David Prosser: China is not so naive after all

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The Independent Online

Outlook That it is possible to patronise what is the world's third largest economy seems faintly odd somehow, but this is exactly what has been happening in the 10 days or so since the deal between Rio Tinto and Chinalco collapsed.

There's been a distinct whiff of the old boys' club delighting in a bit of come-uppance for a would-be new member over the Chinalco affair. The Australian Trade minister, Simon Crean, was at it again yesterday, describing Rio's decision to dump Chinalco's financing in favour of a deal with BHP Billiton as "an important learning curve for China".

Mr Crean is not alone in making such remarks. The unspoken message is that China, for all its wealth, does not yet fully understand the way in which global capitalism works – and that Rio's U-turn will teach it a lesson about free markets.

Well, it turns out that China knows a bit more about doing business than its foes had realised – its announcement yesterday that it would subject the deal to its own anti-monopoly investigation is exactly the sort of dirty trick that we professional capitalists in the West get up to all the time. And it had the desired effect, helping to wipe more than a fifth off Rio's value in early trading (a good part of the decline was for technical reasons linked to the miner's rights issue).

The not-so-subtle warning coming out of Beijing yesterday was that Rio should not expect to escape the Chinalco deal scot-free (even after the £120m break fee it had to cough up to get out of the arrangement). China can't stop Rio dumping it for BHP, but it can – if it so chooses – make life very difficult for the miner.

If yesterday's statements from China are anything to go by, Beijing does so choose. And that could cause Rio all sorts of difficulties. The most obvious issue is the ongoing price negotiation over iron ore – China wants a 40 per cent reduction in what it pays for the stuff, significantly more than Rio and BHP have offered so far. And that was before this row, with Beijing hinting yesterday that its bargaining position is set to harden. It may try to insist on new rights for Chinese companies involved in the negotiations.

There are other reasons for Rio to be fearful – China is a key territory for mining rights, for example, which must be granted by the state. China also has huge diplomatic power, which it is perfectly able to use in favour of – or against – Rio's interests in other countries.

But back in Australia – and elsewhere – they still don't quite get it. The Trade minister reckons China "needs to understand the important role that shareholders play in these sort of plays". Actually, it was Rio that forgot about its shareholders' views, pressing on with the Chinalco deal for months, despite the opposition of many of its biggest investors.

The miner also seems to have allowed another important principle of capitalism to slip its mind. If the customer is always right, doing something that leaves your biggest customer incandescent with rage is probably not a great idea.

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