PRC v. Oz: China Detains Rio Tinto Mining Execs

♠ Posted by Emmanuel in ,, at 7/10/2009 11:05:00 AM
Think of Australia and China as star-crossed lovers. The former needs to find developing market customers as demand for its commodity exports fall in the developing world. Meanwhile, the latter needs coal, steel, and other minerals to power its mighty manufacturing-for-export machine. As in many things IPE, frictions arise. Australians are wary of those dratted foreigners acquiring controlling stakes in major Aussie mining concerns. For instance, see China's efforts to head off a proposed Rio Tinto-BHP Billiton deal that would have combined Australia's largest mining concerns in fear of the resulting combination exercising undue monopoly power. (See the table to the left taken from the Wall Street Journal on the China-Rio Tinto soap opera.)

Now we have word from the WSJ that China is taking a more aggressive stance towards Australian miners by detaining Rio Tinto executives over alleged security intrusions. Being no slouch in being accused of industrial espionage itself, this is pretty rich for the Chinese authorities. Moreover, I doubt whether the Chinese have any trade secrets that would hold interest for the likes of Rio Tinto. At any rate, this episode marks a low point in PRC-Australia relations. If you will recall, Oz PM Kevin Rudd is a fluent Mandarin speaker, and this was supposed to portend better relations:
China said a detained Australian mining executive and three colleagues "stole Chinese state secrets for a foreign country," escalating Beijing's business dispute with a major supplier and straining the economic relationship between two nations that depend on each other for growth.

The actions of the four Shanghai-based employees of mining giant Rio Tinto PLC "hurt China's economic interests and economic security," said foreign ministry spokesman Qin Gang, breaking Beijing's official silence on their detention since Sunday. Mr. Qin didn't say what secrets are alleged to have been stolen. The allegations relate to the employees' actions in relation to negotiations between Rio Tinto and Chinese steelmakers on the price of iron ore, according to reports in the Chinese press that an official at the State Security Bureau in Shanghai said were accurate.

On Friday, Australian Foreign Minister Stephen Smith noted that official Chinese comments posted Thursday stated Mr. Hu stole state secrets by illegal means, including bribery of Chinese steel company officials. Rio Tinto declined to comment on the situation.

China's state-secrets law has a broad reach that could cover the commercial information of state firms. Australian Prime Minister Kevin Rudd said Friday that his government will take whatever action is appropriate in the case and "proceed carefully."

Three of the detained employees are Chinese citizens; the fourth, Stern Hu, general manager in China of Rio Tinto's iron-ore division, is Australian. Australia's foreign ministry said consular officials will be able to visit Mr. Hu on Friday, and that China has given assurances that he is being treated well.

The detentions stunned the Australian mining industry and sparked a fierce reaction from opposition politicians. In Australia, anti-China sentiment has been simmering as some worry about a surge in Chinese firms buying into Australian resource companies. Last month, Rio Tinto walked away from a $19.5 billion deal to expand an alliance with Aluminum Corp. of China in favor of a tie-up with fellow Anglo-Australian miner BHP Billiton Ltd.

China, scouring the world to secure energy and materials to feed its fast-growing economy, has spent the past several years trying to improve relations with resource-rich nations in Africa and Latin America. It has offered aid and investment to developing countries and a sympathetic ear to governments not well received in the West. But China's business dealings haven't always been welcome in other countries, and the Communist Party has often failed to sway foreign public opinion...

The interests of China and Australia are interlocked, with Australia's iron-ore miners and China's steel industry depending heavily on each other. Australia is the world's biggest exporter of iron ore, expected to account for 40% of global seaborne iron ore produced in 2009, while China is by far the biggest importer, set to account for 62% of imports of seaborne ore this year, according to Goldman Sachs JBWere. China was Australia's second-largest trading partner last year, narrowly outstripped by Japan. China has built up the world's largest steel industry to supply its demand for the metal as it expands its cities and adds roads, bridges and other infrastructure.

Scholars say economic interdependence will likely push the two governments to find a solution. "Even if the charges are found to be unfounded, it won't make a really serious dent in the nature of the relationship which at this stage is economic and strategic," said Michael McKinley, an expert in global politics at Australian National University...

Mr. Rudd's government has been wrestling with how best to handle a surge of investment by Chinese state enterprises in the mining sector. This year, more than $6 billion of such investments have been announced, more than double all of last year. The detentions could complicate the situation for Chinese firms going to Australia's Foreign Investment Review Board, analysts say...

Mr. Rudd Friday played down any threats to relations between Australia and China. "I am confident we can get through this," he told 3AW radio. "This is a relationship which is very broad, but we take the interests of any single Australian national very seriously." He said he isn't ruling out intervening on the matter but described the process as a "complex, consular" case that requires a step-by-step approach.

The strains with a key trading partner aren't unprecedented in Australia. In the 1970s, Japanese companies were investing in Australian resources for the same reasons China is now. At the time, Japan's involvement raised the ire of some Australians -- but has since been broadly recognized as providing much-needed funds for development. "The current situation is largely the same," said Hou Minyue of the Australian Studies Center at East China Normal University. "There is a process the two countries need to go through to understand each other."
The Japanese also aroused the ire of many while cottoning up to Oz in previous times to garner a steady supply of raw materials. What will be interesting to watch is how Canberra treats Chinese firms trying to gain clearance for investment in Aussie miners after this episode. As always, stay tuned for further developments.

UPDATE: In its latest salvo, Oz officials warn that foreign investment may be discouraged by China's actions.