Saturday, July 11, 2009

Frustrated, China's regime is showing it's teeth

Event #1: From the WSJ on June 5th
Anglo-Australian mining giant Rio Tinto walked away from a proposed $19.5 billion deal with Aluminum Corp. of China, dealing a blow to China's ambitions to buy access to raw materials crucial for its economic growth.

The proposed deal would have given state-owned Aluminium Corp., known as Chinalco, an 18% stake in Rio Tinto, the world's third-largest miner and owner of rich iron-ore and copper mines in Australia and elsewhere. It also would have given the Chinese company direct stakes in some mining assets.
Chinalco's plans fell victim to a potent mix of shareholder opposition, economics and politics, partly reflecting fears -- especially in Australia -- of the consequences of giving China direct access to a huge trove of natural resources. The deal's collapse, previously reported by Dow Jones Newswires, came just days before Australian regulators were expected to set tough conditions for their approval of it.
Event #2: From Bloomberg on July 6th
China, the world’s biggest buyer of iron ore, faces the risk of higher cash prices as annual contract talks stall with producers.
Supplies will tighten and cash prices gain, should other markets, such as Europe and Japan, recover this half, said Tom Price, a commodities analyst at Merrill Lynch & Co. in Sydney. “Then China will probably start to panic because Rio, BHP and Vale will probably start switching their tons to the contract levels they’ve secured with Japan, Korea and with Europe.”
Iron ore price

China’s mills, who had demanded a cut of as much as 45 percentt, are ready to discuss a reduction of between 33 and 40 percent, Caijing magazine reported last week. They’re aiming for an agreement by the end of this month and want Rio to consider contracts that run for less than a year, Tian Zhiping, vice president of Hebei Iron & Steel Group, said this month.
Event #3: The arrest on July 9th

Stern Hu, the Australian head of the Anglo-Australian mining giant's Shanghai office, faces criminal charges for stealing state secrets on foreign countries' behalf, Chinese foreign ministry spokesman Qin Gang said.

"Competent authorities have sufficient evidence to prove that they have stolen state secrets and have caused huge losses to China's economic interest and security," Qin told reporters.
But in China it's entirely up to the authorities to determine what information is classified as a state secret:

From the WSJ:
... even information that is publicly circulated can be withdrawn or later determined to be a “state secret” based on the consequences of disclosure (of relevance to the Rio Tinto case, harming the economic interests of the state and weakening the economic strength of the state are specifically mentioned as possible rationales for retroactive classification of state secrets). Sending information overseas can also carry heavier consequences. One notable instance of this involved the Uighur activist Rebiya Kadeer, who was sentenced to eight years in prison in 2000 for sending Chinese newspaper clippings to her husband in the U.S.
These may seem like isolated events but they are not. These are driven by the global economic slowdown, which China has been trying to avoid. A failed corporate takeover attempt by China and an unsuccessful iron price negotiation (in the face of rising prices) by the state makes for some angry bureaucrats in Beijing. Both are of strategic importance to China as it tries to secure resources to fuel it's "targeted" 8% growth. The communist party desperately needs the growth in order to stay in control of the increasingly uneasy and restless population.

With factory layoffs in China's cities, large numbers of ex-farmers are becoming displaced. Spurred by economic slowdown, Urumqi ethnic violence is threatening to destabilize whole regions. Domestic terrorism is picking up. Graduating students around the country are having a tough time finding work - and many have heard the news coming out of Iran. The authoritarian regime will do whatever it takes, including tightening control on information and threatening and bullying foreign corporations. This arrest was not a coincidence.

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