The banks continue to be trouble,trouble,trouble

The weekend just past has been full of banking news which has not been good. That is quite an anti achievement when we note that a decade or so ago when the banking crisis hit we were assured by politicians and central bankers that it would never be allowed to happen again and they would fix the problems. Whereas the reality has been represented by this from the Guardian this morning.

Under the new Lloyds Bank “Lend A Hand” deal, a first-time buyer will be able to borrow up to £500,000 for a new home, without putting down a penny of deposit.

Why is this necessary? It is because the establishment have played the same old song of higher house prices and telling people they are better off via wealth effects. Meanwhile the claims of no inflation are contradicted by the increasing inability of first-time buyers to afford housing even with ultra-low mortgage rates to help.

In this instance the mortgage is 100% of the loan for the people taking it out but payments are backed for 3 years by a family member or members.

The Lloyds deal requires that a member of the family – such as parent, grandparent or close relative – helps out. The bank will only grant the 100% mortgage if the family member puts a sum equal to 10% of the value of the property into a Lloyds savings account.

I have looked it up and their liability is limited to the first 3 years.

At the end of the 3 years, you will be able to take out your savings plus interest. That’s as long as the buyer hasn’t missed any payments or their home hasn’t been repossessed.

Frankly if payments are in danger of being missed it may suit the family member to fund them. But unless things go dreadfully wrong after 3 years we have what it a mortgage with only a little equity as not much is repaid in the first 3 years.

But as ever we see something of a round-tripping cycle between the central bank which pushes cheap liquidity to the banks who then pump up the housing market.

Vim Maru, group director of Lloyds Banking Group, which also controls Halifax, said: “We are committed to lending £30bn to first-time buyers by 2020 as part of our pledge to help people and communities across Britain prosper – and ‘Lend a Hand’ is one of the ways we will do this.

Mark Carney’s morning espresso will be tasting especially good today.

China

Let me hand you over to the People’s Bank of China which has issued a Q&A about its new (easing) policy and it starts with something very familiar.

Banks need to have adequate capital to guarantee sustainable financial support for the real economy.

When central banks state that what they in fact mean is the housing sector. For example the Bank of England claimed its Funding for Lending Scheme was for smaller businesses when in fact lending to them fell but mortgage lending picked up as mortgage rates plunged. So let us dig deeper.

The Central Bank Bills Swap (CBS) allows financial institutions holding banks’ perpetual bonds to have more collateral of high quality, improves market liquidity of such bonds, and increases market desire to buy them, thereby encouraging banks to replenish capital via perpetual bond issuance and creating favourable conditions for stepping up financial support for the real economy.

As we do so we see that what are finite organisations (banks) have debt forever which is troubling for starters. We also note that this is a type of debt for equity operation as we mull that there are some quite good reasons for not being keen on bank equity. So debt in this form ( perpetual) qualifies as capital and I believe Tier 1 capital in this case. The next move is that the perpetual bonds can be swapped for central bank bills meaning that the central bank now has the risk and the investor has none in return for a haircut depending on how much collateral is required. Thus we get.

increases market desire to buy them

because if you have worries you just accept the haircut and pass the rest of the risk to the PBOC.  As to improving market liquidity then the Bank of China was quick to back up that point.

Bank of China issued 40 billion yuan perpetual on Friday at a coupon rate of 4.5%, the first bank issuer of perpetualbond in . ( Yuan Talks)

The catch is that these sort of moves create liquidity for a time but later can drain it. That is because if things go wrong you end up with two very different markets which is the real one and the central bank supported one.

So the banks will get more capital and they will use it to raise lending and if history is any guide the “real economy” will be the housing market. This will then be presented as a surprise and we will learn what the Chinese word for counterfactual is.

Deutsche Bank

It is always there isn’t it? Let us start with what looked like some better news which was a 4% rally in the share price to 8.13 Euros on Friday. This looks like an early wire on this from @DeltaOne yesterday.

DEUTSCHE BANK GETS ADDITIONAL INVESTMENT FROM QATAR…….DISCUSSIONS ON QATAR INVESTMENT ARE ADVANCED BUT NO FINAL AGREEMENT TIMING AND SIZE OF INVESTMENT UNCLEAR

As they are already shareholders then this would be a case of doubling up or rather if we look at the price history doubling down. Of course this is not the only plan doing the rounds about DB.

Shareholders in Deutsche Bank have voiced deep concerns about the German lender’s mooted tie-up with domestic rival Commerzbank, saying the move would “paralyse” the country’s largest lender and destroy value for investors. ( Financial News)

Mind you it has been doing a pretty good job of destroying shareholder value all on its own.

Greece

Here we have seen massive sums used to pump up the banks at the cost of the national debt of Greece itself. But according to the IMF at the end of last week more is needed.

Restoring growth-enhancing bank lending will require swift, comprehensive, and well-coordinated actions to help repair balance sheets. Coordinated steps by key stakeholders are needed to support banks’ efforts to achieve a faster reduction of non-performing loans (NPL).

So all the bailouts have been to the tune of “Tantalize Me” by Jimmy the Hoover from back in the day.

Comment

The sad part of all of this is that we are observing yet another lost decade. As so often the hype and indeed hyperbole has not been matched by action. Central banks like to trumpet the improvement in bank capital ratios but if you look at bank share prices then there has been a shortage of investors willing to put their money where the central banks open mouth operations are.

In the case of Deutsche Bank as well as the Chinese and Greek banking systems we see that we are entering yet another phase of the crisis. With the problems recently at Metro Bank in the UK that had its risk model wrong in another “mistake” then the central banks will be on the case this time or maybe not.

