By John Garnaut
Construction is up, but the liquidity check looms.
THE biggest economic questions for Australia in 2010 are whether this year's China-driven resources boom will match the heights of 2008 and if it will end in a similar collapse. The answers are in the hands of Chinese policymakers.
It's understood by now that when top Chinese leaders say they will revive an economy, then they tend to follow through. What is less well known is that they have no great record of fine-tuning an economy that has become too hot.
In 2004 and 2007, the central bank and banking regulator - both subject to political control from higher up - let inflation get away and then responded by smashing the real estate sector with credit and other administrative controls.
The biggest question for Chinese commodities traders is if and when they will do the same. Some of the biggest of these traders are clearly worried that they will begin to manufacture a slowdown soon, and sooner than the world thinks.
In the first quarter of last year, Beijing unleashed almost as much credit as it did for all of 2008, while giving local officials and executives a licence to chase growth at all costs. That's why real estate construction (measured by floor space) is up by almost 50 per cent from a year ago; why this week's industrial production growth number is likely to push 20 per cent; and why the HSBC purchasing manager's index rose to 56.1 in December. That's the second highest on record, even as the same index showed that inventories shrank.
These kind of figures explain why the world's big miners are once again caught with their pants down struggling to catch up with Chinese demand.
Copper on the London Metal Exchange has duly risen from $US3100 a tonne to $US7600 in one year. Nickel has nearly doubled, to $US19,000 per tonne, while zinc has shot from $US1200 to $US2640.
Iron ore and coal, which underpin Australia's fortunes, are usually sold in annual contracts, but spot prices are following similar upward paths. The price of iron ore in China has doubled since March.
But with China's reliance on investment rather than household consumption, inflation is increasingly rearing its head in asset markets. And that's proving to be every bit as politically and economically fraught as consumer price inflation.
''The major risk is on the overheating side, and the major problem is asset prices,'' says Zhang Bin, a scholar at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.
Zhang is not so worried that a potential property market slowdown will prompt investors to liquidate their portfolios of empty apartments.
That doesn't seem to happen in China. Rather, he's concerned a slowdown will hammer demand for new land that local governments rely on for revenue.
Which leads us to some bizarre movements last week on Chinese commodities futures markets.
By midweek a bevy of soft (agricultural) and hard (metals) commodities reached new post-financial crisis highs.
But early on Thursday, trading prices for soft commodities like cotton, cooking oil and sugar suddenly fell the maximum amount allowed.
Domestic and international metals markets later fell in sympathy.
It seems that a handful of Chinese traders had dumped their soft commodities futures contracts on what seemed like the barest of pretexts.
The first was a rumour: that authorities would start tracing where their money was coming from. The second was a microscopic monetary policy change. The People's Bank of China had offered 60 billion yuan of short-term bonds at a yield four points higher than the previous week's sale.
The Chinese construction boom already has enough momentum in it to see us through the first half of this year. But the Chinese liquidity boom that has recently been driving it will not be around forever.
John Garnaut is China correspondent.