Australia’s relationship with China is great… or worrisome depending on who you talk to. Like many countries Australia has rode the Chinese wave, only Australia has ridden the wave more than anyone else. In 2013 out of Australia’s total exports 31% went to China. The reliance on China’s economy has been a boon for Australia in the past few years, but with recent risk worries in China some economists are worried that Australia has placed itself in a position of too much risk.
While its obvious that Australia has placed itself in a position where its economy will to great extent rise and fall with China’s economy there are other worries for Australia’s economy. One of which is that the Australian bond is now seen as the best way to hedge an overexposed Chinese position. This is because if Chinese markets were to falter their would be a sell off of Australian bonds and the interest rates on the bonds would have to rise to compensate investor’s additional risk.
An Australian Fund’s manager Peter Nathanial says,
China is like all the big emerging economies at the moment – vulnerable. It has an overvalued currency, no productivity gains, no structural reforms, capital outflows, inflation in dollar terms. All the signs are there.
While fund managers like him
self think that a gamble on Australia and China is acceptablem he thinks that policy makers in Australia should work to diversify risk. Although such a position would make his own funds safer their there is a certain amount of truth to the position. While unlikely, if China were to experience a downturn Australia would quickly follow. On top of that the interest rates on bonds might reach high levels impeding Australia’s ability to finance stimulus.
Read more: Sunday Morning Herald [Sydney]