Chinese Arrests Upsets a Delicate Balance between Business and Politics
By Steve Fiscor, Editor-in-Chief
On July 5, the Chinese State Security Bureau arrested Stern Hu, an Australian mining executive working for Rio Tinto and three colleagues, who are Chinese citizens. As of press time they had not been formally charged. Early reports circulating in the media alleged they bribed steel mill operators for information. On July 14, a China Foreign Ministry spokesperson told a news briefing, “It’s an individual judicial case, in which the employees of Rio Tinto stole Chinese state secrets and posed a grave risk of damage to China’s economic security and interests.” Rio Tinto issued a statement saying that they believed the bribery allegations in the media were false and that they were concerned about the detention and the fact that Chinese officials had not informed them of any charges.
Hu and his colleagues were engaged in iron ore price negotiations. He is believed to be the highest ranking Western executive to be accused of espionage by China. Charges of spying would be difficult to interpret by Western standards, but many Chinese companies are state-owned and any confidential information could technically be considered a state secret.
The Australian press has also suggested that the arrests were retribution for Rio Tinto’s decision to reject a proposed major sale of some of its assets to Chinese aluminum producer Chinalco for $19.5 billion. The mining company instead opted for a proposed Rio TintoBHP Billiton iron ore joint venture in Western Australia (see Leading Developments, p. xx). The Australian media hype plays on isolationistic fears of Australians who view this proposal and other deals involving Chinese state-owned companies as selling off national resources.
Currently the China Iron & Steel Association (CISA) is managing the iron contract negotiations with foreign suppliers. China has been pressing suppliers for a 40% price reduction, which is well above the 33% that the Japanese and South Koreans received. The unresolved iron ore negotiations had already passed a targeted deadline of June 30. The arrests and allegations were making an already tense situation an even more difficult.
Rio Tinto said that it continues to operate in China and is maintaining high levels of iron ore shipments from Australia. Being the world class companies they are, Vale and BHP Billiton have not taken advantage of the situation to the detriment of Rio Tinto and seem to be steering clear of the fray. Toward the end of July, however, it appeared that more of the Chinese steel producers were buying iron on the spot market, driving prices higher, and the CISA was losing its grip on price negotiations further frustrating the Chinese buyers.
The fact that China acted so heavy handedly sends a clear signal that Chinese officials believe they have the evidence they need. They would not risk a large portion of the Chinese economy on trumped up charges. How the Chinese handle this situation will certainly impact future business deals with state-owned companies. Hopefully there will be some level of transparency. As iron ore producers, along with the rest of world, watch the judicial process unfold in China, they will learn even more about future dealings with their largest trading partner.
