Australia's treasurer Wayne Swan on Tuesday gave his approval for a $844-million (A$1.2 billion) investment by the Chinese steel producer Hunan Valin in Australia's Fortescue Metals Group (FMG). The decision comes amid growing concerns and political debates about Chinese investments in Australia.

The deal would allow Hunan Valin Iron & Steel Group to obtain a 17.5-per cent stake in FMG, the third largest iron ore producer in Australia after Rio Tinto and BHP Billiton. Hunan Valin is the ninth largest steel company in China. (See: China's Valin raises stake in Australian Fortescue Metals).

The approval is subject to "formal and strict undertakings" in relation to the board seat Fortescue has allotted for the chairman of Valin and comes with a set of conditions to shun trade rivalries including "marketing, sales, customer profiles, price setting and cost structures for pricing and shipping". Hunan Valin must not use their inside information when the companies are negotiating resource prices.

"These undertakings ensure consistency with Australia's national interest principles for investments by foreign government entities. They ensure the appropriate separation of Fortescue's commercial operations and customer interests, and support the market-based development of Australia's resources," Swan said.

FMG said companies seeking Chinese funds have to prove to the government that any such deals would not compromise on national sovereignty.

"In many ways, it does show up a yardstick as to how other companies can attract Chinese investment."  FMG's CEO Andrew Forrest said.

"I think what we've established here is a fair investment in our equity together with an opportunity that allows Australia to say yes, this is a good deal for Australia." FMG's operations manager, Graham Rowley said.

The investment will fund Fortescue's expansion plans especially when other credits are scarce due to global economic crisis. The company has already commissioned necessary infrastructure in Pilbara region, Western Australia to produce, and ship around 24 million tones per annum (mtpa) of iron ore to a number of steel customers in China and plans to enhance the capacity to 55 mtpa.

Forrest said Fortescue may seek further funding from China's debt markets and capital providers for the expansion.

On the other hand, Hunan Valin will benefit from backward integration providing them with "stable long-term iron-ore supply for its core steelmaking business," said Wang Jun, the company's deputy general manager. Initially, Fortescue will commit to supply up to 4 million tonnes a year of iron ore to Valin.

Fortescue will issue 260 million shares to Hunan Valin for A$665 million, and further 275 million shares will be bought by Valin from New York's Harbinger Capital Partners.

The Fortescue-Valin deal is the first amongst the three major Chinese investments under review by the Australia's Foreign Investment Review Board in the mining sector and could provide a positive stimulus for the others.

The big one is Chinaco's $19.5 billion investment in the mining giant Rio Tinto, raising its stake to 18 per cent. The bid is much more complex as there are more issues and concerns to be tackled. (See: Chinalco-Rio Tinto deal may run into rough weather).

Chinalco yesterday unveiled the $21 billion debt it has secured from Chinese banks in liberal terms for the deal.

The other proposal under review is the rescue plan of China's Minmetals for Australia's debt-laden OZ Minerals Ltd.

Australian Government last week rejected the deal on the grounds that one of the mines at Prominent Hill is located close to a defense sensitive area. However, Minmetals is presently reworking on the proposal excluding the sensitive location. (See: Australia rejects China's bid for OZ Minerals).

The shares of Fortescue rose 2.4 per cent to A$2.55 at Sydney on Tuesday.