China’s property market threat to Australia: Gottliebsen

Keep your eye on Hong Kong and Shanghai in this market rally.

And remember that global stock markets, including Australia, are dominated by professional traders working for the big investment banks and institutions. Given world instability, they are moving markets up and down while putting pressure on politicians and central bankers to find a permanent solution to the European crisis.

The current rally was created because traders had oversold the market, and politicians and central bankers spread the word that they would at last take action.

If that action is yet another band aid and does not include a massive reconstruction of European banks to recognise their losses, then the counter-cyclical rally will run out of steam and the bear market will resume.

But counter-cyclical rallies can be substantial.

What’s happening in Europe has a direct impact on Australia. Outgoing Commonwealth Bank chief executive Ralph Norris dared to tell the truth when he warned that the looming Australian interest rate cuts might not be passed on in full because the turmoil in Europe is boosting the cost of overseas borrowings – which Australian banks require to fund about 40% of their book.

I could be wrong, but my guess is that the Europeans need to feel more market pain before they will take required action.

But while the Europeans dither, there is an emerging property problem in Hong Kong and China, which sent the Hong Kong market to a 26-month low yesterday and saw a continued steady decline in Shanghai.

Last year when the Chinese central banks began the process of tightening, Chinese property developers and state-owned enterprises found private loans to keep up their development momentum. Property gluts are now emerging, and Shanghai and Hong Kong prices are starting to fall. This is weighing on both the Hong Kong and Shanghai markets and is one reason why the price of copper is being hammered (although there was a late rally last night, which recovered a further big fall).

All this may be lost in the current market rally but if there is a sharp cutback in Chinese apartment construction, it will affect commodities. The Chinese government is looking at further stimulation but it also has an eye to inflation.

For Australia, how China plays out will be as important as what is happening in Europe, and Europe needs Chinese money to recapitalise its banks. If China has a crunch of its own at the time of the European crisis, then the world faces a new degree of danger.

But meanwhile, enjoy the rally and, as I told Eureka Report readers last week, if you are uncomfortable with your levels of equity then these rallies give you the chance to adjust your exposure.

This article first appeared on Business Spectator