All losers as Australia hits China's brick wall

LOSE, lose, lose.

Kevin Rudd has arrived back in Australia minus a road map on how to extricate Stern Hu or his own government from the messy unravelling of the relationship with Australia's most important trading partner. Beijing is clearly less interested in solving the problem or even limiting the fallout than it is in making a very brutal point.

The fact that this undermines China's own self interest and reputation doesn't help Australia's predicament. To the extent that China is damaged, so is Australia given the interdependence of the economic relationship. As for Rio Tinto, the disaster just keeps on escalating, while other mining companies wonder what it will all mean for them. Answer: nothing good. It's just a question of how badly and broadly the ripples spread.

West Australian Premier Colin Barnett is about to head off to China on a long-scheduled trip at the end of this week. This trip had been planned in part to reassure the Chinese that their investment in the Australian resources industry is "welcome and needed".

Hopefully, the Premier will have somewhat more luck than Trade Minister Simon Crean did in his attempts to talk to senior officials about the case of Hu and won't be similarly dismissed with a deputy's deputy. It will probably help Barnett's reception that he has consistently made clear his support for greater Chinese investment and for the now collapsed Chinalco deal with Rio Tinto. More recently, he also criticised the federal government's failure to establish a more mature political and economic relationship with China and told The Australian last week that China wanted to be treated with greater "respect". The Chinese media, hardly independent voices, quoted these comments prominently over the weekend. But even as a China enthusiast, Barnett was warning yesterday what a serious situation this was and said that most businesses dealing with China were quite nervous.

"We're behind the eight ball to some extent but what I will be doing, to the extent I can as a state premier, is trying to get that relationship back on track," he said at a press conference yesterday.

Well, good luck. But it's unlikely to lead to any simple or quiet backdown from a crisis that has so quickly spiralled out of Australia's control and is becoming more openly politicised by the day in both countries. That won't change. The Prime Minister is facing down the opposition's hysterical demands for his immediate and public intervention. This would certainly raise the political temperature without guaranteeing any results and, given the diplomatic mess, would more likely prove quite counter-productive.

But what would be effective as an alternative approach from the government is less obvious. Despite the government's firm assertions that the issue is being dealt with in a responsible and appropriate manner, its efforts are obviously hitting the Great Wall.

That says a lot about the state of relations between Canberra and Beijing leading up to this debacle. What is increasingly evident is that rather than Rudd's deep knowledge of China being a strength in Canberra's dealings with China, the government's approach has become ever more of an irritant in Beijing.

Australians doing business in China suggest that prime ministerial references to his prowess at Mandarin and his understanding of China are widely regarded as unbecoming boastfulness by the Chinese. At the same time, Canberra's all too evident apprehension about the level of Chinese investment in Australian resources and about the potential Chinese military threat have resonated loudly. That's even without silly snubs like trying to change seating arrangements to avoid Rudd sitting next to the Chinese ambassador in London.

None of this explains, let alone justifies, the provocative act of the Chinese in detaining four Rio Tinto employees, including a senior Australian executive. But it may help explain why Beijing has been so dismissive of the Australian reaction and sensitivities to the extent there was no prior warning or attempt to deal with the matter through back channels.

It also completely disrupts any confidence that Chinese state-owned enterprises will act in a commercial and independent manner -- as Rio Tinto and Chinalco and the Chinese government so confidently asserted in the protracted lobbying before the Chinalco deal finally fell over last month.

What is a state secret when it comes to commercial negotiations? Apparently just about anything the Chinese want it to be.

James Philips, a partner with Minter Ellison, said in a note to clients yesterday that the detentions had again raised the question of how assertive the Chinese state would be in commercial matters.

For now, that question seems to be closely connected to the political struggle going on in China about how to handle the ever fraught iron ore negotiations and how centralised control of those negotiations should be. The China Iron & Steel Association is apparently determined to maintain an ever tighter grip as sole negotiator and demonstrate its superiority in obtaining a better result on prices.

It wants to end the previous system of allowing Baosteel to take the lead, with Chinese steel mills having an increasing say in what deals they were prepared to do.

Rio Tinto's aggressive behaviour during iron ore negotiations last year won't have helped the sentiment in China. At the time, Rio, under pressure to escape the clutches of BHP Billiton, was particularly cavalier about breaking long-term contracts to get the higher prices available on the spot market.

This year, the delay in settling a price has gone on longer than ever before, with CISA refusing to accept the 33 per cent price decline accepted by Japan and Korea and holding out for more.

The arrests are obviously not just a clumsy overreaction by low-level officials, but seem to be part of a much broader shift in policy in China about how to deal with China's economic needs and its resources security.

Premier Hu Jintao understands how important that is. He obviously thinks it's far more important than whether or not China antagonises Australia or other Western countries and their companies.

Lose, lose, lose.



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