Communist Capitalism or Capitalist Communism?

As irony goes, this is pretty good. Communist China has been funding the US budget deficit for years, but now they appear to be moving up a gear and are embracing the full power of free markets to expand their empire. This is all happening in a way that the capitalist world want to argue with, but can't.

Deflated stock prices around the globe, have left so-called "strategic" national assets up for sale to the few remaining cash rich buyers out there, of which Communist China is one of the biggest. This week Australia has been centre-stage for this worldwide protectionism debate, as Chinalco - China's state-owned aluminium company - announced it would inject $19.5billion into Anglo-Australian mining giant Rio Tinto, which will increase their stake from 9%, and give them access to an even more significant share of the firm's most valuable Australian mines. Furthermore, another Chinese state owned firm, China Minmetals, announced it would pay $1.7bn in cash for Oz Minerals Ltd. the worlds second largest zinc miner.

The economics behind both deals is clear to see - and sufficiently compelling for the Chinese that there are likely more to come. Both Rio Tinto and Oz Minerals have been crushed by the global recession's effect on demand for what they produce. Both have seen their value plunge as a result, and are Lazarus-like stumbling along under substantial debt burdens. In Rio Tinto's case, not so chronically fatigued as Oz Minerals, they have debts of about $20bn coming due in the next 24 months (roughly the amount invested by Chinalco), that cannot be refinanced on attractive terms through international bond markets. Rio Tinto's stock price peaked at $552 last April, and has precipitously fallen reaching an annual low of $55. Similarly, China Minmetals will pay a 50% premium on Oz Mineral's significantly depreciated share price, which still may represent a complete bargain. Clearly for China, who's voracious appetite for metals and minerals drove commodity prices sky high until last year's bust, the timing is now right to start picking up these sorts of assets.

On the flipside, the Australian government is understandably uneasy about it's core "national" assets being sold off in such a fashion. Not least, because of a potential loss of control over decisions relating to these domestic based assets, but moreover because they are being sold to a country who's ideology is so different from their own. However, their hands are probably tied. Rio Tinto has told the government that failure to approve the contentious Chinalco rescue package could cost close to 5,000 Australian jobs. At its core, the performance of the Australian economy has always been heavily dependent on economic growth in the US, but more recently China has become much more significant. In particular, mining exports to China have led Australia to levels of prosperity over the past 15 years not previously seen. In terms of GDP, this sector has doubled its percentage contribution since 1993. Kevin Rudd, the prime minister, is a fluent Mandarin speaker who had made it clear that solid ties to Beijing are among his top priorities. With the mining industry in dire straits as the global recession deepens, it's unlikely that the government will go out of its way to insult one of the few flush folks left at the casino.

On the same tack, Australia is one of the most laissez-faire capitalist economies in the world, and is ranked 3rd in the somewhat subjective "Indices of Economic Freedom". These indices recognise "...an absolute right of property ownership, fully realized freedoms of movement for labour, capital, and goods, and an absolute absence or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself". To prevent free capital movements, and to block an international acquisition of the stake in Rio Tinto, would fly in the face of this ideology, but it is becoming more tempting to sacrifice the ideology for self interest. Likewise the Communist Chinese government is happily using capitalism against itself in its own best interest, and is likely to do this in many other parts of the world while asset prices on international markets are so historically cheap.

In great contrast to the current Chinese moves, for years many would be Democratic countries have at times sacrificed their ideologies in the pursuit of self-interest; regularly using subversive, anti-democratic, anti-laissez faire policy (i.e. what we would call Communist policy) to push their version of how the world order should be. A good commodities-based case in point is that of Chile in the 1970s, when despite US covert operations to the contrary, Salvador Allende became the first and still the only democratically elected Marxist leader anywhere in the world. He came to power after a particularly poor economic run for Chile during the 1960s, when there was a growing sense that international ownership of the then valuable mining resources that Chile had on its soil, was draining the country of it's chance to see domestic income grow.

When Allende took office in 1970, his immediate economic policy involved the nationalization of many key domestic companies, notably the highly valuable copper mines that had been stealthily acquired by various US corporations. The potential for nationalizations was a significant reason behind US opposition to Allende's reformist socialist government. The most prominent US corporations in Chile prior to Allende's presidency were the Anaconda and Kennecott Copper companies, and ITT (International Telephone and Telegraph). Documents released by the CIA in 2000 confirmed that before the elections of 1970, ITT gave $700,000 to Allende's conservative opponent, Jorge Alessandri, with help from the CIA and the US government on how to channel the money safely. Similarly the Anaconda and Kennecott companies had channelled funds back to the CIA pushing for further covert operations to undermine Allende's chances of winning the 1970 election. Allende won the 1970s election, despite the best efforts of these companies and the US government.

While the US government hostility to the Allende government is unquestioned, it's role in Augusto Pinochet's military coup that overthrew and killed Allende in 1973 remains a highly controversial matter. What is clear is that the CIA spent $8mm between 1970 and the coup in September 1973, and covert US activity was present in almost every major election in Chile in the decade between 1963 and 1973. Categorically, the US was more protecting its own interests in Chile than pursuing its professed democratic liberalism. Henry Kissinger, who was US National Security Advisor in 1973, was quoted as saying after the coup: "I don't see why we need to stand by and watch a country go Communist due to the irresponsibility of its own people. The issues are much too important for the Chilean voters to be left to decide for themselves." Similarly, Gerald Ford, spoke of the military coup, saying that: "I think this is in the best interest of the people in Chile, and certainly, in our best interest." Thankfully for the US, Pinochet got US economic interests in Chile back on track, but in doing so ordered many of the purges that saw more than 3000 supporters of the Allende regime killed, thousands more tortured, and many thousand more forced into exile. Sounds a bit like what happens in parts of Communist China, only more dramatic.

As the world is more and more being forced to turn to the Chinese for access to capital, there is an interesting new paradigm being created. The Chinese are using Capitalism against the arch capitalists, embracing free markets in a way that the G7 world has encouraged for many years. The problems of loss of control of domestic interests for the likes of Australia will play out over the coming years, but were always part of the downside of having fully international capital markets. Comparing the Chinese invasion of Australia in 2009 with Chile in the 1970s, where self-interests were being protected abroad in the most un-democratic and anti-Capitalist of ways, is extremely ironic. It seems universally true that ideology goes out the window when self-interest is at stake.

As Ralph Waldo Emerson said, "Every man alone is sincere. At the entrance of a second person, hypocrisy begins."