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So what is happening here I wounder



AT least 10 Chinese companies have withdrawn foreign investment applications to buy into Australian resources companies after pressure from the Rudd Government.

The Government has in recent weeks made it plain privately that it wants more time to consider the issue of the national interest in terms of ownership of the Australian resources industry.

The Chinese companies have been politely but firmly given the unprecedented message that it would be preferable to back off and resubmit any such applications to the Foreign Investment Review Board at a later date.

The issue is being handled discreetly at high levels. Any outright rejection or publicly conceded delay would be extremely difficult politically, particularly given the great importance of China to the Australian economy.

It also comes as Australia is seeking to gain approval to increase Australian investment in China, particularly in the financial services area.

Some of the Chinese companies' applications are seeking advance approval for taking possible future stakes in Australian companies that are yet to be revealed to the stock market.

The Chinese Government is aware of what is happening and would have to have given approval or encouragement to the individual Chinese companies involved to follow the route of least resistance for now.

The Rudd Government has been careful to say it welcomes foreign investment, including by Chinese investors, subject to its foreign investment guidelines and national interest concerns.

But it has been increasingly alert to the potential for dramatically increased Chinese investment in Australian resources companies after the state-owned Chinalco in February teamed up with Alcoa of the US to take a 9per cent stake in Rio Tinto.

Chinalco submitted its bid to the FIRB, while saying it was not legally obliged to do so, and its chief executive has raised the prospect of taking a larger stake. This was sensitive in the context of BHP Billiton's bid for Rio - a bid the Chinese oppose amid fears the merged $400 billion giant would have too much power over commodity prices.

At the time of Chinalco's move, Wayne Swan clarified Australia's foreign investment principles as they relate to the national interest. The move was viewed as a message to China and its state-backed enterprises as they looked to expand into Australia's resources sector.

Most of the companies that have withdrawn applications recently, or which are in the process of resubmitting their applications, are believed to be smaller investments, concentrated in the mid-range iron ore companies in Western Australia.

But the Rudd Government does not want to be rushed into making decisions on even these more modest proposals, given the wider implications for control of the resources industry and possible commodity pricing issues.

The companies involved include Sinosteel, which has already had a $1.2 billion bid approved for West Australian iron ore producer Midwest, in early January. That bid has since turned hostile, making it the first such hostile bid by China in Australia. While that approval is through, it has complicated a separate and later FIRB application to take a possible stake in another iron ore company, Murchison Metals. A spokesman for Sinosteel said he had no comment.

Antam will resubmit its withdrawn bid for Herald Resources because Antam is a joint venture between an Indonesian company and Chinese metals and mining company Zhongjin. China Metallurgical is also believed to have been forced to stall its $400million bid for Cape Lambert Iron Ore after lodging a FIRB application last month.

Rio Tinto chairman Paul Skinner said yesterday he did not believe Chinalco's motives were "sinister". He said the Rudd Government had taken a "very measured approach" to its foreign investment rules but warned against "rushing to conclusions" over the implications of Chinese state enterprises buying into Australian companies.

He said the Japanese investment that was key to developing Australia's resources industry in the 1960s and 70s also involved strong state direction. "The Government are absolutely right to be very thoughtful about the public interest and ... the set of foreign investment principles that the Treasurer announced a relatively short time ago are very well balanced and a fair test of intention," he said.

Under Australian rules, foreign investors must seek government approval if they wish to take more than 15 per cent of a company worth more than $100million. The FIRB advises the Treasurer, who has 30 days to object before it is deemed accepted. Alternatively, the board can rule it wants a 90-day extension but this order is then made public - publicity many companies prefer to avoid.

Immediately after the Chinalco move on Rio, the Government made public the principles that would guide its decisions on a case-by-case basis.

It was also a clear public signal to the Chinese Government to be cautious in moving ahead on large-scale investment. The Government concentrated its statements at the time on investment by foreign governments and their agencies, as opposed to companies. In these cases, the Treasurer can make a decision on any investment no matter the size of the stake.

But the situation with Chinese companies is more complicated than with most countries that have traditionally invested in Australia as the line between commercial and political interests in China is still opaque.

Chinalco's Xiao Yaqing visited Resources Minister Martin Ferguson as a matter of courtesy after Chinalco made its initial purchase. He insisted that Chinalco merely wanted to be a passive investor in a great resources company.

But the market and the Government remain cautious about Chinalco's intentions.

BHP has been lobbying furiously in Canberra about the risks of allowing a Chinese company to block the prospect of a super resources company headquartered in Australia.