Chinalco

Treasury always supports foreign investments. It believes resources should flow to wherever they earn the best return. It says overseas investment is especially important for Australia because we depend on foreigners to fund our capital expansion. And in these financially strained times, direct investment is particularly welcomed. Moreover, governments should not veto agreements negotiated in good faith (although this assumes the parties to the deal are competent). But Chinalcos proposed $19.5 billion investment in Rio Tinto – as critical as it is to Rio – will test the Treasurer, Wayne Swan.

Although the Chinalco proposal crosses six countries, Australias response is critical. About 60 per cent of Chinalcos direct purchases of Rios assets involve Australian resources, and the purchase of convertible bonds allows Chinalco an 18 per cent shareholding in Rio, the 12th largest Australian company. And while antipathy towards foreign investment peaked in Australia years ago, Swans decision will have political repercussions: important Australian resources are being sold.

The Chinese governments ownership of Chinalco causes further problems. Compared to the practice in China, you expect Australian governments to have a hands-off relationship with their trading bodies. But even in Australia, governments closely supervise state corporations. The boards of Australian government trading enterprises are appointed by ministers, after cabinet approval. For corporations where the board appoints the chief executive, ministers still informally intervene to veto unhappy selections. In one case, when Carl Scully was NSWs transport minister, the State Rail Corporation had to seek Scullys approval for spending above $100,000. Even if a government body in Australia had the most relaxed minister, it would not have acted alone in an issue of equivalent importance to Chinalcos bid.

The Chinese government is more intrusive in its corporations affairs. Half of Chinalcos senior managers are Communist Party members. All of the undisclosed officers on the companys supervising committee – analogous to the board of an Australian government-owned commercial body – would be senior government employees and Party members.

Chinalco infers that its supervising committee is less involved than government boards in Australia. It says the supervising committee is responsible for safeguarding Chinalcos assets while the executive committee manages the company. But this division of roles allows for overlapping responsibilities. In any event, Chinalcos proposal, involving US$19.5 billion of monies borrowed from a Chinese government bank, would have been scrutinised at high levels in the Chinese government. For a start, there are too many foreign relations implications for this deal to have been treated as routine commerce.

In exercising his foreign investment powers, Swan has wide discretion. He could reject the proposal just on the basis of reciprocity: why should the Chinese government be allowed to buy Rio shares when Australians have no right to buy Chinalco shares. Swan could reject the Chinalco investment on the basis of its ownership. Government ownership means governmental policies can trump commercial considerations to determine Chinalcos actions. Chinalco does not publish its annual or financial reports on its website, but it curiously measures its success in terms of asset growth and thus influence. There is no discussion of profitability.

Then there are the complexities of the deal. Although Chinalco is essentially an aluminium company, the biggest direct asset purchase, involving more than a quarter of the total deal, concerns 15 per cent of Rio Tintos Hamersley iron ore business. Rio plans to limit Chinalcos involvement in the running of Hamersley, but Chinalcos uncharacteristic investment is consistent with Chinas wish to influence iron ore supplies and the prices China has to pay for ore. Swan must also consider Chinalcos 18 per cent ownership of Rio, if it converts its subordinated bonds. Had the percentage been a little higher, Chinalco would have been deemed to control Rio. Rio has negotiated restrictions on Chinalcos used of its shareholder power, but such restraints are rarely effective.

Swan also has to decide on two other foreign investment proposals from bodies controlled by the Chinese government, one involving Oz Minerals the other Fortescue Metals. These are smaller and less controversial. If he approves them, Swan can show he is not opposed in principle to Chinese government investments. He can also hope that Rio shareholders reject their inept boards proposal. That would save Swan from an invidious decision.

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