Financial Services Talking Points | 19/07/2017

In today’s talking points: RBA sets neutral cash rate at 3.5%; Australian major banks required to raise capital; Speculation of a Chinese financial “super regulator”; China to address state-owned enterprises’ debt to ensure financial stability 

With the Australian dollar seeing a two year high as growth is speeding up, the Reserve Bank of Australia has raised the neutral interest rate about two percentage points above the current level. “The RBA minutes had a pretty positive tone and they’ve thrown out this idea that the neutral cash rate is 3.5, so people are like, well we’re at 1.5 so that’s super-accommodative and so forth”, said sally Auld, head of fixed-income and currency strategy for Australia at JPMorgan Chase & Co. The increase is on the back of the strong Australian dollar, which has climbed from 78.08 to 79.01 cents this week. The RBA have still advised cautioned, with housing and jobs still remaining clouded, the economy is not an absolute certain to continue to grow. The rising of the cash rate is also targeted at slightly reducing lending for investment into residential property.

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Australian Major Banks Required to Raise Capital

The Australian Prudential Regulation Authority on Wednesday has unveiled its long-awaited views on new capital requirements for major banks. It said that the country’s largest lenders would need to increase top tier capital by about one percentage point of their assets, which would rise the overall requirement to 10.5 percent. The new target has been set for 2020, with banks already raising capital in anticipation of the changes. The Regulation Authority has also warned banks to not pass on the burden to customers, as was shown in 2015 when banks raised their interest rates on loans in response to the new capital requirements. ANZ Bank, Macquarie Group and Westpac all stated that they were taking into account the new capital requirements into their future budgeting.

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Speculation of a Chinese financial “super regulator”

The National Finance Work Conference, a closed-door policy meeting occurring every 5 years, commenced on July 14 to discuss the management of China’s financial system and to support the economic growth. The focus of this year’s conference is on addressing ways to deal with financial risks and improving cooperation between the 3 major Chinese regulators, China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission, in overlooking the financial market with the People’s Bank of China (PBOC). According to the China Security Times, to encourage the various regulators to work in tandem of one another will be a challenging task as it will require re-assigning responsibilities and roles where there are entrenched interests. As such, ever since the 2015 stock market incident, there has been speculation that China is looking to build a “super regulator” to increase transparency, reduce financial risks and risk of bribery and corruption. There is further speculation on how this will be executed – some believe regulatory power will be consolidated by the PBOC while others think a coordinating committee will be formed. Regardless, economists like Xu Hongcai, are encouraged by the policy direction. Though implementation is likely to only occur after the 19th National Congress, economists like Xu Hongcai are encouraged by the policy direction and believes will appeal to international investors.

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China to address state-owned enterprises’ debt to ensure financial stability

Though there was a focus to expand lending markets in the last National Financial Work Conference 5 years ago, China is now looking to ensure financial stability by addressing and managing the borrowing binge especially by state-owned enterprises (SOEs).  They have a debt of 103% of China’s gross domestic product, which is two thirds of the total corporate debt. Though addressing SOEs’ debt is a difficult feat, as it has both political and economic implications, President Xi Jinping may look to employ downsizing measures in his second five-year term to tackle this issue. Alternatively, there may be a further promotion of “mixed ownership” plans, where equity will be provided through partial privatisation schemes. President Xi’s comments at this year’s conference seem to suggest that credit supply and demand will remain important.

Read more at: AFR