Australia weighs risks of saying "no" to Chinalco

Diplomatic ties might take a knock if Australia rejects China's $19.5 billion investment in miner Rio Tinto Ltd/Plc, but the biggest casualty could be a planned free trade deal and the economic growth it promises.

Australia's Foreign Investment Review Board (FIRB) is reviewing a raft of Chinese investments in Australia, including the Chinalco-Rio deal. Treasurer Wayne Swan will have the final say after weighing national interests.

Swan is under growing pressure from politicians and unions to oppose the deals due to concerns that China, a major customer for Australian resources, will be able to exert influence over prices and production of mineral exports from some mines.

Foreign policy analysts said they expected Swan would approve the deals, with some conditions, because an outright rejection would lead to a diplomatic backlash from China, Australia's top trading partner, and could stall negotiations for a free trade pact.

Two-way trade between Australia and China was worth A$68 billion ($46 billion) in 2008.

A joint China-Australia analysis said a free trade deal would boost Australia's gross domestic product (GDP) by A$18 billion over 10 years, and China's by A$64 billion over the same period.

It found a free trade deal would boost Australian sales to China of cereal grains, wool, minerals and metals, while China's manufacturing, textiles, clothing and toy industries would benefit from easier access to Australian markets.

Australia's Greens, a key independent Senator and a conservative politician have all spoken out against the China investment deals, warning that Australia must not sell prized national assets to companies controlled by a foreign government.

Conservative National Party Senator Barnaby Joyce has run television ads against them, saying China would never allow Australia to buy a mine in China, which might be difficult to dispute after China's rejection this week of a bid by Coca-Cola (KO.N) to buy juice maker Huiyuan Juice (1886.HK). [nHKG367771].

Swan will have to weigh up concerns about Chinese investment with the need to protect investment in mining projects and jobs in Australia, with unemployment set to rise as the economy slows, and with the government due to hold elections by late 2010.

The types of conditions Swan might impose could include insisting on a number of Australian directors on the board or other guarantees curbing Chinalco's influence on the company's decision making.

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