Why potash is not at the top of China's national insecurities  

John Garnaut at the SMH has some thoughts about China's reaction to BHP's takeover bid for Potash Corp - Why potash is not at the top of China's national insecurities.

In 2003 when the US invaded Iraq its net oil imports were 1 per cent of the country's gross domestic product. Last year, when China arrested Rio Tinto's Stern Hu for endangering China's national economic security, China's iron ore imports also added up to 1 per cent of China's GDP.

Resource insecurity can provide background encouragement for powerful nations to do stupid and counterproductive things. Invading Iraq destabilised the whole oil-producing region, while arresting Stern Hu exhausted China's political capital that might have been spent on resisting this year's move to quarterly benchmark pricing (Hu's subsequent conviction had only a tenuous link with the original framing of the case).

America's oil import dependency has crept up to 1.4 per cent of GDP. This year China's iron ore import dependency will hit 1.3 or 1.4 per cent of GDP if it keeps importing at something like the recent rate of US$6.5 billion ($6.9 billion) a month. ...

Yet anyone expecting China's nuclear submarines to stake out the Pilbara may be comforted by the fact that China's dependency on the Australian-Brazilian iron ore cartel looks insignificant when compared with its dependency on oil. China's oil imports stand at 2.4 per cent of GDP.

China's oil dependency explains why Chinese foreign policy has at times been hijacked - to use the words of Professor Zhu Feng at Peking University - by its oil companies. PetroChina and Sinopec have drawn China into risky investments that may one day cry out for military protection in Sudan, Angola, Nigeria and Iran. Similarly, the latest round of diplomatic hijinks between China and Japan at the Diaoyu (or Senkaku) Islands is closely connected with adjacent oilfields.

"CNOOC [China's offshore oil company] has played a major part in China's territorial disputes with south-east Asian states because of the Spratly Islands and with Japan over the East China Sea, in large part over the areas' untapped oil and gas reserves," write Linda Jakobson and Dean Knox of the Stockholm International Peace Institute, in their excellent paper, New Foreign Policy Actors in China.

And then there is potash.

In recent days there has been a flurry of excitement over Chinese media reports that Sinochem is or is not serious about competing with BHP Billiton's bid for Canada's Potash Corp. China takes its food security very seriously, potash is an ingredient in that, and the mere mention of "BHP " is enough to activate China's resource anxieties.

But no Chinese entity has the management or technical capacity to operate a huge potash mine in Canada, even if Canadian authorities would let them (which they won't). A blocking stake doesn't seem plausible, either, given that Canadian laws require a much larger proportion of shares than in Britain or Australia.

And when Sinochem looks over at Chinalco - the last company to take a hit for China's national interest - it sees a company laden with debt and a balance sheet dominated by shares in Rio Tinto valued well below the purchase price. Last year Chinalco posted a loss of 7.25 billion yuan, ranking it dead last of 108 centrally owned companies listed by the government's holding entity, SASAC.

Sinochem may feel obliged to go through the motions of protecting China's national interests and holding its hand out for tens of billions of dollars of virtually free state funding. It remains possible that Sinochem or another state-owned enterprise, such as CNOOC's fertiliser subsidiary Blue Chemical, would explore an elaborate joint venture arrangement with Potash Corp (or even BHP Billiton).

But China's leaders will have trouble mustering the motivation to approve any such scheme when they see that alongside iron ore (at 1.3 per cent of GDP) and oil (2.4 per cent) China's potash imports don't even round up to a decimal point.