What does a slowing Chinese economy mean for Australian property?
What’s on our mind: China’s biggest property developer going into administration in the US? What does a slowing Chinese economy mean for the Australian property market?
What happened this week: The Chinese economy is starting to deflate.
What are we watching next week: US unemployment, Chinese manufacturing purchasing numbers.
Prelude:
What’s on our mind:
Earlier this week, one of China’s biggest property developers filed for bankruptcy in the US.
The Chinese economy also started to show signs of deflation.
This week we look at what a slowing Chinese economy could mean for the Australian property market:
(Source)
Rates up everywhere… except China:
Over the last 16 months, interest rates worldwide have been heading higher.
The US Federal Reserve has gone from 0% to 5.5% ⬆️
The Bank of Canada has gone from 0.25% to 5% ⬆️
The Bank of England has gone from 0.1% to 5.25% ⬆️
The European Central Bank has gone from 0% to 4.25% ⬆️
And here in Australia, the RBA has gone from 0.1% to 4.1% ⬆️
While all this continued, one central bank went in the opposite direction.
The People’s Bank of China - the central bank for the 2nd biggest economy in the world.
Policy interest rates in China have gone backwards - from ~4.25% in 2020 to 3.45% now ⬇️.
The most recent cut was just last week - a response to a decline in economic conditions.
But why has China been going in the opposite direction?
It's relatively simple…
Domestic credit growth in China was down to the lowest level in seven months in July, while broad credit growth dropped to a record low.
(Source)
The real estate industry is in decline, and the domestic economy is on the brink of collapsing.
Today we look at the risks of a domestic Chinese economic slowdown's risks on the Australian property market.
How a Chinese collapse could impact the Aus prop market:
There are three main impacts a Chinese slowdown will have:
A China slowdown impacts commodity prices.
China is the world’s industrial superpower and a key consumer of most of the world's commodities.
It buys almost a fifth of the world's crude oil, half of its copper, over half of its nickel and zinc, more than three-fifths of its iron ore, and consumes over half of its coal.
In the critical minerals space, China purchases and processes even more - 60% of the world's lithium and ~80% of the world's rare earths.
In 2021 China produced ~53% of the world's steel.
Simply put, Chinese demand accounts for a huge portion of global commodities demand.
As economic activity inside China slows, demand for commodities slows with it.
We have already started to see a slowdown’s impact on commodities prices:
Lithium prices are down ~60%.
Copper prices are down ~13%
Iron Ore prices are down ~20%.
How does this impact Australia and the Australian property market?
China is Australia’s biggest trading partner.
~35-40% of Australian exports were sold to China in 2022.
A China slowdown impacts demand for Australian goods.
Fewer things being sold to the Chinese means less demand for Australian goods.
Decreasing international demand for Australian goods puts pressure on the AUD exchange rate - we have already started seeing this in the last few weeks:
(Source)
This is where it starts to impact the Australian Property market…
The RBA generally doesn't mind small depreciations in the AUD exchange rate BUT also doesn't like it when it goes too far.
A weak Australian dollar exchange rate can mean increased domestic inflation - fuel prices are a good example.
Anyone who owns a car would have noticed petrol prices at the pump have been edging higher over the last few weeks - this is in part related to the depreciation in recent AUD exchange rate weakness.
The RBA can defend the AUD exchange rate by increasing the cash rate to encourage foreign capital to flow into the country.
In the 60s, the RBA is unlikely to act too aggressively to defend the exchange rate, BUT if we start to see the exchange rate fall into the 50s, then the RBA may be forced to hike rates and defend the Aussie dollar.
This puts into play counter-cyclical rate hikes…
Even if the domestic economy struggles, the RBA may be forced to keep increasing rates.
Higher domestic interest rates can only be bad for the property market…
See how exchange rates and cash rates correlate here:
(Source)
The Chinese contagion effect scenario:
This is perhaps the hardest to predict…
Just like in 2008, when the US property market collapse led to a global financial crisis, the same is possible in a China collapse scenario.
While the exposure of banks worldwide to China is a lot lower than it was to, say, the US housing market, there is always a risk that a China collapse scenario creates negative sentiment in markets.
A decrease in lending and a slowdown in credit growth will impact prices negatively.
This one is hard to predict, but something to be aware of.
A second-order impact (and one that is easier to recognise) could be a flow of capital out of Australia back into China.
Chinese capital outflows have played a significant role in economies outside China - consider the mega deals for eastern suburbs Sydney properties with harbour views.
A domestic slowdown may lead to Chinese billionaires and millionaires liquidating foreign assets to settle domestic debts.
At the very least, it could lead to the disappearance of Chinese buyers in Australia (and the rest of the world).
Both these scenarios are hard to predict and could go either way, but they are things to be aware of.
What we are looking out for over the coming months:
The Australian Federal Budget recently recorded an unexpected surplus of $19BN.
(Source)
We expect surpluses to decrease and the budget to return to a deficit in a China slowdown scenario.
We anticipate earnings across the Australian mining complex to go backwards and for lower commodity prices to reduce export revenues.
We will be tracking commodities prices & Australian exports closely over the coming months as the whole China slowdown story plays out.
Commodity prices falling, the AUD exchange rate depreciating could mean higher interest rates in the short term…
Here are some links worth bookmarking:
Thanks for reading,
Aus_Prop team.
You can contact us here:
On Twitter @Aus__Property
Via email at Auspropertymarket@gmail.com
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