BHP Billiton’s recent $140 billion takeover bid for rival resource giant Rio Tinto has revealed the still immature nature and direction of the rapidly growing Chinese economy.

BHP Billiton, alongside Rio Tinto and the Brazilian CVRD supply about 70% of the iron ore used by China’s massive and rapidly growing steel industry. China’s large steel industry has played a key role in its recent economic growth, providing some of the much needed raw materials to fuel its construction and manufacturing boom.

The possibility of a merger between BHP and Rio has alarmed China’s steel makers who are scared that the market share of such a combination would lead to sharp price increases.

China’s steel makers and the Chinese economy as a whole are particularly exposed to the market power that could be wielded by a BHP-RIO combination. Firstly, China is heavily reliant on imports for much of its mineral resources. Secondly, China’s firms, including it’s steel makers are in general at a lower level of development and concentration than the massive firms they deal with in the international arena.

China’s economic growth over the last thirty years has been massive, bringing its total productive capacity up to the levels of the advanced imperialist countries. But while china’s total output is now similar in absolute terms to Germany or Britain, the structure of its economy is not.

The old industrialised economies of the west have, over the past hundred years or more, undergone a relentless process of concentration and centralisation of their capital. This process was clearly identified at the start of the twentieth century by socialists such as Nickholai Bukharin, Rudolf Hilferding and Vladimir Lenin.

These writers saw that the pressure of competition was forcing rival firms into larger and larger combinations that came to dominate whole sectors of national economies. As these firms grew they came to play a decisive role in national politics and at the same time became increasingly reliant on their home state in providing the best possible conditions for engaging in international competition with rival firms. This process of economic concentration was ultimately associated with international rivalry between states for protected access to markets and raw materials for their rival firms.

In the industrialised countries of the west, this process has led to the development of massive multi-nationals such as BHP. These massive firms tend to dominate particular areas of activity (such as iron ore extraction) in a process of horizontal integration. They also tend to combine a variety of complementary tasks and steps in the production process such as research and development, production, and marketing in a process of vertical integration. China has recently begun to develop some very large firms, particularly in the form of state run or state partnership enterprises. But in general the level of horizontal and vertical integration amongst Chinese firms is not the same as larger and older western corporations.

In the case of steel production, China’s massive steel production capacity is shared amongst several firms that are large but still on a completely different scale to BHP. None of them are capable of bargaining effectively on their own with BHP or Rio. The talk of a possible BHP Rio merger is increasing already existing pressure on Chinese firms to emulate their older western rivals and concentrate into larger combinations.

A similar process occurred during the early twentieth century, when newer economic powers such as the US, Japan and Russia encouraged mergers through state policy in an attempt to emulate the economic success of German industrial consolidation Currently there is speculation of a rival Chinese government backed bid for Rio Tinto.

The president of China’s largest steel maker, Baosteel has claimed “We are studying countermeasures and discussing how to purchase (Rio)”. Such a move would require a higher level of cooperation amongst china’s steel makers and most likely involve significant government backing and funding.

Such moves are symptoms of a general tendency towards greater integration and maturity in the Chinese economy with profound consequences.

Currently the Chinese economy as a whole is characterized by a very low level of vertical integration. Whilst China is a manufacturing powerhouse, it plays little role in the research and development, marketing and sales of the goods it produces. It is also reliant on imports for much of its raw materials needs.

This specialisation in the manufacturing stage of production has a significant impact on China’s financial policy. In order to keep it’s manufactured goods competitive in the world market, it has kept it’s currency artificially low through selling massive amounts of Yuan and buying US treasury bonds. This has had a flow on effect of stabilizing the US economy, allowing it to run a large deficit without having to raise interest rates. Effectively China is providing large amounts of cheap credit to the US economy.

However, moves towards greater levels of vertical integration in the Chinese economy imply changes to the current financial policy. As in the case of a possible government backed bid for Rio or other mining companies, there is a tendency to use China’s massive currency reserves to buy up large foreign firms in an attempt to accelerate the process of vertical integration. This can take the form of buying up the providers of china’s imports, such as raw material producers, or buying up the purchasers of china’s exports, such as foreign manufacturing firms higher up the production chain.

Such moves would put pressure on china to revalue it’s currency to make foreign acquisitions cheaper and would involve a significant diversion of China’s surplus from the US bond market to capital purchases.

This could cause significant downward pressure on the US dollar, forcing up US interest rates and estabilising the US economy.

At the same time, greater economic integration and a more aggressive approach to purchase foreign capital could mean China becoming a more fully developed imperialist state, tending to bring it into increased competition with its more established economic rivals.

by Kieran Latty