Here's my Top 10 links from around the Internet at midday today in association with NZ Mint.
As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz.
See all previous Top 10s here.
My must reads today are #7 and #9 on China's rapidly growing local government debt and what it means for us. A lot, is what it means.
1. Why isn't the dog barking? - It is the great economic mystery of our age.
Why hasn't inflation surged after several trillion dollars of money printing?
Holders of gold are still shaking their heads after years of fevered predictions of hyper-inflation.
Surely all that extra cash will turn into inflation? Well, it's been 5 years now and nothing.
The IMF has recently released a paper (which David has already linked to to) which has got everyone talking again.
My instincts tell me the forces of globalisation, Asia's manufacturing surge, technological unemployment and years of dogged inflation targeting by central bank is keeping a lid on things. Don't forget also the power of ageing, which is depressing spending instincts and heightening hoarding instincts.
Here's ABC with a nice summary of the debate:
Speaking in Washington at the release of the IMF's World Economic Outlook, Mr Simon said the credibility and independence of central banks meant inflation targeting was working.
"There's been an evolution in central banking such that now it's very possible that we really are reaping the benefits of the low and stable inflation targets the central banks have set," he said.
"So one of the consequences is that we think there are actually substantially cyclical unemployment gaps, which means that there is actually the scope for falls in unemployment as the recovery progresses without there being corresponding bursts in inflation."
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China likes its trade partners small...
The agreement was signed during a visit to Beijing by Icelandic Prime Minister Johanna Sigurdardottir, and follows six years of talks between Reykjavik and Beijing.
"This is a major event in China-Iceland relations," Chinese Premier Li Keqiang said.
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3. 'Lemme at some of that freshly printed money' - Here's another sign of the increasing friction in the world of capital flows and relations between banks in nation states.
Reuters reports Italy's Bank of Monte Paschi, which is in deep strife, is claiming over US$2 billion from Japan's Nomura bank.
Italian prosecutors said they have ordered the seizure of 1.8 billion euros ($2.4 billion) of assets from Japanese bank Nomura (8604.T) as part of an investigation into a suspected fraud involving troubled lender Monte dei Paschi di Siena (BMPS.MI).
The seizure order concerned 88 million euros of hidden commissions that they say Nomura received and 1.7 billion euros of funds deposited with Nomura by Monte dei Paschi by way of collateral for the so-called Alexandria trade, which is at the center of an investigation into risky derivative deals.
The trade involved the purchase by Monte dei Paschi of Italian government bonds for 3 billion euros, which the bank financed through a long-term repurchase agreement with Nomura. Prosecutors and the bank's current management say the trade helped Monte dei Paschi to conceal losses by spreading them over 30 years.
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4. Here comes the reaction - FT reports South Korea has announced a major government spending programme to offset the depressing effects of an appreciation of its won relative to the yen in the wake of the Bank of Japan's massive money printing announcement. Noticed how Hyundai's are now relatively more expensive than Mitsubishi's lately?
South Korea would prefer its central bank was able to cut its interest rate, but the bank is worried this would encourage very heavily indebted households to just rack up more debt. South Korea's household debt to income ratio is around 160%. Sound familiar?
New Zealand's household debt to income ratio is over 140% and rising again.
We now live in a world of reaction to massive money printing and currency wars.
Concerns about the household debt burden may have contributed to the Bank of Korea’s decision not to cut interest rates last week, defying heavy government pressure. The central bank has left its policy rate unchanged at 3.25 per cent for a sixth consecutive month despite low inflation.
“Obviously, the BoK sees no reason to cut the rate from the already accommodative level when the economy shows a gradual recovery, while the government wants to see a firmer and faster recovery,” said Kwon Young-sun, economist at Nomura. “But a rate cut will probably exacerbate a debt overhang, which could pose a risk to a sustainable recovery.”
5. The Chinese local government debt worry - I've been banging on about this stunning rise in Local Government Financing Vehicles in China for over a year. Now the Chinese authorities under new leadership have banned new borrowing by these LGFVs. No wonder China's growth rate is slowing.
China's banking regulator has banned the country's lenders from creating new loans via local government financing vehicles (LGFV) as it tries to rein in ballooning risks with rising defaults.
Banks should control loans to LGFVs and must not increase its size, according to a guideline issued by the China Banking Regulation Commission.
"For LGFVs with a lower-than-100 percent cash flow coverage ratio or higher-than-80 percent debt-to-assets ratio, their loans as a share of total bank lending should not be higher than that in the previous year," the CBRC said.
6. Why China won't mind slower growth, but others (like NZ and Australia) will mind... - Here's the FT with a good analysis of the Chinese slowdown:
If commodities exporters were pinning hopes on an acceleration in Chinese growth, Monday was not a good start to the week. The disappointing gross domestic product statistics for the first quarter give the likes of Australia, Brazil and Indonesia plenty to be worried about.
