Hard landing for China will rock Australia

All eyes are on the Chinese economy, because any further weakness will impact heavily on Australia. Cracks are already appearing, with tumbling steel consumption and declining house and commodity prices. "Even gambling in Macau has slowed down," Sean Fenton, portfolio manager of Tribeca Investment Partners, said at a Grant Samuel Funds Management seminar for financial planners.

The fall-off in China has triggered the end of the mining boom in Australia. Fenton says income from mining had supported services ranging from hairdressers and coffee shops in Perth to accounting firms in Sydney. "China has been through a massive industrialisation process and has driven the most rapid increase in demand for steel that the world has seen," he says.

"But what do we do when the mining boom winds up? This is not a cycle that's going to start again - this a one-off super cycle and we need to think past it."

Whether China has a soft or hard landing is the big question. Fenton says a hard landing would be disastrous for Australia.

He is critical of the Reserve Bank of Australia's interest rates cuts, which have stimulated housing and construction. "It's a very high-risk strategy from the RBA to try and get the dollar down and stimulate exports using housing as a lever to rebalance the economy." If something goes wrong there's not really a lot of room, given the budget position, to offset that.

Fenton says sharemarkets will be volatile and investment firms need to be flexible to take advantage of the opportunities. A traditional long-only approach to investing could suffer badly, whereas active shorting of shares - where you can take a position that prices will decline - could do well.

Susan Hely is a senior writer for Money magazine.

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