Australia at risk if investment cycle turns

ECONOMIC spending levels are reaching similar proportions to those typically seen before major financial crises, prompting warnings that overinvestment could lead to a significant correction.

ECONOMIC spending levels are reaching similar proportions to those typically seen before major financial crises, prompting warnings that overinvestment could lead to a significant correction.

And Australia, as a major commodities exporter, could be one of the most at risk, according to a new report from the credit rating agency Standard & Poor's.

S&P singled out China as the biggest risk factor. The world's second-largest economy has the highest investment-to-GDP ratio in the world, but a post-financial crisis stimulus binge has meant much of the spending was inefficient.

While economic investment is typically a healthy thing, overinvestment had created an "overhang" in a number of countries, including China.

As returns on investment diminish, rational investors pull out, sparking a downturn in the economy.

The severity of the dip depends on the magnitude and speed at which investors retreated - with the global financial crisis a case in point.

But the author of the report, S&P analyst Terry Chan, said the government-driven Chinese economy was more able than most to manipulate levels of investment to suit its economic needs.

"They will have an influence in what happens in their economy through their state-owned banks and state-owned enterprises," Mr Chan said, pointing out he was tipping 8 per cent growth in the Chinese economy for the year.

"We're not saying there will be an economic crisis," he said. "We're saying the investment cycle could turn; there could be a correction."

But the key risk remains whether the new Chinese leadership can wrestle with its challenges. It has long identified its reliance on investment-led growth as a key problem. China was the only country identified by S&P at "high risk" of an economic correction due to over-investment. However, Australia was included in a group of eight countries that were considered the next most at risk.

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