Australia at risk if investment cycle turns
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.
Frequently Asked Questions about this Article…
Standard & Poor's warns Australia could be vulnerable because it is a major commodities exporter. If a global investment cycle turns and demand or prices for commodities fall, countries reliant on commodity exports — like Australia — can be more exposed to an economic correction.
S&P flagged China as having the highest investment-to-GDP ratio in the world. The report says post‑financial crisis stimulus led to large, often inefficient, investment spending that created an 'overhang' — meaning diminishing returns on new investment that raise the risk of a correction if investors pull back.
Overinvestment happens when too much capital is put into projects that eventually deliver lower returns. As returns fall, rational investors may withdraw funds quickly, which can spark a downturn. The size and speed of that investor retreat determine how severe the correction could be.
No. The report and its author, S&P analyst Terry Chan, say they are not predicting an outright economic crisis. Instead they warn the investment cycle could turn and there could be a correction, with the risk level varying by country.
S&P notes China’s government can influence investment through state‑owned banks and state‑owned enterprises, allowing it to manipulate investment levels to support the economy. That means China may be better able than some countries to smooth or manage investment swings.
According to the report, post‑financial crisis stimulus spending in China was large and often inefficient. That stimulus-led investment increased the investment-to-GDP ratio and contributed to an overhang of projects with diminishing returns — a key factor in overinvestment risk.
S&P singled out China as the only country at 'high risk' of an economic correction due to overinvestment. Australia was named among a group of eight countries considered the next most at risk, though the report does not list all eight in the article.
Based on the report's themes, investors might monitor signs such as falling returns on new investment, slowing commodity demand or prices (important for commodity exporters), and rapid investor withdrawal from sectors or projects. The report emphasizes that the magnitude and speed of investor retreat determine how big a correction could be.
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