How Beijing kicked an own goal on aluminium

If "China Inc" were a person it would probably be Xiao Yaqing, the former president of Chinalco who is also an alternate member of the Communist Party's Central Committee.

Xiao twice mustered the resources of the Chinese state to buy into Rio Tinto and disrupt BHP Billiton's empire-building ambitions. For his efforts he was rewarded with a plum job as deputy secretary-general to the State Council.

But China Inc is less coherent, less sinister and far less effective than often imagined. Here is the background story of how Xiao kicked a home goal by persuading his superiors to accumulate "strategic" metals reserves.

In November, after commodities prices had collapsed, Xiao requested and received an urgent meeting with the Premier, Wen Jiabao, sources close to Chinalco say. Xiao told Wen that the whole aluminium industry was in crisis. Chinalco and every other big aluminum company was losing money, and hundreds of thousands of jobs would be lost if the state did not step in and soak up excess production.

Wen briefed the State Council, China's cabinet, and spoke in favour of a rescue plan. The State Council instructed the State Reserve Bureau to buy aluminium and other metals including copper, zinc, nickel, tin and titanium as part of a diversified metals industry rescue plan.

Steel was initially included in the list but later removed, as the metal takes up a lot of storage space and tends to rust.

Officials at the State Reserve Bureau and the institution in which it is housed, the National Development and Reform Commission, thought the Xiao Yaqing-Wen Jiabao policy was a mistake from the start. Nevertheless, the bureau duly bought 300,000 tonnes of aluminium in late December and another 290,000 tonnes in February.

Chalco, Chinalco's listed subsidiary, was the most obvious beneficiary. It accounts for a quarter of Chinese production but received nearly half of the stockpile orders.

Provincial governments followed the Reserve Bureau's lead, JP Morgan estimating they bought 880,000 tonnes of aluminium for stockpiling in the early months of this year. The corporate sector also became involved, competing to accumulate inventories as prices rose.

Together, they brought forward a large proportion of the country's expected total production this year, which is predicted to be about 12.5 million tonnes.

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