Chinese credit boom to hit Australia hard: S&P

According to S&P managing director and chief economist, Asia Pacific, Paul Gruenwlad, the weakening Chinese property sector is a significant risk for Australia if China's government fails to adjust policy settings to keep the bottom from falling out of the market.

Speaking at the Australian Securitisation 2014 annual conference in Sydney last week, Mr Gruenwald said that during a recent visit to the world’s second largest economy the local expectation was that property prices only go one way.

“As economists and analysts we should all get very nervous when the expectation is that prices are only going to go up,” he said. “We have been highlighting this risk.”

The risk is the intersection of China’s shadow banking or non-bank credit boom going into the interest rate sensitive sectors like housing, Mr Gruenwald said, adding that the market has already started to turn.

“We now have prices falling in 69 of the 70 cities that report in China,” he said.

“Everything is softening now in China and the question is: can the government adjust the knobs and keep the thing going or are we in for something more serious?”

Mr Gruenwald said that while China’s economic future remains uncertain, continued falls in its property sector fuelled by an excess of developers, too many banks, too much credit and poor credit discipline will create turbulence that will spread across the rest of the region.

“If you line up all the economies in the region, the number one most exposed economy is Hong Kong because of the financial linkages, but Australia is right after that,” he said.

“Of all the sizeable economies in the region, Australia is the most geared into the China investment story.

“If we go into a downslide scenario in China, Australia would be the toughest hit in the region.”

NAB Group senior economist Gerard Burg has forecast that the nation’s cooling economic trends could continue well into next year.

“President Xi Jinping commented at the APEC CEO Summit earlier this month that seven per cent growth would continue to rank China as one of the world’s fastest-growing economies – potentially indicating a lower official growth target in 2015,” he said.

NAB forecasts economic growth at 7.0 per cent in 2015 and 6.8 per cent in 2016.

APRA and the RBA have flagged a weakening Chinese economy as a key risk to the local housing market.

The prudential regulator views China as a trigger that could potentially lead do dramatic falls in the Australian property market.

Earlier this month APRA released the results of its stress test of 13 Australian banks.

The scenario included a housing market double-dip, prompted by a sharp slowdown in China.

Speaking to Mortgage Business, AMP Capital chief economist Shane Oliver said there is no doubt that the performance of China’s property market is a risk to Australian house prices.

“If I think back over the years that I have been monitoring the Australian housing market and worried that it is expensive and therefore vulnerable, one of the triggers I always had for a potential collapse was a collapse in the Chinese economy,” Mr Oliver said.

“An obvious trigger to that would be a property collapse in China,” he said.

“So it is certainly a risk and probably one of the bigger risks around at the moment.”