Asia2025: Hi, welcome back to the program.

I’m not in China for the 60th anniversary celebrations but in Oz. However, I’m sure most of you have read about the leadership’s precautions in the lead up to the celebrations in Beijing. Let’s see how it goes.

Next program I’ll be looking at US and Chinese climate change policy. There was a lot of fanfare about what the Chinese would deliver at the G20 in Pittsburgh, and I’m not sure they did but I’m going to try and get to the bottom of the rhetoric being bandied about by both powers.

Most notably, the interesting and not so oft quoted clause in the US Clean Energy Security Act, that requires the President from 2020 to impose a tariff on certain goods from certain countries, that do no limit their carbon emissions. It is up for vote in the US Senate next month and I daresay China is worried.

This program I’m also going to cover strategic issues and national interest by looking at the bid by China Nonferrous Metal Mining to buy a 51% stake in the Australian rare metals company, Lynas Corp. They have now withdrawn the bid but it has highlighted Chinese dominance of the rare metals sector and concerns about strategic Chinese acquisitions in Australia.

Many of you may have followed the failed Chinese bid for Australian mining giant, Rio Tinto, commentators and politicians in Australia citing national security reasons as to why the Chinese bid should fail.

So, how dangerous are China’s strategic acquisitions? And is this part of larger concerns about China’s military build up?

I spoke to John Lee from the Centre of Independent Studies, about the issues surrounding China’s rare metals dominance.

JL: Well, China was interested in these rare earth metals because they realised that when you look at future technologies, especially environmentally friendly technologies, these rare earth metals are crucial and at the moment there are very few substitutes for them.

Why China is so interested in buying Australian other companies, well, it was actually part of a plan hatched around 15 years ago, to control the supply of rare earth metals round the globe and that’s what they’ve been trying to do for the last decade or so.

Asia2025: So, why do they want these rare Earth metals? What is it? What can they do?

JL: Well, they realised that because these metals are so essential to fissure technologies, by controlling supply they can achieve one of two things. First, they give their own indigenous industries, especially state controlled industries, a huge advantage in a global market and secondly, any foreign competitors will be forced to relocate to China.

Now, if they do relocate to China, there’s always a threat of a technology theft, R&D theft, which is a real problem for foreign companies operating in China right now.

Asia2025: But it already controls 95% of this market, doesn’t it?

JL: It does, there are actually rare metals all around the world, it’s just that because the world has been relying on supply from China, a lot of the mines round the world have fallen into disrepair. Now, the rest of the world can start to mine rare metals again, but it will take five to 10 years to raise supply to adequate levels. So, this in a sense, gives Chinese companies a window of opportunity in these five to 10 years.

Asia 2025: You did say this started 15 years ago and I did read that these metals are essential in radar systems and laser and precision weapons. Now, on that topic, was this a strategic, and I guess a sort of national security imperative, decision on behalf of the Chinese?

JL: Yes, very much so. There was an explicit national security element to it and explicit commercial element to it. In terms of national security element, the Chinese realised that the Americans, for example, have relied so much on these laser guided weapons, will be concerned if supply is denied to the Americans.

Asia2025: But the Chinese Ministry of Information and Technology as I understand it, has proposed limiting the export of these metals. Is that correct?

JL: That’s correct, they’ve even proposed banning export of all these metals altogether. Now, this is just a proposal, it’s not government policy but it is an official body putting forward a strategy into the future.

Asia2025: The really interesting this about the Lynas deal falling through, is ... was that it was withdrawn but the Foreign Investment Review Board was looking very closely at the deal and had some concerns and I think there was one of the heads there, talked about that in the papers.

JL: Yes.

Asia2025: What do you think that’s saying about Australian companies’ view of strategic acquisitions by China? We had the Rio deal fall through this year and while many more have been successful, there are concerns about China’s expansions abroad at national, strategic levels aren’t there?

JL: Yes, there definitely is. I think one thing that Australian regulators and Australian politicians have realised is that all of the Chinese resource companies trying to buy into or takeover Australian companies, almost, without exception, they’re all state controlled or state owned companies.

So, what you have now is that we, the Australian side, tends to consider takeovers as a matter of Chinese government policy and not just the activity of private companies. I think that’s definitely changed, as far as we’re concerned.

Asia2025: But, interestingly, the federal government’s relaxed foreign ownership thresholds for Australian mining companies. But, I see the Chinese will have to go through the Foreign Investment Review Board process as it only applies to non government owned enterprises.

JL: Yes.

