Chinalco and Rio Tinto -- An Unhappy Ending

Beijing lost a fair bit of face yesterday when Chinalco, a Chinese state-backed aluminum company, was forced to walk away from a $19.5 billion offer to purchase a large chunk of Anglo-Australian mining giant Rio Tinto. The deal was high-profile, and it had triggered all the usual paranoia about Chinese companies and the notion that they are somehow aiming to corner the market on every commodity in order to feed their own (still growing) economy. My favorite quote against the deal was from former Australian Treasury head John Stone: "Once in the spider's parlor, the fly doesn't often get out." How's that for sinister?

There's no doubt that China is hungry for natural resources and that its global shop for them is going to continue to be contentious. But the truth is that's not what killed the Rio Tinto deal. For starters, while there was lots of public protest about the potential buy in Australia (including television ads paid for by opponents of the deal that showed Chinese police quelling protesters 20 years ago in Tiananmen), Australia's leadership is not anti-Chinese; in fact, just the contrary. Prime Minister Kevin Rudd speaks fluent Mandarin; his daughter married an Australian-Chinese man, and one of his sons studied at Fundan in China. The demise of the Rio Tinto deal was ultimately about business. During the long and very complex negotiations, both the commodities market and the financial markets turned significantly, making it a much better time for Rio Tinto to do a big share rights issue – which is what it now seems to be planning – than it was before. Why give away 18 percent of your company to a controversial buyer when you can raise money on the public markets?

That's not to say that Australian politicians aren't breathing a sigh of relief that they don't have worry about the fall out from Chinalco. The problem is that the failure of the merger will be perceived as a real slap in the face back in Beijing. Back in December when I attended a meeting of Chinese and Western business leaders in Barcelona, I was amazed that the Chinese oil executives in the group were still smarting about the U.S. blocking CNOOC's bid for Unocal back in 2005. Today, an interesting Eurasia Group report today is speculating that yet another high profile failure might prompt Beijing to take a firmer hand in directing China's multinationals and their acquisitions overseas. It's funny, because the specter of more state control is actually what seems to worry people who get nervous about China's resource grabs.

The other important point here is that China doesn't have to limit its shopping to the West. Already, Chinese oil companies seem to be focusing their recent acquisitions mainly on emerging markets (where there's plenty of natural resource wealth to be had). It's likely that other commodities firms will follow. I think this is just the beginning of a larger trend in which BRIC nations – those emerging market giants – will be dealing more and more with each other, deepening trade and financial ties amongst themselves. And why not? After all, developing countries have economies that are still growing strongly – which is more than can be said for the U.S. and Europe.