Société Générale strategist Albert Edwards has warned investors who own Australian government debt they face the 'mother of all hard landings' if China's economy slows down as they expect.
Edwards, well known as a serial pessimist but nonetheless widely respected, said Australia's consistent economic growth over the last two decades had left bondholders with an 'excessive' appetite for the country's debt.
He warned these investors are now facing a sharp fall from grace if Chinese growth derails.
"The absence of any recession since 1991 has led Australians to have an excessive appetite for debt in the belief the future will reflect the past," he said.
"But for us, suppressed volatility is merely storing up an even bigger crash further down the road."
He said the Australian economic 'miracle' is "dependent on the wheels not coming off China", but noted China's latest official PMI number in April - which came in at 53.3, the worst April figure for years - is a sign growth is under pressure.
This in turn could ramp up the damage done to Australia, with Edwards concerned the country faced not only a credit bubble but also a commodity bubble.
"All we have in Australia, at its simplest, is a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China," he said.
"Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious than the rather prominent nose on my increasingly haggard face."
Australia's central bank - the Reserve Bank of Australia (RBA) - cut rates earlier this week by 0.5% to 3.75%, in a move which surprised many, amid weakening inflation and soft economic data.
The cut prompted M&G's Anthony Doyle to deliver a similar warning to Edwards.
"If China wobbles or the Australian housing market starts to correct then the RBA will be forced to cut rates which will reduce the Australian dollar's appeal," he said.
Noting foreign investors had been piling into Aussie bonds as a carry trade, he warned a fall in yields could cause Australia some serious headaches.
"If the yield pick-up diminishes and/or the currency falls, then the huge number of foreign investors will start to leave, which will put further downward pressure on the currency," he said.
"Australia is not as bad as Ireland - the government will not go bust as it can print its own currency, but the banking sector is obviously vulnerable. It is easy to see how a nasty downward spiral can quickly develop."
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