THE FAR EAST

China is a completely different world and the way of doing business there clashes with traditional Western practices.  If the West's great contribution to humanity was the rule of law then the East's great contribution is bureaucracy.  This method for allocating capital does have some advantages but that hardly means it is done morally or efficiently.

 China is not communist and I saw more entrepreneurship there than in America; particularly since the emergence of the Goldman Sachs Web.  As Bill Gates has observed, "It is like capitalism on steroids.  It is a little scary."

STERN HU ARREST

Bloomberg reports that Rio Tinto executive Stern Hu who had a 'sharp focus' on 2009 iron-ore negotiations was arrested and detained in Shanghai on charges of obtaining classified information or 'state secrets' about steel mills. Both Australian Foreign Minister Stephen Smith and Australian Prime Minister Kevin Rudd are upset with China's behavior.

A PRIZE FLOWER

Rio Tinto is a highly desired asset.  With a recent announcement of $58B in gross revenue, $10.3B in underlying earnings, a monstrous $20.7B of cash flow from operations, a 50% decline in net income to $3.7B and a $45B market capitalization Rio Tinto is a world leader in finding, mining, and processing mineral resources such as gold, silver, platinum, copper, zinc and aluminum.

Rio Tinto rejected a BHP Billiton offer and a later hostile takeover valuing the company at $147B.  Chinalco, a Chinese government owned resource group, purchased 12% of Rio Tinto's London shares to complicate the hostile takeover.  Chinalco currently owns 9% of Rio Tinto.

As Javier Espinoza of Forbes.com observes, Chinalco has a deal pending approval from American, Chinese and Australian regulators where the proposed investment structure involves $12.3 billion for the purchase of ownership interests of Rio Tinto assets in its iron ore, copper, and aluminium operations, plus $7.2 billion for convertible bonds.

The transaction would bring Chinalco's ownership of the company to approximately 18.5%.

Australia is a major exporter of iron ore and China has a voracious appetite.  The Chinese are on a hunting trip for natural resources and Rio Tinto is an exceptional trophy asset.

CHINESE CORRUPTION

Like the American bailouts the $586B Chinese stimulus package is ripe pickings for the corrupt.  As Chinese business leaders have gotten rich their allegiance to the central government has weakened.  Some business leaders have even disobeyed the central government's orders outright.  The central government is most likely attempting to centralize power over key industries.  This is similar to how Russia is dealing with their oligarchs.

Back when the United States used to define a dollar they had a low tolerance for corruption regarding financial matters.  Under Section 19 of the Coinage Act of 1792 provided, “That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to the directions of this act, through the default or with the connivance of any of the officers or persons who shall be employed at the said mint, for the purpose of profit or gain, or otherwise with a fraudulent intent, and if any of the said officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined, or any of the coins which shall be struck or coined at the said mint, every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.”

Like the United States used to, China deals harshly with those involved in corruption who are not high enough on the bureaucracy ladder.  For example, the New York Times reported that Zheng Xiaoyu, former head of the State Food and Drug Administration in China, admitted to taking bribes to approve untested medicine and he was swiftly executed.

There has been civil unrest in China.  Significant unrest is happening opposite of Beijing in Xinjiang.  Since 5 July 2009 shopkeepers have been unable to open their shops because the Grand Bazaar has been occupied by paramilitary troops.  With 20,000 troops deployed in the area, over 192 people have died and more than 1,400 have been arrested and threatened with the death penalty.  On 16 July 2009 most Chinese paramilitary troops withdrew.

THE GOLDMAN SACHS WEB

Goldman Sachs' deep capture of the government of America, Washington DC and the various regulatory agencies has led to some interesting circumstances.  Imagine what would happen to the country of America if current and former Goldman Sachs executives, which received over $10B of government bailout funds yet reported $3.4B in earnings due to generally accepted fair value lying standards and because of their 'unmatched risk taking and management skills', received the same treatment?

It would be most unfortunate for Goldman Sachs' earnings if some Scout Sniper, like Mark Wahlberg in the highly rated fictional movie The Shooter, felt their patriotism had been abused because they and their combat buddies were expendable resources not for defending freedom but for the benefit of derivative traders and therefore decided to rectify the situation.  They may want a mail forwarding service and then learn how to vanish.

CHINESE LEADERSHIP MOTIVATION

The central government's leadership knows they hold a bunch of worthless FRN$s.  They know real assets are what matter.  In China over the past 25 years over 300M people have been lifted out of poverty.  They know regime change in China happens only one way and therefore they must quell any dissent.

To consolidate political power they are pressuring domestic businessmen, cracking down on 'corruption' and requiring greater evidence of allegiance while smashing domestic unrest with a bloodied iron hand.  Some of those the central government deems 'corrupt' are executed.

As the financial crisis continues and the Chinese continue losing millions of jobs it will be even more difficult for the central government to maintain their power.  Therefore, the Chinese are on a hunting trip for real assets so they can maintain and increase the standard of living of the average Chinese which will preserve the current political structure.

CONCLUSION

There has been some bad press to China for kidnapping Stern Hu.  It will likely have negligible impact.  China is probably still perturbed from the failed Unocal acquisition.  Now they are playing corporate hardball and acquiring real assets.

Rio Tinto is only one company of many that the Chinese government wants to own.  As one of the leading mineral resource producers it is a prized trophy.  

China is attempting to assert their power beyond their borders and international companies will take notice.  The Chinese central bank acquired over 450 tons of gold and did not report their holdings.  The Chinese know how to buy gold and why, to avoid the FRN$ bubble.

On the other hand, Goldman Sachs keeps stealing things, not doing anything productive for society, looting the American people, hijacking the United States federal government, making tons of profits and the victims keep getting angrier.  There is one hardball game that will be very interesting to watch:  Goldman Sachs v. China.

Disclosure:  Long physical gold, silver and platinum with no interest in the problematic GLD or SLV ETFs, Goldman Sachs or Rio Tinto.