Put together a Chinese state-owned enterprise, a foreign country’s natural resources and a selection of that same country’s politicians, and sparks will fly. This is why certain types of outbound investment will always be a precarious balancing act for China.
As we discuss in this month’s cover story, China’s oil giants have learned their lessons the hard way. Now Aluminum Corp of China (Chinalco) has, too.
Chinalco’s first investment in Anglo-Australian miner Rio Tinto, paying US$14 billion for a 9% stake, was a surprise. The second, unsuccessful investment – US$19.5 billion, including US$7.2 billion in convertible bonds that would take its holding in Rio to 18% – was more predictable. The Chinese firm was making the most of Rio’s debt problems by putting down long-term roots in a key market. It was a deal that would transform the global mining industry – and no one expected it to sail through unmolested. A compromise solution that addressed the concerns of Rio shareholders and Australian politicians seemed inevitable.
Chinalco has since said it was willing to scale back the investment considerably. But even this was not enough. Emboldened by its rising share price, Rio instead opted to meet its capital needs by issuing new equity and launching a joint venture with rival BHP Billiton.
It would be wrong, however, to write off Chinese firms. Perhaps the Rio deal was one audacious step too far – certainly, it drew unwanted attention on other investments in Australia’s mining sector. But at the same time this sector has always relied on foreign capital for development. The country picking up the tab tends to be the one that, at the time, has the greatest need for the extracted minerals. First it was Japan; now it’s China.
There is a difference between the opposition Japan faced in the 1960s and 70s and what China faces now. The Japanese investors were large trading firms with experience overseas. By contrast, the metals producers behind many of China’s investments tend to be overseas M&A virgins and/or companies working with the government’s hand on one shoulder.
But the Chinese are learning. Some of the larger state-owned firms are becoming seasoned players in overseas markets. Meanwhile, the creation of Chinese private equity funds focused on overseas mining investments could create a buffer between business and government that keeps the political hawks at bay.
One way or another, Chinese capital will continue to play a more direct role in global commodities. It is a simple case of demand and supply.