Category: A sustainable economy

  • Australia Feels Chill as China’s Economic Shadow grows

     

    The government of Prime Minister Kevin Rudd, which generally favors the sales, has been savaged as naïvely cozy with China, a view some in his own military appear to share. Opposition politicians have flogged the specter of an Australian future more or less as a giant open-pit mine in which the locals toil, but Beijing takes the profits.

    “It’s the Communist People’s Republic of China, 100 percent Communist-owned, buying up sections of the country and minerals in the ground which they will then sell to the Communist People’s Republic of China,” said Barnaby Joyce, who is a leader of the National Party in Parliament. “And we’re going to live off the commission on the way through. They’ll try to make sure we get as little as possible.”

    But a few months after the first of the deals was announced, a sharp initial backlash has given way to a more subtle queasiness over whether Australia’s place in the region, anomalous but secure for so long, is about to be altered by the new Chinese giant looming over its horizon.

    Nor is Australia alone. From the Philippines to Vietnam, China’s neighbors are recalculating the benefits — and potential deficits — of life in the shadow of a newly dominant nation.

    Australia has always been the West’s outpost in the East, the British penal colony with American spunk and European joie de vivre. But seemingly overnight, China has become Australia’s biggest trading partner, one of its biggest tourism customers, the largest single buyer of its government debt, a major buyer of farmland and real estate.

    China’s hunger for steel gobbles up half of Australia’s iron ore exports, and its textile factories buy more than half of Australia’s wool. Over 120,000 Chinese students throng to Australian schools and universities.

    Although China’s purchases remain dwarfed by cumulative investments of the Americans and the British, they are growing much faster.

    And suddenly, Australians are stepping back, realizing that their new best friend is someone they really do not know very well, much less trust.

    “The momentum has shifted from being broadly receptive to these deals to having a hard think at this,” said Alan DuPont, who heads the Center for International Security Studies at the University of Sydney. “This is not just about China and Australia. It’s about how the world sees China playing its role in the future as a great power.”

    Surviving Corporate Invasions

    This is not a new question. More than a century ago, Australians fretted about becoming vassals of the resource-hungry British Empire; then, in the mid-1900s, they feared becoming an American subsidiary. When Japan Inc. began snapping up companies in the 1970s, suspicion of Tokyo ran rampant.

    The British and Americans proved good corporate citizens, however, and Japan’s expansion faded amid economic problems. Now, Australians are asking whether China will be different.

    In one way, it assuredly is. Western companies, if at one time equally ravenous for Australia’s resources, are not direct appendages of their national governments. The dominant shareholder in major Chinese resources companies is the Chinese government.

    China has 115,000 state owned companies; the cream are more than 150 giants controlled by the central government. Those corporations — in mining, steel, finance, communications and other crucial areas — seek to make profits much as Western companies do. Government boards audit them, appoint their top executives and evaluate their performance, but in general, the companies insist, Communist Party leaders do not meddle in business strategy.

    Even if that is true, China has long insisted on maintaining state control over companies in crucial industries, blurring the line between national and corporate interests.

    Take steel. China makes more steel than any other nation, but it is highly dependent on iron ore imports to keep its mills humming. That raises suspicions that China may want big stakes in mining companies now to help ensure stable prices in the future.

    But if China works to keep iron ore prices stable, that might benefit steel producers more than it does Australian mining companies. That concern has only grown in recent months, as China’s largest steel producers have rejected as insufficient offers of lower prices from Australian mining companies.

    There is also the question of whether China’s stake in strategic industries — like its investment in United States Treasury bonds — could one day morph from a business deal to an instrument of diplomatic influence.

    The Chinese bids for parts of the three Australian mining companies — Fortescue Metals, Oz Minerals and Rio Tinto Ltd. — have been raptly watched for Australia’s answers. So far, they are mixed.

    The smallest deal, an $840 million bid for part of Fortescue, a struggling iron ore miner, won Australian regulators’ quick approval. But Australia’s foreign investments review board, the central gatekeeper for overseas purchases, vetoed part of a $1.8 billion bid for Oz, the world’s second largest zinc miner. The reason: Australia’s military raised the prospect of Chinese espionage at an Oz mine not far from an aerospace test site. A pared-down deal was approved after the suspect mine, the core of Oz Minerals’ assets, was excised from the deal.

    But it is the proposed purchase by the Aluminum Company of China, or Chinalco, of $19.5 billion in Rio Tinto stock, bonds and mining rights — China’s biggest investment in a foreign company — that has caused the most angst.

