China still a risky investment

After Rio Tinto rejected China’s Chinalco investment offer of $19.5 billion, the Chinese Government arrested four of the Anglo-Australian mining company’s executives for “stealing state secrets." Although these charges were dropped, the men still remain imprisoned.

One of the four, Stern Hu, is an Australian passport holder, and will be trialled for “bribing internal staff of Chinese steel companies" causing "huge loss to China's national economic security and interests." China alleges that the accused cost the country a total of $100 billion in over-priced raw materials over three years.

These allegations may be true and the Australian Government have not sought to defend Hu from consequences of his claimed criminality. Nevertheless, the case underlies the politicisation of Chinese life – even in the commercial sphere - and the danger this represents for investors.

China’s geo-economic strategy has attempted to wean its dependence from foreign-owned iron ore providers. Rio Tino, BHP Billiton (BHP) and Brazil's Vale (VALE) account for an estimated 70% of global iron ore sales. The future of China’s heavy industry-based economy, and its plans for continued expansion, requires a reliable source of raw materials.

China has sought to address this by a new aggressive merger and acquisition policy. China Minmetals Corp recently acquired Australian copper-gold mining company Oz Minerals Ltd for $1.39-billion. China’s Yanzhou Coal Mining Co. has also commenced proceedings to buy Australia’s Felix Resources Ltd. for $2.9 billion. Bloomberg reports that Chinese energy companies have acquired $12.6 billion worth of on overseas assets and since December 2008.

Australian-Chinese relations have also been damaged by Canberra’s refusal to block a visit from the Uighur leader, Rebiya Kadeer. Chinese official have vigorously pressed Australia not to issue the Xinjiang exile a visa. Kevin Rudd reacted just as forcefully:

“The government I lead is one where Australia makes decisions on who it issues visas to or not.“

Chinese sensibilities face further embarrassment with BHP Billiton and Rio Tinto finalising their $US116 billion deal to merge their West Australian iron ore operations. This only adds to the backlog of trade disputes, intellectual property rights and currency rows which serves to increase the pressure the business community works in during an international recession.

That China still can behave like an authoritarian dictatorship can come as a shock to a historically pro-market economy. But it is important to note that the country is still not free, and its business community still not secure from nationalistic interventions.