This means we have not been processing most model change requests from internal model banks. ( Reserve Bank of New Zealand)

 

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Chinese economic growth looks set to slow further in 2019

This morning brings us up to date on what has been a theme for a little while now as we have observed one of the main engines of world economic growth starting to miss a beat or two. This from Bloomberg gives us some context and perspective.

China accounted for more than 36% of global GDP growth in 2016.

That sort of growth has led to this according to the Spectator Index.

China’s GDP as a share of US GDP. (nominal) 2009: 35.4% 2019: 65.8%

This has led to all sorts of forecasts around China overtaking the US in terms of total size of its economy with of course the same old problem so familiar of simply projecting the past into the future. Let us know switch to the official view published this morning.

In 2018, under the strong leadership of the CPC Central Committee with Comrade Xi Jinping as the core, all regions and departments implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the general working guideline of making progress while maintaining stability, committed to the new development philosophy, promoted high quality development, focused on the supply-side structural reform, stayed united and overcame difficulties.

And I thought I sometimes composed long sentences! It also provokes a wry smile if we convert that to the country where we are in as I mull Theresa May telling the UK we “stayed united and overcame difficulties.”

Gross Domestic Product

Firstly we are told a version of tractor production being on target.

According to the preliminary estimation, the gross domestic product (GDP) of China was 90,030.9 billion yuan in 2018, an increase of 6.6 percent at comparable prices over the previous year, achieving the set target of around 6.5 percent growth for the year.

But then we get a version of slip-sliding away.

Specifically, the year-on-year growth of GDP was 6.8 percent for the first quarter, 6.7 percent for the second quarter, 6.5 percent for the third quarter, and 6.4 percent for the fourth quarter.

The trend is exactly as we have been expecting. Also let us take a moment to note how extraordinary it is that a nation as described below can produce its economic output data in only 21 days. There’s mud in the eye of the western capitalist imperialists.

By the end of 2018, the total population of mainland China was 1,395.38 million  an increase of 5.30 million over that at the end of 2017.

That brings us to a clear problem which is that we can I think have confidence in the GDP trend but not in the outright number. Not everyone seems to believe that as many have repeated this sort of line.

According to just-released official statistics, ‘s grew 6.6% in 2018. While it’s the lowest annual annual expansion in almost 30 years, it still is quite a robust rate for an that faced — and is facing — several internal and external uncertainties.

That was Mohammed El-Erian of Allianz.

Industrial Production

Perspective is provided as I note that 6.2% growth is described as “slow but stable” and we remain on message with this.

the value added of the state holding enterprises was up by 6.2 percent……. and enterprises funded by foreign investors or investors from Hong Kong, Macao and Taiwan, up by 4.8 percent.

A clear superiority of the state over foreign private investors and especially the pesky Taiwanese. But they cannot hide this.

In December, the total value added of the industrial enterprises above the designated size was up by 5.7 percent year-on-year, 0.3 percentage point higher than that of last month, or up by 0.54 percent month-on-month.

We are told about the monthly improvement which is welcome but it is still below the average.

The real growth of the total value added of the industrial enterprises above the designated size in 2018 was 6.2 percent, with slow yet stable growth.

So with 6.2% being slow and stable if 5.7% just slow? Many countries would love such a rate of growth but not China.

Services

Again we see a monthly rise being reported.

In December, the Index of Services Production was up by 7.3 percent year-on-year, 0.1 percentage point higher than that of last month.

However this is also against a backdrop of a weakening over the full year.

In 2018, the Index of Services Production increased by 7.7 percent over that of last year, maintained comparatively rapid growth.

That theme continues as we note that year on year growth was 8.3% in December of 2017.

Retail Sales

We find ourselves in familiar territory.

In 2018, the total retail sales of consumer goods reached 38,098.7 billion yuan, up by 9.0 percent over last year which kept fast growth……..In December, the growth of total retail sales of consumer goods was 8.2 percent year-on-year, or 0.55 percent month-on-month.

If we look back the reported growth rate in December 2017 was 10.2%.

Property

This has been an area that has fueled growth in China but Reuters now have their doubts about it.

Real estate investment, which mainly focuses on the residential sector but includes commercial and office space, rose 8.2 percent in December from a year earlier, down from 9.3 percent in November, according to Reuters calculations based on data released by National Bureau of Statistics (NBS) on Monday.

That was just ahead of the slowest pace of growth last year at 7.7 percent recorded for October.

So the two lowest numbers were at the end of the year and compare to this.

For the full year, property investment increased 9.5 percent from the year-earlier period, down from 9.7 percent in January-November.

I note that in the official data whilst prices are still rising volume growth has slowed to a crawl in Chinese terms.

The floor space of commercial buildings sold was 1,716.54 million square meters, up by 1.3 percent. Specifically, the floor space of residential buildings sold was up by 2.2 percent. The total sales of commercial buildings were 14,997.3 billion yuan, up by 12.2 percent, among which the sales of residential buildings were up by 14.7 percent.

Trade

This was a factor in things slowing down as we note the faster import growth over 2018 as a whole.

The total value of exports was 16,417.7 billion yuan, up by 7.1 percent; the total value of imports was 14,087.4 billion yuan, up by 12.9 percent.

Those who consider the trade surplus to be one of the world’s economic imbalances should echo the official line.

the Trade Structure Continued to Optimize

Comment

So we find that the official data is catching up with our view of an economic slow down in China. Those late to the party have the inconvenience of December showing some data a little better on a monthly basis but the trend remains clear. Looking ahead then even the official business survey shows a decline because the 54s and 53s were replaced by 52.6 in December.

