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From an Asian centric point of view the week has been mixed. The news from China has to be seen as a long term positive but potentially negative in the short term.
The tripling of bad debt write-offs from China’s five largest banks that spooked the Asian market on Wednesday will reduce the risk of a hard landing longer term. The banks themselves collectively saw profit of CNY76 billion in the first half of the year and can easily equate for the CNY22.1 billion. The write-offs remove the risk from the balance sheet and will allow the banks to mitigate a surge in nonperforming loan ratios and the risk of increasing defaults.
News that Premier Li Keqiang is also urging banks to increase risk buffers as the central government comes to grips with the mass rise in the asset prices and the increased risk of defaults should also be seen as long term positive. The GFC was built on similar issues, though the increase in bank regulation will reduce risk here.
The property prices data on Tuesday illustrated this concern as business hubs Shenzhen and Guangzhou jumped 20% year-on-year in September, while Shanghai increased by 17% and Beijing 16%. Property remains a slight thorn in the side of the central government and this news may see a new round of tightening over the coming months. That could be a slight constraint on the region as a whole, as the world’s second largest economy tries to iron out possible bumps, but again – a longer term positive.
The spike in the short term money markets seen this week also illustrates the impact the PBoC is having by withdrawing funding from the financial systems. The movement in the seven-day bond rate, which is the key gauge of liquidity in China, has shot up 150 basis points to a four-month high of 5%. The concern would be a return to the liquidity-squeeze seen in June, however I see that call as a premature one as the tightening by the PBoC is only mild and is largely designed to neutralise inflows from offshore.
The win from China was the flash PMI data, the fact this came in a head of expectations shows that even with slowing exports and tightening from the central government domestic demand is maintaining the demand for Chinese goods.
The rotation from a developing nation to a developed nation comes when domestic consumption and the middle class takes over from offshore demand. This still has a long way to go in China, but with a domestic population of 1.3 billion and a middle class that is expected to hit 630 million inside the next seven years, the rotation will gain momentum.
Global analysts are downgrading China’s GDP to 7%, with Fitch jumping on board the call from Standard and Charter overnight. Short term movements will be bumpy, but don’t be surprised to see longer term predictions underestimating actuals.
Ahead of the Australian open
The news from Philip Lowes speech yesterday was interesting; his talk around the AUD and green shoots in the non-mining space from my perspective confirmed the easing cycle is over.
‘Australia will have a higher AUD than it had historically,’ Mr Lowes said.
This was a key part of the speech and shows the RBA will be looking for organic moves in the currency, not one that is altered by the bank itself.
He cites the pickup in residential construction and the increased hiring in this area as the part of the economy that will start to offset the mining plateau. This leads back into the rates calls, if lending starts to balloon as investor snap up new housing it will lead to rate hikes in the future and is another sign the two year easing cycle is probably over.
With risk still switched on, even with China concerns we are calling the ASX 200 up 21 points to 5394 (+0.4%) as the market looks to test the 5400 point mark. My call that the market is heading to 5426 is still very much a reality, and with Bank reporting week starting on Tuesday, watch for rallies into the results. BHP’s ADR which is suggesting the stock could flat up two cents to $37.37 (+0.05%); the positive call is going to come from moves in the banks and other defensives.
I still see some very positive sessions over the coming week and this would result in four positive weeks in a row. However, post Melbourne Cup, if the RBA confirms a neutral stance this could be a very different story, and I would be watching for a pull back.