4: Chinalco And The Party: Go Figure

Interesting as it is, the debate over the Chinalco bid for a bigger stake in Rio Tinto needs to be seen in a larger context. Shareholder anxiety about the mismanagement of Rio Tinto, anxiety at BHP Billiton that its market position is under threat and anxieties in Australia about large-scale investment from China are all understandable. However, they seem to have too many people overlooking the proverbial ‘elephant in the room’: the ambitious mercantilist designs of the Chinese state. That state, though still dominated by a political body calling itself the Communist Party, has become an emergent authoritarian, mercantile market state. Its resources strategy must be understood in this context.

The plight of Rio Tinto is fascinating for the same reason as the disasters on Wall Street and elsewhere around the world. How could corporate managers have made decisions that left their mega-firms so perilously exposed? How can boards have failed to rein in the reckless risk-taking of those managers? Doubtless, in the case of the resources sector, part of the problem was the over confident faith that the resources boom would go on for the next thirty years. Perhaps it will resume some time in the next five or ten. 

As for nationalist anxieties in Australia, we have long combined dependence on with resentment of foreign investment. Concern over Japanese investment in Australia’s resource sector, thirty or forty years ago, led the Whitlam government to create the Foreign Investment Review Board. Notoriously, Rex Connor wanted to reduce the country’s dependence on foreign investment by borrowing huge sums of money from overseas to ‘buy back the farm’. To compound the irony, of course, he went to the shadiest of sources to get his foreign money. Such are the vagaries of economic irrationalism.

The problem here is not foreign investment in Rio Tinto. It is difficult to imagine either public opinion or the Rudd Government being especially exercised if the stake in Rio Tinto was being offered to British, American, German or Japanese investors. Certainly, it would be far easier in any such case for standard reasoning about markets, governance, rents and royalties to win the day over vaguely nationalist unease or resentment. Is the problem that the buyer is Chinese? No. The problem is that the buyer is the Chinese state. 

Chinalco is an arm of the Chinese state, not a normal commercial enterprise. The fact that Xiao Yaqing, Chinalco chairman, has been tipped to take a leading political appointment as point man for China’s global resources strategy is one symptom of this, but it is only a small part of the bigger picture. The Chinese Communist Party, with a monopoly of political power, has retained a commanding heights role in the economy to an extent altogether at odds with the notion that China is now a market economy. 

The combination of these two facts is the reason for legitimate concern about the Chinalco deal. Such concern is seldom expressed quite this way. But even when stated candidly, it needs spelling out if it is to be understood and thought through. That means addressing three questions: why should it bother us that the Communist Party is in the picture; why should it bother us that it has a global resources strategy; and how important, really, is the Chinalco deal in this larger scheme of things?

Even leading Chinese dissidents say that no-one in China, including leading Party officials, believes in Communism any more. Certainly, the investment of Chinese funds in Rio Tinto has nothing to do with Communism. So, why not think of the Communist Party as being like the Japanese Liberal Democratic Party with Chinese characteristics, with its own versions of MITI and Mitsubishi and its own emerging Hondas and Toyotas? That is how many Western businesspeople now appear to think. It is a beguiling idea. There are some broad similarities. But it is the differences which are cause for unease.

All major states have global resources strategies. The involvement of Britain and the United States in the Middle East over the past eighty or ninety years is the most obvious evidence of this. Japan has a global resources strategy. Over the past sixty years, it has charted a remarkably effective course in ensuring resource security through market access. What, then, is the problem with China having such a strategy? Well, there is no problem with it having a strategy. The problem lies in the precise mechanisms through which that strategy is being implemented: state-owned resource companies, state-owned financial institutions and state-owned military enterprises - all run by a secretive and dictatorial Party. 

Granted there is cause for some unease in this regard, what is the significance of the Chinalco move? Primarily, that it is actually taking place in this context. Whereas the kind of information Chinalco would be privy to if it gets the stake it seeks in Rio Tinto is not available to the Australian or British governments, it will go directly to the Chinese government. This has considerable strategic implications. If we view the present case in isolation, we fail to think strategically. Xiao Yaqing and his Communist Party bosses are thinking strategically. What calls for our attention, then, is strategy, not just this individual move.

The best mental model we can avail ourselves of in this respect is the Chinese game of Go or Wei-ch’i. Go is a game in which, instead of taking pieces by frontal assault, as in chess, you place your pieces around the board to surround territory. When you have an area surrounded, all your opponent’s pieces within that area are removed from the board. Forty years ago, Scott Boorman’s The Protracted Game: A Wei-Ch’i Interpretation of Maoist Revolutionary Strategy argued that Chinese and Vietnamese Communist strategy was best understood in terms of Go. He had a point. Now it is time to think in the same way about the strategy of the authoritarian, mercantile market state into which the Chinese Communist nation state has morphed. We won the Cold War against Communist revolution, but we are now on a new board and the game is on in earnest. Ideally, the Australian government will parry the Chinalco move, by encouraging BHP Billiton and the shareholders of Rio Tinto to forge a deal.