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”.