In the Year of the Rat, China enters the dragon's den

Huge currency reserves are helping the country mull a bid for mining giant Rio Tinto, and flex its muscles as a global investor
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The Year of the Rat starts this weekend, the rat being supposedly the thriftiest and luckiest of the Chinese zodiac signs. At mining company BHP Billiton, chief executive Marius Kloppers will be praying the authorities in Beijing go for thrift and decide not to counter his £70bn bid for rival Rio Tinto Zinc. He might not have long to wait.

The problem for Mr Kloppers is that Chinalco, the state-owned aluminium producer, which owns a potentially blocking 12 per cent stake in RTZ with the US miner Alcoa, is said to be waiting until the end of this week's New Year celebrations before deciding whether to make a rival bid. It has the money on tap if needed – the China Development Bank has promised the funding for an offer that would have to top the £70bn on the table, already the biggest takeover bid in history with the exception of the £100bn paid by Vodafone for Mannesmann in 2000.

It's not only Mr Kloppers and his Sydney-based team who have been thrown by Chinalco's audacious market raid in buying the RTZ stake for $14bn (£7bn), forcing BHP to make a higher formal offer than it had hoped. Mining analysts have been rocked by China's new tactics too. One says: "This stake- buying was the first, aggressive go at red-blooded stock market capitalism that we have seen by the Chinese authorities. No one quite knows what is going to happen next, although we do know that BHP's price will have to be increased if it is to win."

Whether Chinalco makes a full bid or not, it has bought a seat at the table in any takeover or break-up of assets. If successful, a combined BHP and RTZ would create a £300bn giant with dominant positions in the world's natural resources – iron ore, copper, aluminium, coal and uranium. Consuming a third of the world's iron ore production, the Chinese authorities can't afford to let that happen without a say in how the market is controlled and how it is regulated.

Lee Downham, mining director at consultants Ernst & Young, says: "This is an intriguing situation. China has an insatiable appetite for all metals but the miners can't meet the demand because they have under-invested for a couple of decades. That's why the Chinese cannot afford to see the market contract from three to two."

RTZ, the Brazilian miner Vale and BHP are China's biggest ore suppliers. Chinalco is a serious contender, having applied to the Australian authorities to increase its stake in RTZ – which, like BHP, is dual listed in London and Sydney – to 19.9 per cent, while Alcoa has asked for the right to up its stake from 5 per cent to 25 per cent in its joint bidding vehicle with Chinalco. BHP, which has been rebuffed by RTZ, must now submit all its merger proposals for scrutiny to the competition authorities around the world, and this will take at least six months to a year to clear.

Meanwhile, China has been busy gobbling up mining assets around the world but usually it goes for strategic partnerships. Only last week the China Development Bank signed up with Anglo-American, another of the world's biggest miners, to develop mines in China and South Africa. China is one of Africa's most important investors, specifically in mining resources and infrastructure projects across the continent, and now is digging deep in Australia, which has massive iron ore reserves.

Another analyst says: "To date the Chinese companies have chosen to be friendly, long-term investors and to watch and learn. They are still at an early stage and some might ask whether they have the leadership skills to run a big company like RTZ."

But a BHP observer says: "You can see parallels here with Russia and its creation of Gazprom. Look at the way Gazprom acquired assets, building the group into the biggest gas producer in Europe. But it took Europe a long time to work out what was going on in Russia and then, hey presto, suddenly it was there on our doorstep. Is China doing the same in mining?"

No one really knows, and the Chinese have not given much away. The newly created $200bn China Investment Corporation was set up last year to boost returns from China's massive foreign-currency reserves, at present mainly invested in low-risk US Treasury bonds. CIC has not revealed its investment philosophy, but so far the Chinese have gone for mining and banking: over the past year they have taken big stakes in Barclays Bank, Morgan Stanley, Credit Suisse and private equity group Blackstone.

Whether China will be investing more in RTZ is what BHP's Mr Kloppers wants to know. What's for sure is that the Chinese are investing long-term – the Year of the Rat only comes around once in a 60-year cycle.