OZ rescue adds to Swan's headaches

A Chinese white knight for Oz Minerals may give stressed shareholders some relief but it will only add to the mounting pressure on federal Treasurer Wayne Swan who has the final word on foreign investment.

Mr Swan already had the massive Rio Tinto deal to cast his eye over before Oz announced today's $2.6 billion offer by China's Minmetals.

While that might be a healthy-looking 50 per cent premium to the share price when Oz last traded, it is a fraction of the $12 billion combined market capitalisation when Oxiana and Zinifex announced their merger deal almost a year ago.

On Thursday, mining giant Rio Tinto has sold minority interests in some of its most valuable assets, including iron ore miner Hamersely Iron, to Chinese group Chinalco as part of a transformational US$19.5 billion deal.

Because of Rio's dual listed status and the importance of its assets in Australia - including the Pilbara iron ore company Hamersely Iron in which Chinalco will take a direct stake for US$5.15 billion - the deal will need to be approved by the federal government.

These are the latest in a string of deals that have seen Chinese entities take strategic holdings in a raft of mining companies, including Gindalbie Metals, Mt Gibson Iron, Grange Resources and Perilya.

There is also the growing greenfield interests of groups such as Citic Pacific which is investing $5 billion in an iron project near Cape Preston.

While Chinese investment is coming off a low base compared to other leading nation's such as the US and Japan, the psuedo-state nature of China's corporations has caused jitters in Australia long before the market down-turn made our resources attractive at firesale prices.

Mr Swan will have to make some hard choices.

The unexpected plunge in global markets has made capital a rare commodity and the Chinese appear to one of the few nations that remains willing to spend. By buying mines and resources companies it could be argued it is saving Australian jobs and giving beleagured investors some return on their investment.

But that largesse is because of the strategic importance of our resources and there are fears that, when markets rebound, Chinese ownership will influence prices and future investment decision-making.

Whatever the case, the global financial crisis is forcing a rethink of many aspects of the way governments act, from fiscal policy to foreign investment.

Xenophobia over jobs has already political pressure in places like the UK and Australia needs to be careful how it treats foreign investors, especially ones representing a huge customer and regional powerhouse like China.

Market purists believe that foreign investment controls are the wrong way to control such issues, and that existing laws such as state agreements, mining and exploration covenants and transfer pricing rules already provide enough sticks to manage a foreign owner.

However, market economics is on the nose right now and no-one likes to see the farm sold off, be it to China or anyone else. Your call Mr Swan.