Kevin Rudd’s resource super profits tax has one massive risk – that commodity prices collapse before he gets to collect one cent of it.
Yesterday, the influential forecaster, Marc Faber joined those warning of problems ahead in China. “The market is telling you that something is not quite right”, he said in an interview on Bloomberg television. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”
On Sunday – as Kevin Rudd and Wayne Swan were announcing their new resources tax – China’s central bank made another attempt to dampen property market speculation. It lifted its reserve requirement ratio by a further half a percentage point, so that most Chinese banks will now have to hold 17% of their deposits on reserve.
But this latest increase in the reserve ratio will likely prove as ineffective as the two previous rises in January and February this year. Many believe the Chinese property bubble will continue to expand for as long as the Chinese government maintains interest rates below the rate of inflation.
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And that’s the core of the problem. The Chinese government is reluctant to increase interest rates because it risks exposing the huge fault lines that exist in the economy.
Over the past decade, China has built factories and expanded its manufacturing capacity in the expectation that the United States and Europe would continue to demonstrate a robust appetite for Chinese-produced goods. But western demand for Chinese products slowed in the wake of the financial crisis, leaving the Chinese economy with substantial overcapacity in manufacturing.
The problem was exacerbated during the financial crisis. With Chinese exports plunging, the Chinese government launched a massive economic stimulus program, equivalent to around 14% of the country’s GDP. It also ordered Chinese banks to lend, and instructed Chinese state-owned companies to borrow.
The program had the desired result. The Chinese economy grew at an 11.9% annual clip in the first three months of the year, the fastest pace since 2007. And we benefited too, because this strong Chinese growth pushed up the prices of our commodity exports, such as iron ore and coal.
But there are huge concerns over how the Chinese stimulus money was spent. Provincial governments, under instructions from Beijing to reach specified growth targets, undertook massive construction projects that have resulted in a glut of commercial office space, and huge shopping malls that are near-vacant. And much of the increase in bank lending was funnelled into property market speculation, pushing up housing prices to astronomic levels.
The Chinese government has tinkered with various measures to contain its property bubble – increasing the reserve requirement, lifting the minimum deposit that home buyers must have before they’re allowed to borrow, and urging banks to monitor their risks.
But it is loathe to raise interest rates for fear that it will cause mass defaults among manufacturers and property developers, leading to huge problem loans in the banking system.
Eventually, however, an end-point will be reached. Either the Chinese government will raise interest rates, or the property market bubble will collapse under its own weight. At that point, commodity prices will plummet, slashing the profits of the big mining companies.
And if this happens before July 1, 2012 when the new tax regime for the miners comes into effect, Rudd is unlikely to ever see a cent of his new resource super profits tax.
This article first appeared on Business Spectator.