However if we switch to my favourite short-term indicator which is narrow money we see that the economic brakes are still on. The M1 money supply statistics show us that growth was a mere 1.5% over 2018 which is a lot lower than the other economic numbers coming out of China and meaning that we can expect more slowing in the early part of 2019. No wonder we have seen some policy easing and I would not be surprised if there was more of it.

Still it is not all bad news as it has been a while since there has been so little publicity about the annual shindig in Davos. Perhaps someone has spotted that flying to an Alpine resort to lecture others about climate change has more than a whiff of hypocrisy about it.

China may have landed on the moon but its economy is slowing

This morning has brought more news on the economic theme of late 2018 and early 2019 which is of a slowing. As ever at the beginning of the week it comes from the Far East as eyes turn to China. From the South China Morning Post.

Total exports fell to US$221.25 billion in December, down 1.4 per cent from November, and 4.4 per cent from the same month in 2017, according to data from China’s General Administration of Customs.

This is at least party driven by the ongoing trade war.

The December figures give the first indication of the full impact of the US-China trade war.

Exports in previous months were supported by “front loading” of orders by Chinese producers to beat the planned rise in US tariffs to 25 per cent, scheduled to go into effect on January 1 before Chinese President Xi Jinping and his US counterpart Donald Trump agreed to a 90-day tariff ceasefire in their meeting on December 1.

So we move on noting that external demand for the Chinese economy is showing a sign of weakening and as usual the experts were whistling in the wind.

The December drop – the biggest since December 2016, when China grew at its slowest pace since 1990 – was unexpected, with analysts forecasting a 2 per cent rise, according to a Bloomberg survey.

However in my opinion there was something even more significant which was this.

Total imports fell to US$164.19 billion, a fall of 10 per cent from last month and down 7.6 per cent a year earlier.

This is because falls in import volumes are usually a sign of a weakening economy as lower consumption leads to lower import demand.  But to see this fully we need to remind ourselves that the Chinese consume in Yuan and that in it the numbers were down 9.7% on a monthly basis but 3.1% on an annual basis with the difference reflecting a fall in the Yuan. This is quite a change as the numbers for 2018 as a whole showed imports to be 12.9% higher. There is of course an irony in this as we note that imports are a subtraction from GDP ( Gross Domestic Product) numbers so this change will boost it as highlighted below.

Those trade flows still resulted in a trade surplus of $57bn in December, the highest in three years. ( Financial Times)

Although of course contrary to the way the media has reported all this it will be reported in the Chinese GDP data in Yuan as 395 billion.

If we switch to the Financial Times I suspect Donald Trump will be focusing on this bit.

China’s annual trade surplus with the US rose to $323bn for 2018, a jump of more than 17 per cent to the highest level on record, according to Reuters data reaching back to 2006.

Meanwhile there was plenty of food for thought for those in the South China Territories ( Australia) from this bit.

Data also showed that China’s imports of iron ore fell for the first time since 2010, a development that will have impacted commodity exporters.

Xinhua News

It is always interesting to see how things are being reported in China itself so here we go.

 China’s foreign trade rose 9.7 percent year on year to a historic high of 30.51 trillion yuan (about 4.5 trillion U.S. dollars) in 2018, the General Administration of Customs (GAC) said Monday……..Exports rose 7.1 percent year on year to 16.42 trillion yuan last year, while imports grew 12.9 percent to 14.09 trillion yuan, resulting in a trade surplus of 2.33 trillion yuan, which narrowed by 18.3 percent.

No mention of any declines but there was space and indeed time to mention something else favourable to China.

Trade with countries along the Belt and Road registered faster-than-average growth, with the trade volume standing at 8.37 trillion yuan, up 13.3 percent year on year.

If we stay with Chinese reporting then we can take a look at the value of the Yuan as well.

The central parity rate of the Chinese currency renminbi, or the yuan, strengthened 349 basis points to 6.7560 against the U.S. dollar Monday, according to the China Foreign Exchange Trade System.

The new rate was the strongest since July 19, 2018, according to data from the system.

Since the beginning of this year, the yuan’s central parity rate has strengthened more than 1.5 percent against the dollar.

Presumably driven by the stronger trade figures… ( sorry couldn’t resist it). But the Bank of China New York branch plays along with the official drumbeat.

China’s economy has been undergoing structural reform with the introduction of various macro-economic policies. The bank believed that the yuan’s strong buying momentum showed world financial markets have restored confidence in the Chinese currency.

“With the deepening of China’s reform and opening-up, steady expansion of the domestic financial market, and the higher status of CNY in the international monetary system, it is expected that investors’ willingness to hold CNY will increase further,” said the bank’s foreign exchange desk.

I must say they do have rather eloquent foreign exchange traders as most of the ones I have met communicate mostly in words with only four letters in them.

Indeed things are even going rather well in space.

To better understand the lunar environment and prepare for a human return to the moon, the Chang’e-4 probe, which has just made the first-ever soft landing on the far side of the moon, carries payloads jointly developed by Chinese, German and Swedish scientists to conduct research.

This of course contrasts with the efforts of the evil capitalist Imperialists.

U.S. space technology firm SpaceX, led by Elon Musk, will lay off about 10 percent of its more than 6,000 employees, according to media reports.

Also there is something which reminds us of the Belt and Road plan.

Passengers waiting to board a train from Nigeria’s capital Abuja on Saturday were wowed when they were informed that the train service had been safely operating for 900 days.

