MacroScope

Forever blowing bubbles?

UK finance minister George Osborne is speaking at a Reuters event today, Bank of England Deputy Governor Charlie Bean addresses a conference and we get September’s public finance figures. For Osborne, there are so many question to ask but Britain’s frothy housing market is certainly near the top of the list.

The government is extending its “help to buy” scheme at a time when house prices, in London at least, seem to be going through the roof (no pun intended). Property website Rightmove said on Monday that asking prices for homes in the capital jumped 10.2 percent in the last month alone.

The Royal Institution of Chartered Surveyors has suggested the Bank’s Financial Policy Committee should cap house price inflation at 5 percent a year. A Bank of England policymaker retorted that it wasn’t down to his colleagues to regulate prices.

Osborne has give the Bank a say on pulling the plug on his scheme early but not until September next year. Overnight, the RICS property industry body said house building in Britain is making its strongest recovery in more than 15 years, but supply is still failing to keep pace with demand.

The government and Bank of England insist there is no sign of a bubble inflating but one only needs to look at the volatile history of Britain’s housing market to see why there is widespread concern.

from The Great Debate:

China’s commitment to growth will drive the global economy

From outside China, the Bo Xilai trial looks like the Chinese news event of the year, one of the preoccupations of Western media, along with corporate corruption and the clampdown on American and European companies. Yet these issues are no more than sideshows to the most important economic event of recent times, the unveiling and ratification of a major program for reforms for the next decade, which will occur at the Chinese government’s third plenum in November. The reforms promise to bring another great leap forward in China's dramatic ascent.

Chinese officials will reveal how long China will need to make the transition from an investment-led, middle-income country to an innovative, consumer-driven, high-income one -- and thus when it will become the world's largest economy. Can China circumvent what we know as "the middle-income trap" that has for decades denied high-income status for Latin America and Asian countries like Malaysia and Thailand?

The challenges that China's new leadership faces in pushing for rising levels of innovation, entrepreneurship and skills will be the main discussion points this week at the New Champions summit in Dalian, China, organized by the World Economic Forum under the leadership of executive chairman Klaus Schwab. The summit recognizes the important truth that China’s degree of success will determine global growth: it will determine whether the twenty-first century will be the Asian century, and whether by mid-century Asia -- which not long ago represented just 10 percent of the world economy -- will represent half or just a third.

China at a crossroads on yuan internationalization project

As China marks the third anniversary of the first ever bond sale by a foreign company denominated in renminbi, questions are rife on what lies next for the offshore yuan market.

Since hamburger chain McDonalds sold $29 million of bonds on a summer evening just over three years ago, China’s yuan internationalization project has notched up impressive milestones.More than 12 percent of China’s trade is now denominated in yuan from less than 1 percent three years ago, Hong Kong – the vanguard of the offshore yuan movement – has more than one trillion yuan of assets in bank deposits and bonds and central banks from Nigeria to Australia have added a slice of yuan to their foreign exchange reserves.

China’s aim to internationalize the yuan has two major objectives: One, to ensure that its companies do not have to shoulder the foreign exchange risk of swapping yuan into dollars in global trade. The second is that as China gradually makes the transition from a current account surplus nation to a deficit country, it would, like the United States, want its debt to be denominated in its own currency.

Turning up?

Manufacturing PMI surveys for euro zone countries and Britain will be the latest litmus test of the durability of fledgling economic recoveries.

Even the readings from Spain and Italy have shown improvement over the summer so it may well be that they are the most interesting given we’ve already had flash readings for the euro zone, Germany and France which showed business activity across the currency bloc picked up faster than expected in August.

Having exited recession in the second quarter, further euro zone growth now looks likely in the third.
Britain’s recovery looks more solid still following a 0.7 percent leap in GDP in Q2. Its PMI will be augmented by Bank of England figures on its funding for lending scheme, whereby banks are offered cheap money on the proviso they lend it on to smaller companies.

Does less QE from the Fed necessarily mean a stronger dollar?

Based on the latest U.S. Treasury flows data, it may be time to ditch the textbook theory that says less monetary stimulus means a stronger currency – at least for now.

