SUBSCRIBE:

Wednesday, August 19, 2009

China's commodity appetite

China signed a huge $41 billion liquefied gas deal with Australia:

Tension, what tension?

Australia and China have just signed their largest ever trade deal -- a 20-year agreement worth $41.1 billion for Petrochina to import liquefied natural gas from Exxon Mobil's share of the Gorgon gas field down under.

Cue warm words from Australia's energy minister about the health of the trade and investment relationship between the two countries.

The reality is this deal merely papers over the cracks.

The bare bones of the contract between Exxon and Petrochina were hammered out earlier this year, before a marked rise in bad feeling between Australia and China emerged.

So it predates Chinese anger over Chinalco's failed bid to take a major stake in Rio Tinto, for example, and Australian jitters over the arrest of Rio employees in China this summer -- including Stern Hu, an Australian citizen.

And because this deal doesn't involve any actual Chinese ownership of Australian assets or companies, it's palatable for the Canberra government.

Long-term contracts involving Australian resource supplies to China are fine. A much sterner test of the two countries' relationship will come when Australia's foreign investment authorities settle down to consider Yanzhou Coal's takeover bid for coal miner Felix Resources.

A rejection or moderation of that deal would reveal how delicate Sino-Australian relations remain. Opposition leader Malcolm Turnbull yesterday said they were at their lowest ebb for many years.

Me. Turnbull, of course, has political motives. He knows that the reputation of Australian prime minister Kevin Rudd -- a fluent Mandarin speaker -- rests to some extent on his ability to handle relations with China.

Mr. Rudd, an old China hand, will in turn know business with China in future won't be as smooth as this gas deal makes it seem.