A male voice announced from a public address system that the train service had been in commercial operation for 900 days and without any major accident recorded since its inception.

This Chinese built railway is apparently a modern wonder.

Many looked in amazement, expressing satisfaction at the safe operation of the Abuja-Kaduna train service, the first standard gauge railway in Nigeria and West Africa…..Many looked in amazement, expressing satisfaction at the safe operation of the Abuja-Kaduna train service, the first standard gauge railway in Nigeria and West Africa.

One should not be too churlish as there are plenty of issues both security and otherwise in Nigeria but “many looked in amazement” is the sort of thing written about the first journey’s of George Stephenson and his Rocket back in the day.

Football

Another example of a combination of economics combining with foreign policy is the way Chinese football clubs have been offering very high wages to marquee players. West Ham fans will currently be fearing that Marko Anautovic will leave especially if the rumours of a new £45 million bid plus £300,000 a wage wages are true. But it is hard not to raise a wry smile at this perspective from Barney Ronay of the Guardian.

Marco Arnautović latest: am hearing he will move to a club whose wealth is built on a state-subsidised stadium, owned by “colourful” businessmen and with a manager brought in from Hebei China Fortune… Hang on. No sorry, that’s his current club. My mistake

Comment

It is always difficult to measure an economic slow down because of the way that vested interests and the establishment move to delay and block such efforts. This is how they invariably end up being presented as a surprise. China is of course particularly opaque with much of its data leading people to use alternative measures such as electricity consumption before it too got gamed and manipulated. But we are getting more and more signs of a slowing trend. If we look for other signs then we maybe saw one from Europe earlier as well.

In November 2018 compared with October 2018, seasonally adjusted industrial production fell by 1.7% in the euro
area (EA19) and by 1.3% in the EU28, according to estimates from Eurostat,

Which no doubt reflects this from Reuters.

China car sales fell 13 percent in December, the sixth straight month of declines, bringing annual sales to 28.1 million, down 2.8 percent from a year earlier, China’s Association of Automobile Manufacturers (CAAM) said.

This was against a 3-percent annual growth forecast set at the start of 2018 and is the first time China’s auto market has contracted since the 1990s.

Beneath all this though the move into Africa via the Belt and Road policy continues as seemingly does the football combination of economics and diplomacy. They also seem to have been listening to Pink Floyd.

And if the cloud bursts, thunder in your ear
You shout and no one seems to hear.
And if the band you’re in starts playing different tunes
I’ll see you on the dark side of the moon.

 

 

How long will it be before the Bank of England cuts interest-rates?

This morning has opened with some good news for the UK economy and it has come from the Nationwide Building Society. So let us get straight to it.

Annual house price growth slows to its
weakest pace since February 2013. Prices fell 0.7% in the month of December,after taking account of seasonal factors.

I wish those that own their own house no ill but the index level of 425.7 in December compares with 107.1 when the monthly series first began in January of 1991, so you can see that it has been a case of party on for house prices. If you want a longer-term perspective then the quarterly numbers which began at 100 at the end of 1952 were 11.429.5 and the end of the third quarter of 2018. I think we can call that a boom! Putting it another way the house price to earnings ratio is 5.1 which is not far off the pre credit crunch peak of 5.4.

The actual change is confirmed as being below both the rate of consumer inflation and wage growth later.

UK house price growth slowed noticeably as 2018 drew to a close, with prices just 0.5% higher than December 2017.

Also the Nationwide which claims to be the UK’s second largest mortgage lender is not particularly optimistic looking ahead.

In particular, measures of consumer confidence weakened
in December and surveyors reported a further fall in new
buyer enquiries towards the end of the year. While the
number of properties coming onto the market also slowed,
this doesn’t appear to have been enough to prevent a
modest shift in the balance of demand and supply in favour
of buyers.

Although they then seem to change their mind.

It is likely that the recent slowdown is attributable to the
impact of the uncertain economic outlook on buyer
sentiment, given that it has occurred against a backdrop of
solid employment growth, stronger wage growth and
continued low borrowing costs.

The economic environment is seeing some ch-ch-changes right now but let us first sort out some number-crunching where each UK country has done better than the average.

Amongst the home nations Northern Ireland recorded the
strongest growth in 2018, with prices up 5.8%, though
Wales also recorded a respectable 4% gain. By contrast,
Scotland saw a more modest 0.9% increase, while England
saw the smallest rise of just 0.7% over the year.

They have I think switched from the monthly to the quarterly data here as that average was up by 1.3%.

The UK economy

We have now received the last of the UK Markit Purchasing Manager Index surveys so let us get straight to it.

At 51.6 in December, the seasonally adjusted All Sector
Output Index was up slightly from 51.0 in November.
However, the latest reading pointed to the second-slowest
rate of business activity expansion since July 2016.

I am a little surprised they mention July 2016 so perhaps they are hoping we have short memories and do not recall how it turned into a lesson about being careful about indices driven by sentiment. This was mostly driven by the manufacturing sector which had Markit looking for a scapegoat.

December saw the UK PMI rise to a six-month high,
following short-term boosts to inventory holdings and
inflows of new business as companies stepped up their
preparations for a potentially disruptive Brexit.
Stocks of purchases and finished goods both rose
at near survey-record rates, while stock-piling by
customers at home and abroad took new orders growth
to a ten-month high.

So preparation is bad as presumably would be no preparation. It is especially awkward for their uncertainty theme which was supposed to be reducing output. But let us move onto the main point here which is that the UK is apparently managing some economic growth but not a lot. This matters if we now switch to the wider economic outlook.

