Four observations from Mike Smith on markets and the economy

ANZ chief executive officer Mike Smith spoke on a range of economic issues as part of The Australian & Deutsche Bank Business Leaders Forum in Melbourne on Friday.

"Banking is a globally competitive business and there is no point making Australian banks globally uncompetitive."
Mike Smith, ANZ CEO

Topics he touched on included the health of China, recent market volatility and Australia’s housing market. Below are four key points he made.

No worries on China

Smith played down recent economic worries over China, reiterating that he isn't concerned about the Asian giant’s broader economy.

He said it was business as usual in China and it was important to remember the lessening pace of growth in China is a deliberate ploy by the country’s authorities.

"There’s no doubt the slowdown is policy driven," Smith said. "They are trying to slow it down."

He said China does have overcapacity issues in some sectors and the mining sector is going through a bit of a problem. But other than that, he said, it is going very well.

"So am I worried about China?" he asked. "No, not at all."

Smith admitted China’s recent decision to place tariffs on coal imports was unusual , and said it could be put down to strategic positioning.

“It does smack of protectionism to some extent,” he said. “It could also be gamesmanship.”

Shock volatility

Smith said recent volatility on global sharemarkets has taken everyone by surprise given it had been absent from the market for some time.

He said there needed to be some sort of correction across markets, and that was now clearly underway.

"It's a little extraordinary," Smith said.

The CEO blamed the reaction on the US Federal Reserve’s decision to extend its quantitative easing program in the face of wide expectations it would begin to lift interest rates.

“Basically, putting off that rate rise has got people excited again,” he said.

Housing market

Despite wide overvaluation concerns, Smith said he remains happy about the state of the Australian housing market.

“I think that there are parts of Australia where it’s a little frothy, but it is generally not totally out of whack with where you’d expect it to be,” he said.

Smith said what was more worrying was the current level of household debt to income, but that was mitigated by broadly high savings rates.  

“Am I too worried? No,” he said. “But it is something that needs watching and the RBA is doing that.”

He said the market still had underlying strength as there are parts of Australia with huge amounts of demand and insufficient supply.

Too much regulation

Speaking on the issue of bank capital, Smith asked if the high level of regulation seen in all sectors in recent times may be constraining business.

“Is ever-increasing regulation, in all sectors of business, something which is adding value?” he asked.

Smith said that courtesy of new regulation, on a like-for-like basis, Australian banks now hold almost twice as much capital as they did at the start of the global financial crisis.

“By the end of 2019, when all Basel III  capital requirements are in place, that’s going to be almost three times,” he said. “The question is when is enough enough?”

Smith said the argument surrounding bank capital had got away from the problem it is trying to solve which was about loss absorbancy.

“Banking is a globally competitive business and there is no point making Australian banks globally uncompetitive," he said.