With the US still fighting to find its financial feet and the European markets getting themselves into more trouble, Australian politicians are doing their best to reassure us that as long as we have China as our economic ally, we should weather this latest economic storm relatively unscathed.
But given that China has been racing ahead at breakneck speed to catch up with the developed world, the question needs to be asked – What if the Chinese Bubble Bursts?
Just how long can China maintain such an dazzling pace of growth and is their rapid rise to the top of the global financial pecking order sustainable?
As a property investor the reason these questions should matter to you, is that our two major capital city housing markets are also closely tied to China’s good fortune.
It is estimated that Chinese investors sinking around $2billion into the Sydney apartment markets each year and $1billion per annum into new Melbourne apartments.
About three quarters of the apartments are rented to Australians with the remainder used by the Chinese families.
According to a recent Business Spectator article, a significant portion of these investment dollars have been coming directly from the profits of the mainland Chinese apartment market, which until not too long ago, was booming.
There are now signs of weakness in the Chinese buying of Sydney apartments because of the problems in China and the fall in the copper price.
What has this got to do with the price of copper?
Many Chinese apartment developers have been using copper as a security for their property loans and now, the fall in copper prices in China has caused Chinese apartment developers to carefully weigh up the viability of projects in the pipeline due to their heavy reliance on copper as security for their property loans.
In his Business Spectator report, Robert Gottliebsen says, “Against that background, the five per cent fall in the Hong Kong sharemarket yesterday carried special significance for Australia.”
He explains that the Hong Kong market is more of a direct reflection of consumer sentiment and while, “events in Europe and the US played a role…a large part of the Hong Kong market is linked to Hong Kong and mainland dwellings.”
As such, he says the 20 per cent plus fall that’s occurred in the Hong Kong market over the past year represents a general decline in business optimism, as the Asian economy starts to show signs of catching the European plague of economic pessimism.
In fact according to the global FT-Economist business barometer, 54 per cent of Asian executives now expect global conditions to become more dire, compared to just 36 per cent six months ago.
Interestingly, only 47 per cent of US executives felt the global outlook was one of gloom and doom.
However Gottliebsen says he does not expect a major economic downturn in China.
“As readers will know, I am not forecasting a major China downturn because inflation is moderating and already China is reversing many of the funding clamps that have contributed to the current slowdown. But of course…China cannot avoid the repercussions of the European problems.”
He says while it’s not necessary to hit the panic buttons, Australian investors should nevertheless keep an eye on the Hong Kong market as a reflection of what’s occurring in mainland China and the possible impact on Australia’s future.
In the past we used to say when America sneezes Australia catches a cold.
Well…we’ve now decoupled from America but Australia is not sheltered from the rest of the world and as China expands its economic dealings further into the rest of the world, they will influence our financial prosperity more and more in the years to come.
I recently wrote a blog about China’s ghost cities that contained a gripping short video – please click here to watch it.
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