How a 'sharp deterioration' in China's property market and potential collapse of Evergrande could affect Australia's economy

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Australia's biggest trading partner is facing its biggest economic slowdown in decades, and the Reserve Bank has warned that stress in China's economy will be felt across the world — including here in Australia.

China's property market is facing a "sharp deterioration" which could lead to financial stress domestically, and ultimately affect its trade with Australia.Police have detained its chairman and founder Hui Ka YanThat is one of the key risks, identified by the Reserve Bank of Australia in its latest financial stability review, in a chapter specifically about the "vulnerabilities in China's financial system".

This led to speculation that its downfall would result in some "contagion" effect as China's entire property development sector struggles to pay off its massive debts. Police also arrested an undisclosed number of employees at Evergrande's wealth management division in the southern city of Shenzhen last month.

The entrepreneur founded Evergrande in 1996, which he expanded rapidly by borrowing significant amounts of money to build apartments, and repaying that debt once the properties were purchased.The company has since become a symbol of the excesses fuelled by China's property bubble with its lavish spending.

Evergrande's shares have plummeted by 99 per cent in the past five years, and are almost worthless at less than one cent apiece. Mr Hui's fortune has since dwindled to about $5 billion.On top of its executives' legal problems, Evergrande's plans to restructure its debt have been dealt a significant blow, bringing it closer than ever to being completely wound up.China's economy is in serious trouble.

"But there is, of course, a desire to support the system, so it doesn't lead to systematic problems."In its financial stability review published on Friday, the RBA noted that the "direct links between mainland China’s financial system and advanced economy banking systems are limited", but Australia would not be immune from the fallout.

Last year, Australia exported $184.7 billion worth of goods and services to China, according to Department of Foreign Affairs and Trade data.

 

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