    Chinalco, which bought 9.3 percent of Rio Tinto in 2008, proposed taking a larger stake after the global economic collapse drove Rio into financial straits. If approved, the new investment would give China an 18.5 percent share of the world’s third largest mining company.

    Chinalco unequivocally asserts its independence. “Chinalco operates as a commercial entity, at arm’s length from Chinese political processes,” the company’s Australian spokesman said in a written response to questions.

    Many Australian experts agree. Modern Chinese corporations are state-run in name only, Ross Garnaut, an economist, former Australian ambassador to Beijing and himself the head of a gold-mining company, said in an interview. In practice, he said, they are just like their Western counterparts — fiercely competitive, and focused on profit.

    “You don’t know anything about the dynamics of relations between major corporations in China if you think a major aluminum company like Chinalco would sacrifice its profits to increase profits for one of its rivals in the steel industry,” he said. Even Australia’s antitrust regulators have concluded that the Chinese would be unable to influence the price of iron ore, a crucial Rio Tinto product, were the Rio deal to go through.

    Intentions Arouse Suspicions

    Yet other experts have a much different view of China’s intentions. Paul Glasson, a Shanghai-based Australian who brokers deals between Chinese and Australian businesses, notes that China’s domestic reserves can meet demand for fewer than half of 45 strategic minerals. By 2020, it will have sufficient supplies of only six.

    “In a nation of 1.3 billion people, with the complex issues they face, with such resource deprivation, would it be wise for the government to abdicate that responsibility to S.O.E.’s?” he asked, using the abbreviation for state owned enterprises. “Claiming the head doesn’t know what the body is doing just makes the situation difficult.”

    Mr. Glasson says state ownership actually brings advantages — among them, deep pockets and a focus beyond the next quarterly statement — that any merger partner might find attractive. But Beijing’s denial of a role in its state owned companies, he said, is creating a credibility problem.

    In fact, Chinalco would be very much a junior partner if the Rio deal were to go through, with just two seats on a 17-seat board of directors. Chinalco would have to recuse itself from any Rio issues that posed a conflict of interest.

    Chinalco would also not be able to guarantee a supply of ore to other Chinese companies, although the companies envision new efforts to market iron and aluminum ore inside China.

    Shareholders at Rio’s annual meeting in April were unimpressed. They denounced the proposed deal as a fire sale of assets to a government buyer whose interests were starkly at odds with their own. As if to underscore the point, Rio’s share price has risen sharply since the Chinalco agreement was announced, suggesting that Chinalco shrewdly struck a deal at the nadir of the financial crisis. With every gain in Rio’s stock price, the Chinalco deal looks less attractive.

    Some institutional investors have suggested that they will oppose the bid, which requires shareholder approval, even if regulators approve it this year. And that seems in some question.

    Allies of Prime Minister Rudd argue that increased Chinese investment pumps money into Australia’s economy and opens new trade opportunities. But Mr. Rudd’s opponents say he does Beijing’s bidding. Among a drip of well-timed news leaks were claims that Chinese spies sought to hack into Mr. Rudd’s laptop during last year’s Olympic Games, and that his defense minister had failed to disclose gifts from a Chinese friend with ties to Beijing’s military establishment.

    Those allegations have been flying even as the Australian military has become more focused on China as a potential rival. A newly issued defense strategy proposes the biggest Australian military buildup since World War II, driven in part by a forecast of rising Chinese economic and military power, and a slow American fade in the Pacific.

    And recently, a wealthy Australian businessman began a television advertising blitz opposing the Rio-Chinalco deal, featuring Mr. Joyce, an opposition leader. The theme — that Australia is selling its mineral wealth to a “foreign government” that may not have Australians’ interest foremost — is unlikely to affect regulators’ deliberations. But it stokes a larger disquiet of which Mr. Rudd’s government is acutely aware.

    Mr. Rudd, a Mandarin-speaking ex-diplomat in Beijing, has not helped his cause: after an unannounced meeting with China’s propaganda minister in Canberra, Australia’s capital, he lobbied for a greater Chinese role in global finance at the Group of 20 economic meeting in London, leading critics to dub him China’s “roving ambassador.”

    Mr. Rudd shrugged off the gibes, but seemed stung: in London, his staff quietly asked that he not be seated next to Beijing’s ambassador to Australia during a television broadcast (the request was refused).

    Australia’s foreign investments board has given itself an additional 60 days to consider the Chinalco-Rio deal. But hopes that some of Australians’ unease might ebb during that breather took a hit in May, when another state owned Chinese company, China Nonferrous Metal Mining Group, proposed a $184 million purchase of 51.6 percent of another miner, Lynas Corporation.