The world economy

As I have been typing this the Chinese cavalry have arrived. Reuters.

China’s just cut bank reserve requirement ratios by 100 bps, releasing an estimated RMB1.5t in liquidity by Jan 25. expected this, but argues the central bank can do a lot more – like cutting benchmark guidance lending rates.

Reuters are understandably pleased about finding someone who got something right. But the deeper issue is the economic prognosis behind this which we dipped into on Wednesday and is that the Chinese economy is slowing. For those wondering about what the People’s Bank of China is up to it is expanding the money supply via reducing the reserves banks have to hold which allows them to lend more. So they are acting on the quantity of money rather than the price or interest-rate of it. This relies on the banks then actually lending more. Or more specifically not just lending to those in distress.

Then there is the Euro area which according to the Markit PMIs is doing this.

The eurozone economy moved down another gear
at the end of 2018, with growth down considerably
from the elevated rates at the start of the year.
December saw business activity grow at the
weakest rate since late-2014 as inflows of new
work barely rose……….The data are consistent with eurozone GDP rising by just under 0.3% in the fourth quarter, but with quarterly growth momentum slowing to 0.15% in December.

We need to rake these numbers as a broad sweep rather than going for specific accuracy as, for example, Germany is described as being at a five-year low which requires amnesia about the 0.2% GDP contraction in the third quarter of this year.

Comment

If we switch to our leading indicator for the UK which is money supply growth we see a by now familiar pattern. The two signals of broad money growth have diverged a bit but neither M4 growth at 2.2% in November or M4 lending growth at 3.5% are especially optimistic. That only gets worse once you subtract inflation from it. Or to put it another way in ordinary times we would be in a situation where a bank rate cut would be expected.

What does the Bank of England crystal ball or what is called Forward Guidance in one of Governor Mark Carney’s policy innovations tell us?

The MPC had judged in November that, were the economy to develop broadly in line with its Inflation
Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a
limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

So “I agree with Mark” seems to be the most popular phase which should make taxpayers wonder why we bother with the other 8 salaries? Indeed one of them will be in quite a panic now as back in May Deputy Governor Ramsden told us that 8.8% consumer credit growth was “Weak” so I dread to think what he makes of the current 7.1%. Although @NicTrades has a different view.

that’s China fast!

So that is how a promised Bank Rate rise begins to metamorphose into a Bank Rate cut which will be presented as “unexpected” ( as opposed to on here where we have been watching the journey of travel for nearly a year) and a “surprise”, just like the last time this happened just over 2 years ago.

Let me finish by welcoming the addition of two women to the Financial Policy Committee as there is of course nothing like a Dame.

Dame Colette Bowe and Dame Jayne-Anne Gadhia have been appointed as external members of ‘s Financial Policy Committee (FPC)

So sadly the diversity agenda only adds female members of the establishment to the existing list of male establishment appointees. That went disastrously with the Honorable Charlotte Hogg who proved that even being the daughter of an Earl and a Baroness cannot allow you to avoid family issues, especially when you forget you have a brother.

Weekly Podcast

Including my answer to this question from Rob Wilson.

How can economies such as Italy and Japan endures decades of virtually zero growth and yet the general population don’t seem to be suffering compared to other economies with growth?

 

 

 

 

 

 

China adds to the list of slowing economies

This morning has seen a barrage of economic data released by the National Bureau of Statistics in China. This gives us an opportunity to see if they are catching the economic cold that we have been observing developing amongst us evil western capitalist imperialists. According to the rhetoric things are going really rather well.

In November, under the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, all regions and departments implemented the decisions and arrangements made by the CPC Central Committee and the State Council, adhered to the requirement of high-quality development, stuck to the general working guideline of making progress while maintaining stability, adopted the new development philosophy, deepened the supply-side structural reform, and intensified efforts in policy implementation to maintain stability in areas like employment, financial sector, foreign trade, foreign investment, domestic investment, and market expectation. The economy performed within the reasonable range and maintained the generally stable and growing momentum.

That is quite an opening sentence to say the least! Let us add to that with some perspective as we look back.

Next week marks 40 years since China opened up its economy to the world. It’s economy has grown to 80x the size of its 1978 version. For comparison, the U.S. has grown 8x. ( @DavidInglesTV)

So the rhetoric fits that but as we shall see fits what is currently taking place much less well.

Today’s Data

Industrial Production

Whilst the growth rate would be loved by many this is China and things are not what they used to be.

In November, the real growth of the total value added of the industrial enterprises above designated size was 5.4 percent year-on-year, 0.5 percentage point slower than last month.

This wrong-footed expectations based on the ongoing stimulus programme and was the lowest reading since early 2016. In terms of this year the annual growth rate has fallen from the 7.2% of January to a period of apparent stabilisation around 6% and now another leg lower. In terms of a breakdown we were told this.

In terms of sectors, the value added of the mining increased by 2.3 percent on a year-on-year base, the manufacturing grew by 5.6 percent and the production and supply of electricity, thermal power, gas and water grew by 9.8 percent.

Retail Sales

So with production falling was there a potential boost from consumer demand?

In November, the total retail sales of consumer goods reached 3,526.0 billion yuan, a year-on-year rise of 8.1 percent, 0.5 percentage point slower than last month.

If we switch to Reuters we see that it has been quite some time since growth has been at this level.

Retail sales rose 8.1 percent in November from a year earlier, data from the National Bureau of Statistics showed on Friday, below expectations for an 8.8 percent rise and the slowest since May 2003. In October, sales increased 8.6 percent.

