Rio Tinto Arrests a Warning for Western Businesses

Australia—China special relationship over with arrest of Australian Rio Tinto executive, says China expert.
Rio Tinto Arrests a Warning for Western Businesses
Construction workers prepare steel reinforcing rods at a building site in Shanghai, 2008. (Mark Ralston/AFP/Getty Images)
7/11/2009
Updated:
10/1/2015
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Construction workers prepare steel reinforcing rods at a building site in Shanghai, 2008.  (Mark Ralston/AFP/Getty Images)

The arrest of Australian Rio Tinto executive, Stern Hu, and three other executives by Chinese authorities has sent a chill through the international business community, says China expert Dr. John Lee, and signals that any special relationship between Australia and China is now over.

Dr. Lee, author of the book Will China Fail? says the July 5 arrest of one of the mining giant’s top executives is not coincidental. Mr. Hu’s arrest has been widely linked to the failure of the state-owned China Aluminium Corporation (Chinalco) to acquire a US$19.5 billion (A$25 billion) stake in Rio Tinto.

“The timing has to have something to do with what has happened in the past. I think it would be extraordinary if it was just pure coincidence and I think the Chinese are signalling to Canberra, in a sense, that one should play by Beijing’s rules or if one doesn’t there are other consequences to that.”

Shanghai-based, Mr. Hu, was arrested along with three other Rio staff, for allegedly “stealing state secrets from China via illegal means, including bribing internal staff of Chinese steel companies,” according to a statement on the Shanghai State Security Bureau website.

Mr. Hu and staff had “caused huge loss to China’s national economic security and interests” and had “already broken Chinese law and have violated international business ethics,” the statement concluded.

Dr. Lee, who is a research fellow at the Sydney-based Centre for Independent Studies, said the statement is unusually strong for an incident that will obviously have diplomatic consequences—an indication of how intimately involved the Chinese regime is in business dealings.

“Most countries would see this as a part of the normal business negotiation process—people call it ‘business intelligence,’” he said. “China takes such a broad view of the state interest that it has elevated this into an element of national security and I think that it is pretty unusual.”

He said any doubt that state-owned businesses can be run separately to the interests of authorities in China should now be dispelled.

Mr. Hu Still Detained

Mr. Hu, who was originally from Tianjin, China, has been an Australian citizen since 1994, but moved to Shanghai with his wife and two children in 2000 to run Rio Tinto’s Shanghai office.

He is highly regarded in both the Chinese steel industry and amongst his Western colleagues for his integrity in very difficult negotiations and it is widely understood that espionage would be totally out of character.

John Dougall, the former boss of Hu described Hu as a “trade hero” in the Sydney Morning Herald (SMH), and Ron Gosbee, chief executive of Interscan Navigation Systems said Mr. Hu is of the “highest integrity.”

Mr. Gosbee told the SMH that Mr. Hu’s parents had endured years in labor camps during the Cultural Revolution, a fate he hopes does not await his friend of 20 years.

“Just to think that any foreign citizen can be plucked from the street and incarcerated without charge is pretty scary,” Mr. Gosbee was quoted in the SMH.

Mr. Hu was denied consular visits for five days after his arrest and is still imprisoned.

Chinalco Loses Out to BHP

Instead of completing a deal with Chinalco, Rio Tinto finalized a deal with BHP, enabling the two mining giants to join forces in setting the price of iron ore for China’s hungry steel mills.

Chinalco’s vice-president and spokesman, Lu Youqing, expressed anger at Rio over the failed bid, Fairfax News reported. Mr. Lu was quoted in the China’s Securities Daily soon after Mr. Hu’s arrest saying, “Rio Tinto has no business credibility as a company. It is not unlikely that a few staff are suspected of breaching law.”

Mr. Lu’s comments were quickly removed from the Securities web site and have since been denied by Chinalco, who issued a statement saying, “Chinalco note reporting of comments attributed to Mr. Lu in China’s Securities Daily that were critical of Rio Tinto. These comments were incorrectly reported and do not reflect the company’s view.”

Dr. Lee says other reports suggesting that Mr. Hu’s arrest was linked to the desire by Chinese authorities to bring Chinese steel makers into line were “probably true.”

“It does indicate the messiness of domestic Chinese politics. It is significant that some of the Chinese steel makers very publicly defended the integrity of Stern Hu, so obviously there is some sort of domestic conflict within China. So … it is probably a reasonable guess that Beijing’s own government was sending a message to its steel makers.”

A Shanghai newspaper reported last week that Chinese steel makers had reached an agreement with Rio Tinto to buy iron ore at a 33 percent discount to iron ore contract prices, matching prices agreed to by Japanese, South Korean, and Taiwanese steel mills. Chinese authorities, however, had been holding out for a 40 percent drop in price for this financial year, and to date there is uncertainty whether the deal was finalized.

Mr. Hu had been integrally involved in those negotiations and told Fairfax News last month that he could not discuss the proceedings as he believed his phone was tapped.

To date, three Chinese steel companies are believed to be implicated in Mr. Hu’s case, and at least one executive from a Chinese company has been detained.

Australia’s Special Relationship Finished

While the regime’s very public accusations directed at Mr. Hu is not unfamiliar to South East Asian countries—which have experienced similar bullying from China before—Dr. Lee said China’s behavior will send a chill through foreign business sectors.

“I think this signals that any pretense of a special relationship is really over between China and Australia,” he said.

“There is definitely a lot of nervousness amongst Australian companies dealing with the Chinese. In terms of the longer term consequences, I think on a very personal level, those executives actually residing in China will be pretty careful about what they do.

“The Chinese are actually very pragmatic when it comes to their interest,” he said, “The Chinese have been promoting the special relationship between Australia and China and Australia has quite naively bought into this.”

It appears the action by Chinese authorities was not a well thought-out strategy, and Dr. Lee says the message was not just for Australians.