THE DISTILLERY: China mugs

Entrepreneurs are punters. If you want a dynamic economy, exploding with new industries and companies you need these punters.

The Australian, which is supposedly a defender of free-markets, should understand this. So, why is Clive Palmer on the nose? Andrew Main, business editor, describes him as a "laughing stock” before going on to blame Palmer for "allowing the press and investors to form the view that [he was] planning a $US3bn mining house listing in Hong Kong.” Somehow Main manages to sustain this statement with the acknowledgement that "there's not one report...that specifically quotes [Palmer] as saying the float was definitely going ahead.” Indeed, "...it's all 'sources close to the float', whoever they are, wiggling their eyebrows around”.

Exactly how is this Palmer's fault? It's the media's job to sort fact from rumour. Journalists used to use such methods as corroboration. If The Australian has reported as fact what is actually rumour or interpretation, it is the greater fool.

A much more useful piece on Palmer is provided by John Garnaut of The Sydney Morning Herald who focuses his investigative energies on Li Xiaolin, the chairwoman at the other end of Resourcehouse's big coal deal. In a piece laced with sarcasm, Garnaut reveals that "...a profile by Southern People's Weekend magazine provides some clues. Li is apparently a glamorous, cultured, creative, sensitive, spiritual, smart, patriotic, self-made, modest and unusually intelligent woman-of-the-people. As the journalist and Li climbed the Beijing hills together, Li ran ahead 'dancing like a clean white deer or a snow-white butterfly flying against a background of emerald green', according to an extract posted on the Baidu version of Wikipedia.”

Garnaut also reveals that "Palmer undoubtedly has high-level backing from the Chinese government and has all the other key Chinese players on board.” But he says Li is a "formidable partner”, being the daughter of Li Peng – former premier and adopted son of former premier Zhou Enlai – "[who] effectively controlled China's electricity sector".

Other family connections in electricity include "Li Peng's son, Li Xiaopeng (who was chairman of Huaneng Power before switching to politics), and close family friend Liu Zhenya (who runs the state electricity grid company).”

Garnaut concludes "...it is impossible to do big business deals in China without running into powerful interests whose relationships with politics, bureaucracy and media work in ways that are very different to Australia ... the more you do things on Chinese terms, the more complicated it can get.”

Garnaut is a must read. Every paper – down to the West Wyalong Argus – should have a China correspondent right now.

The reason for this, of course, is the huge and unrelenting punt this nation insists on making on China at every level, including government. David Uren of The Australian takes up that bet in a rosy assessment of Australia's improving budget position. Uren begins with some useful calculations "...bumper profits reported last week by Rio Tinto and BHP Billiton augur well for this year's budget ... The big miners' results alone will generate a tangible improvement in the bottom line. Market economists suggest the 2009-10 deficit is now likely to be little more than $35 billion, far from the $54bn forecast in December. In December, the government forecast that debt would peak at 17.3 per cent of GDP in 2015-16. With company tax receipts and the economy both growing more rapidly than expected three months ago, that peak figure is now likely to be no more than around 15 per cent.”

However, Uren carries this good news on the fiscal front into the private sector when he concludes that Australia has no issue with its chronic current account deficit. According to Uren, "...foreign investors happily absorbed the government's decision to abandon its wholesale guarantees of bank funding, and appear more than willing to take on private sector risk in Australia. As Treasury's head of macro-economics, David Gruen, noted to the Senate estimates committee last week, our current account deficit is not because we lack savings – our savings rate is above that of the US or Britain – but because we have much greater investment opportunity.”

First, the US and UK are hardly paragons of saving. Second, this new version of the Pitchford thesis, that private sector debt is not relevant to financial markets, is yet another punt on China. Borrowing money from overseas is fine so long as your offshore income is rising too. But when it drops or stops, your spending is too high and suddenly those same foreign investors want their money back all at once. As the GFC showed countries like Spain so painfully, in an afternoon your private debts become public and crisis ensues. It is much less risky to save more and finance your own growth.

Another area where Chinese optimism abounds is in changes to the iron ore pricing mechanism. We now have a good slice of Australian commentators – Stephen Bartholomeusz of Business Spectator, Rowan Callick and Matthew Stevens of The Australian – repeating the mantra that the shift to market-based pricing for iron ore is going to be good for relations with China as the acrimony over annual contract pricing negotiations disappears. But as Stephen Wyatt comments today in the AFR, the main reason the miners are shifting the mechanism is because spot prices are so high. He also points out that this will "infuriate” the Chinese who want a special "China price on the basis they are by far the largest buyers.” This column will only add that, sure, the big miners can benefit in the short term, but let's not kid ourselves about Chinese anger, it will find an outlet sooner or later. Relations are set for new lows.

A couple of economics pieces today take on punting and leave much to be desired. Ross Gittins of The Sydney Morning Herald rehashes last week's Reserve Bank conference in strikingly similar fashion to John Quiggin's AFR op-ed last week. The conclusion being that despite acknowledgement of bubble dynamics, reserve banks are engaged in little policy innovation to address it.

Alan Mitchell of the AFR refers to a recent research paper by Ian Macdonald of the University of Melbourne who canvasses various dynamics of the sub-prime mess to argue "homo economicus...the rational, self-interested, optimising actor a the centre of a great many economic theories” is an illusion. This column can only add that if, almost four years after the sub-prime collapse began, leading thinkers are only at the stage of stating the obvious, what hope is there for quality reform?

Finally today, Adele Ferguson of The Age directly addresses punting in a gloomy assessment of Tabcorp. Ferguson points to regulatory risk and a declining share of household budgets going to gambling as part of a range of challenges facing the company. She points to the fact that "...over the past four years, Tabcorp has sunk $900 million into the business, and it will spend another $440 million this year, yet its earnings before interest and tax, depreciation and amortisation (EBITDA) have stagnated at around $1 billion.” Moreover, according to Ferguson, it needs to change its business mix fast as Victoria and NSW are set to liberalise gambling licences. Looks like it'll have to take a punt.