Specter of investment protectionism stalks China

BEIJING (Reuters) - Please, please buy our bonds -- and bits of our bankrupt car companies, if you like -- but keep your hands off our big natural resource companies.

After events last week, that is what China must be making of the stance of rich countries to its overseas investment plans.

No sooner had Treasury Secretary Timothy Geithner returned home from a trip to Beijing in which he repeatedly assured his hosts of the safety of U.S. debt, Anglo-Australian miner Rio Tinto (RIO.AX) (RIO.L) jilted Chinalco, the Chinese state-owned metals firm it had been courting to help it out of a debt trap.

Rio said it had scrapped the $19.5 billion partnership on purely business grounds, and Australian Prime Minister Kevin Rudd insisted his country remained wide open to Chinese investment.

Sure enough, Canberra has approved a string of Chinese equity stakes this year, many of them in the natural resources sector.

Chinese foreign direct investment in Australia leapt to $13 billion in the first quarter from $1.4 billion a year earlier.

Yet China can be forgiven for detecting a pattern that poses a serious threat to its strategy of encouraging state-owned firms to spread their wings and secure the energy and commodities needed to sustain the country's industrialization.

Deep-pocketed China, it seems, is welcome only as a buyer of last resort: witness the eagerness of bankrupt General Motors GMGMQ.PK to announce that it was in talks to sell its gas-guzzling Hummer marque to Tengzhong, a little-known Chinese industrial machinery company.

Rio was desperate when it turned to Chinalco in February, but capital markets and commodity prices subsequently perked up, which gave the miner an alternative in the form of a $15.2 billion rights issue and a $5.8 billion joint venture with rival and one-time suitor BHP Billiton (BLT.L) (BHP.AX).

"This development will strengthen views among Chinese corporates -- particularly in the energy and natural resources sector -- that it may take more than their cash to open the doors to deals for them overseas," said Antony Dapiran, a Shanghai-based partner with law firm Freshfields Bruckhaus Deringer LLP.

DEJA VU

After all, China has been here before.

In 2005 a bid by offshore oil specialist CNOOC (0883.HK) (CEO.N) for Californian rival Unocal fell through in the teeth of U.S. political opposition; also that year state-owned miner Minmetals failed in a bid for Noranda, the Canadian nickel miner, against a backdrop of labor concern about China's human rights.

Ken Davies, with the investment division of the Organization for Economic Co-operation and Development in Paris, said investment protectionism has been on the rise globally, but China's particular worries were not unfounded.

While some African countries were rolling out the welcome mat, other governments were suspicious of Beijing's intentions.

Chinese firms venturing abroad are predominantly owned by the Communist state, raising fears that their investments may not be driven by normal commercial considerations.

"State-owned enterprises are still controlled by SASAC and have to fulfill various policy aims," Davies noted, referring to the powerful State-owned Assets Supervision and Administration Commission.

David Kelly, a professor of China studies at the University of Technology, Sydney, agreed that Chinese corporations would have to do more to define their independence from the state.

"People don't trust in Chinese institutions yet," Beijing-based Kelly said.

Businessmen and analysts said China could do more to win Western hearts and minds by opening up its own politically sensitive sectors more widely to foreign direct investment (FDI).

China has attracted about $1.25 billion a week in FDI since it joined the World Trade Organization in 2001.

But Western executives complain that some sectors where they have a proven advantage are in effect off limits as Beijing seeks to give local firms the chance to develop rival technologies.

High-speed trains and, recently, wind turbines are two fields where Western companies feel they are suffering discrimination.

"I cannot say it's deliberate, but the facts show that no turbine suppliers from international companies established here have been selected," Paulo Fernando Soares, China chief executive of India's Suzlon Energy (SUZL.BO), said on May 14 of the bidding for big wind-power projects.

NO TURNING BACK

For all the friction that is generating, China's Go Forth policy is here to stay. Including the financial sector, China's outbound FDI almost doubled last year to $52.2 billion from $26.5 billion in 2007.

Ian McCubbin with Deacons, a Sydney law firm, said there might be fewer deals, and investors would be selective, but the forces driving Chinese interest in Australia still applied.

"China is a major trading partner and it follows that this trade will spawn investment activity," said McCubbin, whose firm advises many Chinese corporations and banks.

With a stockpile of $1.95 trillion in foreign currency reserves, invested mainly in U.S. bonds, China can in theory try to buy whatever it fancies.

But the lesson of the Rio fiasco is that some targets may just be too big to digest politically, thus calling for what Dapiran at Freshfields described as more subtle ways of tapping energy resources abroad.

Instead of seeking equity stakes, China has extended $45 billion in loans to develop oil and gas fields in Brazil, Russia, Venezuela, Angola and Kazakhstan, which will repay the money in kind. Chinese firms have also signed long-term gas supply deals in the Australian state of Queensland, Dapiran noted.

"The theme will be alternative arrangements that are still going to achieve the ultimate strategic aim of securing energy and natural resources for China's development but without encountering the kind of regulatory and other political stumbling blocks that some more flashy deals might encounter," he said.

Even so, Chinalco's setback could cause Beijing to pause and review its foreign acquisitions strategy, possibly leading to a more active coordinating role for the government, according to Damien Ma and Divya Reddy with Eurasia, a political risk consultancy.

"Already, Chinese leaders appear increasingly aware of the political minefields that could derail deals, with Vice Premier Wang Qishan reportedly criticizing state company managers for lacking the expertise and sophistication to succeed in acquisitions," they said in a report.

(Additional reporting by Lucy Hornby; Editing by Mathew Veedon)