This was published 13 years ago
Swan in a hole on China
Treasury lacks the expertise to understand the appetites of the resource-hungry Asian giant.
By John Garnaut
TREASURER Wayne Swan took umbrage when this paper quoted a former official last year saying: ''There's no one in Treasury who can tell up from down on China.'' If only the Treasurer had expended as much effort fixing his department's China problem as he did shooting the messenger, then his latest tax revenue forecasts would not be quite so embarrassing.
It should by now be a truism that Australia's national income and tax revenues rise (and will one day fall) with commodity prices, and those prices are largely a function of Chinese demand (as well as global mining output).
Yet Treasury managed to upgrade its terms of trade forecast for this financial year by a staggering 2.75 percentage points between the May budget and last month's pre-election update - a period when the indicators coming from China were pointing the other way.
Some commentators smelled a conspiracy, as Treasury's revision initially enabled Swan to pretend that caving in to the big miners and eviscerating his mining tax had hardly dented revenue. Later, Swan admitted he had handed back more than half the anticipated revenue: $US13 billion in the first two years.
A more likely explanation, however, is Treasury still hasn't got its own independent and timely view on what's going on in China.
By late April, when the May budget forecasts were being put to bed, the market knew Rio Tinto and BHP Billiton would be securing huge price increases for the September-quarter iron ore contracts, because they had pushed through a new pricing system in which spot and contract prices would converge, and Chinese spot prices had soared to $US180 a tonne. The pre-election update suggests Treasury has only now caught up. In April, spot prices had started to slide in response to the Chinese government's edicts to shut down property speculation. By July, steel prices and production were edging down and the China iron ore spot price had fallen by a third.
The result was that Treasury got it wrong both ways. It massively underestimated contract prices in May and then upwardly corrected that error just as markets had tanked in July.
With luck, those multibillion- dollar errors may cancel each other out for the next two financial years. The bigger worry is what Treasury assumes beyond that point, when the mining tax cuts in.
Last year's ''messenger'' on Treasury's lack of China expertise was Stephen Joske, a respected analyst who had been the government's top China economist before recently joining the Beijing office of the Economist Intelligence Unit. Swan responded to the story by instructing a staffer to smear Joske's reputation - he would disregard ''the political views of a former Howard government staffer'' - apparently referring to Joske's secondment from Treasury as an adviser to former treasurer Peter Costello more than a decade earlier.
The second point that Joske made and that Swan didn't like was that BHP Billiton was filling Treasury's China analysis void and unduly influencing foreign investment policy. Now, according to Swan, the big mining companies are shaping budget forecasts, too.
He revealed that detailed discussions with the miners about production and pricing trends had ''led Treasury to upgrade substantially its forecasts for commodity prices''.
It is not hard to see that mining companies had an incentive to overestimate production and prices and therefore anticipated tax payments at a time when they were fighting Swan's new resource rent tax. There are competing views in China and Treasury needs to quickly get on top of them.
Ian Roper was Rio Tinto's head iron ore market analyst in Shanghai before joining brokerage CLSA two months ago as a commodities strategist. He forecasts iron ore spot prices will fall from the current $US130 to about $US100 by the end of the year, then stabilise at between $US80 and $US90, and then take another leg down to about $US60 by 2020.
At those prices, says Roper - and after Swan has handed the miners accelerated depreciation on their capital expenditure during these boom years - there may not be any resource rents left for Treasury to tax. ''The mining companies may have actually been sold a tax cut,'' Roper says.