From a global macroeconomic perspective, we encourage readers to consider that the world is experiencing an extended, rolling process of deflating its credit excesses. It is now simply China’s turn.
For context, Japan started deflating their credit bubble in the early 1990s, and has now experienced more than 20 years of deflation and very little growth since. The US began its process in 2008, and after eight years has only recently been showing signs of sustainable recovery. The euro zone entered this process in 2011 and is still struggling six years onward. We believe China is now entering the early stages of this process.
Having said that, we believe that Chinese authorities have a viable plan for deflating their credit excess in an orderly fashion. Please stay posted as we will review this multi-pronged, market-based approach in our next column.
For now, let’s turn our attention to the size of the credit excess that China created and why we estimate it to be the largest in the world.
A credit excess is created by the speed and magnitude of credit that is created – if too much is created in too short a time period, excesses inevitably occur and non-performing loans (NPLs) emerge.
To illustrate the credit excess that has been created in China, let’s review several key indicators, including the: 1) flow of new credit; 2) stock of outstanding credit; 3) credit deviation ratio (i.e., excess credit); 4) incremental capital output ratio (efficiency of credit allocation).
The chart below shows the amount of credit created as a percentage of GDP during the five years prior to major downturns globally.
When it comes to Nigeria’s currency, mind the gap, again: the spread between the official and parallel market rates for the naira is widening once more.
During a more than two-week run, the naira strengthened to a six-month high of 390 per dollar on the black market – close to one of the multiple official exchange rates, but still far off the interbank rate of around 305 to the dollar.
However, the naira is weakening once more on the black market, slipping below 400 to the dollar, to 405 to the dollar on Monday, according to traders.
Chronic dollar shortages in Nigeria began after oil prices crashed in 2014, worsened as the central bank restricted supplies of hard currency, and are unlikely to end any time soon.
In the absence of adequate supplies of dollars in the official market, businesses and individuals have been forced to buy hard currency on the black market, stoking demand there and eventually weakening the naira to a record low of 520 in February. Analysts said the gap between the official rate of just over 300 to the dollar and the black market one indicated the scale of unmet demand for hard currency in Africa’s most populous nation.
With China’s gross domestic product widely pegged to maintain growth of 6.8 per cent in the first quarter of 2017, some official economists and state-backed think tanks are already predicting growth will slow markedly in the second quarter.
Zhang Baoliang, a researcher at the economic forecasting department of the State Information Center, was cited by the state-run Securities Times on Monday as predicting growth could slow in Q2 in the face of low external demand, a rising tide of “de-globalisation” and protectionism, uncertain policy outlook from the US, persistent economic imbalances in China and likely reduction in domestic sales of automobiles and housing.
The paper cited Mr Zhang and a number of other economists as predicting growth of 6.8 per cent in the first quarter.
But it also pointed to a forecast from the Institute of Finance and Economics at the influential Academy of Social Sciences that foresaw growth of slowing to 6.7 per cent in the first half of 2017, and which described full-year growth of 6.5 per cent as “no problem”.
More bluntly, Peking University’s Economic Policy Research Group has forecast GDP growth gradually slowing to 6.5 per cent over the next three quarters, bringing the annual rate to around 6.6 per cent.
At present a median estimate from economists compiled by Bloomberg predicts GDP growth for the first quarter will come in at 6.8 per cent year on year, with 16 of the 36 economists surveyed forecasting exactly that rate.
The Reserve Bank of India, in its first monetary policy review of financial year 2017-18, kept the repurchase (repo) rate unchanged at 6.25%, citing upward risks to inflation and global uncertainty.
The Monetary Policy Committee, however, raised the reverse repo rate by 0.25 basis points to 6%, and cut the marginal standing facility (MSF) rate to 6.5%.
“The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth,” said RBI in its policy statement.
“RBI hiked reverse repo rate by 25 bps to 6.00% thereby reducing the corridor between repo and reverse repo to 25 bps from the existing 50 bps. The essential aim seems to be ensuring a sharper focus on the keeping overnight rates (especially the overnight call money rate) aligned to the repo rate,” said Bekxy Kuriakose, Head – Fixed Income, Principal Mutual Fund.
Here are five key takeaways from the RBI’s policy statement:
Banks can invest in REITs
While reviewing the monetary policy, the central bank has proposed that banks be allowed to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). This follows an earlier proposal by market regulator Securities and Exchange Board of India (Sebi).
The RBI proposed to allow banks to participate in Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvITs) following a proposal by market regulator Securities and Exchange Board of India (SEBI). Banks would be allowed to invest in these instruments within the stipulated limit of 20 percent of net-owned funds.
“One of the highlights of today’s policy was the decision to allow banks to invest in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITs) within the 20% umbrella limit. It will allow banks to invest in an important asset class thereby providing much needed boost to this segment. Owing to better liquidity, the cost of capital for developers in the commercial segment will come down in the future,” said Surendra Hiranandani, chairman & managing director, House of Hiranandani in an emailed note.
Brazilian oil output in February was 14.6 percent higher year-over-year, according to the latest data released by ANP, the South American country’s petroleum regulator.
February production touched 2.676 million barrels per day, an ANP statement said, adding that natural gas output also rose 9.2 percent compared to the same month last year.
Figures released earlier in March from the nation’s Trade Ministry said that oil exports had jumped 94 percent year-over-year in February at 45.7 million barrels – a figure that topped the January 2017 record by 12 percent.
he surge in oil exports was a function of higher production from the offshore areas in Brazilian waters, where huge oil finds were made in the pre-salt and sub-salt layers in the past few years.
“Most members agreed price momentum not firm yet” … sounds like another way of saying not even close to the inflation target … the BOJ seems to have an endless well of creativity when it comes to describing missing their target. Arrgghhh …. but maybe I just got outta bed on the wrong side today.
“Most members said companies will likely raise prices as consumer spending increases moderately”
at least sounds like they have some hope for seeing inflation move in the direction they want.
Following Wednesday’s blowout ADP report, which printed some 40K jobs higher than the highest estimate, the only possibility for tomorrow’s nonfarm payroll report, the last major economic data point before the Fed’s March 15th rate hike announcement, is to disappoint, especially in terms of wages (which in light of the recent downward revision of Q1 GDP by the Atlanta Fed to 1.2% is not out of the question). That possibility, however, is slim to none if one looks at Wall Street’s forecasts, where virtually every sellside analyst boosted their NFP estimate in the hours after the ADP number. Still, with the market pricing in a 100% chance of a rate hike, only a very disappointing – think less than 100K – report will derail the Fed from hiking for the second time in three meetings.
Here are some of the more notable forecasts for tomorrow’s number::
Bank of America 185K
Deutsche Bank 200K
Goldman Sachs 215K
Morgan Stanley 250K
Putting it all together, here is what Wall Street expects from the February payrolls report due out at 8:30am ET tomorrow morning:
Change in Nonfarm Payrolls: Exp. 193K (Prey. 227K, Dec. 157K)