What would a China hard landing do to Australia?

From the SMH blog:

China, India, Indonesia, and Russia are the emerging market economies most at risk of a meltdown.

Analysts at French investment bank Societe Generale have put together this colourful graphic which ranks each country in their EM universe on a variety of measures: private debt, financial system strength, property overvaulation, monetary conditions and governance issues.

Separately, SocGen researchers estimate that a “hard landing” in China – where its economy reaches year-on-year GDP growth of 2 per cent – would shave 1.2 percentage points off Australia’s GDP.

That’s a better list of EM crisis candidates than I’ve seen elsewhere, acknowledging that China is central to ongoing EM woes.

The forecast for Australia in the event of a Chinese hard landing is, however, spectacularly optimistic. The 1.2% fall in Australian GDP might be in the first six months and then the real carnage would start. As national income collapsed with commodity prices, fiscal stimulus would pour forth and the budget deficit would blow out into the hundreds of billions very quickly. Bank credit spreads would widen dramatically, at first with China’s banking seizure and then further as the local budget melted and was downgraded. Interest rate cuts might be passed on initially but not for long and consumer retrenchment and unemployment would bust housing anyway. That would hit the budget again as the banks were bailed out via nationalisation of Lenders Mortgage Insurers.

The recession would be at least as bad as 1991 and the aftermath far worse as deleveraging took hold of households.

A China hard landing would be an economic “reset” for Australia and we’d have to begin rebuilding our now shed export sectors for future growth. Let’s hope that particular risk is the black fantasy of some distant and incredible doomsayer.