In its latest publication released on Thursday, the central bank identified three standout vulnerabilities to Australia’s financial stability – the frail state of China’s financial system, overly optimistic investment markets resulting in low-risk premia, and operational vulnerabilities stemming from increasing complexity and interconnectedness.
“Longstanding vulnerabilities in parts of China’s financial system – banks, non-banks, and local governments – have been exacerbated by the ongoing weakness in the Chinese real estate sector,” the Reserve Bank stated.
“A further loss of confidence – absent a timely and significant response from the Chinese authorities – could see stress spill over to the rest of the Chinese economy and financial system, which would likely affect Australia and the rest of the world through trade and risk aversion channels.”
With nearly a third of China’s GDP tied to its real estate market, the implications of a downturn are considerable.
The RBA noted that growth in new residential property prices has plummeted to its lowest level in nearly a decade, despite various policy interventions aimed at stabilising the market, while construction activity remains subdued.
Additionally, the central bank cautioned about the substantial exposure of the Chinese banking sector to the property market, highlighting a decline in asset quality. While non-performing loan (NPL) ratios are reportedly stable, there are concerns they may be under-reported. Moreover, the share of loans overdue by more than a year, thus categorised as a “loss”, has grown across all categories of banks.
Adding to the tension, the RBA pointed out that the People’s Bank of China (PBC) has raised concerns about significant long-term bond holdings by non-banks, including the wealth management sector, emphasising the need for financial institutions to effectively monitor interest rate risk amid persistently low interest rates.
Australia is not immune to these risks, the RBA said, stressing that the multiple stresses across China’s financial system could reverberate through the global financial system.
The main transmission channels of financial stress, the central bank said, would include heightened risk aversion, a sharp slowdown in global economic activity, declining global commodity prices, and diminished Chinese demand for Australian goods and services.
Ben Udy, lead economist at Oxford Economics, agreed and emphasised Australia’s dependence on China and the ongoing challenges China would face under a Trump presidency, warning that any impact on China would flow through “pretty directly” to Australia.
While Trump has announced a 10 per cent tariff on all imports, he wants a tariff of 60 per cent for those from China, which economists agree would be destructive for the Chinese economy.
“The main impact on Australia will be that weaker trade and demand globally, and weaker demand for Australian exports,” Udy said. He added that Australia is unfortunately not primed, at the moment, to take advantage of the opportunity to capture some of that market share from China that is likely to go “up in smoke”.
A May report from the Organisation for Economic Co-Operation and Development (OECD) highlighted that Australia would be one of the most severely affected economies, projecting a 1.2 per cent drop in GDP if trade between OECD and major non-OECD countries like China and India were to decline by 10 per cent. This would position Australia as the second-worst impacted nation, following South Korea.
Amid these concerns, Treasurer Jim Chalmers travelled to Beijing for a two-day visit this week, the first by an Australian treasurer since 2017. On his return, the Treasurer said he emphasised to China “how much we value the proper functioning of the global rules-based market”.
“I believe that it’s in everyone’s interests that we see those markets function properly,” he said.
The Treasurer also shared that he consulted with BHP, Rio Tinto, Fortescue and Woodside before he went to China to understand “the implications for our exports of a softer Chinese economy”.
While acknowledging that the relationship between Australia and China is “full of complexity and opportunity”, the Treasurer added: “Dialogue and engagement gives us the best chance to properly manage and maximise these important links.
“Our approach to China has been to cooperate where we can, disagree where we must, and engage in Australia’s national interest.”
