What China really wants from us

THE deals announced last Friday by BHP Billiton and Rio Tinto are game changers but they do not justify the dramatic commentary that has come from some quarters.

BHP and Rio will create what is clearly the world's largest iron ore miner by merging their Pilbara operations into a 50-50 joint venture.

The deals represent a major strategy shift by Rio, which has spent the past few months telling everyone about the virtues of its planned alliance with Chinese company Chinalco.

Rio's decision to hook up with BHP and launch a mega rights issue (to solve its balance sheet problems) represents an abrupt rebuff for Chinalco, which was on the brink of completing its own company-making deal, subject to Foreign Investment Review Board approval.

Instead Chinalco has been licking its wounds, while all and sundry in China criticise Rio for its tactics.

Chinalco will be very disappointed by this outcome but does that mean Australia - and Western Australia in particular - should be sweating over the future of its relationship with major trading partner, China?

The short answer is no. Chinalco's original deal with Rio was promoted a commercial opportunity to buy assets at bargain-basement pieces, and to forge tight links with a major iron ore supplier.

If Chinalco pulled off the deal, it would have been a highly profitable move, illustrating the big gains that can flow to brave investors who take a counter-cyclical view.

Rio's decision to link with BHP and raise capital from existing shareholders was also purely commercial, reflecting the big recovery in financial markets in the past few months.

Premier Colin Barnett has suggested the implications are more significant and cast a pall over Australia's relations with China

He has also suggested that Australian governments need to take a lead role in relations with China and cannot leave such important matters to commercial enterprises.

That was almost certainly the case in the 1980s, may still have been the case in the 1990s, but is it a valid perspective in the current decade?

China is still a one-party communist state but it has made enormous strides over the past 10 to 20 years.

A wide range of commercially savvy Chinese enterprises is operating around the globe.

They will use government influence to help achieve their goals, including visits by high-ranking Chinese ministers of the kind we have seen in WA in recent years.

But surely that is just part of their commercial game rather than revealing something unique about China.

The annual argy bargy over iron ore prices is similar.

There is a lot of talk out of China about what is reasonable and responsible, but ultimately the negotiations are commercial.

Mr Barnett has expressed concern that Rio's decision to walk away from its Chinalco agreement was just the latest rebuff for China.

He noted that a China-backed group was unsuccessful when bidding for the right to develop the Oakajee port project.

The Chinese bid mixed business and politics but ultimately lost in a commercial tender process.

Mr Barnett felt so strongly about Oakajee that he unilaterally decided the state government should invest in the port.

He has also been endeavouring to gain Chinese participation alongside the successful bidder, Japanese-backed Oakajee Port & Rail.

A third issue on which the premier has more reason to intervene is the environmental approval process for iron ore mines in the Mid West.

In the past month, the Environmental Protection Authority has cast a cloud over two China-backed projects by recommending only partial approval.

In particular, the EPA has recommended that key iron ore deposits should be excluded from the mining projects.

Ansteel-backed Gindalbie Metals plans to appeal the EPA recommendation while Sinosteel Midwest Corp said the viability of its project is at risk.

This doesn't rank alongside the scale of the BHP-Rio deal but it's a bread-and-butter issue the state government needs to deal with.