Mongolia, China’s largest supplier
of coking coal, passed a law restricting foreign state-owned companies from
controlling key assets, threatening planned investment by groups such as Aluminum
Corp. of China Ltd.

Legislation giving the state powers
to veto acquisitions of assets by foreign companies in the resources, finance,
media and communications industries was passed late last week, according to a
statement on Mongolia’s parliamentary website. Foreign companies seeking more
than 49 per cent of strategic assets will need approval from parliament, it
said.

The restriction means Mongolia joins
Indonesia and Argentina in seeking to control ownership of resource assets to
secure their economic future. The passage of the law was accelerated after a
public outcry following moves last month by Aluminum Corp., known as Chalco, to
buy SouthGobi Resources Ltd.

“We’ve expressed our concern about
the law,” Howard Lambert, the Mongolia country head for ING Groep NV, said by
phone from Ulan Bator.

“If it’s implemented well, policed
and the process is clear for the foreigners, then I can’t see it as
detrimental. But if it’s pulled out of the draw as a weapon on a sporadic
basis, then it could cause problems.”

Shen Hui, a spokeswoman for
Beijing-based Chalco, declined to comment on the new law. Chalco said on April
25 that it won’t proceed with its offer to buy 60 per cent of SouthGobi for as much
as $925 million unless it gets approval from Mongolia.

The law isn’t likely to apply to
deals concluded before it was passed and is aimed at ensuring no one country or
product dominates the economy, Vice Finance Minister Ganhuyag Chuluun Hutagt
said in an interview.

Mongolia is squeezed between China
and Russia, two of the world’s 10 largest economies and the No. 1 and No. 3
countries by land mass. China accounts for over 80 per cent of its neighbour’s
import and export trade, according to the World Bank.

Exports to China rose to 92 per cent
of the total in the first quarter, Mongolia’s statistics office said last week.

Chinese companies, many of which are
state-run, will need to adapt their strategy without necessarily being shut out
of the Mongolian market, ING’s Howard said.

“This may be just a question of
ownership and control,” Howard said. “There’ll still be financing from Chinese
companies that want to develop their presence in Mongolia. So they’ll then have
to use a loans approach as opposed to an equity approach.”

Bloomberg