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

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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