Warm Relations To Hot Seat
Sydney Morning Herald
Tuesday February 5, 2008
AUSTRALIA has ridden the China express for a decade now and, with the arrival of a Mandarin-speaking Prime Minister, the warm relationship with Beijing has become warmer. Now it is possible the relationship could get too warm for comfort, thanks to the actions of the Big Australian, BHP Billiton, and its desire to become the Enormous Australian.
BHP's proposed takeover of Rio Tinto has flushed the Chinese dragon into action. Beijing, acting at arm's length through a surrogate, has moved to block the possible merger by having Chinalco, China's largest aluminium producer, take a joint 12 per cent stake in Rio's London shares for $16 billion. Given that BHP has put Rio in play, China has just bought itself a seat at the table. The reasons are obvious. A combined BHP-Rio Tinto would create by far the world's largest mining conglomerate, and China's largest iron ore supplier, and a major source of other raw materials critical to Chinese economic growth. China has also amassed the world's largest foreign currency reserves, mostly in depreciating US dollars, and wants a better return on its money. It also wants greater certainty in its strategic supply chain. Chinese companies have thus been buying minority stakes in Western exporters into China. This is the logical next phase in Beijing's global economic statecraft. What is not clear is what the Chinese will want from a strategic stake in Rio. Speculation is widespread that Chinalco's move could be the prelude to a full takeover of Rio by a consortium of Chinese sovereign funds and private equity groups, simply because they have the buying power. If this happens, it would place the Rudd Government in a dilemma. Would it want Australia's second-biggest resource company controlled by China? No. We would expect the Federal Government to intervene to block such a takeover in the national interest, as the previous government blocked a foreign takeover of the oil and gas producer Woodside.It should not come to that. Chinese companies have a record of buying minority, passive interests in companies, rather than seeking control. Beijing is a firm believer in "soft power", preferring to shore up its strategic positions without alarming local opinion. If that extends to blocking a super-merger of mining giants that have made a fortune in China, fair enough. If it extends to buying a piece of a merged BHP-Rio Tinto, fair enough. But if China wants to control Rio, then game on. It would go from warm to hot for Kevin Rudd.
© 2008 Sydney Morning Herald