Is it improper to question the word of a senior executive of what is fast-becoming a Chinese multinational corporation? Perhaps, but the public protestations of Xiao Yaqing, chairman of Aluminum Corp of China (Chinalco), in the wake of the firm’s groundbreaking investment in Rio Tinto, may have struck some as a little too earnest.
State-run Chinalco teamed up with Alcoa, a US aluminum producer, to swoop upon 12% of Rio Tinto’s UK-listed shares worth US$14.1 billion. They now own 9% of the entire firm.
The acquisition was shocking – not least for mining group BHP Billiton, which was about to table a US$119 billion takeover bid for Rio Tinto, a major rival. Although Rio Tinto is resisting BHP’s advances, the potential unification of these two commodities giants is a cause for concern in Beijing. Together they would control a large amount of the world’s iron ore – the raw material so readily consumed by China’s steelmakers – and so could, in theory, start setting their own prices.
So what about the timing of the Chinalco-Alcoa investment? Wasn’t it designed to make life difficult for BHP? Merely a coincidence, Xiao claimed.
Given that Chinalco’s purchase is nearly three times the size of the next-largest Chinese outbound deal, it represents a big step forward for the country’s corporate interests. And it appears that China Development Bank helped pull the cash together.
Doesn’t this suggest that, rather than acting of its own volition, Chinalco received some state-sanctioned backing for what is ultimately a state-sanctioned investment? No, Xiao insisted, it’s a commercial deal driven by Chinalco’s need to diversify.
Regardless of how much he needed to spin the situation, Xiao was hardly going to confirm the “worst suspicions” that linger around this deal. To do so would have been to admit that there is no real line drawn between the political and commercial interests of Chinese outbound investment. And there isn’t.
Although large state-owned enterprises have their own commercial agendas and are staffed by party members with sufficient clout to lobby hard in Beijing, any large deal requires State Council approval. In the case of Chinalco and Rio Tinto, it has been claimed that the political goal – to derail the BHP takeover – was established first and a Chinalco investment was then identified as the means to achieve it.
As to which state agencies and/or political interests actually shaped this strategy, that is another question entirely. But it is logical to assume that Alcoa was the smiling corporate face intended to take the edge off Chinalco’s state-directed behavior.
The Rio Tinto investment was clever politics, but at a time when transparency is considered to be fundamental to the smooth progress of China’s outbound investments – whether by sovereign wealth funds or state-controlled corporates – this deal leaves behind an unappetizing metallic taste.