Specter of Investment Protectionism Stalks China

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"Please, please buy our bonds. . .but keep your hands off our big natural resource companies."

Please, please buy our bonds—and bits of our bankrupt car companies, if you like—but keep your hands off our big natural resource companies.

After events last week, that is what China must be making of the stance of rich countries to its overseas investment plans.

No sooner had Treasury Secretary Timothy Geithner returned home from a trip to Beijing in which he repeatedly assured his hosts of the safety of U.S. debt, Anglo-Australian miner Rio Tinto jilted Chinalco, the Chinese state-owned metals firm it had been courting to help it out of a debt trap.

Rio said it had scrapped the $19.5 billion partnership on purely business grounds, and Australian Prime Minister Kevin Rudd insisted his country remained wide open to Chinese investment.

Yet China can be forgiven for detecting a pattern that poses a serious threat to its strategy of encouraging state-owned firms to spread their wings and secure the energy and commodities needed to sustain the country's industrialization.

Deep-pocketed China, it seems, is welcome only as a buyer of last resort. Rio was desperate when it turned to Chinalco in February, but capital markets and commodity prices subsequently perked up, which gave the miner an alternative in the form of a $15.2 billion rights issue and a $5.8 billion joint venture with rival and one-time suitor BHP Billiton.

"This development will strengthen views among Chinese corporates—particularly in the energy and natural resources sector—that it may take more than their cash to open the doors to deals for them overseas," said Antony Dapiran, a Shanghai-based partner with law firm Freshfields Bruckhaus Deringer LLP.

Ken Davies, with the investment division of the Organization for Economic Co-operation and Development in Paris, said investment protectionism has been on the rise globally, but China's particular worries were not unfounded.

Chinese firms venturing abroad are predominantly owned by the Communist state, raising fears that their investments may not be driven by normal commercial considerations.

For all the friction that is generating, China's Go Forth policy is here to stay.

With a stockpile of $1.95 trillion in foreign currency reserves, invested mainly in U.S. bonds, China can in theory try to buy whatever it fancies. But the lesson of the Rio fiasco is that some targets may just be too big to digest politically.

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