China’s steel peak? Buried in the big data drop from China this week were figures on steel production and iron ore imports, which were at odds, but suggest that the peak in Chinese steel production could be a lot closer than even the bearish of bears (and Australian iron ore exporters) might think. While iron ore imports rose in March and in the first quarter, March-quarter steel production dipped for the first time in 20 years. In fact, crude steel production from January to March fell 1.7% from a year earlier to 200 million tonnes. Up until now, first-quarter output hasn’t contracted since 1995. And steel output fell 1.2% in March, to just over 69 million tonnes from the 70.24 million tonnes in March last year — another rarity for China.

Iron ore imports rose 2.4% in the first three months of this year, a fraction of the 19% surge in the same quarter of 2014 (which helped drive Australian GDP 1.1% higher in that quarter). Iron ore imports jumped 18.5% in March, to 80.51 million tonnes, from February, which was impacted by the Lunar New Year holiday. So will China’s iron ore import needs and steel production peak this year, and not in either 2016 or 2017, as many bears believe? Adding to the earlier-than-forecast peak is the continuing decline in real estate investment across China — it rose 8.5% in March (the smallest increase yet recorded), down from 10.4% in the first two months of this year and 10.5% in 2014 and a huge 19.8% in 2013. Now the slowing in China’s (GDP grew 7% in the first quarter, down from 7.3% in the first quarter of last year) economy is understandable given the policy of rebalancing the economy away from a strong dependence on investment (and therefore high steel production and iron ore consumption) there were enough questions in the data this week to spook Australian investors, especially in iron ore companies. Global iron ore prices dipped back under US$50 a tonne overnight, Wednesday to US$49.80. That was not unexpected. — Glenn Dyer

Changing the US debt guard. In a major switch, Japan has emerged as the major holder of US government debt in February, topping China for the first time in nearly seven years. US Treasury figures released in Washington overnight revealed the surprise news. Japanese holdings of Treasury bonds and notes fell by US$14.2 billion to US$1.2 trillion from January, while China’s holdings dropped US$15.4 billion to $US1.2 trillion.

On a year-on-year basis, Japan’s holdings increased US$13.6 billion, while China’s declined US$49.2 billion. Much of the change can be explained by the rise in the value of the dollar against the yen, while the Chinese currency has risen with the US currency because of the peg, and China is reinvesting its surpluses domestically. The third biggest holder of Treasuries in February was a group of countries known euphemistically as “Caribbean Banking Centres” (aka tax havens), which include the Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, and Panama. Their combined holdings were US$350.6 billion, up from US$338.5 billion in January. These figures are a bit flexible, as are those for Belgium, which surprised the market in January with a total of US$1.24 trillion (making it third overall). Its holdings plunged to a more realistic US$345.3 billion in February, more in line with the US$341.2 billion in holdings from February last year. These figures do not include Treasuries held by Chinese and Japanese groups in countries such as the Caribbean Banking Centres, Belgium, the UK or other money centres. — Glenn Dyer

Kiwis won’t rein in the banks. Macro-prudential controls have lost their allure across the Tasman as being the go-to regulatory move to control an overheating property market — a warning for all those urgers in the commentariat here, especially at Fairfax Media, who want the Reserve Bank and the Australian Prudential Regulation Authority to follow the Reserve Bank of NZ down the same route in trying to control the hot Sydney property market.

That stance by commentators ignores the fact that APRA already rejected macro-prudential controls in December. But regardless of that RBNZ deputy governor Grant Spencer yesterday signalled in a speech that more was now needed to control “housing market imbalances” in New Zealand.

While pointing out that the controls on lending with high loan-to-valuation ratios (LVRs) helped moderate the growth in the Kiwi property market, Spencer now wants more done because the NZ housing sector was becoming exposed to a possible “downward correction”, not having “had a major house price correction in the past 45 years”. On top of the LVR changes, the RBNZ has lifted interest rates 1% in four separate moves in the past year and a bit, which now seems not to have been enough to help control the housing boom Spencer is worried about.

His warning about “imbalances” echoes the use of the same word by the Reserve Bank in late 2014 and early this year in pointing to the dangers flowing form the hot Sydney property market, where much of the price growth is being driven by investors (and especially those in self-managed super funds).

Spencer warned that a downward correction in house prices in New Zealand could be prompted by a range of potential shocks, such as rising global interest rates, or a downturn in the global economy and financial markets. And with 60% of its lending in residential mortgages, the New Zealand banking system could be put under severe pressure in such a downturn. The resulting contraction in credit would amplify the impact to the domestic economy and financial system, making it more difficult to avoid a severe downturn. And that in turn would hit the big four Australian banks right in their profit and loss accounts at a time when their Australian share prices are at near record levels. — Glenn Dyer

Peter Fray

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