China Feeling a Chill From Down Under

By ANDREW PEAPLE It is Australia's turn to play tough with foreign investment. The government has a backlog of bids from Chinese companies looking to snap up assets in its resource sector, chief among them Chinalco's $19.5 billion proposal to raise its effective stake in Rio Tinto to 18%. Sentiment toward the deals is cooling, despite the financial straits faced by some of the targets. On Friday, Australia's Treasurer Wayne Swan blocked China Minmetals' takeover bid for OZ Minerals, a company that soon has to pay back 1.1 billion Australian dollars (US$772.5 million) of debt. The deal could be renegotiated: But Minmetals won't get its hands on OZ's key mine -- on land used for weapons testing. Foreign Minister Steve Smith also Friday declared Chinalco would be treated as government-controlled. That is important: A key principle guiding Australia's consideration of foreign investment is how independent the investing company is from a foreign government. The Chinalco deal might still go through. The OZ Minerals deal rejection could be part of an elaborate give-and-take play by Canberra, designed to show China it can't have everything its own way. If, instead, Australia does carry on blocking Chinese investments, some will feel Beijing is getting what it deserves after last week's ruling against Coca-Cola's bid for juice maker China Huiyuan. But that misses the bigger concern that blockages to capital flows are emerging just when the world could most do without them. On that front, Australia is key when it comes to Asia-Pacific. Dealogic says that 58% of the region's M&A flows were into Australia in the first quarter. Write to Andrew Peaple at andrew.peaple@dowjones.com