China adds to global recession by turning off overseas mining investment

Xiao Yaqing PhotoBeijing’s decision to halt all overseas mining investment once again highlights how Government intervention continues to pose insurmountable risks for those who seek to do business with China. It also makes a mockery of the win-win rhetoric frequently espoused by those who promote engagement with China through trade.

Asia Sentinel reports that Beijing has issued a directive to mining and mineral processing companies in China to freeze all overseas investments, citing a need to focus resources on investing at home as an excuse. It is not clear how long this ban will last.

This decision is widely seen as an attempt to contain damages incurred by Chinese companies that had paid top prices for overseas mines before the outbreak of the global financial crisis. Among them is Chinalco. This giant Chinese aluminium producer paid a hefty US$14.05 billion for 12% stake in Rio Tinto in February this year. Since then the price of Rio Tinto shares has fallen 61%, forcing Chinalco’s investment partner Alcoa to write down the mark-to-market value of its stake in early October. In June this year, Chinalco, through its listed arm Chalco, had also engaged in fierce competition with rival Chinese steel companies for a stake in a new Australian iron ore mining company Fortescue.

Behind the reckless move of Chinalco is a company struggling for survival. It came to light last week that Chalco’s third-quarter earnings slumped 93% as metal prices dropped and slowing economic growth hurt demand. Consequently Chalco’s shares slumped 85% this year in Hong Kong trading, worse than the 55% drop in the benchmark Hang Seng Index. It also explains why since the Australian Federal Government granted Chinalco permission to increase its stake, Chinalco has to date not bought any extra shares in Rio, even though the value of Rio shares has plunged.

I cannot help but seriously questioning the wisdom of Beijing’s decision in the current economic climate. As pointed out in the Asia Sentinel report:

… China has more foreign reserves than it knows what to do with, and developing countries in particular are hoping that some of its will come their way into mining and industrial projects rather than helping bail out Wall Street by buying more US bonds …

… Chinese caution may be understandable both in the context of uncertainty about the length and depth of recession and the realization that it may have overpaid for mining assets in the recent past, just as it overpaid for distressed western financial institutions. But it is a case in which what may make sense at the micro level makes no sense at all at the macro level where the need is for a revival of spending and of risk-taking, regardless of whether the investment is at home or abroad.

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6 Responses to China adds to global recession by turning off overseas mining investment

  1. Pingback: China adds to global recession by turning off overseas mining … | fixedinvest.com

  2. justrecently says:

    CITIC is a big new kid on the global block. If the Chinese investors are really dumping partners in developing countries now, it seems to indicate that so far, the investment is mostly about economics, not about long-term political influence there. It might happen that the World Bank and the IMF will become more interesting stakeholders in the developing world again. Maybe Chinese money kept coming in to Angola just long enough to secure the governing party’s election victory in September.
    Even with this election win, Angola’s governing elite will still be stuck with a reputation for self-dealing and corruption that shows up in studies by Transparency International and the World Bank Institute.
    A lot of nasty things can be said about the IMF and World Bank. As a BBC series a year ago described, Chinese development payments drained away within Angola’s bureaucracy, they were never accounted for, and Beijing didn’t ask questions. (BBC audio here.)
    I would have thought though that China’s strategy would be more long-term, taking the next boom into account already.

  3. justrecently says:

    Two stories about China’s investment policies – and development aid approach. If Angola suffers from a more austere Chinese policy now, the government could still count itself lucky – they’ve just won the elections. A lot of Chinese money has kept people happy, even though substantial amounts drained away within the bureaucracy, says this BBC audio of a year ago. Those amounts were never accounted for by the government in Luanda, and Beijing didn’t ask questions. Maybe the World Bank and the IMF arent’t the worst institutions after all.

  4. C.A. Yeung says:

    The problem with China’s long-term overseas investment strategy is that there doesn’t seem to be one. The main players are a few state-owned enterprise run by a handful of party princelings who have access to an enormous amount of money. They have made some really bad investment decisions and are fast becoming a laughing stock in the international market.

    CITIC is not exactly a new company. It was the first investment arm set up in late 1970s or early 1980s with the endorsement of Deng Xiaoping. The company is at the moment involved in some scandals. Its financial director has recently resigned for conducting high risk forex transactions without obtaining approval, leaving investors in serious doubts about the company’s internal control and risk management.

  5. justrecently says:

    It’s true that CITIC isn’t new. But it has recently bought heavily in the global markets – and seen the first big blunders…

  6. tanmoy das says:

    closing down the business will not show any solution towards recession………as a business management student i would like to go with the strategy of “diversification of business in related areas” for the long time solution of recession.

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