Analysis: The problem with China

Australia has a China problem far deeper than the legal dispute which broke out this week between mining entrepreneur, Clive Palmer, and Sino Iron.


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Tim, I'd like to add to what you wrote by pointing out a few more things. The two decade China boom is not sustainable because it represents a perfect storm of smoke-and-mirrors type politics and economic policy throughout the value chain: a) the US grows demand by way of dubious mortgage lending policy; b) China enters WTO in 2001 and sets out on a crash course of development, with a near term goal of cashing in on its membership to WTO and a long term goal of undermining manufacturing in developed countries (by way of overcapacity relative to current markets, bolstered by cheap labour and cheaper capital); and c) poor economic policy in Australia that takes advantage of high raw material input costs (due to export parity pricing and artificially constrained supply) and, in so doing, unwittingly pushes its manufacturing base off the cliff. Meanwhile resources companies cash in and the Australian government is only too happy to do so, riding the Chinese-fueled resources boom like so many ticks on the back of a prize Greyhound dog. The wrenching market correction that was the GFC in late 2008 should have caused the slowdown in the Australian resources sector that we are seeing come to fruition now. Instead, China blew $1.75 trillion dollars in municipal bond debt to go full-bore Keynes and "stimulate" its economy. Our resources companies breathed a sigh of relief and Labour was able to grandstand on the back of it, claiming how its policies were what actually kept the Australian economy afloat and relatively insulated from the worst effects of the GFC. From this came the infamous "ghost cities" that were built in China for the express purpose of spending money to keep its companies from folding (and then having to deal with the massive wave of civil unrest that would have been sure to follow). But China now needs to pay that debt and is frantically trying to sweep it under the proverbial rug, by way of quietly extending the terms of those loans. The day of reckoning is already upon us, as is evidenced by the rapid drop in iron ore prices over the last six months, increasing uncertainty in new iron ore and other mining projects, and the ominous signs that China can no longer spend itself out of debt. Now if you think Australia is up for a rough patch in this regard, have a look at the EU: it too used cheap Chinese products to shoot its manufacturing sector in the head, by way of pushing carbon taxes and carbon permit trading full bore over the last few years. Ironically, its day of reckoning is coming not on the back of a shrinking China, but because of a quietly resurging US manufacturing sector that has been boosted by ultra cheap natural gas over the past two years. The only way I see out of this predicament on the Australian side is to have Canberra and the states put an end to constraining the resources, oil & gas, and manufacturing sectors of our economy through encouraging new projects and removing tax burdens across the board. Cheaper raw material inputs and cheaper goods and services will stimulate the entire Australian economy, not just the few big resources players. But I fear that Canberra's willingness to do this, unfortunately, would be akin to the likelihood of a tobacco addict to stop smoking through his tracheal breathing tube.

As a geologist, I'm disappointed that so many of the mineral deposits sold to Chinese and other overseas interests have been 'dogs' - deposits that are difficult to mine or have other economic or technical constraints imposed upon them. Some people have benefited from such sales but it adversely impacts upon Australia's standing in the world community as a good place to do business.

As another geologist and having consulted on some of these projects that are now being put on hold, I agree with Bernie to some degree. The only problem is that nobody forced the Chinese to buy marginal deposits that any geologist with experience would have known would be very difficult if not impossible to develop at a profit. I also consulted to Chinese buyers on numerous manganese deposits in Africa and very seldom advise was followed. They idea was always that profit on the ore would be made at the smelters in China. Now with oversupply, inexperienced Chinese miners will struggle to compete with their marginal deposits.

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