In Australian discussions on China's push for a greater role in world affairs, matters of critical national self-interest are currently being obscured by short-term party politicking on both sides of the political spectrum. In fact, both Kevin Rudd and Malcolm Turnbull have been right about China. Rudd was correct to suggest that China's say in the International Monetary Fund should be increased. He was not acting as China's advocate, as Malcolm Turnbull asserted, but merely stating a self-evident fact. Equally, Malcolm Turnbull was correct when he said, in relation to China's recent flurry of bids to buy into Australian resource assets, that, while China was a friendly country, Australia has its own national interests just as China has. Whatever else members of the Opposition have said about China, these particular remarks do not qualify Turnbull as a racist or as a supporter of ''yellow peril'' politics, but more as a realist.
Most developed nations have indicated concern about non-commercial entities buying their strategic assets. Thus, Chinese National Offshore Oil Corporation's purchase of US oil and gas company Unocal Corp foundered as the result of Congressional opposition in 2005. In the Chinalco case, apart from unhelpful remarks from the main political parties, leadership from the Australian Government has been wanting. As one newspaper commentator has pointed out, Kevin Rudd's China expertise has not been reflected in his guidance on this issue. For instance, neither he nor Treasurer Wayne Swan have explained the complexities of the strategic problems raised by Chinalco's bid for more Rio Tinto shares, nor have they led an informed debate about the pros and cons. Fear of offending China seems to be one reason for their hesitation. And yet, there is a critical national interest in debating the separate issues of both China's global financial role and the role it should play in Australia's domestic economy. Each issue should be judged independently on its merits from the point of view of our national interest.
The case for an increase in China's role in the IMF is clear. Already on September 1, 2006, the executive board of the IMF had recommended to the IMF board of governors a package of reforms on quotas and voice in the IMF ''to better align the current governance regime with members' relative positions in the world economy and to make it more responsive to changes in global economic realities while, and equally important, enhancing the participation and voice of low-income countries in the IMF''. Specifically, it recommended ''increases in quotas for a small group of the most under-represented countries comprising China, Korea, Mexico and Turkey''. The IMF membership duly agreed with the recommended initial ad hoc quota increases. In April 2008, a second round of ad hoc quotas was agreed to. At the London Summit of the G20 in early April 2009, world leaders decided that the resources of the IMF should be boosted from $US25billion ($A35billion) to $1trillion. The first tranche of $345billion was achieved by finalising with the Japanese a $138billion loan, while the Europeans committed another $138billion. This left an initial $70billion to be raised with other partners, which, as of April 2 included a possible Chinese contribution of $55billion. Since voting power within the IMF is determined by quotas set according to a state's economic size and characteristics, it is clear that China's growing economic clout and its contribution to efforts to tackle the global financial crisis will inevitably be reflected in increased quotas within the IMF. It is in every country's national interest, not just Australia's, that this should occur.
On the other hand, there are equally strong reasons, whether commercial, political or strategic, why we should think carefully before allowing Chinalco greater control of Rio Tinto. First, the relationship between commerce and officialdom in China is much more complex and fluid than in Australia. Resource-based companies form part of China's tight strategic network, even though, as ambassador Zhang Junsai has claimed, such companies may be allowed more freedom in decision-making than in the past. There is also less of an emphasis in Chinese commercial life on the need for board members to declare conflicts of interest, and the problem of corruption in commercial transactions is ongoing. The recent appointment of the former head of Chinalco, Xiao Yaqing, to an important cabinet position in China illustrates the contrast with the Australian political system where, in the case that a businessman, such as Malcolm Turnbull, becomes a politician, he has first had to submit to a gruelling electoral process.
Secondly, unlike Australia, China directs such resource companies with long-term strategic goals in mind. The Chinalco bid is just part of China's world-wide push for access to guaranteed sources of energy which naturally seeks to establish as low a price for commodities as possible. By contrast, the main priority of Australian companies is to maintain in the short term as high a price as possible for their shareholders. What would be the impact of the appointment to Rio Tinto of two Chinese board members? Although they would be subject to our laws by virtue of their board positions and under Australian insider trading laws, the enforcement of such obligations is poor in both Australia and China.
Moreover, conceiving resources as strategic items, China would not allow a similar deal to be made by Australia in relation to a comparable Chinese company. In late March, China even rejected an apparently non-strategic deal, Coca-Cola's bid to buy a Chinese juice maker, Huiyuan Juice Group. In the Chinalco case Australian company law would have to be followed. But should Australia allow such an asymmetrical deal to be concluded?
A further commercial concern is the question of Chinalco's own viability. Little is known about the company. But, as Ian Verrender has pointed out, Chinalco is losing money: its main investment, Chalco, has reported a $544 million fourth-quarter loss. Despite cheap finance provided by China's state-owned banks, Chinalco would incur a huge debt if it succeeded in its Rio bid.
There is a further and related source of concern. In March this year, a month after Chinalco had unveiled its plan to pour another $27.3 billion into Rio Tinto in return for another 9 per cent stake in the company, Australia was successful in pressing China to recommence negotiations for a free trade agreement, in which China had lost interest once it had achieved its main goal of persuading the former Howard government to accept the fiction that China was a market economy. Australia's interest in the agreement lies in further opening up China to its goods and investment. Is this development just a coincidence, or could Australia and China both be viewing the Chinalco deal as a quid pro quo for obtaining this agreement, in which case our politicians may not be sufficiently concerned about the long-term implications of the transaction?
Finally, one should ask the purely pragmatic commercial question: ''Why the rush?'' At a conference in Singapore in late March, Rio's chief financial officer Guy Elliot revealed an alternative plan B if the Chinalco bid did not go through. According to this, the company could sell shares, bonds and assets, reschedule debt or combine the four options under an alternative plan to pay down its debt. More recently, the company successfully raised $5billion in the bond market and, in a prospectus for the bond offering, warned of several risks associated with the Chinalco deal, including Chinalco's power to ''exercise a greater degree of influence or control over (Rio) strategy than is currently assumed''. Despite the lack of Australian political leadership, six out of 10 Australians believe the Federal Government should block the bid by Chinalco to increase its stake in Rio Tinto. If alternatives exist, why would an Australian government take such political, strategic, security and commercial risks to allow the Chinalco deal to go through?
Ann Kent is a Visiting Fellow at the ANU College of Law who has written extensively on Australia-China relations and China's role in international organisations. She has a minority shareholding in Rio Tinto.
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