Why China's property wobbles are a big concern for Australia: Robert Gottliebsen

Last night's fall in global share and commodity markets plus the slump in the Australian dollar will affect not just Australian superannuation balances and consumer confidence, but will extend deep into sectors of the Australian dwelling market. If you are about to buy or sell an apartment or house, you need to be aware of the forces that have been unleashed.

The most dramatic contributor to last night's drop, from an Australian point of view, was not the growing frustration with Europe; it was not the global banking crisis; and it was not the fact that the US must introduce mandatory spending cuts. All of those events were very important, but what spooked our part of the world was the statement by Chinese Vice Premier Wang Qishan that a long-term global recession is certain to happen and China must focus on domestic problems. In the last few months, Wang Qishan has been meeting with global leaders including telephone talks with US Treasury Secretary Timothy Geithner.

We tend to underestimate the severity of the Chinese situation. According to the Financial Times, the number of property transactions in China's largest cities has fallen to dangerously low levels. The FT reports that the China Banking Regulatory Commission earlier this year ordered domestic banks to weigh the impact of a 30% decline in housing transactions in "stress tests" aimed at determining the health of the Chinese financial system.

A Chinese real estate slump would have a significant ripple effect on the global economy. Property construction accounted for more than 13% of China's economy last year. No doubt this is part of what is concerning the Chinese leadership.

If the Chinese leadership has concluded that there is to be a global recession, and is adjusting its domestic policies as a result, then Australia will not escape.

Let me explain how we will get caught. First understand that behind all the Greece, Italian and Spanish drama is potentially one of the greatest banking crises the world has seen in recent decades. Major European banks, led by those in France and Germany, have taken depositors' money and loaned it in big lumps to problem countries like Greece, Spain and Italy. The fall in the market value of those loans has caused the foolish banks to lose all their capital and much more. But the banks refuse to face up to the truth and take the necessary actions.

As a result no major American banks will lend to a European bank. There is a list of pariah banks that few in the world will touch. The European Central Bank is providing the funds to keep the pariah banks alive. Mixed in this morass is a web of derivative securities that these pariah banks are parties to. No one knows where that heads but everyone assumes that Germany and France will not let their banks fail.

Last week I spoke with leading investment bankers who concluded that once the crisis became deep enough, Europe would begin printing money to solve the problem.

The European banking crisis will affect Australian banks because it will make it harder and more expensive for them to undertake their overseas borrowings, which fund about 40% of their book.

Worse still, if the crisis is further inflamed, European banks might have to dump their Australian securities. At least one European bank has sent people to Australia to canvass that option.

On the other hand, the likelihood that the Reserve Bank of Australia will cut interest rates has been increased. However it will be harder for many banks to pass on those rate cuts.

All those events affect our dwelling market. But there is more. Currently the Chinese are spending about $3 billion a year buying apartments in Sydney and, to a lesser extent, in Melbourne. Without Chinese buying, apartment prices would fall and it would be impossible to justify the building of major inner city apartment blocks given the policies of local councils and other bodies who add about 20 per cent to the cost of an apartment.

Most of the Chinese who bought Sydney and Melbourne apartments obtained their wealth via the development and purchase of apartments in major Chinese centres. Those apartments are now falling in value and there is a squeeze on.

A month ago there were signs that the Chinese were slowing down their purchases of Australian apartments. Those Chinese who have bought in the past few months have now been savaged by the fall in the Australian dollar. At a time when Chinese buyers of Australian apartments are being squeezed at home, any new Chinese buyer will be nervous that the Australian dollar fall has just started.

Prepare for Chinese buying to be severely curtailed while, in the words of Wang Qishan, the Chinese turn to problems at home.

This article first appeared on Business Spectator.