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    Greater China
     Jul 14, 2009

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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