CHINA/AUSTRALIA: BUSINESS GOES ON DESPITE

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 002418 SIPDIS E.O. 12958: DECL: 08/24/2029 TAGS: ENRG EINV ECON AS CH SUBJECT: CHINA/AUSTRALIA: BUSINESS GOES ON DESPITE POLITICAL TENSIONS REF: PERTH 00038 BEIJING 00002418 001.2 OF 002 Classified By: Acting Economic Minister Counselor Rob Forden. Reasons 1.4 (b/d). ¶1. (C) SUMMARY: Despite the recent political tensions between Australia and China over Rebiya Kadeer's visit to Australia and the arrest by Chinese security officials of Rio Tinto executive and Australian citizen Stern Hu, Australia remains committed to developing its economic ties with China, according to a Beijing-based Australian diplomat. Our contact said that the USD 41 billion liquefied natural gas (LNG) deal between ExxonMobil and PetroChina showed that "business will go on" despite tensions but expressed surprise at the absence of Chinese media coverage. He said the agreement with Fortescue Metals to supply iron ore at a 35 percent discount would not set a precedent for China's ongoing negotiations with Rio Tinto and BHP Billiton. Australia was negotiating with China for an "investment framework" but faced Chinese complaints that Australia opposed Chinese state-owned enterprises (SOEs) acquiring Australian firms. Australia was concerned by anti-Australian rhetoric in the Chinese press but did not expect calls for boycotts of Australian goods to have a significant impact. End Summary. Exxon-PetroChina LNG Agreement -------------- ¶2. (C) In an August 21 meeting with EconOffs, Australian Embassy Economic Counselor Trevor Holloway (protect) said the USD 41 billion LNG deal between ExxonMobil and PetroChina was a sign that "business will go on" in spite of political tensions between Australia and China. At the August 18 Beijing signing ceremony for the agreement, the Australian side was surprised at the complete absence of Chinese media coverage. Holloway speculated PetroChina wanted to downplay the signing due to the fact that the company had not yet received the National Development and Reform Commission (NDRC),s approval for exceeding PetroChina,s assigned quota for LNG imports, an issue that was not expected to derail the agreement. The company might also have wanted to avoid publicity during a period of strained relations over the arrest of Rio Tinto employees and Rebiya Kadeer,s visit to Australia. Iron Ore Negotiations -------------- ¶3. (C) Holloway downplayed the significance of China,s agreement with Fortescue Metals to supply iron ore at a 35 percent discount - much less than the 45 percent cut that China had been seeking and only slightly higher than the 33 percent offered to steel mills in Japan, Taiwan and South Korea. He said the deal would not set a precedent for China,s ongoing negotiations with global giants Rio Tinto and BHP Billiton. The Fortescue agreement, which included up to USD 6 billion in Chinese financing for Fortescue, only extended six months, and the 20 million ton supply was a small fraction of China,s total consumption needs. He noted that there were rumors that the Chinese Iron and Steel Association (CISA) might lose the lead role in the negotiations with Rio and BHP and would be replaced by Bao Steel, China,s traditional lead negotiator. This could help break the deadlock, he said, as Bao Steel officials were savvier and understood the market better than the bureaucrats at CISA. Negotiating for an Investment Framework -------------- ¶4. (C) Holloway said Australia was in the process of negotiating with the Chinese a "comprehensive investment framework" that would fall under the Australia-China Free Trade Agreement (FTA). The investment framework would establish standards to improve transparency and allow Australian firms the same access to the Chinese market that Chinese firms enjoy in Australia. However, he said Chinese officials regularly complained that the Australian government was opposed to Chinese SOEs acquiring Australian firms, particularly after Chinalco's failed bid to buy a larger share in Rio Tinto. Holloway said Chinese officials were skeptical of Australia's argument that Rio Tinto, not the Australian government, had decided to cancel the deal. He BEIJING 00002418 002.2 OF 002 noted that Australia had approved nearly every M&A deal between Chinese and Australian firms, deals worth more than USD 34 billion. Boycott of Australian Goods? -------------- ¶5. (C) Commenting on the state-run Chinese media's steady stream of attacks on Australia for allowing Rebiya Kadeer's visit to Australia, Holloway said Australia was somewhat concerned about nationalist rhetoric encouraging Chinese to boycott Australian goods and stop traveling to Australia. However, he downplayed the impact of this anti-Australian propaganda on Chinese imports of Australian consumer goods, noting that natural resources make up over 80 percent of Australia's exports to China. HUNTSMAN