Foreign Correspondence

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The next big test for China's foreign investment policy will be Australia. Specifically, it will be the application
by China's state-owned Chinalco to take its holding in Rio Tinto to 18 per cent, with bigger stakes in some prize
Rio assets. The Federal Government, particularly Treasurer Wayne Swan, is considering the application. .. from previous ..

Chinalco - Rio Tinto deal falls through - view from the Global Times
June 7th, 2009

China’s attempts to use the financial crisis and the collapse in commodity prices to increase their access to raw materials encountered a set back in recent days when Rio Tinto rejected Chinalco’s US$19.5bn offer for an enlarged stake in the company. In a double blow for China Inc, Rio Tinto are also exploring closer relations with fellow Australian mining giant BHP Billiton - which might put Chinese steel firms in an even more difficult position when it comes to negotiating for their purchases of iron ore - much of which come from Australia.

I reviewed an article in nationalist tabloid the Global Times and some of the posting’s to online discussion board the Strong Nation Forum to get a sense of how the news has gone down in China. A few points of interest:

A commonly expressed view is that Rio Tinto wanted China’s money but not to be subject to Chinese control. When rising iron ore prices gave them breathing space they started to shop around for a more palatable deal.

Ma Yu, who works for a research center under the Minister of Commerce, says that iron is a special industry where government controls are particularly severe, the failure of the Chinalco Rio Tinto deal does not spell the end of Chinese companies’ ‘going out’ policy.

A representative of the Chinese Metals Mining Association said that the problem was all the noise associated with China’s attempts to buy up mineral resources. If the strategy had been executed more quietly and with less obvious government backing it would have enjoyed more success, he said.

One poster to the Strong Nation Forum, which is linked to the People’s Daily, made the link to China blocking Coca-Cola’s acquisition of Huiyuan, pointing out that: ‘if we don’t let people into our fruit juice market, we can hardly expect others to allow us into their iron ore market.’

A few thoughts from me:

At US$19.5bn this was a substantial deal and its collapse will put a substantial dent in China’s outward FDI numbers for the year. To put it in perspective, in 2007 China’s entire outward FDI was only slightly more than US$20bn. It also raises questions about foreign attitudes to Chinese overseas acquisitions. A self-made Australian businessman ran a prominent campaign against the Chinalco Rio Tinto deal, with public adverts highlighting China’s dubious record on human rights. Ultimately, the decision was made at a commercial level, but had Rio Tinto not backed out the Australian government would have faced a difficult decision.

The failure of the deal also raises a question about what China can do with new flows into its stock of foreign exchange reserves. With a further fall in the value of the US$ widely expected, voices within China have been calling for a diversification in use of new reserves, including supporting Chinese companies’ ‘going out’ policy. If Chinese companies are going to face substantial obstacles in their going out then China will also be more restricted in how it can use new flows into its reserves.

Finally, many China commentators (including me) have confidently predicted that a combination of frozen credit markets and low commodity prices equal a great opportunity for China to buy up stocks of global raw materials. Cash for oil deals with Russia and smaller deals with medium-sized Australian iron ore miners demonstrate that this is a real trend. The failure of the Chinalco Rio Tinto deal, however, demonstrates that even deep Chinese pockets can’t buy everything, and the window of opportunity for China’s overseas commodities acquisitions might be closing.
http://www.chinatranslated.com/?p=395
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China arrest 'not linked to deal'
Rio Tinto ticker


The four were arrested at the weekend

Australia's foreign minister has said he sees "no basis" to suggestions
that the arrest of a mining executive in China is payback for a cancelled deal.

Stephen Smith's comments came as Chinese officials confirmed that
Rio Tinto's Stern Hu and three others had been arrested on spying charges.

Australian media has speculated the arrests were sparked by Rio cancelling a $19.5bn (£12bn) Chinese investment.

Mr Smith said Australian officials were now trying to see Mr Hu.

The cancelled deal in question was Rio's announcement in February that it was to
accept a further $19.5bn of investment from China's state-run aluminium group Chinalco.

The deal would have been a record Chinese investment in a foreign company, but Rio changed its mind last month,
cancelling the agreement and instead launching a tie-up with fellow Anglo-Australian miner BHP Billiton.

Chinalco said at the time that it was "very disappointed".

Accusations 'surprising'

Mr Hu, a Chinese-born Australian national and Rio's main iron ore salesman in China, and the
three other Rio employees were arrested on Sunday on charges of stealing state secrets.

The charges against the four carry a maximum term of life imprisonment.

Chinese foreign ministry spokesman Qin Gang said there was "sufficient evidence to prove that they
have stolen state secrets and have caused huge loss to China's economic interest and security".

Mr Qin denied the case was connected to Rio's cancellation of the Chinalco deal, and called on the
Australian government not to politicise the case, saying this "would be no good to Australia".

Mr Smith said Australian officials wanted consular access to Mr Hu "to satisfy ourselves as to his welfare, to
satisfy ourselves as to his well-being and to get some indication from him as to how we can be of assistance".

He added that the spying accusations were "very surprising".

Rio has said in a statement that it has no evidence of spying.

"We have been advised by the Australian government of this surprising allegation,"
it said. "We are not aware of any evidence that would support such an investigation."

According to reports in China, an oil ore executive from the country's eight largest mill has also been arrested.,

Meanwhile, Australian newspapers have also speculated that the Chinese government is unhappy with
continuing iron ore price talks that Rio Tinto is leading on behalf of the big global mining firms.
http://news.bbc.co.uk/2/hi/business/8141766.stm