Rio/Chinalco sparks protectionism debate

“There is a degree of paranoia about Chinese investments,” said a source close to the deal.

“The government is doing its best to say it welcomes foreign investment. But I think it will need to clarify its approach to this in the next few decisions involving Chinese companies or State Owned Enterprises (SOE),” he added.

“The wash up of the transaction will mean that it will take time to work out the ramifications. I do think that there's some confusion in the market due to the general approach taken by the government on SOE investment,” said the source.

Antony Dapiran, partner at Freshfields Bruckhaus Deringer in Beijing disagrees. “It was a complex deal involving many different shareholders and stakeholders in a turbulent market. I don't think there were nationalist or protectionist concerns,” he said.

Dapiran does not believe that structural flaws hampered the deal, but rather the speed of action from Chinalco. “Chinese companies generally tend to be quite bureaucratic, especially state-owned enterprises,” he said, adding that privately owned companies are more nimble.

Chinalco is expected to receive a break fee of around $195 million. This is consistent with UK and Australian law for a controlling stake, which grants the buyer 1% of the deal's size. Although the Chinalco investment was not a traditional takeover, both parties agreed that the deal's size and scale meant that the 1% of $19.5 billion was suitable.

Despite the compensation, Dapiran believes that Chinese companies should re-think their approach to investing abroad, especially in the contentious natural resources sector. “An outright acquisition of a controlling stake is difficult. I would recommend asset deals, supply contracts and soft loans.

In March, Australia's Foreign Investment Review Board rejected a proposal by China Minmetals Corp. to buy OZ Minerals for $1.8 billion on the grounds that OZ Minerals' Prominent Hill mines are in a military zone.

Minmetals, which is backed by the Chinese government, ultimately won approval for a smaller, $1.2 billion purchase that excluded Prominent Hill and no longer was structured as a takeover. Instead, it was a purchase of assets that allows OZ Minerals to remain a listed company.

Other Chinese companies are taking softer stakes, too. Electrical appliance manufacturer, Haier took a 20% stake in Fisher & Paykel Appliances of New Zealand on May 27, highlighting the advantages of smaller acquisitions.

Haier will take two seats on Fisher & Paykel's board following the investment. The companies said they would also co-operate in product development, sourcing, manufacturing and marketing.