Eyes on Chinese banking stability

Kia ora,

Welcome to Monday's Economy Watch where we follow the economic events and trends that affect New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news inflation risks aren't the only worry - Chinese banking stability might be too.

In China, there have been official warnings to many regional banks of a coming tidal wave of bad debt. Now Beijing is dealing with the issue by bundling many of these vulnerable lenders up in a mass consolidation. Unfortunately for them, this comes at a time when many of the already large national banks are struggling with profitability. And some of these large institutions are being roped in to help shore up the regional risks. Beijing is risking its banking system foundations in trying to avoid regional bank bankruptcies, the result of the excesses they engaged in.

In Hong Kong, they finally have some good GDP data to report. Their Q1-21 economic growth was +5.4% better than the ugly Q4-2020 data, and +7.9% higher than the pandemic-affected Q1-2020.

In South Korea, their booming export export sector seems to be quite able to sustain that growth with fast-rising prices. Export prices were up +2.2% again in April from March, capping a +11% rise just in the first four months of 2021.

In Ireland, their official health system was taken down after a ransomware attack. Doctors are unable to access patient records after ‘very sophisticated’ attack. It will be days before it is back online again.

The commodity rally is stuttering. The iron ore prices is slipping still and now off its highs. Copper is too. There are market fears that Beijing is about to crack down on buyers who bid higher prices.

In the US April retail sales data was reported as 'weak', with no gain from March. This wasn't the +1.0% rise markets were expecting. Of course, the year-on-year change is barely relevant, but if we look back to April 2019, last month's result is +21% higher, so it really isn't a bad result that was posted. And if you realise that the March 2021 comparison is a very high bar, being able to maintain that should be seen as a good 'win' and a continuation of stimulus-fuelled spending.

US industrial production data came in under expectations as well. That too continues a volatile set of month-on-month changes. Again going back to April 2019 it records a -2.5% decline, so this data is no net progress even if there is a good net gain over the last six months.

The latest US consumer sentiment survey, this one from the University of Michigan, is lackluster as well, recording an interruption in their optimism. A key reason is the sharp rise in inflation expectations. This survey finds it up to +4.6%. If it happens at that level, it would be the highest annual rate since 1990. The current actual rate is +4.2%, so it is quite within the realms of possibility - even likely.

The latest weekly Fed balance sheet data was stable at US$7.8 tln or just under 36% of GDP. This coming week Treasury bond issues are relatively small with one 20-year and on TIPS auctions, together about $14 bln and far lower than the US$192 bln auctioned last week. But corporate activity will be strong with US$35 bln being offered by majors, and that follows a week of US$42 bln from big corporates.

In Canada, their bank loan officer survey found lending conditions tightening for both mortgage and business borrowers.

They also reported industrial production data, and that was positive and boosted by rising production in their car manufacturing industry.

The UST 10yr yield starts today at 1.64% and up a tiny +1 bp from where we left it Saturday.

The price of gold starts today up +US$3 from this time Saturday at US$1845/oz. Over the past week, the price of gold has risen a net +US$15/oz.

Oil prices start today at just under US$65.50/bbl in the US, while the international Brent price is just over US$68.50/bbl. These are very similar levels to a week ago.

The Kiwi dollar opens today at 72.5 USc and unchanged after Saturday's rise. Against the Australian dollar we are up marginally to 93.2 AUc. Against the euro we are unchanged at 59.7 euro cents. That means our TWI-5 starts today at 74.1 which is actually marginally lower from this time last week.

The bitcoin price is now at US$47,143 and back down -6.7% from this time Saturday. Volatility in the past 24 hours has been a high +/- 3.8%. Over the past week, the bitcoin price has fallen -19%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.