ECONOMY: by Patrick J. ByrneNews Weekly
Development bank now urgently needed
, October 3, 2009
As Australia becomes more reliant on China to fund mining projects and federal and state government deficits, the need for a government-backed development bank is now urgent.
The Western Australian premier, Colin Barnett, last year warned that "Australia could be overwhelmed by the weight of Chinese investment". He said, "We do need to make sure we do keep it manageable, that we don't lose control of our own economic development." (The Australian,
September 30, 2008).
In the same vein, the National Civic Council (NCC) told a recent Senate economics committee conducting an "Inquiry into foreign investment by state-owned entities" that the famous US investor, Warren Buffett, has warned that the world is witnessing a new form of strategic dominance. Countries that excessively depend on foreign borrowing risk losing their sovereignty, being "colonised by purchase rather than conquest" (Fortune
, October 26, 2003).
The NCC's concern has been that any serious analysis of China's expanding investment in Australia's resource industries can only
be made in the context of Australia's growing dependence on borrowing from China to finance our burgeoning foreign debt.
Our foreign debt is set to rise rapidly because of the twin effects of the global financial crisis: the huge federal government economic stimulus packages and falling state government revenues.
Consequently, governments are borrowing heavily offshore to fund growing government debt.
The Senate committee has examined in depth the dangers of Australia becoming overly economically reliant on China.
But its subsequent three recommendations, concerning the future of foreign investment, particularly from China, are bizarrely weak.
Indeed, its failure to make serious recommendations highlights the very concerns the NCC expressed to the inquiry: has Australia now become so dependent on China to fund its growing foreign debt that it is finding it increasingly difficult to manage foreign investment from China in Australia's national interest?
So inadequate were the Senate committee's recommendations that a strongly worded dissenting minority report - from Senators Barnaby Joyce, Nick Xenophon and Scott Ludlam - recommended new rules with "teeth" to manage foreign investment in Australia by foreign government-controlled companies.
These recommendations included:
- Disallowing any foreign government from using a corporate entity to purchase strategic assets in Australia.
- Assessing whether Australia has reciprocal rights of investment in the country of origin of the investor company.
- Enacting new laws to stop creeping acquisitions, i.e., a foreign company gradually gaining a controlling interest in a major company or an industry.
By themselves, the recommendations would be workable. However, so long as Australia's addiction to foreign borrowing leaves us dependent on funding from China, then the condition for such funding is almost certainly going to be that Australia must accept major Chinese investment in our industries.
Depending on China to fund the foreign debt may become an even more acute issue.
The chiefs of some of Australia's biggest banks and some leading business figures have warned that foreign borrowing to fund the nation's foreign debt was no longer sustainable (Australian Financial Review,
June 18, 2009).
In 2006 the same warnings came from the International Monetary Fund (IMF) and the Australian Prudential Regulation Authority.
Reserve Bank governor Glenn Stevens and Finance Minister Lindsay Tanner have belatedly joined them, saying Australia must find ways to reduce its foreign debt. (The Age
, September 15, 2009).
For a time, lenders may still regard Australia as a stable democracy and economic safe haven, meaning that they will continue to lend to us.
However, the US and EU banks are currently heading towards a second credit crunch. US Professor Tim Congdon, from International Monetary Research, has recently said that US bank loans are declining at a pace not seen since the Great Depression of the 1930s.
He said that the new regulatory push to require banks to be less leveraged and have higher capital adequacy has resulted in their cutting lending to build their reserves. (The Telegraph
, UK, September 14, 2009).
Indeed, this restrictive policy should have been pursued several years ago to curb the worldwide assets bubble, but now it is likely to exacerbate the world economic crisis and bring on a second recession.
Consequently, the German Finance Minister, Mr Peer Steinbrueck, is proposing that the country's government-backed development bank, the KfW, begin global lending to small-to-medium businesses, which are the engine of Germany's export-based economy. (Spiegel
online, August 31, 2009).
Another worldwide credit squeeze could see governments and the Australian banks, which carry the bulk of the nation's foreign debt, become even more reliant on borrowing from China.
Australia should learn from Germany. It should tweak the Commonwealth Future Fund, which has assets of $58 billion, in order to start lending to domestic companies to develop the nation's resources and to help roll over some of the foreign debt. The fund should provide a channel for superannuation funds to invest in the development of resources industries.
A government-backed development bank is now urgently needed to protect Australia's economic independence.Patrick J. Byrne is national vice-president of the National Civic Council.