Australia has more to worry over China

Hong Kong - JULY 27, 2014: Hong Kong Victoria Harbour on July 27 in China, Hong Kong. Aqua Luna is popular tourist attraction in Hong Kong

Colin Brinsden, AAP Economics Correspondent
Canberra
(Australian Associated Press)

The Greek crisis may have spooked Australia’s financial markets, but it is China that will potentially give Treasurer Joe Hockey nightmares.

As the European Union grapples with its stubborn, debt-defaulting Greek member – which even now could result in a “Grexit” from the euro – China’s economic woes could have a more lasting impression on the global economic outlook.

That’s the view of Standard & Poor’s sovereign ratings managing director Moritz Kraemer, who is more worried about China than Greece “by a large margin”.

As Australia’s number one trading partner, a slowing Chinese economy and their tumbling share prices are not good news.

China is trying to stem a meltdown in its share market, which has tumbled about 30 per cent in the past three weeks after a staggering 120 per cent rally over the previous eight months.

As the Greek population was voting “no” to imposed austerity measures from its creditors in last weekend’s referendum, Chinese authorities were putting together a series of measures aimed at pumping money into its equity market.

However, they have so far failed to have an effect.

Hundreds of stock exchange-listed Chinese companies have also suspended trading, rather than see their prices dwindle away.

Prices for iron ore, Australia’s major export to China, have taken a renewed hit, dropping below $US50 ($A67.10) per tonne and more than 20 per cent since a high in June.

Billions of revenue dollars were wiped off Hockey’s budget when the price fell to $US47 in April, when his forecasts were made on the premise of a $US96 iron ore price.

He took a more conservative approach in May with an average iron ore price of $US48, even as the price was again rising.

But many analysts predict a fall to below $US40 in the next year or two.

Reserve Bank governor Glenn Stevens gave both Greece and China only a passing mention in his traditional statement following Tuesday’s monthly central bank board meeting, where it left the cash rate at a record-low two per cent.

However, he still wants to see the Australian dollar to fall further to reflect slumping commodity prices, even though the exchange rate has already skidded to a six-year low to about 74 US cents.

While China poses a worry for an Australian economy that is already struggling below its long-term growth average of 3.25 per cent – a level needed to put sustained downward pressure on unemployment – some economists believe the fear of weakening Chinese shares is being overplayed.

An analysis by global bank HSBC suggests the stock market wealth effect has less of an impact on consumption than many think, with less than 15 per cent of Chinese households investing in shares.

“Consumption growth in China is largely driven by income growth rather than changes in wealth and Chinese households still park most of their wealth in cash and deposits,” HSBC economists say.

ANZ economists also doubt that the decline in share prices will be too much of a drag on Chinese growth, even if shares return to November’s pre-rally levels, given that when the stock market was rising, Chinese consumer confidence did not pick-up.

Even so, China is likely to cause some restless nights among investors.

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