The efforts by Chinese authorities to control credit growth have contributed to a 60 per cent fall in foreign investment in Australian real estate, Treasury believes.
Commenting after Moody’s Investor Services stripped China of its “AA” credit rating, lowering it to a single “A”, Treasury secretary John Fraser said China was maintaining a growth rate of 6.5 per cent by making increasingly intense use of credit.
“Chinese authorities are clearly aware of the risks attached to this, and probably now even more in the light of Moody’s downgrade,” Mr Fraser told a stockbroking conference in Sydney yesterday.
Moody’s downgrade of China, the first by the ratings agency since 1989, comes barely two weeks after Chinese authorities agreed to allow the big three US credit ratings agencies to operate in their country as part of a deal with President Donald Trump.
Moody’s argued there was a conflict between the Chinese government’s desire to stimulate its economic growth and the need to slow the growth in debt.
“The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole,” it said.
China’s finance ministry dismissed this reasoning, saying Moody’s had “overestimated the difficulties faced by China’s economy and underestimated the government’s ability to deepen reform”.
Moody’s concern about China’s debt is shared by the Reserve Bank and Treasury. The federal budget commented that “high levels of debt, potential financial imbalances and over-capacity in some sectors remain as risks to China’s economy”.
Mr Fraser said China’s efforts to maintain financial stability included fresh restrictions on capital outflows.
“This has contributed to a softening of Chinese investment in Australian residential real estate since late 2016. Although business investment remains strong, even here, we are seeing the impact of tighter credit availability,” he said.
“The number of all foreign investment applications for residential housing has fallen from 40,000 in 2015-16 to an expected 15,000 in 2016-17, partly reflecting these factors.”
The Reserve Bank’s latest review of financial stability included an extensive discussion of the risks from China’s difficulty in sustaining elevated growth rates while also trying to control debt.
“The longer that debt-driven growth and distortionary incentives in the financial sector persist, the more likely it is that China’s economic transition will include a financial disruption of some form,” it said.
As a AA-rated nation, China stood alongside countries like France and South Korea while Moody’s gives a single “A” to Israel, Japan and Saudi Arabia.
By David Uren