise but from talking to other people who work for Chinese companies (we conclude) the way decision-making gets done and the clear delegated authority we are used to in this country is not how it operates (in China).

http://www.stuff.co.nz/business/farming/76518155/why-i-left-gary-romano…

Translation perhaps: I found myself a Western puppet?

by Ralph | 22nd Sep 17, 1:25pm 1506043541

I honestly don't get the China love going around these days, anyone thinking it is business as usual is driving about with their headlights off in the dark.

True story:
I was doing business with a Taiwanese manufacturing company. China had started up their program of joint co-operation areas for IT. Broadly speaking the deal was the government provided land, a building for the factory, unlimited free labour and no income tax. The manufacturer had to bring in the parts for assembly and teach the locals how to do it. Once the Chinese could manufacture any of the parts being imported at an equal quality the manufacturer had to buy the local part.

Remember the manufacturer is Taiwanese Chinese and has relatives on the mainland, so they are not culturally uneducated in the Chinese way of business.
Remember that in China the phrase "the government" means the communist party, which extends to all local government, all prefectures, all banks, army, police, courts -- everything.

So anyway, as part of the deal my Taiwanese friends agreed to let their local "partner" become the local China distributor for the IT things they are manufacturing.

After the factory has been outfitted and everyone trained etc, nine months into selling real products through the local partner the group accountant bangs on the door and asks the CEO when he thinks the outstanding invoices will be paid. "Which are unpaid', he asks. "All of them", says the accountant.

Long story short, after another six months the CEO finally realises that the unspoken part of the deal is these invoices will *never* be paid. And if he keeps chasing them then bad things will start happening with customs and his imported parts. So he can either include it as a cost of doing business or make a fuss and pay it anyway through increases in customs "taxes/fees" (means bribes in our language).

Another true story:
I am buying memory through a small company owned by two brothers in Hong Kong. The brothers have a lot of family inside China and regularly travel from HK to China. A few years into our trading relationship one of the brothers goes "missing" inside China on one of these trips. Turns out his family had some argument with someone well connected with the party and he has been detained by an army general whilst crossing the border of one prefecture to another.

After some enquires they discover a local judge has ruled he owes some "fines" that amounted at that time to over US$1 million dollars and if they want to see him released from detention they must pay these fines. He has not been charged with any crime and there is no trial to be had.

So the other brother was forced to sell both the business and house he owned to raise the million dollars to pay off the general to get his brother out of China.

by Kate | 22nd Sep 17, 1:38pm 1506044307

Yes. Our media really should refer to the CCP government as opposed to the PRC government - given the former is the latter.

by Ralph | 22nd Sep 17, 1:45pm 1506044742

When people use that phrase. 'it's just a different way of doing business', I always wonder what exactly they are trying to wallpaper over.

by NorthernLights | 22nd Sep 17, 2:41pm 1506048064

Exactly KATE !
The People's Republic of China IS the Chinese Communist Party complete with spies in every apartment building in China reporting back to the communist party intelligence bureau. This is fact not fiction
The fact NZ has been so gullible to allow China to buy up farmland & even the countries citizens housing as land banking is obscene
Even more obscene is the use of the words racist & xenophobia against anyone who dares criticize this very unfortunate affair

by J.C. | 22nd Sep 17, 2:47pm 1506048436

From Vietnam, Chinese involvement in infrastructure and development projects is a disaster. Similarly in Cambodia and Myanmar.

https://asia.nikkei.com/Politics-Economy/Economy/China-s-projects-in-Vi…

by NorthernLights | 22nd Sep 17, 2:55pm 1506048933

JC does this mean Chinese investment in NZ Dairy farming will also prove disastrous?
Maybe

by J.C. | 22nd Sep 17, 2:46pm 1506048360

From Vietnam

https://asia.nikkei.com/Politics-Economy/Economy/China-s-projects-in-Vi…

by NorthernLights | 22nd Sep 17, 2:52pm 1506048753

RALPH
Great insights into the swamp our hapless leadership has gotten NZ into
We as a tiny country of 4.5 million dealing with a Communist Party controlling 1.3Billion people
The loser will always be NZ

by NorthernLights | 22nd Sep 17, 2:26pm 1506047172

How could it possibly be that a Chinese buyer pays double the GV on JKeys house ?
Same as how could it possibly be that JKeys govt left the gates wide open for Chinese to speculate in Auckland homes & repatriate the capital with profits untaxed out of NZ for many years
NZers have been conned for years by National who have no strategy for NZ at all except keep the migrants flooding in !
It's a great shame John Key was never as good as his PR which in the end was terrible appearing as a ponytail pulling creep in the media worldwide

by bw | 22nd Sep 17, 9:35am 1506029746

" Mario Draghi, says....financial and business cycles can become de-synchronised... and monetary policy is not the right instrument to address these financial imbalances."
Really?! A bit late to see the light now, Mario!

by Alter Ego | 22nd Sep 17, 9:38am 1506029898

Buy Buy Birdie...Buy Buy.

