Richard Mcgregor Friday, February 15, 2008 Beijing

　　along with one of its big state enterprises, has been at pains in the past week to stress that the Chinese purchase of a stake in the mining giant, Rio Tinto, was a purely commercial transaction. It should come as no surprise that not everyone believes them.

　　The Aluminum Corporation of China, or Chinalco, spent $14.1bn (?9.7bn) in conjunction with Canada's Alcoa, a junior partner in the transaction, to buy into Rio's UK-listed arm. Executed in a lightning share raid, Chinalco's purchase is the largest ever single Chinese investment offshore.

　　The timing of the raid was crucial, coming days before the deadline for BHP Billiton to make a firm bid for Rio. BHP's full offer duly followed, but the Australian miner now proceeds in the knowledge that China, or at least Chinalco, has secured a seat at the table

　　.As a huge and growing consumer of commodities, China's concern about the BHP takeover is unsurprising. Nor is Chinalco's denial that the Rio raid had anything to do with the BHP bid. Such po-faced obfuscation is standard in corporate jousting around the world.

　　Disentangling Chinalco from China, and China Inc, however, is a much harder proposition. BHP and Rio are dealing with a huge number of demanding shareholders. Chinalco's investor relations are a lot more straightforward. Its overseas listed subsidiary aside, Xiao Yaqing, Chinalco's chairman, answers to a single shareholder – the Chinese state. Mr Xiao himself serves at the pleasure of the ruling Communist party's human resources arm, known as the “Organisation Department”, which oversees all top executive appointments in state enterprises. Not that he does not have some clout around town. Mr Xiao is an alternate member of the party's central committee, a privilege not enjoyed by all senior state executives, but he is still constrained by the system.

　　Chinalco's purchase was funded by the China Development Bank, a state policy bank, a shareholder of which is the country's sovereign wealth fund, the China Investment Corporation. The sovereign fund, further, owns the largest Chinese investment bank, which is advising Chinalco.

　　The ambitious CDB itself is no stranger to doing the state's business offshore. It has been given crucial government mandates, most importantly to fund the expansion of local companies in Africa, primarily for resource projects.

　　In short, you do not have to be a rabid conspiracy theorist to conclude that Chinalco is a front for China Inc. “Why does BHP really want to tempt the dragon? Chinalco has already made the message clear: they really do not want to see a merger,” Geoffrey Cheng, of Daiwa Institute of Research in Hong Kong, told Reuters. “You're not going against a corporation. You're going against a nation.”

　　Quite why BHP should quake in its boots at Chinalco's supposed cease-and-desist order is not clear. China needs the resources BHP is selling. Would China, a beneficiary of the global trading system, really try to punish BHP for buying Rio? How would they do it? Certainly not by turning back iron ore shipments, so desperately needed by their steelmakers.

　　The second point is the more salient one – the perception that Chinalco represents “the nation” in this transaction. A world waking up to a new fact of life in the global economy, the phenomenon of Chinese offshore investment, is naturally going to see a tangled monolith. But, oddly enough, the Chinalco tilt and the various Chinese state bodies involved represent, by local standards, a growing diversity of players with potentially diverging interests.

　　Chinalco, the development bank, the sovereign wealth fund and the investment bank either did not exist a decade ago or are unrecognisable from the bodies they once were. All of them sit under a Communist party that demands they produce an economic return. Such benchmarks strengthen the party, as the country gets wealthier, but also entrench independent-minded interests in the system, which ultimately may undermine it.

　　Many have wondered why Chinalco has taken the lead on the issue, when, in theory, it is the merged BHP/Rio entity's potential grip on the iron ore market that worries the Chinese the most. The most likely reason is that Chinalco has won the confidence of top leaders as one of the best-performing enterprises, by building a diversified business offshore and consolidating the energy-guzzling industry at home.

　　So, what then is Chinalco's measure of success? A break-up of Rio might be China's preferred scenario, but that is a distant prospect. Perhaps Beijing would be happy for Chinalco to drop a few billion dollars if they manage to impede BHP along the way. But it is likely that Chinalco, having convinced top leaders to allow the company to intervene in the takeover fight, will bear any risks itself and thus have an incentive to sell to BHP.

　　There is a final disconnection in the debate about Chinese intervention in the BHP bid, one that proceeds on the premise that Beijing wants to use vehicles such as Chinalco to buy Rio to keep resource prices down. Or to put it another way, China will buy Rio in order to run it into the ground. In a country in which even the Communist party appreciates the need to make a buck, that will not wash.

　　As fractious as it may be, China Inc will not be able to run at a loss. If there are any positives to be taken out of this exercise, that may be it.