China, the world’s second-biggest energy consumer, has proposed to widen a new resources tax on coal, oil and natural gas output throughout the country. The 5% tax, which was introduced last month in Xinjiang (China’s largest gas-producing province), will be extended to include the entire western province, the government said in a statement. However, it remains unclear as to when the tax will be applied nationwide.
 
The new natural resources tax, to be based on prices instead of volumes produced as first announced, is part of China’s efforts to raise funds for the development of poorer inland provinces. Following the imposition of the tax throughout the resource-rich but poor and restive western region, the local government’s revenues are expected to increase significantly from current levels. This, in turn, is expected to improve the economic prospects of the region.
 
As per the country’s National Development and Reform Commission, China is planning to embark on 23 new resources projects (including the development of infrastructure, wind farms and a nuclear power plant) in the west this year at a mammoth investment of RMB 682.2 billion ($100 billion). The new tax measure will help Beijing to sponsor these much needed projects and drive the country’s economic development.
 
However, the boost to government finances is likely to come at the expense of China-based resource producers, adding to their costs and eating away into profits, unless the administration comes out with offsetting measures. In particular, China’s two biggest oil and natural gas companies and index heavy weights — PetroChina Company Limited (PTR) and Sinopec (SNP) — could see considerable reduction in their earnings.
 
In the event the tax gets rolled out across the entire country and the companies get a full year of impact from the tax, some analysts estimate PetroChina’s earnings per share to fall approximately 15%, while Sinopec could see its earnings decline around 7%.
 
PetroChina ADRs are currently rated as Zacks #4 Rank (Sell), implying that the stock is expected to under perform the broader U.S. equity market over the next one to three months. On the other hand, Sinopec, with Zacks #3 Rank (Hold), is likely to perform in line with the overall market during the next quarter.
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