Once again everyone has focused on what Reserve Bank Governor, Glenn Stevens was saying in his first speech on the Australian economy in two months in Melbourne this week, and not looking more broadly at what is going on elsewhere, especially in the weakening Chinese property sector.
China and its stumbling property sector is now a key trigger for the RBA to cut rates – and yesterday we got another reminder of the increasing fragility of the Chinese economy when the first results of the monthly survey of manufacturing revealed a slowing – to a reading of 50, where it is neither growing or contracting. It had been slowly expanding for the year up to this month. It was a six month low for the survey.
Mr Stevens’ speech rightly received a lot of attention for what he said on Australian property prices (but not those in China), and how to make our home building boom last longer, hinted at about growth and interest rates (we’ll come back to that shortly), some straight talking about what happened to the Australian economy during the GFC (we had a recession he says, despite what the GDP figures show), investment and the value of the dollar.
That all got publicity, impacted the value of the dollar (briefly) and saw more speculation about controls on home lending.
But Mr Stevens isn’t the only RBA spokesman on the economy – much of what he said last night was canvassed in the minutes of the November RBA board meeting, released earlier on Tuesday of this week; in a speech last week on the business cycle by the bank’s chief of economics, Assistant Governor, Chris Kent and in recent publications. Today the bank’s head of economic analysis, Alex Heath speaks in Sydney and next week, the deputy governor, Phil Lowe is due to make speak on the economy to the Australian Business Economists group.
And then there’s the four times a year examination of the economy’s performance in the Statement on Monetary Policy (SMP), the latest of which was issued earlier this month. It to that we have to look for find out what will move interest rates lower in this country – and what is now keeping the central bank’s senior executives awake.
Every comment about the Australian economy from the RBA and its senior executives have to be framed against events in the weakening Chinese property sector. It was like Banquo’s ghost in Mr Stevens’ speech on Tuesday night in Melbourne.
The SMP was released on November 7 and for the first time, the RBA singled out the health of the Chinese property sector as one of the main external threats to Australia (the other was the value of the Aussie dollar, if it doesn’t continue dropping).
In fact, for the first time the RBA used the outlook section of the SMP report to issue an explicit warning about the downside risks of the Chinese property market, identifying it as a “key source of uncertainty for sometime”.
"If there was a very large and protracted decline in the Chinese property market, this would be likely to reduce demand for Australia’s exports of bulk commodities and the prices received for them. Over the past year, prices for bulk commodities have fallen by about a third. While much of this fall has been the result of increasing supply of iron ore and coal, weaker growth of Chinese demand for steel is also likely to have put downward pressure on prices in recent months.
If growth in Chinese steel production was to weaken a lot further, without accompanying cuts to iron ore and coking coal production globally, further commodity price falls may eventuate. This would have implications for the revenue of Australian miners. For higher-cost Australian miners, further price falls could precipitate the closure of unprofitable mines, especially in the coal industry, leading to lower exports than otherwise,’’ the bank wrote.
And to that end, the release of October’s housing data in China on Wednesday afternoon (all but ignored by Australian media) wasn’t encouraging. ShareCafe didn’t miss it.
The latest data from China showed new home prices fell month to month (from September to October) in 69 of the 70 cities surveyed and the average price was down 2.6% from a year ago. In September prices also fell in 69 of the 70 cities surveyed, with the average down 1.3% from a year ago, the first annual fall in two years. Excluding public housing, private-sector home prices fell in 67 of the 70 cities in October from a year earlier, up from the 58 cities that reporting falls in September.
In Beijing last month, house prices fell 1.3%, against the 0.4% rise in September, while in Shanghai the rate of fall accelerated from 0,8% to 2% in October. For existing residences, 64 of the 70 cities saw price drops last month, with northeastern city of Mudanjiang registering the sharpest fall of 1.8%, according to government websites. China’s National Bureau of Statistics said property investment continued to cool in the first 10 months, growing 12.4% year on year, down 0.1 percentage points from the first nine months. In terms of floor space property sales fell 7.8% in January – October, compared with an 8.6% drop in the nine months to September.
And China’s new yuan-denominated lending in October rose to 548.3 billion yuan ($US89.3 billion), up 42.3 billion yuan year on year. But compared with September, lending fell 308.9 billion yuan, with the weakness in housing blamed for the sharp drop.
It is clear that a prolonged and deepening slide in the Chinese property and housing sector will make the transition of the Australian economy from the mining investment boom to domestic driven growth, much tougher than it already is. The RBA can live with a slow slide, and slowing growth in the Chinese economy, but not a sharp slump. The Australian economy is already coping with the gentle slowing in China. The question for the RBA now is, how much more of a slide can we handle before it becomes necessary to cut interest rates (and cut the value of the dollar) to soften the blow and protect the domestic economy?
With the sharper than expected slide in October prices, it’s no wonder iron ore prices fell to new five year lows this week .
That’s the sort of fallout the RBA is looking at from what is happening in the Chinese property market. The RBA is looking at the way the Chinese property sector is sliding and the way that is hitting the Australian economy.
A number of provincial and city governments, plus the central government have moved to ease restrictions on property purchases to try and support the sector and stop a slump. They need time to work. But despite those support moves, the quickening rate of very broad fall is now making the RBA nervous.
And finally, a pointer about what to watch for. The RBA has been ending the post meeting statements from Mr Stevens and board meeting minutes with this phrase in recent months:
"In their assessment and given the information available, the Board judged that the current accommodative stance of monetary policy continued to be appropriate to foster sustainable growth in demand and inflation outcomes consistent with the target over the period ahead. Members considered that the most prudent course was likely to be a period of stability in interest rates.”
A sharper slide in Chinese property and house prices than what we now seeing, with bank losses and write downs appearing, will force the RBA to cut rates.
The above paragraph from the SMP is as clear a description of why the next move in interest rates in this country will be down – but only of the Chinese property market’s woes start seeing steel production fall faster than it has been doing in the last three months, coal and steel prices fall even further and more collateral damage in Australia to production and employment.
China’s central bank has been quietly pumping billions of dollars a day into China’s financial system to maintain liquidity and support the banks. There’s a feeling things are more fraught than they appear.
Glencore’s three week Christmas break announcement last week falls into the above criteria outlined by the RBA above, as does the continuing slide in iron ore prices.