The problem may just be that the theory doesn’t fully account for the situation when your largest creditors – and they are very large – are trying to beat you to the market.

The Federal Reserve first hinted in May it would start reducing its bond purchase programme because the U.S. economy is recovering and so is the job market.

China’s new economy needs fresh, reliable indicator on consumers

China’s transition into a domestic demand driven economy has kicked off with the government announcing long-awaited reforms, but it is missing a key element — an indicator to measure the success of the plan.

Long considered the ‘factory of the world’, China has a vast population that works in factories that produce everything from consumer and electronic goods to clothes, technology equipment and trinkets of everyday value.

Accordingly, its achievements are measured by economic indicators like exports, industrial production, gross domestic product and trade surplus, among others.

Is Europe past the worst?

The PMI surveys take top billing today. China’s report showed a further slowdown in manufacturing activity with the index following to an 11-month low and well into contractionary territory.

Flash readings for the euro zone, Germany and France are due later. Whisper it, but it could just be that Europe’s economy is past the worst.

Beijing’s travails will obviously have knock-on effects for Europe, particularly Germany for which China is such a huge market. A Chinese “hard landing” – still not the central scenario – would be the last thing the world economy needs just as it shows signs of life.

Just when you thought it was safe to get back in the water…

A worrying weekend for the euro zone.

Greece’s coalition government – the guarantor of the country’s bailout deal with its EU and IMF lenders – is down to a wafer-thin, three-seat majority in parliament after the Democratic Left walked out in protest at the shutdown of state broadcaster ERT.

Prime Minister Antonis Samaras insists his New Democracy can govern more effectively with just one partner – socialist PASOK – but the numbers look dicey, although it’s possible some independent lawmakers and even the Democratic Left could lend support on an ad hoc basis.

Samaras has ruled out early elections and says the bailout – without which default looms – will stay on track. If the government fell and elections were forced, the likely beneficiaries would include the anti-bailout leftist Syriza party which, if it got into government or formed part of one, really would upset the applecart.

Yield is king in China’s ‘dim sum’ offshore yuan bond markets

 

A return to China’s offshore yuan bond markets, or “dim sum” as they are colorfully known in Hong Kong, may be sweet for Gemdale, a mainland property developer. But not all fund managers are smiling. The company raised five-year money at 5.63% amounting to 2 billion yuan. Not bad, considering that last July, it raised a lesser sum for a shorter tenor while coughing up nearly double of what it paid this time around. Add the fact that it did so by keeping to the same weak bond covenant and Gemdale seems to have pulled off a stunner.

But Gemdale doesn’t seem to be the only one. In recent days, issuers with weak bond covenants have discovered a ready market for their debt and at much cheaper rates. In theory, bond covenants can be divided into two halves: affirmative and negative ones. The former promises to pay bond holders on time while the latter forbids it from exceeding certain financial ratios such as interest paid/EBITDA, debt to equity, etc. And of course, they are secured by the company’s assets or backed by bank guarantees or letters of credit

But when theory meets reality (read: offshore hunger for yield meets hungry onshore Chinese issuers), financial “creativity” is the outcome. So mainland companies set up complicated structures to ensure they are able to keep regulators and ratings agencies happy while getting access to cheap capital quickly without having to negotiate labyrinthine approvals processes.

Trade entrails

An exercise in divination using the entrails of last week’s U.S. international trade report shows signs of a move with larger implications than just the gaping deficit that caught analysts wrong-footed: the possibility of a persistent burden on the American economy caused by Japanese and German imports, like in the 80s.

The U.S. trade deficit widened 16 percent in November to $48.7 billion, the Commerce Department said on Friday, above the $41.3 billion expected. The negative surprise prompted economists to cut hastily their U.S. gross domestic product estimates for the last quarter to a negligible rate. The stock market took a hit.

The disappointment was limited, however, as analysts attributed the bulky import bill behind the deficit increase to a resumption of merchandise flows into the U.S. after Hurricane Sandy paralyzed port activity in the East Coast the previous month. Some economists still on yuletide mode are, apparently, missing the big picture.