As one investor put it: “For the global economy this data is bad news. Commodity exporters are screwed (especially those needing exports to China as key component). I would be very worried about places like Brazil, Indonesia, Australia and the like. The current level of GDP growth in China is OK with China but not OK for the currencies above.”
7. 'It's out of control' - FT reports a very senior auditor in China has warned about the explosive growth of the LGFVs mentioned above. He has stopped signing off on local government bond sales. And this is all before we start looking at the WMPs (Wealth Management Products) that banks are hocking off to yield-starved depositors.
“We audited some local government bond issues and found them very dangerous, so we pulled out,” said Mr Zhang, who is also vice-chairman of China’s accounting association. “Most don’t have strong debt servicing abilities. Things could become very serious.”
The International Monetary Fund, rating agencies and investment banks have all raised concerns about Chinese government debt. But it is rare for a figure as established in the Chinese financial industry as Mr Zhang to issue such a stark warning. “It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”
Local government debts soared after 2008, when Beijing loosened borrowing constraints to soften the impact of the global financial crisis. Provinces, cities, counties and villages across China are now estimated to owe between Rmb10tn and Rmb20tn ($1.6tn and $3.2tn), equivalent to 20-40 per cent of the size of the economy.
Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013.
Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”
Mr Zhang added that he grew alarmed when smaller towns and counties discovered that investment vehicle bonds were an easy way to raise financing. “This evolution was quite frightening,” he said. “China has more than 2,800 counties. If every county issued debt, it could lead to a crisis. It could be even bigger than the US housing crisis.”
8. The 8 point plan - Here's the 8 things the new Chinese leadership are now enforcing on departments and businesses. Again, another reason for the slowdown.
I may seem a little obsessed with China, but it's what is driving the external sector of our economy and it's what our own dear leader is betting New Zealand's future on.
Here they are in full, in English, courtesy of an excellent website called CPC Encyclopedia.
1. Leaders must keep in close contact with the grassroots. They must understand the real situation facing society through in-depth inspections at grassroots. Greater attention should be focused on places where social problems are more acute, and inspection tours must be carried out more thoroughly. Inspection tours as a mere formality should be strictly prohibited. Leaders should work and listen to the public and officials at the grassroots, and people's practical problems must be tackled. There should be no welcome banner, no red carpet, no floral arrangement or grand receptions for officials' visits.
2. Meetings and major events should be strictly regulated, and efficiency improved. Political Bureau members are not allowed to attend ribbon-cutting or cornerstone-laying ceremonies, or celebrations and seminars, unless they get approval from the CPC Central Committee. Official meetings should get shortened and be specific and to the point, with no empty and rigmarole talks.
3. The issuing of official documents should be reduced.
4. Officials' visits abroad should only be arranged when needed in terms of foreign affairs with fewer accompanying members, and on most of the occasions, there is no need for a reception by overseas Chinese people, institutions and students at the airport.
5. There should be fewer traffic controls when leaders travel by cars to avoid unnecessary inconvenience to the public.There should be fewer traffic controls arranged for the leaders' security of their trips to avoid unnecessary inconvenience to the public
6. The media must not report on stories about official events unless there is real news value. The regulations also ban worthless news reports on senior officials' work and activities and said such reports should depend on work needs, news value and social effects.
7. Leaders should not publish any works by themselves or issue any congratulatory letters unless an arrangement with the central leadership has been made. Official documents without substantial contents and realistic importance should be withheld. Publications regarding senior officials' work and activities are also restricted.
8. Leaders must practise thrift and strictly follow relevant regulations on accommodation and cars.
9. The antidote - New Zealand reporter Jamil Anderlini has written an excellent backgrounder at FT.com on the Chinese debt issue to pour some cold water on the debt fears elucidated above. Maybe not a catastrophe, he says, but a significant slowing of growth, as happened in the early 1990s.
If we think of a financial crisis as a relatively brief moment in which the old order rapidly falls apart, China appears to be well insulated. But there is another financial disaster scenario and it is one that played out in China a little over a decade ago.
Back then, the state-owned financial institutions, under orders from the party to avoid a traditional crisis at all costs, were busy rolling over, forgiving and hiding the mountains of bad loans they had built up through state-directed lending in the 1990s. The result was non-performing loan ratios of up to 50 per cent and a clutch of zombie banks that kept on lending but created progressively less real economic activity.
Some analysts warn that a similar dynamic is at work today following the enormous expansion in lending to local governments and state-backed infrastructure projects in the wake of the global financial crisis in 2008. Credit intensity figures in China show that more and more loans are now needed to drive lower and lower growth rates and that suggests the old games of the late 1990s are back in vogue.
It is hard to envision a calamitous collapse in the Chinese financial system, but a slow erosion is probably already under way.
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