In its latest publication released on Thursday, the central bank identified three major vulnerabilities to Australia’s financial stability: the fragile state of China’s financial system, overly optimistic investment markets resulting in low risk premiums, and operational vulnerabilities resulting from increasing complexity and interconnectivity.
“Long-standing vulnerabilities in parts of China’s financial system – banking, non-banking and local governments – have been exacerbated by continued weakness in China’s real estate sector,” the Reserve Bank said.
“A further loss of confidence – in the absence of a rapid and meaningful response from Chinese authorities – could lead to tensions that spread to the rest of China’s economy and financial system, likely affecting Australia and the rest of the world through trade and risk aversion. chains. »
With almost a third of China’s GDP linked to its real estate market, the implications of a slowdown are considerable.
The RBA noted that price growth for new residential properties has fallen to its lowest level in almost a decade, despite various policy interventions aimed at stabilizing the market, while construction activity remains subdued.
Additionally, the central bank warned of China’s banking sector’s substantial exposure to the real estate market, pointing to a decline in asset quality. Although non-performing loan (NPL) ratios are apparently stable, there are concerns that they are underestimated. Furthermore, the share of loans overdue for more than a year, therefore qualified as “losses”, increased in all categories of banks.
Adding to the tension, the RBA highlighted that the People’s Bank of China (PBC) had raised concerns over large long-term bond holdings held by non-banks, including the wealth management sector , emphasizing the need for financial institutions to effectively monitor interest rates. risk in a context of still low interest rates.
Australia is not immune to these risks, the RBA said, noting that the multiple stresses affecting the Chinese financial system could spill over into the global financial system.
According to the central bank, the main channels of transmission of financial tensions would be increased risk aversion, a sharp slowdown in global economic activity, a fall in global commodity prices and a reduction in Chinese demand for goods and Australian services.
Ben Udy, senior economist at Oxford Economics, agrees and highlights Australia’s dependence on China and the continued challenges China would face under Trump’s presidency, warning that any impact on China will would have a “fairly direct” impact on Australia.
While Trump has announced a 10 percent tariff on all imports, he wants a 60 percent tariff on those from China, which economists say would be destructive to the Chinese economy.
“The main impact on Australia will be weaker trade and demand globally, as well as weaker demand for Australian exports,” Udy said. He added that Australia is unfortunately not ready, at the moment, to take advantage of the opportunity to capture some of this market share from China which is likely to “go up in smoke”.
A May report from the Organization for Economic Co-operation and Development (OECD) highlighted that Australia would be one of the most seriously affected economies, projecting a 1.2 percent drop in GDP if trade between The OECD and major non-member countries like China and India were expected to decline by 10 percent. This would position Australia as the second worst-affected country, after South Korea.
Amid these concerns, Treasurer Jim Chalmers traveled to Beijing this week for a two-day visit, the first by an Australian treasurer since 2017. On his return, the treasurer said he stressed to China “to how important we are to the proper functioning of the world organization.” rules-based market.
“I believe it’s in everyone’s interest for these markets to function properly,” he said.
The treasurer also said he consulted with BHP, Rio Tinto, Fortescue and Woodside before traveling to China to understand “the implications for our exports of a weaker Chinese economy”.
While acknowledging that the Australia-China relationship is “full of complexity and opportunity”, the Treasurer added: “Dialogue and engagement give us the best chance to properly manage and optimize these ties important.
“Our approach to China has been to cooperate where we can, disagree where we must, and engage with Australia’s national interest.”
