Return of the GFC

A second trigger for the recent increase in risk aversion among investors has been the measures announced by Chinese authorities aimed at dealing with that country's property market bubble, which have prompted concerns that China's growth rate could slow significantly.

There's no denying that property markets in several Chinese cities are displaying "bubble"-like features, including a combination of rapid increases in prices and mortgage debt. But it is also apparent that the measures the Chinese authorities are taking in response have been specifically targeted at speculative property investment and development (such as higher down-payment requirements for the purchase of second homes), as opposed to broader measures (such as higher interest rates) which could carry the risk of "collateral damage" to other sectors of the Chinese economy. Significantly, the measures include requirements that local authorities increase the supply of land and housing, especially at the "affordable" end.

The fact that measures such as these have been taken in less than 18 months after China's great November 2009 policy "U-turn" attests to the authorities' confidence in the sustainability of the broader economic recovery, and to their determination to ensure that it isn't derailed by the emergence of large bubbles.

Thus, although property-related investment is likely to slow (indeed if the latest round of measures don't work, further measures can be expected), there's no compelling reason to believe that China's overall economic growth will decline significantly as a result.

Nonetheless, these concerns have contributed to the sharp declines in the Australian sharemarket and the Australian dollar over the past two weeks, along with the now-familiar pattern where Australian assets tend to fare relatively badly during periods of heightened investor risk aversion.

Given the size of the resource sector in the Australian sharemarket, the adverse reaction to the government's proposed resource rent tax hasn't helped, either.

The abrupt shift in investor sentiment will probably reinforce the Reserve Bank's inclination to leave official interest rates on hold for some time, given that the increase earlier this month achieved the RBA's stated objective of returning interest rates paid by borrowers to "normal" levels appropriate for an economy growing at around its trend rate.

There may now be some greater risk to the RBA's (and Treasury's) latest forecast of above-trend growth in 2011.

There will be no harm done in a period of cautious monitoring of global developments, backed by a preparedness to change course swiftly if warranted.