FOREIGN INVESTMENT: by Ian H. McDougallNews Weekly
China businesses 'left and right arms of the state'
, July 25, 2009
Walk down a leafy street in Beijing and, amongst the imposing head offices of China's most important enterprises, you will find Minmetals, advertising its presence in the upper strata of Chinese companies with bold, bright red letters. This is the state-owned company that successfully bid for Australian miner OZ Minerals.
The outcome of Chinalco's bid for Rio Tinto was less than happy for Beijing. China's recent bid to take a large share of the Anglo-Australian mining giant failed on commercial grounds, informed observers say, but that has not lessened the outrage in Beijing.
Said one Australian businessman, resident in Beijing, who has many years of experience with commercial negotiations with China: "They let the deal get away from them. They just couldn't react quickly enough when business and economic conditions changed. That was why the deal fell over. The negotiations failed on commercial grounds.
"Chinalco has taken up its entitlements in the Rio rights issue, which will leave it sitting on about 14 per cent of the company. They will be in a good position in any further negotiations. We haven't heard the last of this story by a long shot."
The result for Anshan Iron and Steel Group was happier for Beijing. AnSteel, a leading Chinese steelmaker, secured a 36 per cent stake in Western Australian iron-ore miner Gindalbie Metals as a result of a placement.Long-term access
China makes no secret of the fact that it is taking advantage of the low share prices of international mining companies brought on by the global financial crisis to secure long-term access to raw materials and energy. Beijing is making similar moves on other companies. For example, high-tech enterprises headquartered in Taiwan have come under pressure from cashed-up communist enterprises. The bids for Australian mining companies are part of a pattern.
Simultaneously, China has been on a raw materials buying-spree, again taking advantage of low commodity prices. This may now be tapering off. China has simply run out of storage facilities for the torrent of metals and minerals pouring in from all over the globe.
China should reconsider its overall strategy in overseas mergers and acquisitions, said one analyst.
"China is inexperienced in accessing overseas resources. The country is building up national metal reserves while at the same time its companies are bidding for similar assets abroad. These efforts have been pushing up global commodity prices. People should be able to tell whether they are wise moves," the unnamed analyst commented (China Daily
, June 24, 2009).
Without doubt, the failure of Chinal-co's Rio Tinto bid hurt China's national pride. The successful OZ Minerals bid helped massage hurt feelings.
Shujie Yao, professor of economics and head of the School of Contemporary Chinese Studies at the University of Nottingham, wrote: "The deal represented just a fraction of the Chinalco deal, and OZ Minerals had no better way of surviving. But it was an important psychological boost for China's overall acquisition ambitions. Minmetals was quick to learn lessons from its brother, upping its offer for OZ Minerals by 15 per cent the night before a make-or-break vote by shareholders. That made it absolutely sure that China would not lose face twice in one month. It was a reminder to the West that Chinese business champions are not isolated commercial entities; they represent their country and people.
"In little doubt is the phenomenal firepower that underpins China's overseas investment drive. The kind of lending activity that saw China's banks stumping up the funds for Rio Tinto is possible only in China, where state-owned banks and businesses are treated as the left and right arms of the state." (China Daily
, June 17, 2009).
Yao has advocated a less public strategy to gain control of overseas resources. He wrote: "Rather than huge $19.5-billion offers, as was the case with Chinalco, a more piecemeal, calculated approach is more effective. Chinese companies should seek out more covert ways of gaining power through joint ventures with savvier Western private equity businesses."
Yao seems more measured and analytical in his response than other leftist academics. Take, for example, the reaction of Antonio Castillo, a Chilean-born journalist and junior academic at the University of Sydney. In an article entitled "Chinalco lost Rio bid to Australian paranoia", Castillo describes Tony Abbott as a "well-known anti-Asian Australian leader". Castillo says "paranoia is not new and has always occupied centre-stage in the collective psyche of white Australia", quoting "one of Australia's most respected intellectuals" Professor Ghassan Hage, who "observed that white Australians are obsessed with paranoid fantasies about foreigners seizing control of the country". (China Daily
, June 19, 2009).
Commenting further on Australia's "paranoia" about China, Castillo comments that "the Australian paranoia has reached preposterous levels. Even speaking Mandarin can be seen as a contributing cause. Prime Minster Rudd is fluent in Mandarin and this has become a liability."
This is news to me, as it must be to just about everyone else in Australia who want an Australian policy towards China based on rational self-interest.