Policy Research Group - Strategic Insight: Sino Australian ties hit a road block Sino Australian ties hit a road block ================================================================================ editor on 17 February, 2010 07:35:00 Two developments in 2009 in Australia underlined its relationship with China. These are two different aspects of ties – political & economic. A scheduled visit by Vice Minister He Yafei was cancelled by the Chinese government because of Canberra's decision to grant a visa to exiled Uighur leader Rebiya Kadeer. However, the announcement of a 50 billion Australian dollar ($41 billion) liquefied natural gas deal reaffirmed China's economic importance to Australia and China's insatiable need for Australian resources and energy. Beijing is unhappy with what it sees as a series of calculated Australian attacks on Chinese interests. First Canberra released defense white paper (in May 2009) that questioned the intent behind China's rapid naval build-up and committed Australia to strengthening its own maritime capabilities. The very next month, June 2009, saw the collapse of state-owned Chinalco's plan to acquire a major stake in Rio Tinto—even though it was eventually blocked not by the Australian government but by legitimate shareholder disquiet. The last straw seems to have been Canberra's decision in July to issue a visa to Kadeer. But fundamental problem probably lies somewhere else. China depends on Australia for imports of iron ore, the price negotiations for which are increasingly acrimonious. China's political leaders see guaranteed access to low-cost raw materials as vital to sustaining growth. That makes minerals and energy a vital strategic interest. Canberra is nervous about Chinese corporations seeking to buy into Australian resources companies to secure future supplies of uranium, iron ore, bauxite, and other minerals. Rio Tinto's share price fell 3% when the company was accused in the Chinese media of commercial espionage. Many in Australia's business community were nervous in 2009, in some cases cancelling plans to travel to China following the arrest of Stern Hu, a Rio Tinto executive. Last year another major Australian mining company, Fortescue Metals Group, agreed to undercut Rio Tinto's price offer for iron ore in return for $6 billion of cheap Chinese infrastructure funding. The aggressive China Iron & Steel Association lost no time in announcing it would use the price agreed with Fortescue as leverage in negotiations with the world's three largest iron ore producers. The Rudd government was particularly concerned in February 2008, when the Chinese government-backed Chinalco Corp. bought a 9 percent stake in Australian mining giant Rio Tinto. The acquisition was part of a Chinese strategy of blocking a bid by resources giant BHP Billiton – nicknamed "the big Australian" – to take over Rio Tinto, its rival iron ore supplier. Chinese buyers fear that if the firms merged, their resulting enhanced bargaining power would enable them to further raise the price of iron ore. The $14 billion Chinalco raid prompted Rudd to declare that he would defend the "national interest" in reviewing proposed investments by Chinese firms. China's assertive economic policy, Australia’s military plans and attempts to control free speech even outside its own borders reflect in part China's growing power and preparedness to deploy it where Beijing feels its interests are being jeopardized—irrespective of international norms or the interests of others. In 2007 China overtook Japan as Australia's largest trading partner. Australia has been selling raw materials to China as fast as it can dig them up and load them onto ships, generating jobs and revenue. More recently, demand from China has cushioned Australia from the worst effects of the global economic downturn. Australians became rich, in large part because of the Chinese economic juggernaut, which has sent property prices soaring, propelled the stock exchange to new heights, and plunged unemployment to its lowest level in more than 30 years. No surprise then that Aussies developed soft corner for China. In fact in 2004, former foreign minister Alexander Downer seemed to question whether Australia's alliance obligations would apply in the event of a U.S.-China conflict over Taiwan. There was palpable concern in Washington. Then there was advent in Australia of a Mandarin-speaking prime minister Kevin Rudd in 2007. However in Rio Tinto case Chinese officials brushed off requests for consular access and dismissed Rudd's public statements of concern as "noise." Lowy Institute polling in 2008 showed that while Australians continue to acknowledge China's importance to the Australian economy, they are increasingly aware of, and concerned about, the darker side of China's rise. Nearly 90 percent of Australians believed that China will become the leading power in Asia; almost 60 percent of these people expressed discomfort with the prospect. Just over half of all Australians agreed that Australia should join with other countries to limit China's influence. In Australia's history, political, strategic, and economic interests have been aligned. Initially Britain was both security provider and major economic partner. For several decades Japan--democratic, developed, and a U.S. ally--took over. As Australia's economy becomes more integrated with China's, relations with Beijing are set to become much more sensitive and politically contested. This is likely to strengthen Australia's alliance with the United States and with its other most important regional partners -- Japan, India, and Indonesia. Canberra's assessments of Beijing's rapid military modernization program--particularly its acquisition of blue-water naval capabilities--are reconverging with Washington's. Australia signed a historic joint security declaration with Japan in 2007 and is moving to strengthen its strategic ties with India and Indonesia. The Rudd government has committed to acquiring cruise missiles, a larger, more capable submarine fleet, and larger surface ships. China has an insatiable demand for strategic raw materials that Australia has in abundance--iron ore, uranium, coal, and gas--giving Australia leverage, too. A new report from one of Australia's most respected policy institutes criticizes China's aid program to the Pacific island states. The Lowy Institute's report says China's aid program in the South Pacific lacks long-term goals and is too secretive. In recent years, Beijing sharply increased the amount of financial support it gives to island nations. In 2008, China gave $200 million, making it the second largest contributor of aid in the region after Australia. Australia's Lowy Institute, a foreign policy research center, thinks that China's system of aid is so secretive and inconsistent that it makes long-term planning difficult for recipients. Analysts conclude that China's lack of transparency makes it hard for other donors to know what projects are being done, leading to duplicated efforts. There has been no official reaction from Beijing to the report. The institute's Fergus Hansen says Beijing's unilateral approach to distributing aid in the South Pacific causes problems. "If you look at China's aid by contrast, it's very sporadic and it tends to focus on one-off projects," said Hansen. "For example if you look at aid to Micronesia, in 2008 its pledge was worth just 28 percent of the amount it had promised the previous years, and it really means that for these governments it's very hard to rely on Chinese aid or to look at long-term development strategies." By contrast, Hansen says that other international donors, including Australia and the United States, focus on long-term objectives, such as improving education and health services. The Lowy Institute also reports that China pays Pacific island governments vast amounts of money not to recognize Taiwan. The report also notes concerns about China's support for Fiji's military strongman, Commodore Frank Bainimarama, who seized power in a coup in 2006. Hansen thinks Beijing's support for Fiji's military government is a "miscalculation" because of Commodore Bainimarama's lack of domestic support in Fiji and what analysts see as his precarious grip on power.