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Arrests of Rio executives in China

It is important that the reasons for the arrests of three Chinese nationals and one Australian of Chinese ethnicity who work for Rio Tinto be made clear as this is damaging the China-Australia economic relationship.   It is natural for foreign companies to seek ethnic Chinese to help them in China since they know the lay of the land and best appreciate the local culture.  That they work for foreign firms in settings where bargains between these firms and Chinese firms are occurring inevitably will inevitably create tensions.

It is natural for businesspeople in the west to speculate that the arrests are related to the failure of the Chinalco bid for joint ownership of key iron ore assets owned by Rio. Speculation is also rife that the arrests are related to the apparent failure of Chinese steel producers to secure greater price discounts in the current bargaining round with both BHP-Billiton and Rio.  This is just speculation which is why the reasons for the arrests must be clarified.

As I argued earlier the reason that the Australian Government delayed approval of the Chinalco bid was unrelated to political considerations about the conjectured role of the Chinese Government.  It was probably just due to an assessment of Australia’s national interest.  Australia has some monopoly power in iron ore markets and China, because it is the major purchaser of Australian iron ore, has monopsony power. The resulting bilateral bargaining situation would move against Australia’s interests were a major customer to gain control over supply.

All the evidence since suggests that is an accurate way of understanding the situation.  China is threatening anti-trust action against BHP-Billiton and Rio Tinto in  China and there is a concerted effort to make sure that China presents a united front in bargaining over iron ore prices.  Indeed one speculation about the reason for the arrests is that individual steel makers in China attempted to do separate direct deals with the ore suppliers (see the update below).

The arrests however may add credibility to the initial hypothesis that political factors do make Chinese investments in Australia undesirable. This would be mutually disastrous given the massive current scale of such investments. In the long-term Australia and China have too many coincident economic interests to prevent a good economic relationship but the current events are causing real damage.

Update: I have just received the China Daily which sets out more specifically the Chinese concerns:

“Stern Hu, a general manager for the Chinese operation at Rio Tinto’s iron ore division, as well as three other employees at the mining company were detained July 5 for alleged spying. Their acts caused huge losses for China’s economic and security interests, said Qin Gang Thursday.

During iron ore price negotiations that China held earlier this year with Rio Tinto, Vale of Brazil and BHP Billiton of Australia, Hu and the three Rio Tinto employees procured national secrets by bribing insiders with Chinese steelmakers, according to Shanghai’s State Security Bureau.

Though authorities have not revealed details of the State secrets and how they affected the price talks, the 21st Century Business Herald cited an anonymous source close to the issue that Hu was in close contact with a senior executive from the Shougang Group, the sixth largest steelmaker in China.

The executive, Tan Yixin, is head of the export and import business of iron ore for the Shougang Group. He was arrested on July 7 for commercial crimes”.


5 comments to Arrests of Rio executives in China

  • Sir Henry Casingbroke

    I think you are right there Harry about separate deals. The latest news, as of 7pm, Friday, is that Stern Hu’s associates attempted to, or did, bribe steelmaker executives to come across with bottom line negotiation figures to gain a commercial advantage for Rio to up the ante. That’s the line from the Chinese official sources, anyway.

    Which makes Malcolm Turnbull’s premature ejaculating a bit silly. I mean, this is a developing story that could go anywhere at this point. Demanding “a charge or release” policy from China is a bit stupid, especially for a lawyer. China, like France, Italy, Brazil, Portugal, Hungary, Spain, Argentina, Poland, Russia, Belgium, Switzerland indeed, most of the world except the anglophones, have in place one form of Napoleonic code or other, in which the authorities can detain you without charge and then proceed with an investigating judge or magistrate to see if the law had been broken. That is how the mafia figures got convicted in Italy. We’ve been led to believe that Malcolm was smart. Who is writing his scripts? The Mad Monk?

  • […] here: Harry Clarke » Arrests of Rio management team in China This entry was posted on 星期四, 七月 9th, 2009 at 8:29 下午 and is filed under […]

  • hc

    I agree the facts should be uncovered first. It would be seriously improper for Mr Hu to offer a bribe to find out the Chinese minimum offer. I wouldn’t call it ‘selling state secrets’ but I would call it corrupt.

    But nothing is determined yet. We all (including Malcolm) need to wait for some facts to emerge.

    Malcolm is smart – he needs to cool it.

  • Sir Henry Casingbroke

    I note now that pressure is being applied to the Rudd government via the agency of moral suasion via the good offices of retired CRA/Rio execs. It is being said that Stern Hu was responsible (a “hero”) for keeping Australia out of the world recession by helping to keep up the volumes of exports to China. The figures being bruited about are a bit rubbery but anyway, this is a nice move from friends of Hu – putting the acid on the government that it is dropping like a hot potato an individual who is repsonsible for their own good standing as managers of the Australian economy.

    Apart from the nasty element of fascism intruding here, and of course the personal tragedy of the individuals caught up in this, here we have a fascinating phase of historical reversal of political economy, where China is the foremost exponent of mercantilism as it was once its victim. Clearly, they forget nothing. Is this a payback for the Opium Wars?

  • derrida derider

    On the mercantilism, Sir Henry, you are right. Resentment of imperialism – and of imperialist fostering of separatism – still runs deeps. But they ought to also pay attention to the second half of Talleyrand’s bon mot.

    Surely “charge or release” is about the last thing the Australian government should call for. Considerations of face would ensure that he was charged and quickly given a show trial.

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