The “Economic Outlook” chapter of the Reserve Bank’s latest Statement of Monetary Policy, released this morning, contains some potentially grim reading for Australian mining companies — and the government.

The RBA has used the report to issue an explicit warning about the downside risks of the Chinese property market, identifying it as a “key source of uncertainty”:

“The Chinese authorities have taken some actions recently to support activity in the property market, but it remains to be seen if these measures will be sufficient to avoid a protracted slump. There are a few reasons to be concerned about downside risks to the property market in the current episode and the potential effects on residential investment and economic activity more generally. First, unlike previous episodes (including in 2008), the current downturn in the property cycle has been accompanied by a slowing in growth in total social financing, partly as a result of efforts to place financing and economy- wide leverage on a more sustainable footing. Second, there appears to be a large overhang of property developer debt and unsold property relative to earlier episodes, and anecdotal reports point to weak demand conditions in smaller cities.”

In the view of the RBA, the Chinese housing market also poses risks to the financial stability in China via direct and indirect exposure of Chinese banks. And “[i]f there was a very large and protracted decline in the Chinese property market, this would be likely to reduce demand for Australia’s exports of bulk commodities and the prices received for them … This would have implications for the revenue of Australian miners. For higher-cost Australian miners, further price falls could precipitate the closure of unprofitable mines, especially in the coal industry, leading to lower exports than otherwise”.

And what affects the revenue of Australian miners affects the revenue of the government — in circumstances where revenue forecasts have already been downgraded despite the government’s claim that the Labor era of overestimating revenue was over.

When Xi Jinping addresses the Australian Parliament in 10 days’ time, those sitting to his right will have much riding on his ability to avoid a significant slump in the Chinese property market.

Peter Fray

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