China's growth based on coal and debt

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By Interest.co.nz, Interest.co.nz / Podcasts NZ, and David Chaston. Discovered by Player FM and our community — copyright is owned by the publisher, not Player FM, and audio is streamed directly from their servers. Hit the Subscribe button to track updates in Player FM, or paste the feed URL into other podcast apps.

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 the bitcoin price is tanking sharply today, losing all of April's big gains.

But first, China has turned in the expected 'very good' economic data anticipated by analysts. The Q1-2021 GDP rose +18% above their pandemic affected Q1-2020 levels. Their fixed asset investment levels were even higher on that basis (+25%) and also as anticipated. However, industrial production there undershot expectations at +14%.

Some analysts are warning of data accuracy with this latest Chinese release, but they do see the momentum continuing there. Excessive leverage remains a key risk.

Electricity production rose sharply, consistent with the economic momentum. In March it was +12% higher than in March 2019 (which avoids the twisted base effect of a year-on-year comparison). But it is coal-fired electricity generation that is driving these gains, up +26% in two years. Sadly, clean energy generation is very variable, with lesser gains for nuclear (+9%), wind (+11%), solar (+4%) and hydro (-9%), all on the March 2019 basis.

The iron ore price has pushed back up to its recent highs, and on rising volumes. Chinese coking coal prices are rising too. (These greatly benefit Australia and gives them leverage in the political disputes between the two countries - at least, room to ignore Chinese attempts to punish them.) Anticipation of rising demand emanating out of the US is behind the moves up. Many other commodities are rising too, including copper.

And the prices paid in China for some key agricultural products (corn, soybean, rice) are also showing signs of rising again, something that will be bad news for global food prices (if you are a consumer). Their catering sector is recovering fast, and that probably means millions more hotpot meal orders, with fast rising demand for beef and lamb, not to mention dairy products.

Chinese retail sales out-performed the expected year-on-year rise, up +34% when a +28% rise was expected. And there is an expectation that this will improve sharply around their upcoming May Day holiday, a five-day long weekend and retail spending spree.

China’s holdings of US Treasuries rose in February to the highest since mid-2019. These holdings increased by +US$9 bln to US$1.1 tln, the highest total since July 2019. It was the fourth straight monthly increase, and the longest buying streak since 2017. China is the second-largest foreign holder of US government bonds after Japan, who reduced its holdings slightly.

China will need these savings. It will need to spend ¥2.2 tln (NZ$ 500 bln) each year until 2030 just to transform their energy sector in order to reduce carbon emissions. That is nearly 3% of GDP every year, just for that one industry to meet the goal set by Xi Jinping. They are unlikely to use those reserves however; most of that is expected to be borrowed.

In the US, new housing starts rose strongly in March, bouncing back after the surprise February hesitation, and are now at an all-time record high. New housing permits rose as well, and new housing completions rocketed higher.

Reflecting that optimism, American consumers reported higher confidence in early April from surging economic growth and strong job gains due in turn to record stimulus spending, low interest rates, and the positive impact of vaccinations. The UofM Sentiment Index rose to its best level in a year on the strength of recent gains in current economic conditions, while future economic prospects remained unchanged from March. This is opposite of the usual pattern over the past fifty years, when recoveries were paced by larger and earlier gains in expectations.

Last week, the US Fed 's balance sheet rose to almost US$7.8 tln at a time when the Fed boss started talking about tapering bond purchases. Clearly they don't need to pump in as much monetary support in a rising economy, especially as fiscal support is kicking in now, but how markets will react when they do pull back will be interesting

The UST 10yr yield ended last week at 1.59%.

The price of gold starts today at US$1777/oz and that is up +US$33 in a week.

Oil prices are still just over US$63/bbl in the US, while the international price is still at US$66.50/bbl.

The Kiwi dollar opens today at just under 71.5 USc. Against the Australian dollar we are little-changed at 92.4 AUc. Against the euro we are also unchanged at 59.6 euro cents. That means our TWI-5 is just on 73.4 to start the week.

The bitcoin price will start today sharply lower; in fact, it’s lowest of the month at US$55,318 and -10.4% lower from this time Saturday. And that is -15% below its peak on Thursday. Volatility in the past 24 hours has been extreme at +/- 8.6%.

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.

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