    Lynas, which mines rare-earth minerals, also has been left short of cash by the global economic crisis. Critics were quick to note that China Nonferrous operates huge nickel and iron ore mines in Myanmar, widely denounced as one of the world’s most repressive nations, and has extensive gold-mining operations in North Korea.

    “So Lynas would become part of a group which makes hay in Burma. Can the government live with that?” The Australian, one of the nation’s major newspapers, asked. “What are the rules about ethical investments?”

    The executives at Chinalco, which also has operations in Myanmar, might be expected to rue the bad timing of China Nonferrous. On the other hand, it could be promoted as evidence that the government does not stage-manage corporate strategy.

    But at least one Chinalco executive no longer has those worries. The company’s chairman, Xiao Yaqing, the architect of both the 2008 and 2009 purchases of Rio assets, left the company in March after being promoted — to deputy head of the State Council, the team of cabinet ministers that sets policy for all China.

     

    Meraiah Foley contributed reporting.

  • Govt defends overseas stimulus blunder

     

    Labor Senator Mark Arbib has told a Senate estimates hearing the money needed to be distributed quickly and there was not time to exclude people in certain categories.

    “Speed was of the essence, we needed to get the money into the community as quickly as possible, and after both sides of the Parliament and Labor senators voted for those payments, obviously money needed to get into the community,” he said.

     

  • NSW burden drags nation deeper into strife

     

    The council’s chief executive, Katie Lahey, said NSW was too big a part of the economy to let it drift. “I think right now NSW needs more fundamental support than just a bucket of money. These are different times now. I think different solutions are needed and perhaps something a bit more radical, a bit out of left field, needs to be brought to bear in NSW.”

    An official report card on the economy on Wednesday is expect to confirm Australia is in recession. But a Herald analysis has found NSW has been slipping as a share of the national economy ever since it hosted the Olympic games in September 2000.

    NSW now contributes less than 32 per cent of the country’s economic production, down from nearly 34.5 per cent just after the Games. An exodus of people interstate has also led NSW’s population share to shrink by 1 percentage point to 32.5 per cent.

    Even more remarkable has been the slump in NSW’s share of new business investment and new home building activity. Of every dollar businesses spend investing in new equipment and buildings, NSW accounts for just 23 cents, down from 35 cents in late 2000.

    And despite being home to one-third of Australia’s population, only 15 per cent of all new home-building takes place in NSW. The state approved just 1558 new homes in March, behind Victoria (4023) and Queensland (2052).

    NSW’s jobless rate remains consistently one of the highest in the country and the traditional wage premium NSW workers enjoyed over other states has all but evaporated. In late 2005 NSW employees earned $3500 more a year than the national average. Now it is just $500.

    Ms Lahey said NSW’s sub-standard performance was a common topic of conversation among the top 100 companies. “They talk about the fact that under normal circumstances NSW is the power house of the economy; it is about a third of the economy and it is the face of Australia internationally and there is a lot of concern about the capacity of the Government here to be able to deliver and support a growth platform.”

    Many in the business community see the NSW Government’s failure to secure funding for major Sydney transport projects in the recent federal budget as a turning point for NSW-federal relations.

    Of $8.5 billion in transport spending announced in the federal budget on May 12, Sydney received just $91 million for a study on the West Metro, compared to $3.2 billion for a Melbourne rail project.

    The chief executive of the NSW Business Chamber, Patricia Forsythe, said: “A decade ago NSW was No.1 for infrastructure. Victoria has now claimed that mantle.”

    But two members of the Rudd Government’s Infrastructure Australia advisory board have suggested to the Herald that NSW needs to lift its game in developing its infrastructure proposals.

    A board member and a professor of sustainability at Curtin University, Peter Newman, said NSW needed a more co-ordinated approach to planning. “I would say the key thing is that people start talking to each other from across the silos. That process … requires leadership.”

    Fellow board member and the chairman of Industry Funds Management, Gary Weaven, questioned whether Sydney would always be Australia’s premier city, pointing out that other eastern seaboard cities, foremost of them Melbourne, could also fit the bill. “NSW is the biggest state and it is the most populous state and it has the biggest city. Maybe that won’t be forever.”

    NSW’s persistent under-performance is a headache for the Rudd Government, keen to distance itself in voters’ minds from its crisis-prone state counterpart before next year’s federal election.

    However, several federal cabinet members are understood to be highly concerned about NSW’s performance.

    The Prime Minister, Kevin Rudd, has floated the idea of creating a new body, much like the Sydney Organising Committee for the Olympic Games, to help plan Sydney’s infrastructure and the Treasurer, Wayne Swan, last month described Sydney as his “second home”.

