In the past few weeks we have focused on the potential impacts of a financial collapse in Europe. It’s not just Greece that is a threat to the Eurozone, but the possibility of a fall-out spreading to other countries including Portugal, Spain and Italy. But today we look at an issue much closer to home, one with the potential for a far greater impact on the ‘two-speed’ Australian economy: China.

With all eyes on Europe, China has been struggling to make the transition from an industrialising nation to a developed world leader. Regardless of the astronomical growth of recent years, China has a momentum that needs to be maintained. This means continued large-scale domestic borrowing and supporting an explosive housing market that is on the brink of bursting.

With cracks beginning to appear in the seams of its obese economy, the Central Bank of China has recently decreased interest rates by 25 basis points, the first move of its kind since 2008. This is a bold move to spur borrowing by the Chinese masses and avoid the wave of conservatism that has already infected the rest of the world. It may just work. China has room to move. The country is still growing, albeit more slowly than in previous quarters.

While off-pace growth may not be the end of the world, it may reduce the demand expectations for some of Australia’s largest economic contributors. Mining accounts for approximately 5.6% of Australia’s GDP and nearly every Australian adult is invested in mining in one form or another, through superannuation, property or direct company investment. A slowdown in the Chinese economy could have a far greater effect on the Australian economy than an implosion of Eurozone economies.

The fear of a Chinese slowdown is not new to the Australian investment market. It is often played down by government commentary but the underlying evidence is an underperforming Australian benchmark index compared to the American equivalent:

ASX 200:

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Dow Jones Industrial Average:

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The aim of today’s article is not to spread fear among Australian investors but to highlight the inherent dangers facing the Australian market. The economy is heralded as being one of the most stable in the world but it is heavily reliant on China and other developing Asian nations.

The world moves on and so do markets. Traders and investors are seeking value away from the risks of the almost imminent downfall of European nations. The real risks, however, may lie closer to home. How heavily weighted is your portfolio to China-reliant stocks?

Stay Ahead of The Game,

Lachlan McPherson