Swimming spat to soured deals put chill on China-Aussie ties

[HONG KONG] It's been a bad week for China-Australia ties.

Normally able to navigate tensions caused by criticism of China for its territorial assertiveness in the South China Sea, a spat involving Olympic swimmers and a scuppered bid for Australia's electricity grid have cast a more palpable chill over the relationship.

For both countries, that potentially matters. China is Australia's largest trading partner, and was a key engine of its decade-long mining boom, taking a large chunk of Australia's resource exports.

For China, investment in Australia potentially provides it a more secure supply of land, water and commodities.

On Thursday, Australia rejected bids for electricity network Ausgrid from Hong Kong billionaire Li Ka-shing and State Grid Corp of China. Treasurer Scott Morrison said it would be contrary to national security to allow the offers to proceed in their current form.

It's another sign that protectionism is on the rise in Australia, where Mr Morrison earlier this year blocked the sale of the nation's largest cattle rancher to a Chinese-led group.

By associating potential Chinese investment with security threats, Australia could risk ramifications to a relationship that has endured on the economic side despite political ups and downs.

China's rise as a regional power could also complicate ties given Australia is a key US ally in Asia.

"It's not necessary to escalate something that's by nature business to the level of political and security concern," said Su Hao, a professor of diplomacy at the China Foreign Affairs University. "It'll turn a win-win to a lose-lose scenario," Prof Su said.

James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology Sydney, said the Chinese will have "every right to feel disappointed" and noted the countries had signed a memorandum of understanding in 2012 to boost cooperation on delivering infrastructure.

"The Chinese will also be confused," he wrote in a post for the Lowy Institute's Interpreter website. "What hurdles will they face next time? In the eyes of Chinese investors, the sovereign risk of investing in Australia must surely have just jumped."

China's official Xinhua News Agency issued a commentary after the Ausgrid news, warning against a "dangerous mind-set of China-phobia" and saying paranoia over Chinese investment could set back efforts to stimulate global growth.

The Ausgrid development comes after Australia was splashed repeatedly across state and social media in China over the past week, for swimming champion Mack Horton's public remarks at the Rio Olympics describing Chinese rival Sun Yang as a "drugs cheat". The war of words intensified to the official level with China demanding an apology.

In a commentary published in Chinese Aug 7, the state-run Global Times described Australia as "a country at the fringes of civilisation" and a one-time "Britain's offshore prison".

"This suggests that no one should be surprised at uncivilised acts emanating from the country," it said. The English version of the commentary the next day castigated Australia as a "second-class citizen in the West."

Tens of thousands of Chinese fans bombarded Horton's social media accounts, calling him a "snake" and "loser". His Instagram account received more than 200,000 critical comments.

Some China pundits noted the number of Sun Yang fans on Weibo, China's main social media platform, hit 28.7 million, more than Australia's population.

Sun served a three-month suspension two years ago for using a banned stimulant, which he said was treatment for a heart issue.

The tensions in the pool in Rio are a microcosm of a broader suspicion in Australia over China's territorial and military ambitions in the Asia-Pacific region. Australia has backed the US in the South China Sea, even though neither country is a claimant, with Australia flying aerial patrols and hosting US marines in its northern port city of Darwin.

Australia is also a member of the 12 nation Trans-Pacific Partnership, a US-led trade pact that does not include China. Beijing has been touting a separate regional trade deal and forming new institutions including an infrastructure bank that would potentially counter western-run organisations.

Australian Foreign Minister Julie Bishop was chided in February by China for saying the Philippines had the right to take China to an international court over their conflicting South China Sea claims.

Australia "should adopt an objective and unbiased attitude and refrain from doing anything that undermines regional peace and stability," Foreign Ministry spokesman Hong Lei said at the time.

Tensions between the countries have spiked before and then faded. Australia dominated headlines in China in 2009 after the arrest of Stern Hu, an Australian executive who led Rio Tinto Group's China iron ore unit, on suspicion of spying. Mr Hu was sentenced in May 2010 by a Shanghai court to 10 years jail for taking bribes from steel mills and infringing commercial secrets.

"There is no fundamental rivalry between China and Australia," said Shen Shishun, a senior researcher at the China Institute of International Studies under China's Foreign Ministry.

Still, "on the China end, this would cause displeasure in Beijing, and if things like this happen too often in the future, bilateral relations would suffer," Mr Shen said of the Ausgrid decision.

"It's possible that Australia is under the US's sway."

BLOOMBERG