Australia and China after the collapse of the Chinalco - Rio deal

Comments on Peter Drysdale “Australia needs to get its act together on China, and fast”, 7/06/2009, http://www.eastasiaforum.org/2009/06/07/australia-needs-to-get-its-act-together-on-china-and-fast/

Peter Drysdale's article is encouraging in the wake of the fell-over of the Chinalco – Rio deal. Drysdale is one of a small number of Australians who have much better understanding of Japan, China and East Asia and their real significance for Australia and has both the experience, first hand knowledge and the analytical capacity to analyse such issues. Unfortunately, knowledge and rationality do not necessarily always prevail in a society, whether it is a democratic one or not.

The failure of that deal was hailed by many in Australia, as Drysdale implied. That is unfortunate, for both China and Australia. China may feel having been fool-played by the Australian government due to its prolonging its review process of the deal and being stabbed at the back, by some elements in Australia, including the Rio Board.

As a Chinese Australian, I hope China can view this incident as merely a blip in the expanding and beneficial bilateral relationship between the two countries. Leaving any disappointment and upset aside, neither China nor Chinese firms should retaliate against this incident, by countering with strategic playing, even though the Chinese may have greater leverage due to larger size. It will harm rather than benefit the interests of both sides, including China. Greater leadership and statesmanship need to be shown and displayed.

While there are lessons for Australia, China and Chinese companies should learn something from this incident and be more subtle in their approaches to investing in Australia. They need to take into account the political reality in Australia and the knowledge and understandings of Australia to adopt the most appropriate strategies and tactics in doing business with Australia and Australian companies.

The unfortunate delay of the Australian government review process and some media displays may be interpreted by some as Australia played a strategic game against Chinese firms and China. Some may think that the delay by the Australian government may have resulted in a few factors that caused the deal to fail.

First, it extended the timeframe for the equity market to bottom out and to recover, so the deal may be seen less or un-attractive to Rio. The market did just that. The risk for Rio’s survival has greatly reduced and it is breathing much easily now.

Second, the Australian government may have influenced Rio Board to ditch the deal with Chinalco and to join hands with BHP, as the event finally played out. Rio’s Chairman’s remarks, that they received feedback from investors AND regulators about the deal, may be perceived as an implicit admission, though he may have been innocent in saying that and did not mean to sell the government out.

Third, the facts of the changes to the criteria regarding foreign investment in Australia by the Australian government immediately following the announcement of the Chinalco – Rio deal and the conditions imposed to earlier approvals of other deals with Chinese firms may have strengthened the impression that the Australian government has not been fair to Chinese investments in Australia.

Australian Prime Minister, Kevin Rudd should have more expertise on China. It, however, can be a double edged sword. Already, as some Australian media reports suggested, some Chinese analysts and commentators already voiced that Chinese may feel it is more difficult to deal with Rudd as compared to Howard, ironically. The underlying message may be that because Rudd understands the Chinese more, he is aware of their weaknesses and knows how to play them to Australia’s advantage at the expenses of the Chinese. Whether it is misunderstanding or something else remains to be seen.