China’s monetary moves?
Wednesday, while much discussion was of the ECB’s rate decision (they held target rates at 1.0%) and other measures (they announced six small LTROs would commence in July), Chinese monetary and banking policy caught our eye.
Citing a rumor, a major Chinese newspaper reported Tuesday China’s May new loans were 800 billion yuan—well above analysts’ estimates. Should this rumor turn out to match actual data (Chinese data is often distributed via rumor mill), it would mark a sharp reacceleration from April’s 681 billion yuan and constitute the biggest May on record (recall, there’s some seasonality to Chinese loan growth). And, though the actual May data remains to be seen, the report suggests this increased level will remain the trend for the next few months.
Relatedly, China also announced it would again delay implementation of Basel III capital requirements from July to December—a move potentially averting bank deleveraging. In addition, the government further instructed banks to slash risk-weights assigned to small business loans—potentially buoying liquidity further.
Clearly, these reports alone don’t necessarily mean the growth-goosing cometh in the here-and-now. But the broad picture and an article earlier this week in state-run newspaper Xinhua discussing planned stimulus lends some credence to the byline. Ultimately, to us this is a story to watch moving forward—and one that could present a noteworthy tailwind at the back of global equities and economies.
How not to manage a balance sheet
It seems Greece’s government could be out of cash by July, whether or not the country receives its pending aid tranche, since 2012 state revenue is about €1.7 billion less than expected. If this happens, leaders would need a bit of creativity to fund public wages , pensions and fuel, food and drug imports. In our view, this isn’t the start of a Grecian dystopia. Greek and EU leaders will likely find ways to keep food, power and medicine flowing–and civil servants compensated. Alternate funding means are already under discussion.
That said, the potential cash crunch is noteworthy as an object lesson—consider the reasons Greek revenue is falling short. To be sure, the nation’s five-year long economic contraction is a big cyclical factor. But there’s a large structural component as well. On the accounts receivable side, one big culprit is rampant tax evasion. Some analysts speculate Greek citizens owe about €45 billion in back taxes, and Greece’s un-computerized tax system makes avoiders difficult to track. Many businesses now accept only cash payments so they can avoid declaring income—essentially, they’ve pocketed about €800 million in expected VAT revenue. Then there’s the accounts payable side—chiefly, the fact Greece simply has too many. If private firms employed most Greek workers and handled food, fuel and drug imports—and had a bigger role in the broader economy—Greece’s balance sheet would likely be far healthier today (and Greeks would find themselves with more choice and competitive prices).
Recent reforms have targeted Greece’s costly combo of tax avoidance and public-sector bloat, but there seems to be ample room for further improvement. If nothing else, perhaps Wednesday’s news gives the next government some extra incentive to clean house.
Australia up and over estimates
Concerns the global economy is slowing (or stalling) continue to meet contradictory data. Wednesday bore yet another pause-worthy data point—the Australian Bureau of Statistics reported economic growth “down under” accelerated 1.3% in Q1, easily up and over +0.5% forecasts. The 4.3% year-over-year jump marks Australia’s fastest growth in more than four years. Importantly, growth in Q1 was driven by private consumption and business investment—largely propped by miners investing ahead of resurgent Chinese demand.