WA PREMIER SOOTHES CHINA, COURTS INVESTMENT

C O N F I D E N T I A L SECTION 01 OF 02 PERTH 000036 SIPDIS STATE FOR EAP/ANP, EAP/CM, AND EEB E.O. 12958: DECL: 8/5/2029 TAGS: PREL ECON EINV EMIN CH AS SUBJECT: WA PREMIER SOOTHES CHINA, COURTS INVESTMENT REF: (A) CANBERRA 537, (B) CANBERRA 631, (C) SHANGHAI 321, (D) BEIJING 2144, (E) 08 PERTH 42, (F) PERTH 19 PERTH 00000036 001.2 OF 002 CLASSIFIED BY: Kenneth Chern, Consul General, AmConGen Perth, State. REASON: 1.4 (b),(d) ¶1. (C) Summary: Western Australia (WA) State Premier Barnett used a previously-scheduled eight-day China visit to turn down the heat after the collapse of a bid by the state-owned Chinese Chinalco firm to boost its share in Anglo-Australian mining giant Rio Tinto and the subsequent arrest of Rio Tinto executive Stern Hu in Shanghai. Barnett told the Consul General it had been a tough visit, especially at first, with terms like "treachery" in the air, but that the mood had lightened as the trip progressed, and that business leaders like Chinalco's Xiong Weiping were ahead of Chinese government officials in moving beyond the controversy. Barnett raised the Hu case briefly with the Mayor of Shanghai but exerted himself throughout he visit to persuade the Chinese that WA welcomed their investments. He publicly criticized the Australian Commonwealth Government and the WA bureaucracy for failing to facilitate such investments. End Summary. POLITICAL TRIAGE ¶2. (C) On a July 18 - 26 visit to China originally set to build bridges, WA State Premier Colin Barnett was forced to do triage following the rejection of a bid by Chinalco to boost its share in Rio Tinto in favor of a Rio Tinto deal with BHP Billiton (ref A) and the subsequent arrest of Rio Tinto executive and Australian citizen Stern Hu by Chinese authorities for espionage (refs B and C). Barnett told the Consul General that it had been a tough visit. At the beginning, the Stern Hu case, although not brought up in most meetings, had been "the elephant in the room." The rhetoric in newspapers and broadcasts had been reminiscent of anti-U.S. rhetoric Barnett had heard while traveling in China when the U.S. accidentally had bombed the Chinese Embassy in Belgrade a decade ago. Terms like "treachery" and "back-stabbing" were floating around. People were bringing up Tibet, and the planned travel to Australia by Uighur Muslim activist Rebiya Kadeer. A PIVOTAL TRIP? ¶3. (C) Barnett noted to the CG that he had raised the Stern Hu case only once, by agreement with the Australian Commonwealth Government, in his meeting with Mayor Han Zheng of Shanghai (Ref D). He had cautioned the Mayor that if the case dragged on, it had a potential to cause a rift in bilateral relations. At his subsequent meetings, Barnett had stressed WA's welcome for Chinese investment and the need for good bilateral ties. He had coordinated the trip with Canberra, working closely with Ambassador to China Geoff Raby. Barnett told us, with some animation, that it was just by chance that he had gone to China at a pivotal time; he could not say whether his visit had made a difference, but he thought things might have gotten much worse between China and Australia if he had not made the trip. He was not trying to "play diplomat," but Chinese rhetoric had eased and the mood had lightened as the trip progressed. WARM WORDS FROM CHINALCO CHAIR ¶4. (C) Barnett told us that Chinalco Chairman Xiong Weiping had spoken with him about Rio Tinto's rejection of the deal with his firm, telling him, "We're disappointed, but we still have a large investment in Rio, and we're ready to move on." Barnett commented that this willingness to move on and work together was characteristic of the business leaders he had encountered - in contrast to political leaders who continued to display anger about the Chinalco rebuff. After meeting Barnett, Xiong proclaimed that with its abundant resources, well-run economy, stable environment and geographic advantages, Australia was "an ideal place for investment." For his part, Barnett publicly acknowledged Chinese displeasure with the Rio - BHP deal and said that while Australia-China relations were increasingly being defined by companies, governments also had a role: "I will be taking a far stronger hand in how the companies relate to their major customers and the relationships between them," to ensure "the transition from customer to investor to economic partner is done smoothly." He remarked that the prospective Chinalco - Rio deal had not been handled well by the Commonwealth government, which had avoided a decision on whether the deal met foreign investment guidelines until Rio had pulled out in favor of a BHP alliance. PERTH 00000036 002.2 OF 002 SINOSTEEL HICCUP ¶5. (SBU) Further complicating Barnett's trip was an unusual protest read by the Chinese Consulate General in Perth at an official pre-visit briefing, complaining about delays by the WA Environmental Protection Authority in approving iron-ore mining investments by state-owned Chinese company Sinosteel in WA's Mid-West region. Sinosteel, which has been caught up in environmental approvals for three years, wrote Barnett that delays were costing the firm A$4 million (US$3.2 million) a month, adding that the firm had invested A$140 million (US$112 million) in the Mid-West. After arriving in China, Barnett said Sinosteel's treatment had been disgraceful, adding that his office was intervening, not to limit the EPA's independence, but to negotiate better outcomes: "We should not be leaving our major trading partner alone trying to work its way through the maze of our environmental protection processes." WELCOME FOR CHINESE INVESTORS, SKILLED WORKERS ¶6. (SBU) Later in the trip, Barnett expressed support for China's involvement in the multi-billion-dollar Oakajee Port and Rail project to bring Mid-West iron ore to the coast for transport overseas - a sore point for China since WA awarded a contract for the project to Japanese-supported consortium in preference to a Chinese-backed consortium (ref E) - and signed a memorandum of understanding with Ansteel to conduct a feasibility study for an integrated iron and steel plant and rolling mill at the Oakajee industrial estate. He also invited China to take part in greenfields gas developments and irrigation farming in WA's Ord River region. Addressing critics of Chinese investment in WA, he told them to "get over it," to recognize how much further China will go in the next 30 years, to "deal with the reality of today," and to remember when thinking about the nature of Chinese state-owned businesses that the WA government itself owned electricity, water, and transport businesses, concluding: "It is Chinese investment and we should embrace it." After arriving home, Barnett said he would raise with the Commonwealth government the need to facilitate visas for skilled Chinese workers in anticipation of a construction boom spurred by Chinese investments, prompting criticism from labor unions, the WA ALP, and Immigration Minister Chris Evans. COMMENT ¶7. (C) Barnett's China visit spotlighted his ambition to exploit Chinese economic dynamism in the service of continued WA development, along the lines followed with Japan by legendary WA Premier Sir Charles Court in the 1970s. Like Sir Charles's exploits, Barnett's plans have a visionary quality which not all WA business leaders find compelling. One resources specialist commented to us that the notion of an Oakajee steel mill or a Chinese-driven Ord-Region agricultural renaissance had a "build-it-and-they-will-come" quality of doubtful economic viability. But such visions also reflect an increasingly strong welcome articulated by Barnett since becoming Premier for Chinese involvement in the WA economy (ref F). One journalist commented that Barnett has ramped up his pro-China rhetoric to its strongest level yet - something that will surely be controversial in the context of growing strains between Australia and China over issues ranging from investment and strategic planning to human rights. Barnett is betting big that for the long haul, his ambitious agenda with China, reflecting the independent spirit and economic vitality of WA, will pay off. End Comment. CHERN