If we look at the pattern we see the recent peak was 10.1% in March and the early part of the year saw several readings comfortably above 9%.

From January to November, the total retail sales of consumer goods grew by 9.1 percent year on year.

The official data set also gives us an idea of the scale of urbanisation in China now.

Analyzed by different areas, the retail sales in urban areas reached 2,999.0 billion yuan, up by 7.9 percent year-on-year, and the retail sales in rural areas stood at 527.0 billion yuan, up by 9.3 percent.

I doubt you will be surprised to learn what was particularly pulling the numbers down.

Auto sales fell a sharp 10.0 percent from a year earlier, in line with industry data showing sales dived 14 percent in November – the steepest drop in nearly seven years. ( Reuters).

Slowing auto sales on China are part of a pattern that has rumbled around the world this year. Only yesterday there was news about Ford closing a plant in Blanquefort in France and planning job cuts in Saarlouis Germany.

Service Sector

This was not as weak as the others but has also fallen in 2018.

In November, the Index of Services Production increased by 7.2 percent year on year, the same speed as last month………From January to November, the Index of Services Production increased by 7.7 percent year on year.

Taxes

Another way of looking at economic performance is to analyse what a country can collect in taxes and at first this looks good.

China’s fiscal revenue rose 6.5 percent year-on-year to 17.23 trillion yuan (about 2.5 trillion U.S. dollars) in the first 11 months of 2018, official data showed.

But it too has slowed quite a bit in the last couple of months.

The country’s fiscal revenue stood at 1.08 trillion yuan last month, with a 5.4-percent decline year-on-year, according to the Ministry of Finance.

The decline widened from a drop of 3.1 percent in October, the first fall this year.

In November, China’s tax revenue reached 805.1 billion yuan, down 8.3 percent year on year, compared with a 5.1-percent decline in October, the ministry said.

Some of this has been driven by the tax cuts applied to try to stimulate the economy so we will have to wait and see how this fully plays out.

Money Supply

Reuters updated us earlier this week.

Broad M2 money supply grew 8.0 percent in November from a year earlier, matching forecasts and October’s pace.

Adding to signs of stress on balance sheets and faltering business confidence, M1 money supply rose just 1.5 percent on-year, the weakest pace since January 2014. M1 reflects both the strength of corporate cash positions and whether they may be building up funds for possible future investments.

That is a fascinating perception of narrow money. What we would expect from such data ( the growth rate exceeded 10% in late 2015 and much of 2016) is for it to apply a brake to the Chinese economy and that is exactly what it appears to be doing. Furthermore the brake appears to be tightening.

Switching to broad money trends and subtracting inflation we get a suggestion that future economic growth will head towards and maybe below 6%.

Comment

Whilst the rhetoric may be different China has itself a dose of what the western capitalist imperialists are suffering from in 2018 and that is slower narrow money supply growth. We can argue about definitions and circumstances but as we look around Europe, the US and now China it seems the rhythm section are hammering out the same beat. There are different responses because countries start from different growth levels. For example the impact on France seems to have sent production into negative territory if this morning’s Markit business survey is any guide whereas Chinese production is still recording a growth rate above 5%.

But the direction of travel is the same and China has got used to high growth rates so there will be indigestion from the changes. So we can expect more stimuli and if the recent speeches from the PBOC are any guide some interest-rate reductions I think. They will be a bit late for the next few months though.

And so it begins?

China To Lift Retaliatory Tariff On US Cars For Three Months -Had Imposed 25% Retaliatory Tariff On Cars -To Lift Tariffs From On Jan 1 ( @LiveSquawk )

 

The China housing crisis builds up steam

This morning has brought news of something which would bring a chill to the heart of any central banker. It comes from China as we note this from Reuters.

 So far this year, the Shanghai stock index is down 14 percent, the CSI300 has fallen 12.4 percent while China’s H-share index listed in Hong Kong is down 4.8 percent. Shanghai stocks have declined 8.1 percent this month……The Shanghai stock index is below its 50-day moving average and below its 200-day moving average.

Not much sign of any wealth effects there at least not positive ones and there were signs of trouble in another area of asset prices too.

An index tracking major developers on the mainland slumped 4.4 percent following a near 5 percent drop the previous session, as a weakening yuan raised fears of capital outflow that could weigh on asset prices.

Actually they have missed something that Will Ripley of CNN did not.

China’s benchmark Shanghai Composite slid into bear market territory Tues, closing down more than 20% below its January high. Chinese stocks have come under pressure in recent weeks from concerns over the strength of the country’s economic growth & an emerging trade war w/ the US.

Of course the definition of a bear market is somewhat arbitrary and Chine’s stock market does tend to veer from boom to bust. But in  these times of easy monetary policy central bankers place a high emphasis on asset prices. This will be reinforced by the falls in the share price of developers as it reminds of the housing market and debt issues.

The Housing Market

Over the weekend the South China Morning Post offered an eye-catching view from Christopher Balding.

Real estate is the driver of the Chinese economy. By some estimates, it accounts (directly and indirectly) for as much as 30 per cent of gross domestic product.

There is something for Mark Carney to aim at as those of us in the UK have time to mull a familiar issue.

Keeping housing prices buoyant and development robust is thus an overriding imperative for China – one that is distorting policymaking and worsening its other economic imbalances.

At first I was not sure about his definition of a bubble.

Despite reforms in recent years, there’s little question that Chinese real estate is in bubble territory. From June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings, rose 31 per cent to nearly US$202 per square foot.

