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Fears of 'China Inc' obstruct foreign investment
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In less than a week, two big Chinese state-owned companies, both eyeing foreign expansion, saw different outcomes of their "going West" moves.

On June 11, shareholders in OZ Minerals overwhelmingly approved a US$1.4 billion offer from China Minmetals Non-ferrous Metals Co to buy most of the indebted miner's assets.

The news could hardly alleviate the bitterness felt in China the previous Friday when Australia's Rio Tinto dumped Chinalco's planned US$19.5 billion offer for an improved stake in the mining giant and turned to a joint venture proposal with former rival BHP Billiton. The deal could have been China's largest foreign investment so far.

An official of the Ministry of Industry and Information Technology (MIIT) said Tuesday that the proposed alliance of Rio Tinto and BHP Billiton had a "strong monopolistic color" and Chinese firms would watch it closely and find ways to cope with it.

Last year, China imported 440 million tons of iron ore, half of the world's total, so any slight market changes would affect Chinese steel makers. China's anti-monopoly law should apply in the proposed deal, said Chen Yanhai, head of the raw materials department of MIIT.


On Monday, spokesman of the Ministry of Commerce Yao Jian said if the revenue of the joint venture reached "a certain amount," China's anti-monopoly law would apply. That law requires a company to get government approval before consolidation if its global revenue exceeds 10 billion yuan (US$1.47 billion) and its revenue in China exceeds 2 billion yuan.

The failed Chinalco deal has been frequently linked with a similar scenario in 2005, when political obstacles blocked China National Offshore Oil Company (CNOOC)'s US$18.5 billion attempt to acquire Unocal, a US energy company.

"The Chinalco debacle followed the same pattern as the aborted CNOOC/Unocal deal four years ago," Yao Shujie, professor of economics at the University of Nottingham (UK), told Xinhua by e-mail. The Chinalco debacle has aroused anger and disappointment in many Chinese. Many believed that the failed deal showed prejudice against China's big state-owned enterprises.

But Yao said a notable factor in the case is the international inexperience of China's business leaders. "The speed of global expansion has given Chinese companies little practice of the pitiless reality of Western-style acquisitions."

Know the West

Xiong Weiping, Chinalco's chairman, has said that Chinalco had worked hard to respond constructively and engage with Rio Tinto to appropriately amend the transaction terms announced four months ago, but the result was completely out of the company's control.

Yao said Chinalco's failed attempt was due to its management's insufficient understanding of the concerns of big Western resource companies, their governments, public and shareholders with China's entering into the foreign resource sector, and of the possibility of a stock price resurgence and its consequences.

"Chinalco should have pressed its negotiating advantage harder and not given Rio time to seek alternatives. Besides, a 1-percent break fee for a US$19.5 billion deal makes breach of contract too easy," he said.

Yao's opinion was shared by Dr Dylan Sutherland, a scholar in Contemporary Chinese Studies at the University of Nottingham. "The complicated deal Chinalco proposed created a long gestation period and opened up possibilities for market corrections and greater political scrutiny," Sutherland said.

In the deal between China's Minmetals and Australia's OZ minerals, Minmetals' last-minute decision to sweeten its offer with an extra US$180 million proved decisive in winning over OZ Minerals shareholders. The improved offer helped Minmetals see off two rival bids for the miner.

Minmetals won Australian government approval in April to take over OZ Minerals with a revised offer after the previous bid was rejected on national security grounds. The new offer excluded one of OZ's flagship mines located near a military range.

"There will always be political pressures on big business investing overseas," Sutherland said. "Chinese enterprises may have to accept, being Chinese state-run companies, that any offer they make will need to be very, very attractive."

Sutherland said one of the main risks to these state companies is that they are perceived as being vehicles for "China Inc."

(Xinhua News Agency June 19, 2009)

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