australia could be next spain

20-30% property falls coming?


http://www.smartmoney.com/news/on/?story=ON-20120703-000047&cid=1259

Andy Xie says RBA must devalue currency to protect Australian economy

--China's resources demand to fall, hurting commodity prices and investment

--Economist says lower mining investment may spark 20%-30% house-price fall

(Adds RBA rate decision in sixth paragraph; background on Australian, Spanish economies in fifth paragraph.)

By Caroline Henshaw

SYDNEY--Australia's economy is dangerously dependent on China and the central bank will have to cut rates aggressively to protect the resource-rich nation from a slowdown comparable with that seen in struggling European states like Spain, said Andy Xie, an independent Shanghai-based economist and adviser to several Chinese banks.

"Australia has a serious Dutch disease," said Mr. Xie, who was formerly chief economist for Morgan Stanley in Asia. "Australia needs to ease the currency down as quickly as possible to prevent a crash in the property market. Once the bubble bursts, if you let the currency stay at the same level, you'll see what we saw in Spain," he said in the recent interview.

Mr. Xie warns that foreign investment, largely directed towards large mining and energy projects, will slump from its current level of just under half of gross domestic product, or GDP. This he argues will spark a downturn in the Australian property market that could see house prices drop by between 20% and 30%.

The downbeat analysis for Australia is against the overwhelming views of economists and the International Monetary Fund, which has flagged the country's success at reducing its levels of debt and maintaining rates of growth higher than its peers. Australia's economy is growing at 4.3% based on the latest data, spurred by China's demand for its raw materials and resources.

Unlike Spain, Australia has low levels of public debt and its government is aiming to post a small budget surplus next financial year. Spain's latest budget data, by contrast, cast doubt on Madrid's ambitions to reduce its budget deficit to 5.3% of GDP, down from 8.9% of GDP last year. Australia also has far more room to devalue its currency in the event of a slowdown--unlike Spain, which is part of the 17-nation euro zone.

The Reserve Bank of Australia on Tuesday held the benchmark cash rate at 3.50%, following a cut of 25 basis points in June and a 50-basis-point reduction in May, amid signs earlier cuts are starting to have a positive impact on the economy.

But it is Australia's dependence on China and resources that Mr. Xie says is the biggest danger for the country. China is now Australia's largest trading partner and the driving force behind its mining industry, which accounts for about 7% of GDP. A slowdown in China is now for the first time leading some analysts to question the longevity of Australia's mining boom.

"Already the Chinese banks are having trouble lending money to fund [resources] projects," said Mr. Xie, who advises several of the major Chinese lenders. "When a bubble is funded by foreigners, that's when we know when it's going to end. The tipping point is once large projects start to be postponed."

Mining giant BHP Billiton Ltd.(BHP) has already eased back on US$80 billion of on new projects by 2015, caught between rising costs and falling commodity prices. Switzerland-based Xstrata PLC shut three Australian mines last year because costs rose too high as reserves became depleted and analysts expect Rio Tinto (RIO) may too be forced to shelve some of its local coal projects. Coal and iron ore prices are trading well below the highest levels seen over the last two years.

To respond, Mr. Xie says that the Reserve Bank of Australia will be forced to slash interest rates, a measure that could see the Australian dollar fall in value against the U.S. greenback by 30%. That would help struggling areas of the economy outside mining, which have struggled to cope with the Aussie above parity.

Write to Caroline Henshaw at [email protected]

(END) Dow Jones Newswires