Currencies, China & the mineral tax

There has been a lot of interesting economic and company news around over the last week or so.

Back in July 2011, Saturday Morning Musings - fall of the US dollar looked at the disparity between weightings in global trade and traded currencies. There I said in part:

I do not pretend to be a currency expert, but on the surface there are advantages in denominating transactions in the currency of one or other of the trading partners. If Australia is trading with China, then (other things being equal) denomination of the transaction in either aussie dollars or yuan limits exchange risk.

I am aware of all the counter arguments. All I am saying is that I feel that, in the longer term, traded currencies are likely to better reflect real patterns of economic activity.

At the time, Fortescue Metals had just announced that it was going to denominate certain contracts in yuan. As another sign of continuing change, last week the Australian Reserve Bank announced a $30b currency swap arrangement with the Chinese central bank. This followed China's decision to allow convertibility between Australian dollars and yuan on the interbank market in China.

These type of change processes are often slow, but you can see the emerging pattern.

On a related topic, there has also been continuing debate in the Australian papers about the amount of revenue that might be raised by the Mineral Resource Rent Tax. This one is quite important in political terms. If the tax raises less than expected, there will be flow on budget and political effects.

Part of the argument about the likely revenue from the tax relates to the structure of the tax itself. However, projected revenue is also being affected by the weakening of the mining boom.

There are two very different mining booms. One is an investment boom, the second the high prices Australia has been receiving for mining exports. The size of investment pipeline means that the first will continue. However, the second is clearly off the boil.

Latest data out of China suggests continued softening in the Chinese economy. This will flow on to prices received for our mineral exports.

It's interesting actually. The estimates I have see suggest that around 40% of mining investment will flow direct to imports. That could push the Australian current account into substantial deficit.