Australia lands in Chinese soup
By Sreeram Chaulia
The arrest by the Shanghai State Security Bureau of Stern Hu, the head of
iron-ore operations in China for the Australian mining giant Rio Tinto, has
shocked the business world and thrown the government of Prime Minister Kevin
Rudd into a diplomatic crisis. Hu, an Australian citizen of Chinese descent,
has been detained along with three Chinese employees of Rio's iron-ore sales
team on charges of bribery and "stealing state secrets", and is potentially
liable to a sentence of life imprisonment.
That local Chinese intelligence agencies could carry out such bold action
against personnel of one of the world's big multinational corporations has sent
shivers down the spines of the large contingent of expatriate businesspeople
resident in China. Questions are being raised as to why the Shanghai sleuths
resorted to such unusually stern measures when all that Hu and
his Chinese colleagues may have done was to try and secure some classified
information to aid their price negotiations on iron-ore exports.
Those who are outraged by the arrests assert that attempting to find out the
bottom-line price of the Chinese side for the year's iron imports from
Australia, even through underhanded means, is a standard business tactic that
many corporations resort to. For defenders of Hu, as Rio's senior salesman in
China, he may have simply wanted inside data in order to clinch a better price
for his company's exports to Chinese steel mills. It was not a capital crime,
they assert, but a standard ploy to counter China's hardball bargaining.
Although South Korea and Japan agreed to import iron ore at a discount rate of
33% less than last year's price, China has been holding out with the demand for
a reduction of up to 45%. China holds the aces in this haggling game because it
is the world's largest importer of iron ore and accounts for nearly 80% of
Australia's exports of the raw material. Rio and BHP-Billiton are the two
companies that dominate Australia's iron-ore exports and hence most vulnerable
to the Chinese virtual "monopsony" (sole buyer) position.
The Rudd government's muted reaction to Hu's detention is a reflection of this
Australian dependence on the large Chinese market. While China's list of
iron-ore exporters is diversified, Australia cannot quickly find new importers
for its crucial foreign-exchange earner during the global economic downturn.
That no hot air is coming from Canberra is a definite sign that China holds all
the aces (as well as probably solid evidence against Hu).
There may be deeper reasons behind Hu's arrest besides Rio's alleged bribery of
Chinese companies. One line popular in Australia is that the move is crude
payback for Rio's scrapping of a US$19.5 billion share-purchase bid by the
Chinese state-owned metals corporation, Chinalco.
Instead of accepting the Chinese equity bid, Rio raised fresh capital of $21
billion through a joint venture with fellow Australian iron-ore producer, BHP.
Nationalistic portrayals of Chinalco's bid as economic encroachment by China on
one of Australia's beloved icons proved popular among Australia's public and
political brass and helped to end Chinese hopes of making a stellar global
acquisition. The arrest of Hu is being attributed by some to sour grapes on the
part of Chinalco and its higher-level bosses in the Chinese government.
Although Chinalco is denying any hand in the detentions, the proposed Rio-BHP
joint venture has come under fire from senior Chinese state officials. In June,
China's Ministry of Industry decried the Australian combine as having "an
obvious color of monopoly, likely to have a big impact on the Chinese steel
industry". It warned that China would seek "new policies and regulations" to
strengthen Chinese companies' hands in iron-ore price talks with Australian
suppliers. The revelation that Hu was allegedly bribing Chinese companies
exactly at this juncture could have irked Beijing (and Shanghai party
officials) and driven them to a strong response.
As Hu remains in detention without legal representation, criticism is mounting
that China's definition of "state secrets" and prosecution of accused are
arbitrary and devoid of due process. Legal experts conjecture that Hu could be
confined for up to 10 months without a lawyer and then coerced into making a
confession.
Hu's case bears a striking parallel to the conviction in May 2009 in a Moscow
court of two American citizens of Russian origin on charges of commercial
espionage against the state-owned energy major, Gazprom. Ilya and Alexander
Zaslavsky were arrested in March 2008 at the height of the tussle over
ownership of TNK-BP, the Russian-British energy concern. One of the brothers
was employed with TNK-BP and accused by Russian intelligence of attempting to
bribe Gazprom employees to gain confidential information that would give
foreign gas companies an advantage over Russian ones. The Zaslavsky brothers,
now sentenced for one year imprisonment, were possibly victims of the Kremlin's
drive to consolidate control over Russia's vast hydrocarbon deposits and shoo
away foreign multinationals from this sector.
Allegations had flown thick and fast during the drawn-out political battle
between BP and the Alfa Group of shareholders (Russian oligarchs considered
close to the Kremlin). The British chief executive of TNK-BP was accused by the
Alfa Group of violating Russian laws, and BP hit back by insisting that "this
is a return to corporate raiding activities". What is instructive from the
TNK-BP imbroglio for the Rio-China fracas now is that the accused CEO was
expelled from Russia and his replacement was installed by the Russian oligarch
shareholders. It was a decisive shift in power in favor of the Kremlin.
If the Russian state stamped its authority through strong-arm methods against
BP, China has an equally strong position for Rio and the Australian government
to contend with. Multinational corporations with the size and deep pockets of
BP and Rio practically rule their domains in poorer and less politically
centralized countries, but they can be bent against their will by dogged and
powerful states like Russia or China. Arresting an American or Australian
citizen might be suicidal for a small Asian, African or Latin American state,
but is a potent message of "don't mess with us" coming from Moscow or Beijing.
Hu's arrest has shaken the confidence of foreign investors in China, but it is
unlikely to dent their desire to continue doing business with and in the
country. China often leverages the size of its market (immortalized by Fareed
Zakaria, editor of Newsweek, as "2 billion armpits to deodorize") and vigilant
state apparatus to extract the best terms from foreign multinational
corporations and governments. Hu's incarceration is a rude awakening for Rudd's
government to the reality that China calls the shots in most bilateral
relationships these days.
Sreeram Chaulia is associate professor of world politics at the Jindal
Global Law School in Sonipat, India.
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