Bruised, China will shun mega-deals for now: bankers

By Joseph Chaney, Asia Resources Correspondent - Analysis

HONG KONG (Reuters) - China's pursuit of mega-sized deals with global leaders in strategic industries will slow as Beijing recovers from Anglo-Australian miner Rio Tinto's stunning rejection of a $19.5 billion tie-up with state-owned Chinalco.

Dealmakers and analysts say the Rio/Chinalco debacle has rekindled fears in Beijing that few companies or governments in the democratic world trust that China -- a resource-hungry nation under an authoritarian regime -- is pursuing multi-billion dollar resource deals for purely commercial reasons.

After the failure with Rio (RIO.AX)(RIO.L), China will temporarily shun outbound mega-deals, as it did after offshore specialist CNOOC (0883.HK)(CEO.N) was rebuffed in a 2005 bid for Unocal by a political furor in the United States, Asian investment bankers say.

"The perception will be that it's another Unocal, and don't try and do another large, transformational, long regulatory approval timetable deal," said an investment banker who advises clients on Sino-Australian resources deals.

Dealmakers say China's worry is that Western companies only see the Chinese as viable partners when things are desperate and options limited. What's more, Chinese firms are courted only for their cash -- not for expertise or prestige or anything else.

"A lot of Chinese companies took it pretty harshly," said a bulge bracket investment banker, who advises Chinese clients on outbound deals. "(Australian Prime Minister Kevin) Rudd came out and said they're open to China, but you can't stop people from thinking that way. A lot of my clients are really concerned."

Both bankers declined to be named because they weren't authorized to speak publicly about the matter.

CONTROL UNWELCOME

While many Western firms are happy to deploy China's cash, they are less comfortable about ceding control, bankers say.

With its proposed Rio deal, Chinalco was on its way to being one of the biggest suppliers of raw materials that drive industrial activity worldwide. But China's insistence on a Rio Tinto board seat smacked of a desire to influence prices, despite claims that this was not the intention.

"Unfortunately, the Chinese seemed to think they needed to have a board seat," said one of the bankers. "It's something the Chinese, in almost all of the circumstances in which we've worked with them, have insisted on: influence.

"They don't just want to make an investment, they want to interfere, and that's the biggest problem here."

It's not just Australia that is concerned about China's influence across the region.

Mongolia is selling up to 49 percent of its prized $2 billion Tavan Tolgoi site, one of the world's largest untapped coking coal deposits, and Chinese coal giant China Shenhua Energy Co (1088.HK) is widely considered the leading bidder.

But if Shenhua seals the deal, the Mongolian government will likely demand it teams up with a Western firm, such as Peabody Energy (BTU.N), to get around geopolitical concerns about total Chinese ownership of the strategically important asset, say dealmakers with direct knowledge of the situation.