From Dan Denning in St.Kilda:

--It turns out that November 3rd—the day Chinese Vice Foreign Minister Cui Tiankai said, “The artificial setting of a numerical target cannot but remind us of the days of planned economies.”

--He probably said that without any sense of irony, since China sets a GDP target roughly commensurate with the need to keep employment growing in China and avoid social unrest. But meanwhile, the numerical target whereby China fixes its currency to the value of the U.S. dollar has unleashed a rash of undesirable consequences in China’s economy which we like to call “higher prices.”

--The Journal says that, “Accelerating food prices—the biggest single component of China's inflation, now running well above the government's target of 3% for the year—are hurting China's neediest households, and their plight could get worse as the country heads into what is forecast to be an unusually cold winter that threatens to disrupt transport and bring new fuel shortages.”

--At last week’s Gold Symposium in Sydney we suggested that higher food and fuel prices—the things that hit ordinary people every day—would force the world to decouple from the dollar standard more quickly than it had planned to do. This dislocation in markets would produce volatility, bigger capital flows, are larger asset price swings as investors try to buy assets which aren’t losing value in one currency or another.

--Which brings us to yesterday’s action in Mt. Gibson. The Western Australian Business News is reporting that, “Chinese corporate shareholders in Mt Gibson Iron have seized board control of the local iron ore producer at a sensational annual meeting in Perth today.” The article continues:

Steel group Shougang and Hong Kong-listed APAC Resources, which indirectly speak for around 40 per cent of the company's shares and are its biggest iron ore customers, today seized a majority of positions on the seven member board.

The two Chinese groups, which were declared associated parties by the Takeovers Panel in relation to another matter involving Mt Gibson in 2008, today used their combined votes, and those of Shougang-associate Fushan Energy, to prevent the re-election of independent director Peter Knowles.

--And now it gets interesting. There are $2.6 trillion reasons why China Inc. would seek hard assets instead of owning U.S. Treasury bonds. But the key issue here is whether the customers of a company—Shougang and APAC Resources—are the best people to maximise profitability of that company on behalf of Australian shareholders. Customers typically seek the lowest prices possible—which is exactly what you’d expect customers do.

--Herein lies the dilemma of having open and free capital markets where your assets are for sale to anyone with cash. Will those assets be run to maximise shareholder value? Or will they be run, in this case, to guarantee price certainty and iron ore supply to Chinese customers? If the answer to the second question is no, will Australia get the most benefit from its mineral reserves?

--Our thoughtless answer is that the projects which the Chinese are allowed to invest in or takeover might not find capital from Aussie investors anyway, so there is a net benefit in jobs to Australia (if not profits to Mt. Gibson’s Aussie shareholders). The government is going to block the takeover of all the mining sectors crown jewels (Oxiana’s assets in SA, Chinalco’s bid for Rio). The lower quality iron ore deposits (lower quality ore and smaller deposits) are perfect for the Chinese and otherwise might not get developed at all. Capital should be welcomed.