The developed countries are beginning to view China as one large vulture fund which bankrolls companies that it controls to buy up key overseas asset at prices undermined by the recession. The resulting tensions may end up being more severe than a trade war.

Australian mining and metals giant Rio Tinto (RTP) has dumped a deal to take $19.5 billion from Chinalco. Instead, it will raise more  than $15 billion in the open market and enter a joint venture with rival BHP Billiton (BHP) which will bring in another $5.8 billion.

The Australian government had already expressed reservations about having one of its largest companies trade cash for access to valuable ore and metals access.  Rio Tinto’s debt burden is so great that taking the money from China was a huge temptation. But, the Rio decision to reject the Chinalco money is another precedent of Western governments influencing private enterprise from taking funds from entities controlled by the communist central government. Last year, the US government blocked a deal for a buyout of 3Com which was backed in part by Chinese electronics company Huawei.

Brazil is faced with the Chinese plan to put $1o billion into oil giant Petrobras in exchange for bonds and access to oil produced by the company. The crude bought by China from Petrobras will be at market rate and not higher as a condition of its investment. The Brazilian government has sanctioned the deal, but it is not clear whether it will bless a series of Chinese investments into a greater exploration of its raw materials.

China has made it clear that it is shopping for undervalued assets outside its own borders. It will probably have success with the credit markets tight and many large companies in need of capital. The one impediment to Chinese expansion is likely to be sovereign governments that want to keep their strategic assets out of the hands of a government which they believe has motives to control critical industries in countries that it compete with for export trade.

China may argue that its aspiration were not different than those of the Japanese during the 1980s. Japanese firms bought assets around the world with a special focus on the US. The Japanese economy was booming, making unprecedented amounts of cash available to some of its largest corporations and trading firms. American officials were often unhappy by the flood of Japanese money into US real estate and financial institutions.  Japan may have had success avoiding regulatory bodies because it was a democracy and one that had been set up by America after WWII.

A Chinese machinery company has made a deal to buy US truck company Hummer, a division of GM that might fold without a buyer. The federal government will have to approve the deal and Congress may have some objections to assets of an American car company going into Chinese hands.

The Rio decision to reject Chinalco, especially under pressure from Australian regulators, certainly sets a precedent for other governments in developed countries to scrutinize transactions that would give China special access to raw material or industries where it can gain special skills that would allow it to more effectively compete with the West. China will object to the meddling by politicians and bureaucrats, but the meddling is likely to get more aggressive.

Douglas A McIntyre

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