However suddenly it looks very bubbilicious.

That’s 38 per cent higher than the median price per square foot in the United States, where per-capita income is more than 700 per cent higher than in China. Not surprisingly, this has put home ownership out of reach for most Chinese.

More than out of reach you would think as it must be multiples of out of reach. Also countries way beyond China’s borders face the issue below.

 Politically, homeowners have come to expect their property values to rise continually in a one-way bet;

There is a rather familiar response at least for UK readers.

Worried about these prices, and about growing indebtedness among developers, China’s State Council has hatched a plan to encourage rentals.

My first thought is that there is a clear opportunity for Gwen Guthrie to translate her hit into Mandarin.

Bill collector’s at my door
What can you do for me, oh?……

‘Cause ain’t nothin’ goin’ on but the rent
You got to have a J-O-B if you wanna be with me

Or to put it more formally.

Wages in China simply aren’t high enough to keep up with the credit fuelled rise in asset prices, and thus developers can’t earn a reasonable rate of return by renting out units.

In terms of the numbers the circle seems to be something of a rectangle.

 In big cities, such as Beijing and Shanghai, yields are hovering around 1.5 per cent (compared to an average of about 3 per cent in the US and 4 per cent in Canada). ……Worse, developers are heavily weighted down with debt, much of it short-term. Many are paying out 7 to 8 per cent bond yields, with debt-to-equity ratios of around 380 per cent.

So the circus requires house price rises of at least 6% per annum to keep the show on the road. But wait there is more and something which to western eyes seems rather extraordinary.

Typically, renters borrow from banks to make an upfront, one-time payment to developers that covers, say, five years.

A rental mortgage is a little mind-boggling. Perhaps though we should have a sweep stake for predict how long it is before we get those in the UK?! Also it is a case of the familiar establishment response to trouble which is to give that poor battered can another kick.

The upfront payment from the bank to the developer provides some short-term cash-flow relief. But otherwise, all it does is delay debt repayments attached to the unit and shrink the loss on unsold inventory.

On a deeper level I wonder how many ( well paid) jobs rely on can kicking and relate to operations which are unviable in profit/loss or balance sheet terms but generate cash for now. How many banks for example or shale oil?

At this stage it all looks rather like the cartoon characters which have to run ever harder just to stand still.

 New starts and land purchases have grown strongly through the first five months of 2018. Investment in residential real estate is up 14 per cent and development loans are up 21 per cent. Far from reducing leverage, banks are jumping back into the speculative bubble: Mortgage growth is now at 20 per cent.

A response

On Sunday, the People’s Bank of China (PBOC) said it would cut the reserve requirement ratio (RRR) for what some banks must keep in reserves by 50 basis points (bps), releasing $108 billion in liquidity, partly to spur lending to smaller firms. (Reuters)

The PBOC operates under a model where it adjusts quantity rather than price or interest-rates. It mostly leaves the latter to influence the value of the Yuan although of course interest-rate moves affect the domestic economy as well. In terms of time you could argue the UK moved away from that in 1973 but anyway the Thatcherite changes of 1979 ended it. In essence it is allowing the banks to raise what is called the money supply ( as it is really money demand) and no doubt some and maybe much of it will be heading in the direction of the housing market in spite of the claim that it is for business lending. In that they are very much like us western capitalist imperialists so shall we call it lending to small businesses in the property sector?

Oh and speaking of the Yuan.

The dollar bought 6.5240 yuan at the close of trading in China, meaning the yuan fell 0.4% on the day, reaching its lowest level since Dec. 28, according to Wind Info. The Chinese currency weakened further on Tuesday morning in Asia, hitting 6.5409 against the U.S. dollar. ( Wall Street Journal)

Care is needed though as whilst the Yuan has slipped over the past week it has still done better against the US Dollar in 2018 than the Euro or the UK Pound £

Comment

There is much to consider here. After all there have been scare stories about the Chinese economy before but it has managed to carry on regardless. The catch is that the western economies did this in 2005, 2006 and some of 2007 before it all went wrong. The size of the housing and development sector invokes thoughts of what took place in Spain and Ireland although of course China is much more systemic.

Meanwhile interestingly China seems to have spotted a way of making debt work in its favour. It started well.

Every time Sri Lanka’s president, Mahinda Rajapaksa, turned to his Chinese allies for loans and assistance with an ambitious port project, the answer was yes. ( New York Times)

But only really ended well for China.

Mr. Rajapaksa was voted out of office in 2015, but Sri Lanka’s new government struggled to make payments on the debt he had taken on. Under heavy pressure and after months of negotiations with the Chinese, the government handed over the port and 15,000 acres of land around it for 99 years in December.

Rather like the UK and Hong Kong?

 

 

 

Trade Wars what are they good for?

This week trade is in the news mostly because of the Donald and his policy of America First. This has involved looking to take jobs back to America which is interesting when apparently the jobs situation is so good.

Our economy is perhaps BETTER than it has ever been. Companies doing really well, and moving back to America, and jobs numbers are the best in 44 years. ( @realDonaldTrump )

This has involved various threats over trade such as the NAFTA agreement primarily with Canada and Mexico and of course who can think of Mexico without mulling the plan to put a bit more than another brick in the wall? Back in March there was the Trans Pacific Partnership or TPP. From Politico.

While President Donald Trump announced steel and aluminum tariffs Thursday, officials from several of the United States’ closest allies were 5,000 miles away in Santiago, Chile, signing a major free-trade deal that the U.S. had negotiated — and then walked away from.

