Beijing’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.