The biggest story for Australia is not Ukraine but the China credit crunch and how far the Chinese authorities will take it.
The collapse of the Zhejiang Xingrun real estate group shows that after stopping a number of past minor attacks on the Chinese shadow banking system when the implications were understood, this time around China is more serious.
I do not pretend to have inside knowledge of how far China will go, but if they keep up the pressure, I think the repercussions will be severe both for China and Australia. For Australia the effects start with the sharemarket and taxation revenue but goes all the way to the prices of residential dwellings in the China belts of Sydney and Melbourne.
The old story that if China catches a cold we get pneumonia applies more to 2014 than any past year.
The first blow to Australia from the China credit crunch has been the price of iron ore, where traders in the December quarter stockpiled ore as a way to gain funding for steel mills. That boosted the iron ore price but the subsequent fall not only affects our major miners BHP, Rio Tinto and Fortescue, but also Australian taxation revenue.
Chinese banks have cut lending by as much as 20 per cent to sectors of the economy plagued by excess capacity. Steel is close to the top of the list. At the weekend a Shanxi steel mill went bankrupt and in response banks are believed to have further restricted credit lines to some mills -- so more bankruptcies are possible, although the better steel mills can still get credit.
Iron ore trading has a big influence on the short-term price. Stocks at the ports are still very high and some of the traders, facing heavy losses, are trying to hold onto their cargo until the market recovers.
The most widely held view among the traders is that the iron ore price will fall further given the supply available but will not fall below $95.
What is far more important than the traders’ situation is the overall demand and supply forces and the steel industry view is that in the April-June quarter there will be a pick-up in demand and high-cost iron ore mining may be reduced.
And that’s where we get to the second part of the credit crunch: property. The Chinese economy gains enormous impetus from the rezoning and development of land. Vast numbers of apartments remain empty because they are too costly to buy, but banks are happy to fund them because prices keep rising. In Australia we know that the only way to stop such situations is a nasty credit crunch where lots of people go broke. But this is very painful and so far the Chinese have not had the appetite to do it. There are many who believe that we are headed to a dangerous situation in China's shadow banking system (The hidden crisis behind copper and iron price collapses, March 11).
Certainly if the Zhejiang Xingrun collapse is allowed to lead to more failures then watch out -- it will affect demand for both steel and copper because confidence will be hit hard.
But it may also affect the ability of the Chinese to ship money into the Australian residential property market. For what it's worth, my guess is that the Chinese will ease the credit crunch when the water starts to get hot.