December 2015
Consumer Sentiment Surveys
There are two main consumer sentiment surveys in Australia. The headline indices that summarise the survey results appear to provide relevant and timely information about economic developments, particularly around turning points. However, in some cases, particular components of the aggregate indices are more useful. This is true of the components that track households' perceptions of their current personal finances compared with a year prior and, to a lesser extent, the components tracking households' perceptions of buying conditions for major household items.
Firm-level Capacity Utilisation and the Implications for Investment, Labour and Prices
Business surveys provide a timely read of the average rate of capacity utilisation at Australian firms. However, discussions with company managers in the Reserve Bank's business liaison program reveal considerable variation in how ‘capacity utilisation’ is interpreted. This variation is important, as it affects the interpretation of survey measures of capacity utilisation and their implications for firms' resourcing needs and pricing decisions. For firms in the more capital-intensive goods-related industries, a high level of capacity utilisation may reveal an impetus to hire more labour and to invest in the capital stock, while for services firms it is more likely to reflect an incentive to hire more labour only. Consequently, movements in aggregate measures of capacity utilisation are likely to contain information about the labour market, while the implications for business investment are likely to be identified at a more granular level. Much of the recent increase in survey measures of capacity utilisation has been driven by services firms. In contrast, capacity utilisation remains relatively low for firms in goods-related industries, which may help to explain why aggregate capital expenditure has remained subdued.
Assessing China's Merchandise Trade Data Using Mirror Statistics
Given their timeliness, Chinese trade data have the potential to provide a useful early read on conditions in the Australian and global traded sectors. However, the reliability of China's merchandise trade data has come under scrutiny in recent years, particularly following reports of over-invoicing of exports to Hong Kong. This article considers the accuracy of China's trade data by comparing the merchandise trade statistics with the reciprocal trade statistics or ‘mirror’ statistics published by its major trading partners (MTPs). In broad terms, growth in trade suggested by the mirror statistics aligns relatively closely with published Chinese data, though the Chinese figures are found to imply more volatile and somewhat higher growth in exports over the past three years than the corresponding trading partner data. While this largely reflects differences with mirror statistics for Hong Kong, it is also due to discrepancies with data from other economies, primarily in the Asian region.
Trends in Australian Corporate Financing
The aggregate funding behaviour of the Australian non-financial corporate sector has been fairly steady over the period since the global financial crisis. However, this masks the quite divergent experiences of the resources and non-resources sectors. Substantial net investment by resources companies has been funded primarily by operating cash flows, while external funding has been modest, mainly comprising borrowing to offset the effect of movements in commodity prices on internal funding. Net investment by non-resources companies has been relatively subdued, with internal funds broadly sufficient to meet this expenditure. Overall, leverage for Australian-listed companies remains relatively low, internal funding continues to cover the bulk of financing needs and companies generally appear to retain good access to external finance in its various forms.
Chinese Capital Flows and Capital Account Liberalisation
Chinese private capital flows are dominated by foreign direct investment and banking-related flows, with portfolio flows remaining relatively small (as a share of GDP). Of these components, banking-related flows account for the majority of the cyclical variation in total flows and seem to be driven by expected changes in the exchange rate. Both the composition of capital flows and the factors that drive their variation are likely to change as the Chinese authorities gradually open the capital account in line with their stated intention. Given the size of China's economy, the implications of a continued opening of its capital account and a significant increase in capital flows are potentially very large. They include a greater influence of global financial conditions on China (and vice versa), a change in the composition of China's net foreign assets, and a change in the nature of the economic and financial risks facing China.
US Dollar Debt of Emerging Market Firms
US dollar-denominated borrowings by emerging market (EM) corporations have increased rapidly in recent years, raising concerns about possible currency mismatch risk. This article uses firm-level data from the top 100 EM corporate bond issuers and Bank for International Settlements data on cross-border bank lending at the economy level to gauge such risk. These data indicate that around two-thirds of the largest issuers of US dollar-denominated corporate bonds are at least in part naturally hedged (based on company-specific information), and a significant share of the remaining borrowers are state-owned enterprises. The largest recipients of foreign currency bank loans by country also appear to derive significant US dollar export revenues. This suggests that most EM corporations that have borrowed in US dollars are well placed to weather an appreciation of the US dollar, particularly given the possibility that some have hedged their exposures via financial markets. However, Chinese property developers may be an exception and some EM resource companies may face difficulties as a result of the current low global commodity prices. Corporations will also face higher financing costs on their US dollar-denominated debt as the US Federal Reserve moves to increase its policy rate.
Total Loss-absorbing Capacity
Total loss-absorbing capacity (TLAC) is a key part of the G20's regulatory reform agenda to address the problems associated with financial institutions that are ‘too big to fail’. By strengthening the loss-absorbing and recapitalisation capacity of global systemically important banks (G-SIBs), the TLAC standard is intended to help ensure that these large, interconnected and complex financial institutions can be resolved in an orderly manner if they fail, without the need for financial support using public funds.
CCPs and Banks: Different Risks, Different Regulations
Recent debate on the adequacy of regulatory standards for central counterparties (CCPs) has often drawn on the experience of bank regulation. This article draws out the essential differences between CCPs and banks, considering the implications of these differences for the regulatory approach. It argues that banks and CCPs affect systemic stability in different ways, with a CCP's systemic importance largely derived from its central role and a bank's systemic importance typically derived from the size and breadth of its activities. Any refinements to regulatory standards for CCPs that are drawn from bank regulation should not overlook these differences.
Some graphs in this publication were generated using Mathematica.
ISSN 0725–0320 (Print)
ISSN 1837-7211