Pulling the levers in corporate China

Xiao Yaping, president of Chinalco.

Xiao Yaping, president of Chinalco. Photo: Sasha Woolley

Chinalco's president, Xiao Yaqing, told Australian reporters last month that his spectacular move onto the Rio Tinto share registry was driven by commercial imperatives without Chinese Government involvement. Last week he clocked on for his second job: as an alternate member of the 17th Central Committee of the Communist Party of China.

News footage of Xiao filing in to the Central Committee's second plenary session in Beijing was a reminder that Chinalco and its president are creatures of the state. The Chinese Government hired Xiao and can fire him. It can be involved in planning, approving or blocking Chinalco's main strategic decisions - like buying shares in Rio Tinto.

Last week's Caijing Magazine reveals exactly how deep such government involvement can be.

It reports that China's top planning agency, the National Development and Reform Commission, "summonsed" three state-owned corporate giants to several meetings in December to co-ordinate China's "counter-measures" to BHP Billiton's bid for Rio.

The chosen companies were the aluminium conglomerate Chinalco, the coal group Shenhua, the leading steelmaker Baosteel and the China Development Bank (which the Government uses to fund many of its overseas projects). The Chinalco-China Development Bank consortium came out in front.

In mid-December the State Council, China's cabinet, officially approved Chinalco's application to broaden its core business mandate from aluminium to diversified metals. On February 1 Chinalco, China Development Bank and their junior partner Alcoa stunned the investment world by announcing it had secretly swallowed 9 per cent of Rio.

Without citing sources, Caijing asserts Chinalco has three options. It could block BHP's full takeover bid; it could acquire assets divested in the takeover process or it could try to take control of Rio Tinto in its own right.

This somewhat sinister sketch of government involvement in corporate decision-making will feed into one of Kevin Rudd's most pressing policy challenges. At what point might Chinese investment in Australia become contrary to the national interest? Rudd will be expected to enunciate his clear and principled answer soon - perhaps at the Bo'ao Economic Forum on April 12.

And yet the picture of "Team China" subverting the world economic and geopolitical order is misleading. What looks like political control of Chinese corporations can sometimes be the other way around. While the Chinese Government may have picked Chinalco to pursue some vague and probably unachievable nationalistic goal, Chinalco has also co-opted the Chinese Government into endorsing its own clear and independent corporate ambitions.

Time after time, corporate projects that are born of or backed by the Chinese Government have grown up to be commercially driven, independent-minded enterprises. The best state-owned businesses have often ignored government preferences that conflict with their own bottom lines.

Chinalco, for example, is on the way to becoming a diversified global resources company because it has acted in ruthless competition against other state-owned enterprises. It engaged Lehman Brothers and China International Investment Corp to work on its Rio attack plan well before it got the go-ahead from government - just as Baosteel had to shake off other steel companies before reaching the government shortlist.

Some commentators speculate that Chinalco might subsidise Australian iron ore sales to China's steelmakers if it had the chance. But Chinalco executives would be loath to compromise their own profit margins to help a junior rival like Baosteel.

"Chinalco is a very entrepreneurial and competitive organisation," says Michael Komesaroff, a consultant who works with large mining companies, including in China. "Even though they are wholly owned by the Chinese Government it's hard to see them acting as an arm of Chinese foreign policy."

The experience of China Inc in Africa is telling. Contrary to some Western commentaries, Chinese oil companies in Africa have bid against each other for assets, sold oil on the world market rather than to China when market prices are favourable, and have largely ignored the preferences of China's Ministry of Foreign Affairs.

"Chinese commentators have complained that the foreign investments of China's national oil companies are like a battle in which each soldier is fighting his own war," writes Erica Downs in her paper, "Fact and Fiction Of Sino-African Energy Relations", in November's China Security journal. "Government agencies face enormous difficulties co-ordinating the formulation and implementation of energy decisions among themselves, let alone with the national oil companies."

Unlike the case with some hedge funds, there is little evidence that China has deployed its corporations to disrupt world markets or weaken sovereign entities.

Quietly, Rudd's senior ministers have already suggested to Chinalco's Xiao and the Chinese ambassador to Australia, Zhang Junsai, that they disbelieve Chinalco's claims that it is not controlled by the Chinese Government. Chinalco has been gently warned that it should think very carefully before acquiring more shares or pushing for a director on the Rio board.

Rudd's public response to the Chinalco-Rio deal will reverberate down the traffic jam of other Chinese corporations hoping to invest in the country. The Herald understands that cashed-up metal and mineral companies, including Sinosteel, China Minmetals and Baosteel, are considering big investments. The Foreign Investment Review Board is considering at least two big resource acquisitions by Chinese companies. There are four resource investments on the table from one Chinese province alone.

Some of these Chinese companies are turning to Australia precisely to avoid what they see as ideological or xenophobic reactions elsewhere in the Western world. It would be easy for an Australian government to overstep the line that separates nationalistic chauvinism from national interest.