Banks, house prices to take big hit if China growth slumps
In a new report assessing how Australia's financial system would respond to a "hard landing" in China, the credit rating agency said a dramatic slowing in Asia's growth engine would have severe ripple effects for the domestic economy.
S&P said a hard landing in China - where growth would slow from about 7.5 per cent now to 5 per cent - would be unlikely, and attached only a small probability to such a scenario.
If growth did slow this sharply, however, it said Australian banks would face credit rating cuts because of their heavy exposure to the domestic economy and the $1.2 trillion mortgage market.
A hard landing in China would severely dent Australia's growth, it said, causing house prices to fall by as much as 25 per cent. The unemployment rate could surge to 10 per cent, from 5.7 per cent today.
Banks are heavily reliant on economic conditions and would feel such a change through rising bad loans.
The report said the biggest banks that were "highly systemically important" - likely to be the Commonwealth Bank, Westpac, ANZ and NAB - would probably benefit from government help under the most pessimistic conditions.
This would limit their downgrade to one notch, from their present level of A+ to AA-.
Small and mid-sized banks, however, would be less likely to benefit from government support, the analysts said, and would face downgrades of one or two notches.
"An economic hard landing in China would be hard felt by Australian financial institutions," the report said.
"This is because a severe slowdown in China would result in a dampening effect on capital investment, a significant negative impact on Australian exports, and weakening business and consumer sentiment and economic prospects in general."
National Australia Bank chief executive Cameron Clyne said the main threat to house prices would come from higher unemployment, but it would have to get to levels of more than 10 per cent to cause a dramatic reaction.
"The biggest thing that will cause a housing price collapse will be unemployment, because ultimately if people don't have jobs they can't go out and buy houses," Mr Clyne said.
The government is forecasting that unemployment will rise from 5.7 per cent now to 6.25 per cent this financial year, but Mr Clyne said this would not cause a housing collapse.
Despite the risks, S&P said it thought the most likely outcome would be a "soft landing" - Chinese growth of 7.3 per cent this year and next against 7.5 per cent now.
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Standard & Poor’s says a sharp slowdown in China could hit Australia hard — house prices could fall by as much as 25% under a severe ‘hard landing’ scenario because weaker exports, lower investment and falling consumer confidence would cut demand for housing.
S&P warns Australian banks’ credit ratings could be cut by up to two notches in a sharp slowdown in China, driven by rising bad loans from a weaker domestic economy and pressure on the $1.2 trillion mortgage market.
The report identifies the big four — Commonwealth Bank, Westpac, ANZ and NAB — as likely ‘highly systemically important’. S&P says they would probably receive government support in the worst conditions, which would limit their downgrade (the report notes a one‑notch move from their present ratings).
S&P says small and mid‑sized banks would be less likely to benefit from government support and therefore would face downgrades of one or two notches in a severe slowdown scenario.
S&P considers a hard landing — defined in the report as Chinese growth slowing from about 7.5% to around 5% — to be unlikely and assigns only a small probability to that scenario, saying a softer outcome is more probable.
S&P warned unemployment could surge to about 10% in a hard‑landing scenario. National Australia Bank CEO Cameron Clyne said unemployment is the main threat to house prices and believes levels would need to rise above 10% to cause a dramatic housing collapse; he also noted the government expects unemployment to rise only to about 6.25% this financial year.
China’s growth affects Australian exports, capital investment and business and consumer sentiment. A sharp slowdown would weaken the domestic economy, push up bad loans in the $1.2 trillion mortgage market and put pressure on bank credit ratings — all key risks investors should watch.
Despite the risks, S&P expects a ‘soft landing’ as the most likely outcome — projecting Chinese growth around 7.3% this year and next (versus about 7.5% now) — implying less severe knock‑on effects for Australia than the extreme hard‑landing scenario.
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