Saturday 21 Jul 2018 | 04:41 | SYDNEY
Saturday 21 Jul 2018 | 04:41 | SYDNEY

Dealing with China Inc.


Mark Thirlwell

18 April 2008 13:22

I enjoyed Peter McCawley’s email on international competition policy and China’s intervention in the proposed BHP takeover of Rio. The irony he points to – the world’s leading communist country taking the lead in arguing for more market competition – is just one of the ways in which the operations of today’s world economy continue to surprise (another recent example was the reverse bailout of Wall Street by emerging market investors over the turn of year, at the same time as the IMF was having to contemplate imposing an austerity package on itself). That said, it is of course quite hard to see how China’s current economic model looks much like a communist one. State-led capitalism seems to be a better description (Ed: How about 'market-Leninism'?).

Indeed, Chinalco’s February play for 9% of Rio is an interesting example of China Inc in action.  Chinalco’s owner is the Chinese state. Its US$14.1 billion dawn raid was funded by a state-owned bank, China Development Bank. China’s sovereign wealth fund, the China Investment Corporation, is a shareholder in China Development Bank and reportedly stands ready to provide Chinalco with an augmented financial war chest, should one be needed.  

It’s capitalism Jim, but not (quite) as we know it

What about the case for greater international competition in the iron ore market? Competition is usually a good thing for all sorts of reasons, but more competition is only a means to an end, not an end itself. And as Steve notes in his original post on this subject, it’s not immediately clear that more competition would automatically be in Australia’s national interest in this particular case, at least in the short run. 

To the extent that this is all about a wrangle over resource rents, presumably it’s better from an Australian point of view that they accrue more to Australia than to China? Sure, a large chunk of the Australian resource sector is owned by non-Australian investors, who will get their share. But higher prices and higher profits will still mean more corporate tax revenues and royalty payments for Canberra and the states, which can then go to fund tax cuts or infrastructure spending or other government wheezes. While it might have its drawbacks, and worries about the resource curse aside, perhaps trying to turn Australia into the Saudi Arabia of iron ore would not be all bad? 

Finally, it would be interesting to consider how the nature of the strategic game in the iron ore market has changed from the way it was played with Japan a few decades ago, and in particular what – if any – are the lessons learned from that previous experience. Any readers of The Interpreter want to chance their arm on this one?