China to Extend Resources Tax to Entire Nation to Fund Government Spending

China plans to extend a tax on oil, gas and coal output to the entire nation, stepping up efforts to raise funds for development of poorer inland provinces in a move that will reduce earnings for resource producers.

The government will set a benchmark rate of 5 percent that will vary across commodities, Du Ying, vice chairman of the National Development and Reform Commission, said in Beijing today. It’s “unclear” when it will be applied nationwide, he said. The tax, introduced in Xinjiang province last month, will be extended through western areas, the government said on July 6.

The tax will cut profits for PetroChina Co. and China Shenhua Energy Co. while boosting revenues for investment in the country’s restive western provinces. The government follows Australia in increasing taxes on resources extraction after China’s economic growth drove a global boom in earnings for commodity companies.

“This is a long overdue policy change,” Qu Hongbin, a Hong Kong-based economist at HSBC Holdings Plc., said by telephone. “There is much need in infrastructure development, and this should help relatively undeveloped areas like the western or even central regions.”

China will embark on 23 projects in the west this year at a cost of 682.2 billion yuan ($100 billion), the NDRC said on June 6. They include the construction of roads and railways, wind farms and a nuclear power plant in Guangxi province.

Policies to develop the interior come as China takes steps, including subsidies for automobile purchases, to boost domestic consumption and help cut reliance on exports for economic growth.

The country’s economic development will be driven by “whether we can continue to boost internal demand and make it a strategic goal for overall sustainable growth, and whether we can break the bottleneck of constraints on resources,” Du said.

Impact on Earnings

PetroChina, operator of the Tarim gas field in Xinjiang, rose 0.4 percent in Hong Kong trading, compared with the 1 percent advance in the benchmark Hang Seng Index. China Petroleum & Chemical Corp. dropped 1 percent. The company known as Sinopec produces oil in Tahe field in the province.

Shenhua and China Coal Energy Co. have mines in Shaanxi, Ningxia and Inner Mongolia, the biggest coal-producing province. Shenhua, China’s largest coal producer, gained 0.9 percent, while China Coal climbed 2.7 percent.

“If it goes nationwide this year and the companies get a full year of impact from the tax, it may take down PetroChina’s earnings per share by 12 percent and Sinopec 7 percent,” Brynjar Eirik Bustnes, an analyst at JPMorgan Securities Ltd., said by telephone from Hong Kong.

Australian Tax

President Hu Jintao has pledged to double investment in Xinjiang after China’s deadliest riots in decades left at least 197 people dead in the provincial capital in July last year. The province was the country’s fourth-largest crude oil producer in 2009, according to the National Bureau of Statistics.

In Australia, former Prime Minister Kevin Rudd’s plan to impose a 40 percent tax on mining companies led to his ouster as his approval ratings slumped amid opposition from mining companies and threatened the ruling Labor Party’s election prospects.

His successor, Julia Gillard, scaled back the proposed tax to 30 percent to win the industry’s support and ease concern that the levy would curb investments and slow economic growth.

--Wang Ying and Chua Baizhen. With assistance from Sophie Leung in Hong Kong. Editors: Ryan Woo, Nerys Avery.

To contact the reporter on this story: Ying Wang in Beijing at ywang30@bloomberg.net; Baizhen Chua in Beijing at bchua14@bloomberg.net;

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