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CANBERRA, March 19 (Reuters) - Diplomatic ties might take a
knock if Australia rejects China's $19.5 billion investment in
miner Rio Tinto Ltd/Plc, but the biggest casualty could be a
planned free trade deal and the economic growth it promises.
Australia's Foreign Investment Review Board (FIRB) is
reviewing a raft of Chinese investments in Australia, including
the Chinalco-Rio deal. Treasurer Wayne Swan will have the final
say after weighing national interests.
Swan is under growing pressure from politicians and unions to
oppose the deals due to concerns that China, a major customer for
Australian resources, will be able to exert influence over prices
and production of mineral exports from some mines.
Foreign policy analysts said they expected Swan would approve
the deals, with some conditions, because an outright rejection
would lead to a diplomatic backlash from China, Australia's top
trading partner, and could stall negotiations for a free trade
pact.
"If the deal is turned down, there will be some negative
impact to the bilateral relationship," said Australian National
University Chinese investment analyst Chen Chunlai.
"But the party worst hurt would be Australia, not China,"
Chen said, adding that Australia is increasingly relying upon
exports to China to help avert a prolonged recession.
Two-way trade between Australia and China was worth A$68
billion ($46 billion) in 2008.
A joint China-Australia analysis said a free trade deal would
boost Australia's gross domestic product (GDP) by A$18 billion
over 10 years, and China's by A$64 billion over the same period.
It found a free trade deal would boost Australian sales to
China of cereal grains, wool, minerals and metals, while China's
manufacturing, textiles, clothing and toy industries would
benefit from easier access to Australian markets.
Australia's Greens, a key independent Senator and a
conservative politician have all spoken out against the China
investment deals, warning that Australia must not sell prized
national assets to companies controlled by a foreign government.
Conservative National Party Senator Barnaby Joyce has run
television ads against them, saying China would never allow
Australia to buy a mine in China, which might be difficult to
dispute after China's rejection this week of a bid by Coca-Colato buy juice maker Huiyuan Juice <1886.HK>. [nHKG367771].
Swan will have to weigh up concerns about Chinese investment
with the need to protect investment in mining projects and jobs
in Australia, with unemployment set to rise as the economy slows,
and with the government due to hold elections by late 2010.
The types of conditions Swan might impose could include
insisting on a number of Australian directors on the board or
other guarantees curbing Chinalco's influence on the company's
decision making.
CHINA'S RISING POWER
State-owned Chinalco, China's top aluminium maker, wants to
pay $12.3 billion for stakes in Rio's key iron ore, copper and
aluminium assets and $7.2 billion for convertible notes that
would double its equity interest in Rio to 18 percent.
The FIRB is also examining two other Chinese investments in
miners: Minmetals' <1208.HK> $1.7 billion rescue bid for OZ
Minerals Ltdand Hunan Valin Iron and Steel Group's $768
million plan to buy a 16.5 percent stake in iron ore miner
Fortescue Metals Group.
If the Chinalco deal fails, Rio Tinto would need to speed up
asset sales or find some other way to refinance $39 billion in
debt, possibly with a steeply discounted rights issue.
Investors worried that the deal will not proceed have sent
Rio's shares down 13 percent over the past two days.
Australia generally welcomes foreign investment, with FIRB
decisions based mainly on business considerations. But growing
investment from state-owned Chinese firms has added a new foreign
policy dimension to the decisions.
Mark Thirwell, international economy director at the
respected Lowy Institute foreign policy think-tank, said the rise
of China as a major economic power raised new questions about
Australia's trade and strategic outlook.
Previously, Australia's major trading partners -- Japan, the
United States and Britain -- have also been Australia's key
allies. Not only is China outside that club of traditional
allies, it is also a a strategic competitor to both Japan and the
United States.
"This is not just an economic or business decision. It really
is entangled with the importance of the bilateral relationship
and how countries like Australia and others respond to China's
rising economic power," Thirwell told Reuters.
A poll by the Lowy Institute in 2008 found 85 percent
strongly supported more strict investment regulation on companies
which are controlled by foreign governments.
Thirwell said world leaders could not talk about
international cooperation to fight the global financial crisis,
and at the same time shun investment from China.
"China will become a more important player in the Australian
economy, it will become a bigger investor. We need to get used to
that. An outright 'no', and panic about that is not the way to
go," Thirwell said.
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