The steel and aluminium tariffs were an attempt to deal with China a subject to which President Trump has returned only recently. From the Financial Times.

Equities sold off and havens firmed on Tuesday after Donald Trump ordered officials to draft plans for tariffs on a further $200bn in Chinese imports should Beijing not abandon plans to retaliate against $50bn in US duties on imports announced last week.

According to the Peterson Institute there has been a shift in the composition of the original US tariff plan for China.

 Overall, 95 percent of the products are intermediate inputs or capital equipment. Relative to the initial list proposed by the Office of the US Trade Representative on April 3, 2018, coverage of intermediate inputs has been expanded considerably ……….Top added products are semiconductors ($3.6 billion) and plastics ($2.2 billion), as well as other intermediate inputs and capital equipment. Semiconductors are found in consumer products used in everyday life such as televisions, personal computers, smartphones, and automobiles.

The reason this is significant is that the world has moved on from even the “just in time” manufacturing model with so many parts be in sourced abroad even in what you might think are domestic products. This means that supply chains are often complex and what seems minor can turn out to be a big deal. After all what use are brakes without brake pads?

Thinking ahead

Whilst currently China is in the sights of President Trump this mornings news from the ECB seems likely to eventually get his attention.

In April 2018 the euro area current account recorded a surplus of €28.4 billion.

Which means this.

The 12-month cumulated current account for the period ending in April 2018 recorded a surplus of €413.7 billion (3.7% of euro area GDP), compared with €361.3 billion (3.3% of euro area GDP) in the 12 months to April 2017.

 

 

So the Euro area has a big current account surplus and it is growing.

This development was due to increases in the surpluses for services (from €46.1 billion to €106.1 billion) and goods (from €347.2 billion to €353.9 billion

There is plenty for the Donald to get his teeth into there and let’s face it the main player here is Germany with its trade surpluses.

Trade what is it good for?

International trade brings a variety of gains. At the simplest level it is access to goods and resources that are unavailable in a particular country. Perhaps the clearest example of that is Japan which has few natural resources and would be able to have little economic activity if it could not import them. That leads to the next part which is the ability to buy better goods and services which if we stick with the Japanese theme was illustrated by the way the UK bought so many of their cars. Of course this has moved on with Japanese manufacturers now making cars in the UK which shows how complex these issues can be.

Also the provision of larger markets will allow some producers to exist at all and will put pressure on them in terms of price and quality. Thus in a nutshell we end up with more and better goods and services. It is on these roads that trade boosts world economic activity and it is generally true that world trade growth exceeds world economic activity of GDP (Gross Domestic Product) growth.

Since the Second World War, the
volume of world merchandise trade
has tended to grow about 1.5 times
faster than world GDP, although in the
1990s it grew more than twice as fast. ( World Trade Organisation)

Although like in so many other areas things are not what they were.

However, in the aftermath of the global
financial crisis the ratio of trade growth
to GDP growth has fallen to around 1:1.

Although last year was a good year for trade according to the WTO.

World merchandise trade
volume grew by 4.7 per
cent in 2017 after just
1.8 per cent growth
in 2016.

How Much?

Trying to specify the gains above is far from easy. In March there was a paper from the NBER which had a go.

About 8 cents out of every dollar spent in the United States is spent on imports………..The estimates of gains from trade for the US economy that we review range from 2 to 8 percent of GDP.

Actually there were further gains too.

When the researchers adjust by the fact that domestic production also uses imported intermediate goods — say, German-made transmissions incorporated into U.S.-made cars — based on data in the World Input-Output Database, they conclude that the U.S. import share is 11.4 percent.

So we move on not enormously the wiser as we note that we know much less than we might wish or like. Along the way we are reminded that whilst the US is an enormous factor in world trade in percentage terms it is a relatively insular economy although that is to some extent driven by how large its economy is in the first place.

Any mention of numbers needs to come with a warning as trade statistics are unreliable and pretty universally wrong. Countries disagree with each other regularly about bilateral trade and the numbers for the growing services sector are woeful.

Comment

This is one of the few economic sectors where theory is on a sound footing when it meets reality. We all benefit in myriad ways from trade as so much in modern life is dependent on it. It has enriched us all. But the story is also nuanced as we do not live in a few trade nirvana, For example countries intervene as highlighted by the World Trade Organisation in its annual report.

Other issues raised by members
included China’s lack of timely and
complete notifications on subsidies
and state-trading enterprises,

That is pretty neutral if we consider the way China has driven prices down in some areas to wipe out much competition leading to control of such markets and higher prices down the road. There were plenty of tariffs and trade barriers long before the Donald became US President. Also Germany locked in a comparative trade advantage for itself when it joined the Euro especially if we use the Swiss Franc as a proxy for how a Deutschmark would have traded ( soared) post credit crunch.

Also there is the issue of where the trade benefits go? As this from NBC highlights there were questions all along about the Trans Pacific Partnership.

These included labor rights rules unions said were toothless, rules that could have delayed generics and lead to higher drug prices, and expanded international copyright protection.

This leads us back to the issue of labour struggling (wages) but capital doing rather well in the QE era. Or in another form how Ireland has had economic success but also grotesquely distorted some forms of economic activity via its membership of the European Union and low and in some cases no corporate taxes. Who would have thought a country would not want to levy taxes on Apple? After all with cash reserves of US $285.1 billion and rising it can pay.

So the rhetoric and actions of the Donald does raise fears of trade wars and if it goes further the competitive devaluations of the 1920s. But it is also true that there are genuine issues at play which get hidden in the melee a bit like Harry Kane after his first goal last night.