June 12th 2010


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Articles from this issue:

COVER STORY: Financing of terrorism in Australia

EDITORIAL: BP scandal spreads beyond Gulf of Mexico

OPINION: Super-profits tax creates climate of uncertainty

FOREIGN AFFAIRS: Beijing thwarts sanctions against North Korea

CANBERRA OBSERVED: Rudd Government planned showdown with miners

FOREIGN TRADE: China slowdown spells trouble for Australia

PAID PARENTAL LEAVE: Rudd and Abbott overlook stay-at-home mothers

REPRODUCTIVE HEALTH: The chilling reality of late-term abortion

ILLICIT DRUGS: Labor and Greens defeat DLP bid to ban bongs

GLOBAL FINANCIAL CRISIS: Regulators crack down on speculation

OPINION: Time to reclaim Australian history

ENVIRONMENT: Al Gore's actions speak louder than words

GREAT BRITAIN: Who will rescue Britain from its present madness?

Economic illiteracy (letter)

Statistically insignificant (letter)

ALP branch-stacking (letter)

The truth and Kevin Rudd (letter)

AS THE WORLD TURNS: In praise of pessimism

BOOK REVIEW: THE WORLD TURNED UPSIDE DOWN: The Global Battle Over God, Truth, and Power, by Melanie Phillips

BOOK REVIEW: WHAT'S WRONG WITH ANZAC? The Militarisation of Australian History, by Marilyn Lake and Henry Reynolds

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FOREIGN TRADE:
China slowdown spells trouble for Australia


by Joseph Poprzeczny

News Weekly, June 12, 2010
An assumption underlying the Rudd Government's resources super profits tax (RSPT) on mining is that the China market will, if not markedly grow, at least remain at its current high levels into the foreseeable future. But will it?

Has the Rudd Government found an El Dorado that economists outside the Treasury have failed to fully appreciate? Or is the proposed tax destined to end up, like virtually every other Rudd initiative, as a dismal failure?

For if Australia's soon-to-be-super-taxed mining sector does not reap the returns anticipated, a major budgetary miscalculation will have been made.

Several experts have warned against Australian taking an excessively optimistic view of the China market.

The first is Melbourne-based Dan Denning, editor of resource newsletter Diggers and Drillers, who cites cases of empty newly-erected city and shopping complexes, like the huge New South China Mall.

"Opened in 2005 in the city of Dongguan [central China], this 9.6 million/sq feet behemoth is the biggest shopping mall in the world, with room for 2,350 stores," Denning writes. "It has seven ‘zones' modelled on various cities and regions of the world.

"It also has a 25-metre high replica of the Arc de Triomphe, a 2.1 km internal canal complete with gondolas and a 553-metre-long indoor-outdoor roller coaster! Trouble is 99 per cent of the stores in the so-called ‘Great Mall of China' lie empty."

Denning warns that Australians are assuming that China is hooked on economic growth.

"It isn't," he says. "China's expansion is politically, not economically, motivated. This isn't about economic growth; it's about political stability - stability at any cost."

Retired New Zealand academic, formerly of Massey University, Professor Dong Li, backs this assessment.

"Denning's information and understanding are correct," he says. "He is absolutely right to point out that everything the Chinese Communist Party (CCP) does it does to maintain stability, a euphemism for keeping itself in power.

"Given the surplus supplies, the Chinese property market should collapse, as no one can defy the logic of gravity. But the CCP always does things that are not logical. The Chinese property market can't go on like this forever. The CCP has already taken serious measures to cool it.

"On May 3, news came that the central authorities had again instructed big banks to raise their deposit rate by 0.5 per cent. The Chinese property market will probably have a soft landing. Denning's warning is timely. Chinese demand for Australian raw materials will drastically decline."

El Dorado?

The same has been said by experts at the London and Bermuda-based Pivot Capital Management Ltd (PCM), in a study issued on December 30, 2009, under the title: China's Investment Boom - The Great Leap into the Unknown. PCM, a hedge fund which specialises in macro investment strategies on a global basis, has assessed the Chinese market and concluded it should not be viewed as an El Dorado.

Its report begins: "We focus on Chinese capital spending, firstly, because it is the single most important driver of current Chinese and global growth expectations, and, secondly and more importantly, investment-driven growth cycles tend to overshoot and end in a destructive way.

"We conclude that the capital spending boom in China will not be sustained at current levels and that the chances of a hard landing are increasing.

"Given China's importance to the thesis that emerging markets will lead the world economy out of its slump, we believe the coming slowdown in China has the potential to be a similar watershed event for the world markets as the reversal of the US subprime and housing boom. The ramifications will be far-reaching across most asset classes."

China is already quite well-endowed with industrial capacity and infrastructure. This means it has either reached or is approaching a saturation point with its factories and infrastructure such as major road, rail and airport network, all of which required huge quantities of, amongst other things, steel.

"Consequently, further expansion will not have nearly as much impact on growth as in the past," PCM's report says.

"A more striking fact is that currently there are 250 million vehicles in USA versus 43 million vehicles in China, and China already has a comparable size of highways.

"Furthering the comparison, in total there are 600,000 bridges in the USA, of which 450,000 are in use. There are currently 500,000 bridges in China, with 15,000 bridges built every year for the past decade. These numbers are especially astonishing given that the USA has five times more rivers than China. Bridges are a great example of the kind of promiscuous spending on infrastructure that mars China.

"In the past, countries like Japan used to be ridiculed for their ‘bridges to nowhere'. China has already dethroned Japan in that category: six out of the top 10 longest conventional bridges, and a spectacular half of the top 10 longest bridges, are in China."

PCM says that it's impossible not to notice that 37 of 44 airports built since 2005 were located in sparsely-populated western China, so are clearly ‘prestige projects'.

These fundamental economic facts undercut the over-optimistic view that super profits from Australia's current resources boom will go on forever.

Joseph Poprzeczny is a Perth-based historian and writer.




























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