The debate over the proposed increase in Chinalco’s stake in Rio Tinto has once again highlighted concerns about the role of Chinese state-owned enterprises (SOEs) in the Australian resources sector.

China’s growing interest in this sector is not fundamentally different from Japanese interest in previous decades. While the commercial strategies of China’s (SOEs) may differ somewhat, the role of the state in motivating these strategies is remarkably similar.

In the 1960s, the Japanese government suppressed private consumption as part of its post-war industrialisation strategy, largely through state control over financial intermediation, driven by a mercantilist view of industry and trade policy.

While Japan’s corporate and financial sector may have been notionally private, Japanese firms were subject to what was euphemistically called ‘administrative guidance’ by the Japanese state

The chronic underperformance of the Japanese economy in recent decades has left this development model discredited. But it has not stopped China pursuing a similar development strategy. The flaws in this strategy have been ably explored by my CIS colleague John Lee in his book, Will China Fail?

While this strategy failed Japan and will probably fail China, it has nonetheless been of benefit to capital-hungry Australia.

Investment in Australia has always exceeded domestic saving. Access to foreign capital has thus been critical to Australia’s economic development. Domestic financial repression and high levels of saving in East Asia have provided Australia with access to cheaper foreign capital.

While the role of the state in subsidising the Chinese corporate sector is often raised as an objection to Chinese investment, this is a cost China inflicts on itself and a benefit it confers on the recipients of Chinese capital.

Chinese interest in the Australian resources sector can be seen as pro-competitive in two ways.

It increases competition in the market for ownership and control of equity capital.

China’s interest is also pro-competitive in terms of the markets for the relevant commodities. China’s interest in the Australian resources sector is partly motivated by its interest in increased global supply, as well as the security of that supply.

This interest is consistent with the Australian interest in seeing its resource endowment developed to its fullest extent.

Instead of focusing on the potential for increased Australian mining output, employment and export volumes, the critics of an increased Chinalco stake in Rio have been preoccupied with what they believe to be the negative implications for Australian export prices.

This is perverse, because in recent years, Australian policymakers have been concerned that infrastructure and other capacity constraints were reducing Australian mining output and export volumes. In this context, no one was suggesting that reduced supply of Australian commodities to global markets was a positive for Australia.

While Australia certainly benefited from an improved terms of trade due to higher global commodity prices, this reflected global supply and demand conditions, not just capacity constraints in Australia.

The entire global supply chain for commodities was capacity-constrained, at least until the recent sharp falls in commodity demand linked to the global economic downturn.

Because these gains in the terms of trade were driven by global supply and demand conditions, they did not represent market power on the part of Australian producers that could exploited by further restricting output.

Australia remains a price-taker in commodity markets and the most likely implication of restricting Australian output would be to increase market share for foreign producers.

In approving the proposed merger between BHP Billiton and Rio, the Australian Competition and Consumer Commission rejected the notion that the merger would result in a substantial lessening of competition in the relevant commodity markets.

The ACCC concluded that ‘the merged firm would be unlikely to limit its supply of iron ore given the uncertainty it would face in relation to the profitability of this strategy and the risk that limiting supply would encourage expansions by existing and new suppliers as well sponsorship of alternative suppliers by steel makers.’

If a merged BHP Billiton-Rio could not exercise significant market power, then it is hard to see how Chinese interest in the Australian resources sector has implications for the pricing of Australian mining output independent of global supply and demand conditions.

As the ACCC’s scrutiny of the proposed BHP Billiton-Rio merger implies, market power is usually considered to be a bad thing. Those who fault Chinese interest in Australian resources on the grounds of undermining pricing power are effectively arguing that Australian foreign investment policy should be used to promote the cartelisation of commodity markets for the purposes of increased rent extraction.

OPEC has ably demonstrated why beggar-thy-neighbour attempts at cornering commodity markets for the purposes of increased rent extraction are unlikely to succeed.

Chinese interests might sell Australian mining output to related entities at below market prices, but this would simply be a transfer of profits between these entities. It is more likely that Chinese interests see equity participation in Australian mining as providing a hedge against rising commodity prices, rather than an opportunity for strategic pricing behaviour.

While Chinese foreign investment may well be guided by mercantilist thinking, it is Australia that stands to be benefit from the availability of Chinese capital, especially in the context of a global credit crunch.

Dr Stephen Kirchner is a Research Fellow at The Centre for Independent Studies and the author of Capital Xenophobia II.