    The appointment of the NSW Labor powerbroker Mark Arbib to manage reports from individual states on their progress spending billions of dollars of stimulus money on schools and public housing has been interpreted by some as a way for the Government to keep a closer eye on NSW.

  • Stimulus went to 16.000 dead people

     

    The tax office admits it does not know where the payments to dead people ultimately finish up.

    “It is the role of the executor in administering the proceeds of the deceased estate to determine how the tax bonus payment will be distributed to beneficiaries,” the ATO said.

    More than $11 million was spent on “marketing” the stimulus package.

    About $8 billion has been paid to 8.7 million people so far.

    The government is also sending about $25 million in payments to people living overseas, with non-Australians who have worked in the country for at least six months receiving the funds.

    New Zealand and British economies will benefit the most, with 40 per cent of the overseas payments going to expatriates in those countries.

    A total of 7305 people will receive the payment to an overseas address and 18,000 will receive the payment via their bank account.

    The tax office was unable to determine how many prisoners had received the payment.

  • Owner of Coles imposes salary freeze for board members, senior executives

    Executive bonuses are determined in two parts, the individual component and the financial performance component.

    The individual performance part of the bonus isn’t being paid as part of this cost-saving measure, and relates to non-financial performance factors such as management and safety sustainability, for example.

    Executives can still collect performance bonuses for meeting the financial targets in their given divisions.

    Wesfarmers could save up to $4.5 million from this measure.

    The conglomerate had already put its employee share scheme on hold as a result of the Australian Government’s taxation plan on those programs.

    Australia’s federal Government, as part of its recently unveiled budget, announced plans to tax employees up-front when they are granted share discounts, or options on shares, rather than when they take ownership of the shares, or sell them.

    Mr Goyder said in his letter that he was disappointed by the proposal and that Wesfarmers planned to make “strong representations” to the Government about the matter.

  • Failure of BankUnited shows troubles still persist

    Mr Kanas’s team agreed to pump $US900 million in new capital into the bank and to acquire $US12.7 billion of the bank’s assets and $US8.3 billion of certain deposits that are considered less risky.

    BankUnited’s collapse is a reminder of the troubled state of the FDIC’s deposit-insurance fund, the program that guarantees most deposits against the risk of a bank failing. BankUnited is the 34th bank to fail this year after 25 last year.

    The FDIC’s deposit insurance fund had just $US19 billion at the end of 2008 to backstop trillions of dollars in deposits. To replenish the fund, the agency is scheduled to vote on a controversial plan to assess higher fees against more than 8000 banks.

    In addition, President Obama signed a bill into law on Wednesday that allows the FDIC to borrow as much as $US100 billion from the Treasury Department to shore up its fund, a measure the FDIC had sought for months.

    BankUnited’s failure comes just as bankers, federal officials and many investors had been hoping the worst was over for the banking industry. The 19 biggest banks this month performed better than expected on government “stress tests”, and several large and midsize banks in recent weeks have successfully raised capital through public stock offerings.

    BankUnited, based on Coral Gables, is a high-profile victim of the banking crisis. Its problems stemmed largely from its forays into risky housing loans. The bank, founded in 1984, specialised in an exotic type of mortgage to people living outside the US who wanted to buy property in Florida. As of June 30, 2008, BankUnited was holding about $US1.4 billion of these so-called “non-resident alien” mortgages, representing 11.4 per cent of the bank’s total loan portfolio.

    Some investors had long questioned BankUnited’s emphasis on such loans, which primarily went to people living in Latin America who wanted a Florida home for vacation or investment purposes. Sceptics argued the loans were considerably riskier than mortgages to US residents because the loans didn’t finance borrowers’ primary residences.

    BankUnited holds about 2.1 per cent of deposits in Florida, according to the latest figures.

    As BankUnited struggled, it caused problems for the federal government. In March, the Treasury Department placed the acting head the Office of Thrift Supervision on leave amid allegations the agency allowed BankUnited to improperly report its financial condition as healthier than it was. The Treasury is still investigating the issue. Many people have called for the government to abolish the OTS because of its supervision of several banks that have failed in the past year, including Washington Mutual, IndyMac and Downey Savings & Loan.

    When word recently leaked that Mr Kanas and other investors were contemplating investing in BankUnited, markets cheered the news as a long-awaited sign investors were starting to tiptoe back into the beleaguered industry.

    The failure may douse those hopes. Investors were willing to pump money into BankUnited only after regulators seized it and agreed to protect investors against most losses on the bank’s troubled loans. That doesn’t bode well for other troubled banks looking to lure outside capital.