Yahoo Finance 3 reasons Australia needs to worry about China right now
China's economy has the power to impact Australia's in a big way, so are we in trouble?
China’s long run of economic growth can’t last forever. We all agree on that. But when will it falter? Will it be soon? And what happens if it does?
China’s growth - let’s put it on the record - is unprecedented. It started growing consistently back in the late 1970s and hasn’t stopped. Growth has varied from as high as 15 per cent a year - back when their economy was smaller - to 5 or 6 per cent a year more recently.
But 5 per cent growth on a much higher base means China’s actual economic weight is growing as quickly as ever. They’re adding a whole Australian economy onto their economy roughly every couple of years.
Chinese growth is the single biggest moving input into Australia’s growth. We feast on their health. So, when China wobbles, we should be worried.
There’s reason to worry right now.
Warning sign #1: Debt that will make the 'whole world shiver'
First, the Aussie dollar has slumped to 65 US cents on a run of bad news about China’s real estate sector and its financial problems.
Our dollar is a proxy for China’s economy and bets against it are piling up. There is, according to the commitment of traders report, more money shorting the AUD now than ever before.
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Their bets pay off if our economy falters on China’s woes.
China built a truly spectacular number of new homes in the past decade, on borrowed money.
But now, finally, many of the people who were going to move from a brick shack in the countryside to an apartment in the city have done so. So, demand for housing is ebbing, as the next chart shows.
Sales are falling, investment is down and prices are flat.
The homes that were built were financed with debt. And now, some of that debt can’t be repaid. These are the classic ingredients of a messy financial meltdown.
When market participants know there is bad debt in a sector - but not where - they get frightened.
They choose not to lend, cash stops moving and bills don’t get paid. The real economy begins to shrink. If that happens in China, the whole world will shiver.
So far, of course, the problems have been managed in some places and papered over in others.
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The economy has slowed without shrinking and Chinese markets have fallen without collapsing. China is struggling onward. It grew at 5.2 per cent in 2023.
But it is not out of the woods yet. There can be a lag with such matters. In the GFC, the failure of Bear Stearns wasn’t the day of the biggest economic contraction, for example.
Real-world consequences can show up some time after a financial mess is made.
Warning sign #2: RBA sounds 'shadow banking' alarm
Fear of China isn’t just seen in currency markets. The Reserve Bank of Australia (RBA) put out a section on China in its financial stability review late last week and definitely raised the alarm.
This is the second warning signal.
“Property developers’ asset prices have remained at severely distressed levels despite authorities introducing additional measures to encourage banks to lend to the sector,” warned the RBA.
“While broader spillovers appear to be limited so far, there is potential for contagion to other parts of China’s financial sector, given the complex and opaque linkages between commercial banks, the property sector, local government balance sheets and [non-bank financial institutions].”
That last point is important: bank lending is regulated in China so the non-bank sector takes on a lot of the task. They call this ‘shadow banking’ and while the Chinese authorities are trying to measure and manage it, the biggest problems will likely be found in this dark and opaque part of the financial system.
Warning sign #3: Twisting reality
The third and final warning sign on China’s economy is the banana-republic approach that the government has begun taking to economic data. They are pre-releasing their good economic data to try to shape the narrative, as Bloomberg reports. That’s a sign of concern if ever I saw one.
China is an enormous country with many moving parts and it’s possible the real estate situation will not overwhelm its many sources of growth. Just today, a report came in with positive news on profits in the industrial sector.
Betting against China has been a losing game for years. Perhaps this is another such time. But one day, the warnings will be valid and we’d do well to heed them.
