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China clears Australia, miner Stern Hu
JOHN GARNAUT, BEIJING - March 15, 2010

A CHINESE government post-mortem into the collapse of the $US19.5 billion ($A21.3 billion) Chinalco-Rio Tinto investment deal has exonerated the Australian Government and the Anglo-Australian miner.

Instead, it accepts the prevailing view in Australia that ordinary economic forces killed what would have been China's biggest foreign investment deal.

''Objectively speaking, the failure of the merger between Chinalco and Rio Tinto lies in the rapid recovery of the world resources market, including the related stockmarket, which was beyond everyone's expectations,'' says the lengthy report to the State Council, or China's cabinet, seen by The Age.

The report says the deal's failure provides an opportunity for ''introspection'' and has exposed China's lack of experience, talent and political acuity in investing the country's enormous savings abroad.

Its clear-eyed conclusions undermine arguments that the arrest of Rio Tinto's Stern Hu and three colleagues was an act of revenge against Australia or the company following the collapse of the complex Chinalco deal last June 5. Stern Hu remains in custody in Shanghai, with his lawyer and consular officials having limited access.

However, some observers say top Chinese leaders who supported the Chinalco deal were undermined by its collapse, leaving them less willing or able to intervene to block the arrests.

The State Council document reveals a capacity to accept and learn from the Chinalco failure, which may lead to more politically sophisticated deals.

The 10-member State Council includes the most senior members of the government, as distinct from the Communist Party standing committee.

The document does not list the Rudd government or its Foreign Investment Review Board among Chinalco's many problems.

It accepts that ''all nations cannot avoid rebellious emotions of the public when they acquire overseas resources''. But it also says the broad Australian backlash to the deal was bigger than expected, and that was largely because of the behind-the-scenes effectiveness of Rio's chief rival.

''BHP Billiton took full advantage of its skilful mass media propaganda and its lobbying capacity to arouse public emotions and influence the judgements of government policy-makers,'' it says.

It claims BHP ''seized the point that Chinalco had a state-owned background''. It then lists Chinese mistakes that contributed to losing the Australian public relations war: -The near-simultaneous timing of Minmetal's bid for Oz Minerals and Valin Steel's investment in FMG.
-Chinalco's deliberate strategy of keeping a low profile ''lost opportunities for positive publicity''.
-Chinalco regarded Rio Tinto's shareholders as unified and ''thus lacked sufficient communications with each important shareholder''.
-Chinalco lacked experience in engaging its own lobbyists.
-Chinalco wanted too much too fast by combining a large equity investment with separate joint ventures in individual assets.

The State Council document does not mention what many believe was another key perception problem: Chinalco chief Xiao Yaqing's promotion to State Council deputy director-general at the time of the announcement of his Rio Tinto deal. The investment deal was signed in February 2009 and collapsed in June, when Rio announced a joint venture of iron ore operations with BHP Billiton.

The State Council document cautions against apportioning blame. It says Rio Tinto informed Chinalco of its parallel negotiations with BHP Billiton, and that the council accepts that as Rio's financial situation improved, and in the absence of a global anti-monopoly legal regime, Rio had ''more strategic interests'' in merging its iron ore operations with BHP than ''vertically'' merging with Chinalco. ''One important reason for blocking the vertical merger is conflict of interest, that is, when the major customer of Rio Tinto enters the board of directors, it will have certain rights to speak on product pricing which may harm the interests of Rio Tinto's other shareholders,'' it says.

Source: The Age

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