It is no surprise that one of the first foreign officials on the plane to Ulan Bator last week after a new Mongolian government was finally put together after June’s election was China’s State Councillor and national security adviser Dai Bingguo.
In a three-day visit Dai did the rounds of the new government, including Prime Minister Norov Altanhyag of the Democratic Party, with the message that China is a friendly and dependable partner for its northern neighbour.

Very many of Mongolia’s nearly three million people are not so sure and politicians frequently echo the fears that China’s passion for Mongolia’s extraordinary reserves of mineral resources is only the tip of the iceberg of imperial ambitions in Beijing.
Previous governments have taken several steps to try to curb Chinese investment in mineral deposits, which have had a chilling effect on all foreign investment.But the reality which Mongolian politicians and the public cannot ignore is that China is now Mongolia’s top trade partner, taking over 90 per cent of its exports.
About 60 per cent of investment in Mongolian mining enterprises comes from China. But economic nationalism in Mongolia remains strong and politicians of all stripes cannot ignore it.

Even though markets welcomed the coming to power of a Democratic Party government, which is judged to be less extreme in its suspicion of foreign investment than other parties, it only has 31 seats in the 76-seat parliament.
Altanhuyag has had to form a coalition with smaller parties such as the Mongolian People’s Revolutionary Party, which is in favour of nationalizing resources.
The new prime minister’s move to placate the economic nationalists in his camp was to appoint as minister for mines a man with a record of calling for greater state ownership of Mongolia’s natural resources, Davaajav Gankhuyag. Gankhuyag did not disappoint the resource nationalists.

In one of his first media interviews last Thursday with the newspaper Odriin Sonin (Daily News), Gankhuyag said he hopes the new government implements Resolution 57 previously passed by parliament. This calls for the state to acquire 50 per cent ownership of the massive Oyu Tolgoi gold and copper mine being developed in southern Mongolia.
The Oyu Tolgoi reserves, estimated to be 41 billion pounds of copper and 21 million ounces of gold, were identified by the Vancouver company Ivanhoe Mines, now called Turquoise Hill.
Turquoise Hill has passed much of the project to Rio Tinto, which now controls 51 per cent of Oyu Tolgoi and expects to invest $6.2 billion in the mine and begin production next year. Long-term contracts have been signed with Chinese customers for the copper.

Under the current agreement the Mongolian government owns 34 per cent and can only increase its stake to 50 per cent after 30 years of commercial production.Implementation of Resolution 57 would significantly reduce that timetable. The Mongolian government could increase its stake to 50 per cent after the companies have regained their investment in the project. So China’s State Councillor Dai is unlikely to have been encouraged by the flavour of the new government.
Of immediate concern for Beijing is the unwillingness of the Mongolian government to approve a $926-million bid by the Chinese state-controlled company Aluminum Corporation of China (Chalco) for a 58-per-cent controlling interest in the Ovoot Tolgoi coal mine. Ovoot Tolgoi is now owned by SouthGobi Resources, whose majority shareholder is Turquoise Hill. Turquoise Hill says it needs to sell some of its stake in Ovoot Tolgoi to raise cash to fulfil terms of its agreement with Rio Tinto over Oyu Tolgoi.

But in May, before the June 29 election, parliament moved to block the deal with Chalco and other politically sensitive agreements by passing changes to the Foreign Investment Law. The new regulations limit foreign companies from owning more than 49 per cent of companies involved in mining, finance, media and telecommunications.In addition, a government panel must rule on any proposed investment in those four sectors by a foreign state-controlled company regardless of the percentage ownership the deal would produce.
Over the election period there has been an understandable delay by officials to address the Ovoot Tolgoi deal, but Turquoise Hill chief executive Alex Molyneux recently told the Reuters news agency that the government has done everything in its power to block the Chalco purchase.

But China does have a significant lever in its favour and time will soon tell whether Dai applied it during his visit last week. For the first few years of development of the Oyu Tolgoi copper and gold project Rio Tinto and Turquoise Hill will require imported power from China 80 kilometres to the south.
So far there has been no agreement in talks that have been going on for about a year. Mongolia’s economy grew at 17 per cent last year and this year looks just as good.
But the Ulan Bator government needs its share of the revenues from mining projects to provide the jobs, education, house and health services Mongolians are demanding. The impetus to get projects like Oyu Tolgoi moving is considerable and doubtless some accommodation with the Chinese will be found to avoid any stalemate.