China's reserves could fuel natural-resources deals

By Andrew Batson, Alex Wilson, and Rick Carew
The Wall Street Journal
Wednesday, February 18, 2009

http://online.wsj.com/article/SB123495580036609781.html?mod=yahoo_hs&ru=...

China's government is signaling greater willingness to use its wealth for acquisitions abroad, which could accelerate a push into natural resources that already has brought a string of major deals in recent days.

A senior official said Wednesday that China is looking at ways to use its nearly $2 trillion of official foreign-exchange reserves to help companies make investments abroad. His comments followed reports that officials have proposed tapping the reserves to set up a fund for overseas energy acquisitions.

Also Wednesday, Australian mining company Fortescue Metals Ltd. disclosed preliminary talks with China Investment Corp., the country's $200 billion sovereign-wealth fund, as well as separate early talks with mining giant Anglo American PLC. Australian policy makers also revealed they met CIC head Lou Jiwei last week and discussed the country's investment environment. Both CIC and Anglo American declined to comment on the talks.

The heightened Chinese activity in Australia risks raising political tensions in a country with a sharp focus on its natural resources. Australia's policy makers are already considering whether to clear Aluminum Corp. of China's proposed $19.5 billion investment in mining giant Rio Tinto, as well as a deal by China Minmetals Corp. to buy a smaller Australian mine for $1.7 billion. Both need access to funds in a time of slumping prices.

Another resource deal could materialize in Brazil as soon as Thursday, during a visit in Brasilia by Chinese vice president Xi Jinping. Oil company Petroleo Brasileiro SA said China is one of several lending nations it has spoken to about funding exploration of deepwater reserves.

Chinese companies have moved decisively into natural resources deals this month, a trend that reflects both the nation's financial strength and companies' need for cash during the global economic slump. On Tuesday, China struck a deal with Russia to lend $25 billion to Russian energy companies in exchange for larger supplies of crude oil.

The comments Wednesday by Fang Shangpu, a deputy director of the State Administration of Foreign Exchange, could mean China will back the effort with more firepower, if a firmer consensus emerges on how to deploy China's reserves. The idea of using China's foreign-exchange reserves to support outward investment isn't new but seems to have gained traction as the global crisis spurs the government to take a more active role in supporting domestic companies.

The reserves have built up as China's central bank buys up money coming into the country in exchange for yuan. As with most countries' official holdings, China's reserves are largely invested in safe government bonds like U.S. Treasurys. They can be used, Mr. Fang said, to pay for imports or for foreign investment, which require foreign rather than domestic currency.

China Investment Corp., the sovereign-wealth fund, has a wider investment mandate. It's unclear whether its early talks with Fortescue represent a more substantial shift toward natural resources. Fortescue, an iron-ore producer seeking funding for its growth plans, said all discussions were preliminary. The company in the past has signaled its openness to Chinese investors.

Its shares jumped 12% to 2.99 Australian dollars (US$1.90). Before the jump, Perth-based Fortescue had a market capitalization of US$4.77 billion, according to data service FactSet.

Still another Australian miner disclosed talks with Chinese investors, though it didn't provide a name. The receivers of Windimurra Vanadium Ltd. said Wednesday there has been Chinese interest in the company and its partly finished A$240 million vanadium mine in Western Australia. Windimurra was placed into administration and receivership earlier Wednesday after it was unable to raise about A$80 million.

The focus in Australia comes at a difficult time for policy makers. Both Chinalco's proposed investment in Rio Tinto and China Minmetals' deal to acquire OZ Minerals Ltd. require approval by Australia's treasurer, and a stream of headlines could give momentum to lawmakers who oppose investment by state-controlled Chinese companies. "Some people may be concerned about selling off partial rights to Australian natural resources," said Paul Kerin, professor at Melbourne Business School.

Australia Treasurer Wayne Swan said Wednesday that he reassured Mr. Lou, of CIC, last week that Australia welcomes foreign investment "as long as it fits our guidelines and meets our national-interest test."

CIC said Wednesday that Mr. Lou visited Australia last week at the invitation of the chairman of Australia's Future Fund, the country's sovereign-wealth fund, and used the opportunity to meet local leaders and visit enterprises to study partnerships.

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