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Articles today titled ‘Oil sands get vote of confidence’, ‘Ottawa guidelines for state-owned investors get first test’, and ‘Tiomin says Chinese co to buy 70 pct of its Kenya unit’ report further strategic purchases by Chinese interests – a topic I first talked about on this blog many months ago, and consider to be of prime importance as the world moves forward from here.  I consider the transaction discussed in the first two of these articles – the PetroChina purchase from Athabasca Oil Sands Corp. of a 60% interest (for $1.9 billion) in two of its undeveloped Canadian Oil Sands projects - to be by far the more important.  I see the Cdn Oil Sands as a pre-eminent world class asset.  The first article claims “The transaction will hand approximately three billion barrels of Alberta oil to PetroChina, whose parent is the state-owned China National Petroleum Corp., but will leave operation of those projects, named MacKay River and Dover, in Canadian hands”.

I can’t help but wonder why the U.S. seems to be taking a sidelines role (at least from a public perspective) in transactions involving the Oil Sands.  The second article does say that it remains unclear how the U.S. government would view a growing Chinese presence in the oil sands given the U.S.’s strategic interest to have a secure source of oil supply from Canada – but that the current U.S. Administration so far has been silent on this issue.

The third article reports that Canada’s Tiomin Resources has signed an agreement with China’s Jinchuan Group Ltd whereby the top Chinese nickel producer will acquire a 70% equity interest in Tiomin Kenya Ltd which owns 100% of the Kwale mineral sands project in Kenya.

I see these transactions as further examples of continued investment by China in assets it believes strategic to it.  I believe that within in comparatively few years continued acquisitive behavior by China and Chinese companies very likely will contribute significantly to what I see as an ongoing change in the balance of world economic power away from the U.S.

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An article titled ‘China Charges 4 Rio Tinto Employees; Spying Allegations Are Dropped’ reports that yesterday China did just that – formally charging the four with ‘commercial bribery and trade secrets infringement’.  China is reported to have ‘backed away’ from charges of espionage or violation of the country’s state secrets law, which are reported as ‘much more serious’.  The article does not say what the possible penalties might be should one or more of those accused be found guilty.  It will be interesting to see how this plays out, both from the standpoint of this specific fact situation - and in my view even more so from the perspective of what general impact, if any, this has on companies doing business in China.  Stay tuned.

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An article today titled ‘Is China Leading a Global Recovery?’ says “Increasingly, many companies see China as their ticket to surviving—and even thriving—in a post-recession world because of its insatiable appetite for goods as it moves toward a consumer-driven economy”.  The article also says “a lot of people are starting to believe America and China are in two very different boats” and includes interview comments with executives of major companies - at least one of which is quoted as saying:  “Is China going to lead the global economy out of this slump?  I wouldn’t think so”.  For the following 20,000 foot reasons that is the camp I am in:

•    first, from everything I have read I believe it will take China many years to develop a consumer based economy that will to an important degree be significantly internalized and self-sufficient;

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There are three articles this morning dealing with China’s detention of Rio Tinto executives:

•    the first, titled ‘China May Ease Charges of Rio Tinto Workers’ reports that, according to Australia’s foreign affairs minister, China’s investigation into the alleged theft of state documents by 4 Rio Tinto employees may be treated as a commercial case and not an espionage case.  This article also says “Australian and American officials are pressing China for details of the case amid worries about the employees’ treatment and fears that global companies doing business in China could face legal difficulties when dealing with Chinese companies”;

•    the second, titled ‘Australia says China must handle Rio case quickly’ reports Australia’s trade minister said today that Australia wants more details on the detained employees quickly, but said the case would not hurt economic relations if handled properly; and,

•    the third, titled ‘Australia says China-Rio case a signal for investors’ repeats some of what is said in the other two, but also refers to the case as “a signal to everyone looking to invest in China”.

While these reports are consistent with what I have been saying since the China/Rio Tinto incident first was reported two weeks ago, it is evident to me that China is taking the charges it has levied against the Rio Tinto executives seriously – and is not likely to reverse its position any time soon.  Stay tuned.

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An ‘Economist’ article titled ‘The steel fist of government’:

•    reiterates China’s current detention of 4 Rio Tinto executives;

•    says “The Rio case comes on top of other, less publicised moves which involved bewildering use of the legal system and may also have been motivated by economic nationalism. In June three managers at Guangdong Development Bank in southern China were detained over unspecified matters”; and,

•    I think importantly, says “News of detentions often emerges, if at all, not from the authorities but from informal sources including the news media or family members. This only adds to suspicions about the true motives behind the investigations. One lawyer says his foreign clients are not waiting around for more information: they have begun asking to have their names removed from the boards of domestic Chinese operations, just in case they are next”.

The last quote to me points in the same direction as my first reaction to the Rio Tinto detentions I wrote about 10 days ago when the detentions were first announced.  I think that without establishment of clear ‘what constitutes State Secret rules’ this type of activity on China’s part is far more than a ‘tempest in a teapot’.  At the very least in can only be ‘reverse chicken soup’ in the context of China/developed country trade relations – where ‘reverse chicken soup’ is defined as ‘it can’t help and it might hurt’.

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An article titled ‘China Revs Up Its Dealmaking Machine’ says “The Chinese are in the midst of an M&A craze, doubling overseas investments last year. Could the deals benefit the global economy?”, and that “China’s total investments abroad, at $170 billion, come to only one-thirtieth the capital that the U.S. has spent on foreign factories, real estate, and other assets. But the Chinese have definitely been revving up their deal machine. China’s overseas investments doubled last year, to $52 billion, and the Chinese government’s economic planners have predicted a 13% increase this year, despite a slight slowdown last winter”.  The article goes on to talk about the author’s perception of Chinese lack of M&A experience, deal-doing and so on – read the article for yourself.  I see all that type of commentary as puffery.  I have a number of Chinese friends and acquaintances.  They are far from stupid.  I have said previously on this Blog and continue to believe that the Chinese will make many more strategic investments going forward, particularly in the resource sectors.  I believe that anyone that sells China’s interest in pursuing that course and the ability of the Chinese to do it in an economically sensible manner is in for a rude awakening.

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My first reaction when I read the report last week that China had detained 4 Rio Tinto executives was to ask the question ‘What Constitutes a State Secret in China?”  A July 13 article titled ‘What is a ’state secret’? China metals analysts increasingly nervous’ focuses on this and says “Following the arrest of the Rio Tinto Four for ’stealing state secrets’, China’s metals analysts are increasingly nervous on what the state considers secret information”, and “China’s detention of steel executives suspected of leaking state secrets could reduce the flow of market information in China as analysts and researchers self-censor to avoid trouble”.

When I commented last week I focused on concern that executives doing business in China might be less interested in visiting China than they otherwise would be, absent clear and unequivocal rules as to how China defines ‘state secrets’.  That analysts and researchers might similarly be affected did not occur to me until now.  Again, to me this suggests a need for early resolution by China of the specific Rio Tinto issue – but more importantly early enunciation by China of exactly what it means by ‘state secrets’ in order for China/Rest of World business relations to go forward without a specter hanging over them.  In my view, the referenced article is one worth reading.

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