A little bird told me a few years back, do not make war, buy up Countries...it is cheaper.....and they will be forever in YOUR DEBT....and to do that, one must make a Bank Statement.....look good to some...with their Power and Housing Bills.

Market Rates do not apply when printing and purchasing using paper money and electronically sending us to the Wall.

Hope the holiday was worth it Andrewj.....Nothing changes on one's returns...does it...I ask myself.

by NorthernLights | 22nd Sep 17, 2:29pm 1506047369

Nothing new with foreigners buying the locals in NZ either
What do you think the Maori received for their land ?
Blankets & muskets !

by Stephen Hulme | 22nd Sep 17, 10:00am 1506031247

The most important statement the BIS report makes is in many ways a simple one that requires no special knowledge to intuitively accept. It is the same as my own journey of investigation where for a very long time I was told repeatedly that this wasn’t money or even important, but I could see that it was on both counts by what followed from it.

“These transactions are functionally equivalent to borrowing and lending in the cash market.”

Two banks that exchange a basis swap, for example, report only the value of the basis swap on their accounting statements. Functionally, however, you can see that there is so much more to it than that limited expression. A monetary result happens at both ends. Tradition requires that we focus only on the ends, or really parts of those ends, rather than the swap itself that puts those ends together. It is that piece of balance sheet capacity, not the balance sheet itself, that matters in the modern eurodollar system. Read more and more

by scarfie | 22nd Sep 17, 2:19pm 1506046786

I finally got chance to read those links, and will have to read them again. My thought is the size of a lot of this off balance sheet money can be seen in some asset prices. I am sure that a multiplier could then be applied to account for what is harder to account for. What a minefield though! Perhaps we will only truly be able to calculate it in retrospect when it all unwinds?

I also think Snider is on the money when he eludes to the fact that bugger all people really know what is going on. It is just a steam roller that has been set in motion. Some players have a good view of their part of the system, but not the system as a whole.

by scarfie | 22nd Sep 17, 10:04am 1506031446

That is an intriguing comment by Draghi, I hope he enlightens us to this new wisdom further. Seems to me that when you introduce interest to a money supply it is the direct cause of a number problems that affect business cycles.

It sets up compounding interest payments that require exponential economic growth to service the payments. As an economy runs short of resources to supply this growth, a lowering of interest rates is the outcome. Central banks are not in control of this trend, only the peaks and troughs within the trend. So perhaps Draghi has finally admitted he doesn't have any real control(I don't think this is what he means though).

Perhaps what he really means is "monetary structure", rather than "monetary policy".

It is a shame that our politicians are able to fool everyone by diverting their attention to the argument over fiscal policy, when the real argument to be had is monetary.

by J.C. | 22nd Sep 17, 2:50pm 1506048611

Great constructive comment Scarfie. Thanks for posting.

by Zombie ponzi | 22nd Sep 17, 10:10am 1506031834

The next move in Australian interest rates remains down...

by ham n eggs | 22nd Sep 17, 10:28am 1506032888

the everything bubble ...
http://www.mauldineconomics.com/editorial/infographic-the-everything-bu…

by Andrewj | 22nd Sep 17, 10:56am 1506034560

Neofeudalism is a subtle control structure that is invisible to those who buy into the Mainstream Media portrayal of our society and economy. This portrayal includes an apparent contradiction: America is a meritocracy--the best and brightest rise to the top, if they have pluck and work hard-- and America is all about identity politics: whomever doesn't make it is a victim of bias.
Both narratives neatly ignore the neofeudal structure which disempowers the workforce in the public sphere and limits the opportunities to build capital outside the control of the state-corporate duopoly.

http://www.oftwominds.com/blogsept17/neofeudal9-17.html

by Alter Ego | 22nd Sep 17, 1:12pm 1506042721

I was of two minds to put this up here...But I picked it up from the above blog spot. OFTWOMINDS.

(Credit where credit is due..I changed the name appropriately)

But as it is Friday and not contributed for many a week..here goes the Friday Funny..

Trump told his doctor, I think I'm addicted to Twitter.

His response: "I'm sorry, I don't follow you."

(And neither do I).

by Didge | 22nd Sep 17, 3:00pm 1506049210

Verry funny. I enjoyed that.