Asia2025: Do you think that will decrease Chinese investment in our mining sector?

JL: I think the Chinese will continue to try for the next couple of years and I think there’ll be very subtle but sustained political pressure, placed on the Rudd government to allow more Chinese state owned companies to buy into Australian companies.

But I think the Chinese realise that Australia, in a sense, is on to their strategic play and so it’s pretty unclear what the Chinese will do over the next two years. The Chinese realise that Australia is a net import of capital, so we are pretty short of capital but as mentioned, the Australian side is treating Chinese state owned companies as an arm of the Chinese government and that’s the complication.

Asia2025: When we talk about this sort of national security element of this debate and you think about Rio as well, what about the fact that there’s already been so many major acquisitions? There’s still an exceptional amount of investment pouring in, isn’t there?

JL: There is but I think there are a couple of elements that the Australian government watches for.

The first thing is, what is the nature of the Chinese investment? For example, is it a joint venture? Is it an acquisition? Is it really just a minority stake? The Australian government will be very careful about watching for acquisitions, as opposed to just minority investment stakes by Chinese companies.

The second element is that it really depends on whether the Chinese acquisition allows the Chinese company or the Chinese state any strategic or undue commercial leverage. The Australian government will have no problem with the buying of smaller companies or of companies that don’t dominate the market, but for example, when you see it’s ... when you look at the big industries like iron ore and the Rio Tinto case is obviously instructive, then I think alarm bells tend to be raised.

Asia2025: The going out policy, as some people refer to it....or rapid acquisitions, how does this feed into fears of China’s growing military power?

Do you think the issues are linked here? Are there fears with what China might do with these resources?

And I guess we’re talking about the rare earth metals here.

JL: I suppose the fear is that China still has a very Leninist view of the world and what I mean by that is, China still views every arm of the state, whether it be economic, social or political, as an element of national power and as an element of national interest.

Now, there may not be a direct connection with any growing Chinese and military threat but I don’t think ... but I think we’re still quite unsure as to whether China is committed to a genuinely open trade system, where other companies and other countries have an equal opportunity to buy strategic resources, I think that’s the issue.

Asia2025: It also does need these resources to continue its economic growth, doesn’t it?

JL: Yes it does.

Asia2025: And to hedge against the weakening US dollar. So, it’s not just strategic.

JL: Well it’s not just strategic but unfortunately the Chinese tend to view the securing of economic resources in a very old fashioned way and that is rather than purchasing resources through the market, the preference is to own these resources directly and ship these resources straight into the Chinese economy. Now, that’s not a very free trade, liberal view of legitimate competition and that’s a concern.

Asia2025: What about a possible looming trade war, between the United States and China?

I see China at the G20 tried to get a statement from leaders that they would actively oppose trade protectionism, but we’ve already seen the US decision to impose a 35% tariff on Chinese tyres, and the EU’s decision to impose new anti-dumping duties as high as 39% on steel pipes and 30% on aluminium foil.

And China’s already responded by looking at anti-dumping measures on US chicken imports. Do you think we are seeing a possible trade war between these two major powers?

JL: Yes, I very much so. I think this has been brewing for a while, even before the global financial crisis. You had a lot of complaints coming out of America and Europe that China was artificially devaluing its currency to make its exports cheaper.

Now that we have a global recession, I think these sort of fears or these sorts of concerns are exaggerated or at least become heightened and I think they’ve increased political pressure in Europe and America to erect some of sort of selective tariff on Chinese products.

Asia2025: But I mean, the tariff issue has also been linked to domestic issues. I mean, the one issue I want to look at here is, the interesting clause in the US Clean Energy Security Act, that requires the President from 2020 to impose a tariff on certain goods from certain countries that do no limit their carbon emissions, it’s up for vote by the US Senate next month.

Surely that’s a vote that would worry the hardly environmentally conscious China?

JL: Yes, it certainly will worry the Chinese. I think that in the current environment, both in terms of the financial crisis and both in terms of the pressure to address the issue of climate change. The sort of trade-off is jobs and I think that American leaders and European leaders, in terms of sweetening any deal that they put to their populations, will want to portray it as something that is job in hand thing. So, I think in a sense, the Chinese are the losers as a result of this local politics.

Asia2025: And that was John Lee from the Centre of Independent Studies in Australia.

That’s it for my first program back.

Next program I’ll have interviews on climate change and reports of border tensions in Ladakh. What does this mean?

You’ve been listening to Asia 2025.

Thanks for listening, have a great week.