European Edition: Draw the Line
HEADLINES
Australia: The minutes of the September 2nd meeting of the RBA policy board note: “Accommodative monetary policy was supporting demand in some sectors of the economy, but policy also needed to be cognisant of the risks to future growth that could accompany a large further build-up in asset prices, particularly if that was associated with an increase in leverage.” The minutes added: “For investors in housing, the pick-up in housing credit growth had been more pronounced than for owner-occupiers, with investor demand particularly strong in Sydney and to a less extent in Melbourne. Members further observed that additional speculative demand could amplify the property price cycle and increase the potential for property prices to fall later.” The minutes also describe the AUD as “above most estimates of its fundamental value.”
RBA Assistant Governor Christopher Kent tells the Bloomberg Economic Summit in Sydney: “The exchange rate has declined somewhat relative to its peak in the first half of 2013. But it remains high, especially given the sizable decline in commodity prices this year.” He notes: “A further decline in the exchange rate would provide additional support to demand for domestic firms producing tradable goods and services. At the same time, however, the high exchange rate also means that imported capital goods are currently relatively cheap. Hence, the still-high level of the exchange rate may be a net positive factor for the investment plans of some firms in non-tradable industries.” He concludes: “In short, the high exchange rate might be playing a part in restraining investment in some sectors of the economy, but it’s unlikely to be the full story.”
China: Foreign direct investment in August fall 14% y/y to USD 7.2 Bn (a level not seen since February 2012). FDI for the January to August period totals USD 78.3 Bn, down 1.8% y/y.
Commerce Ministry spokesperson, Shen Danyang, says: “We are not sure foreign trade can certainly sustain the high growth rate seen recently in coming months because there are still a lot of uncertain factors in external and domestic markets.” Mr Shen also says that the decline in FDI was not linked to the country’s anti-monopoly probes.
Euro-area: A senior Canadian official tells Reuters that G20 finance ministers and central bankers will likely discuss what Europe can do to stimulate growth, and that it will be natural to turn to Germany to do its part.
Clemens Fuest, president of ZEW, tells Bild there is a risk of a devaluation race with other central banks and a loss of purchasing power. He says that it is “questionable” whether other central banks will passively accept a further EUR depreciation. Allianz Chief Economist Michael Heise also tells that paper that “it’s a dangerous way to lead the euro zone out of the crisis and to ensure more growth.”
Japan: Bank of Japan Governor Haruhiko Kuroda says: “Japan’s economy has been on a path suggesting that the price stability target of 2% will be achieved as expected. We are only halfway there, however, and the Bank will continue with quantitative and qualitative easing, aiming to achieve the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner.”
Finance Minister Taro Aso says that, generally speaking, rapid swings in the currency market are undesirable. He adds that he has no specific levels in mind in making such statement. He also says that he will be ready to take steps to support the economy after examining Q3 economic data in deciding whether to raise the sales tax as planned next year (although there’s no plan now to compile an extra budget in the autumn).
The Meteorological Agency reports an earthquake with preliminary magnitude of 5.6 centred in the Ibaraki Prefecture, just northeast of Tokyo. There were no immediate reports of damage.
Health Minister Yasuhisa Shiozaki says that “safe and efficient” asset management is a priority for the Government Pension Investment Fund. He argues: “The most important thing is that people think the system is trustworthy.”
COMMENTARY
Many of the problems China now faces arose as a direct result of its policy response to the 2008 global financial crisis. On November 9th of that year, the State Council approved a plan to invest a staggering CNY 4 Trn over a two year period whilst the PBOC had already embarked upon a wide-ranging set of policy easing measures. The result was a credit-led binge of historical proportions: gross investment rose to an astonishing 50% of GDP and over the five or so years that have elapsed, land prices have increased five-fold and outstanding credit has increased from 120 to 190% of GDP. Given that GDP growth dropped from 14% in 2007 to just 8% in 2012, it can be readily understood that the opportunity cost to China of standing pat would have been high indeed; but then, this is not to say that the policies were implemented with impunity: far from it.
The property sector’s path since 2008 has been serpentine and hence, reflective of the difficulties the government faces in trying to control a sector that has become so integral to the country’s economic fortunes. Accordingly, whilst the government began to tame the bubble in 2010, it eased restrictions after growth slumped in 2012 and one year later, prices were once more on the charge. At this point, property investment had grown to around 13% of Chinese GDP – roughly double the US share at the height of its bubble in 2007; but in terms of its scale, more evocative is the fact that in just two years – 2011 and 2012 – China produced more cement than the US did in the entire 20th century (FT). The sheer excesses of the investment binge in the sector are laid out for all to see in the ‘ghost’ cities of Beihai, Chenggong, Thames Town and Ordos.
It is this spare capacity that has been a prominent issue in the 10.5% slide in the value of property sales so far in 2014. Prices posted their largest decrease in five years over the summer and China Real Estate Index System reports that 31 Chinese cities have excess housing inventories that will take more than three years to work down (WSJ). Property developers are clearly at risk of a protracted fall in prices (though less so householders who prefer savings to mortgages); and with much non-residential investment funnelled via State Owned Enterprises and undertaken with little regard to risk assessment, sizable malinvestments inevitably lurk on banks’ balance sheets.
As such, the market slowdown poses a genuine dilemma for the Chinese government and Premier Li Keqiang’s reform program – announced last year as a brave but long overdue alternative to the country’s “growth at all costs” model. The problem, however, is that there are now fears that the slide in property prices is broadening out into a more general and potentially sharp slowdown: industrial production growth fell to a six year low in August with power output, an honest bellwether for economic activity, posting its first annual decline in more than four years. And over the first eight months of the year, FDI fell to levels not seen in over two years. Talk of a hard landing is growing accordingly.
Of course, the government has declared the end to large scale investment packages – a pre-requisite if China is to navigate its way out of the middle income bracket by diverting a massive relocation of resources to “upstream activities”. But given what is at stake, this may prove to be easier said than done (the PBOC has given banks a larger re-lending quota to support farms, but this hardly constitutes appreciable stimulus). Speaking at the World Economic Forum in the northern city of Tianjin last week, Premier Li implied that China ‘can’ avoid a hard landing and we suspect that there were few in the audience who did not believe him. The bigger question on their minds, however, may have been just what this will take.
KEY EVENTS
UK August CPI (0930 GMT+1): Reuters consensus forecast 1.5% y/y; previous 1.6% y/y
UK August core PPI output (0930 GMT+1): Reuters consensus forecast 0.0% m/m; previous -0.1% m/m
EZ Q2 labour costs (1000 GMT+1): previous 0.9% y/y
DE September ZEW index (1000 GMT+1): Reuters consensus forecast 4.8; previous 8.6
US August core PPI (1330 GMT+1): Reuters consensus forecast 0.1% m/m; previous 0.2% m/m
KEY LEVELS
