China's bid for a major stake in Anglo-Australian mining giant Rio Tinto is treading on more toes than just those of resource nationalists in Australia. The financing of state aluminum producer Chinalco's offer to invest US$19.5 billion in Rio is now also under scrutiny as analysts see evidence of a large state subsidy facilitating the offer.

This has wider global implications than the bid itself, which can only be stopped by the Australian government on national interest grounds, or by the existing shareholders on grounds that the price inadequately reflects the management influence that the deal would give to Chinalco.

Under the proposal, Chinalco would acquire direct stakes in several Rio copper, iron ore and bauxite mines plus bonds which when converted into equity which would raise its stake in Rio's holding company to 18 percent. In addition it would acquire two board seats and a say in the production and marketing policies of the operating companies.

For some Australian nationalists, any more Chinese acquisitions of their mining assets is a sell-out – even though the Rio mines involved are in Chile, Indonesia, the US and elsewhere as well as Australia. Less emotional and more persuasive opposition comes from those – including some non-Australian shareholders – who fear that allowing Chinese state entities which are major buyers of Rio's ores a say, via Chinalco, in its policies would be highly detrimental to the seller.

Chinalco at present may just be an aluminum company but has been marked out, together with its Hong Kong-listed subsidiary Chalco, to lead China's overseas mining investment push. Major state companies are not totally autonomous units. They exist to serve the state as well as, hopefully, make money. Ultimately Chinalco represents the needs of the buying nation, China, and the state companies which dominate metals production for low cost and reliable supply ore sources.

And so it seems too with the financing of the proposal. Four large state banks have together agreed to lend Chinalco US$21 billion for 15 years at a cost of just 90 basis points over the London Interbank Offered Rate (Libor). Under present circumstances, this would appear to be quite extraordinarily cheap financing. Even the biggest and best capitalized global private sector companies are having to pay four times as much for 10-year money. Chinalco itself is currently almost certainly losing money as a result of massive overinvestment in aluminum production and having seen its original US$14 billion investments in Rio at the height of the mining boom last year fall by 60 percent in value.

Nor can Chinalco's bid and its financing be seen as anything other than high state policy given that its former chief executive was recently elevated to deputy secretary-general of the State Council, a key political position and apparent reward for making once insignificant Chinalco into a champion of the state sector.

At one level it makes a lot of sense for China to use some of its reserves to buy real assets and influence rather than more US Treasury bonds. The global fall in asset prices in principle makes this a good time to buy.

But providing a big state financial subsidy has four negative results. Firstly, it will foment opposition to China's acquisitions of foreign assets generally and increase suspicions that it will not play by the same market-driven rules as other major participants in the world economy. Secondly, subsidies reduce pressure on state companies to operate efficiently rather than rely on political connections. Thirdly, cheap and poorly secured loans make it more likely that state bank non-performing loans will soon soar again and require more government bailouts using money which should have had better uses. Fourthly, and perhaps most important, it encourages further over-investment by China in heavy and capital intensive industries just when the economy desperately needs to stimulate consumption and invest in the social infrastructure.