China: the ultimate value investor

On Febraury 12th, Rio Tinto announced plans for a $19.5bn cash injection by Chinese state-owned firm Chinalco. The heavily indebted mining group will issue convertible bonds and receive investments in three strategic partnerships, giving Chinalco minority positions in some of Rio Tinto's best mining assets and increasing its total share of the firm to 18%. The plan is subject to shareholder approval and requires official permission by the governments of Australia (which swiftly moved to amend its foreign investment rules to consider convertible bonds as equity) and Chile; approval is far from certain and the deal is already highly controversial amongst Rio's existing shareholders.

Rio is effectively selling pieces of its best assets to one of its biggest customers; empowering a shareholder whose self-interested desire for low commodity prices directly conflicts with the interest of the others (high prices). But should the deal succeed, it would be the biggest Chinese investment ever in a foreign company, and herald a new focus in China's pursuit of resource security. China's investments in Africa are well-documented and readers of zzzeitgeist will surely be familiar with China's "FDI for access" bargain. But an 18% capital investment in one of the world's largest mining groups suggests a higher profile campaign to leverage the relative economic strength of the Chinese government towards the acquisition of strategic corporate assets.

While the era of the sovereign wealth funds came and went with a whimper, state-owned companies with decent balance sheets seem primed for a foreign buying spree, particularly in the heavily indebted mining sector. With mining assets cheap, and the financial backing of the Chinese state strong, the opportunities for Chinese companies abroad are immense. That is, if they can overcome the tricky little problem of economic nationalism.

A final academic point: the US has been referred to as the world's largest venture capitalist. Perhaps we should begin referring to China as its largest value investor.

(photo from kt_bluesky's photostream)