Rudd Proves Theory. China Cannot Win.

Wednesday, July 15, 2009 10:59
Posted in category Uncategorized

A lot of coverage recently has once again thrown China (the prosecutor) into the spotlight for charging Rio Tinto’s GM and 3 employees (The Innocents) with espionage. It is a situation that has gradually escalated from a period of concern (when no one knew what happened to the executives) to this recent statement from Australian Prime Minister Kevin Rudd:

“Australia of course has significant economic interests in its relationship with China, but I also want to remind our Chinese friends that China too has significant economic interests at stake in its relationship with Australia and with its other commercial partners around the world,” Rudd said.

“A range of foreign governments and corporations will be watching this case with interest and be watching it very closely, and will be drawing their own conclusions as to how it is conducted.”

Essentially, Kevin Rudd has threatened economic sanctions should the executives not be treated fairly (i.e. released ASAP).

From the viewpoint of China, it is quickly becoming yet another media storm that they are in fear of loosing control over. AGAIN.

That, regardless of whether or not they are arresting executives at MULTIPLE Chinese firms as well for being apart of the same crime, their own foreign ministry is having to put out a fire that is moving faster than a brush fire. A storm only picking up in intensity as Commerce Secretary Locke has also publicly stated his concerns, and intention to discuss the issue.

Were China not consistently being chided for its corruption, then perhaps I would be a bit more understanding or apathetic to the Australian side, but I cannot.

China has been a punching bag for many over the years for commercial and political corruption, and now that “one of their own” has been caught up in it, the tables are turned. That now China is being too heavy handed, is risking economic ties, and that everyone in China should beware.

Yet nothing could be further from the truth.

In fact, I would say that this case should surprise no one.

That for the last several years, China has been taking every opportunity to clean up many of the commercial and political corruption issues it faces, and to think that they would simply overlook the role that a foreign firm or executive may have played in a case is simply bad precedent (just wait for the next time a Chinese executive is arrested for a similar charge to see what the Chinese response is.. or see this current case in the US)

Yes, China’s law enforcement could have been more transparent about the arrest, but their silence on the arrest and the underlying issues in the days following the arrest should not somehow minimize the core issues of corrupt practices and stealing of state secrets.

China is not the U.S. where every detail of a case is played out on TV before the trial has started, and it is in the interest of everyone involved to exercise patience and wait for the evidence to be presented.

China deserves the time to work through this case. to complete gathering and presenting the evidence ( inside the court or out) and the process to be completed.

To force it to cut the process short in the name of economic interests would simply further ingrain the belief that some have that there is a double standards.  that, in reality, it is not about fighting corrupt practices.  that it is in fact about fighting corrupt practices that are will “level the playing field” for foreign firms in China.

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10 Responses to “Rudd Proves Theory. China Cannot Win.”

  1. Sean says:

    July 15th, 2009 at 2:10 pm

    This is just part of the problem of having state-controlled enterprises. The US may have similar problems in the future, but it will be handled differently. Namely, affairs that are concerning enterprises will be handled in civil court. Government corruption is obvious when, say, local police indefinitely detain an outside businessman who is in civil contention with an important private local business. This is the context that most outsiders are seeing this case in, except the private local business is now a state-owned one.

    Instead, the Chinese appear to see most of their economic interests akin to the way the US sees its DOD IP. If you steal nuclear missle plans, you’ll be arrested by the state. In China, if you steal steel manufacturing plans, you’ll be arrested by the state.

    It’s confusing because this is one area where most outsiders see this is clearly a civil matter. The government is only involved insofar as it manages the company. China see all of its interests in the manner the US sees its security interests.

    I think I pretty clearly understand where the Chinese are coming from on this, but I also think they are wrong.

  2. Rich says:

    July 15th, 2009 at 9:45 pm

    Sean,

    Thanks.

    Actually, while I would agree that there is a structural difference in how the US and China would handle this, I would actually not use trade secrets vs. nuclear as the analogy. I would be more inclined to see this as a monopoly case in the US.

    Why I say this is that the information clearly posed no physical security threat as a nuclear secret would, but the information that Rio is being accused of trying to access would have given them an unfair competitive edge in their negotiations (merger and market pricing).

    Second, it is – and always has been – clear that China will treat many commonly known facts in the West as secrets here. Statistics on energy, and its raw materials are no different. It is why large parts of the country are still off limits to many outsiders (Chinese and foreign).

    Finally, as the sector is largely controlled by firms with significant state ownership, the information the may have been seeking could be treated as state secrets. Arther Kroeber makes an interesting case for this on China Herald

    So, whether or not they are wrong is still left to be seen. At this point, they are being accused of bribery with the intent to gain access to information. We do not know the data points they are seeking, and therefore I think it is premature to make a judgement.

    I am not saying either side is right or wrong, just that no one has the information to make even the basic of educated guesses.

    R

  3. China Hearsay: China law, business, and economics commentary says:

    July 16th, 2009 at 2:01 am

    […] Rich at All Roads also has a post on Rio Tinto that is a good read. […]

  4. Chris Devonshire-Ellis says:

    July 17th, 2009 at 2:04 am

    The implied on-going media and diplomatic assumption that all Western backed executives would never get involved in bribery and corruption, and the initial knee-jerk reaction that China is always wrong/heavyhanded/immoral/throwingitsweightaroundetcetc is an outmoded and borderline racist view, often perpetrated by individuals and businesses who peddle shock/horror tactics about business in China to scare naieve investors into hiring them to keep them “protected” from the perceived dangers.

  5. Rich says:

    July 17th, 2009 at 2:50 am

    Chris.

    I am not sure I would go so far as to call it racist.

    Arrogant and self serving at times, no doubt
    Out of ignorance for how the system works here, sure

    Yesterday, I was speaking to some bloggers/ reporters abut the case, and their main point was that China could have “handled it better” could have been more “transparent”, but from my view… while China has certainly not been transparent by CNN 24/7 tweet feed news, it has actually been far more transparent with the evidence against Rio Tinto executives than it has with the evidence against the others.

    Yet no one mentions that.

    Again, I am not saying I know anything more than what anyone else can read i nthe paper, but I am bothered by the fact that foreign media and firms think a seperate standard should apply for foreigners.

    There are certainly issues with transparency here, but that is not the story being told now that one of their own is caught up in the drag net.

    R

  6. tdaxp says:

    July 17th, 2009 at 3:34 am

    This post seems to miss the point.

    China has engaged in a series of legalistic retaliations against Rio Tinto after a business deal with Rio Tinto went south. First talk about a brand new anti-monopoly which would have been aimed at Rio Tinto, now this sudden ‘espionage’ arrests of Rio Tinto execs, etc.

    Anyone wanting to do business with China now knows that if China does not get the price it wants, arrests might follow.

    China is current a system with a rule-by-law, but not any rule-of-law. The laws are applied selectively against those who displease powerful interests in business and government (largely, the same thing).

  7. Rich says:

    July 17th, 2009 at 4:11 am

    tdaxp

    Again, I am not making judgments as to whether or not these arrests are supported / lacking evidence. the point of this post is that NO ONE has the information, that everyone is speculating, and that in nearly every case the media is showing China as having a heavy hand.

    So, in a sense… you have missed my point, and further supported my point by writing your version of the case based on what you believe to have happened.

    You have no more facts that anyone else, yet you are already concluding that the reasons for this arrest were linked to the negotiations.

    Maybe you will be shown right, maybe you won’t, but the fact is that China’s actions at this point show a much wider clean up of the industry is occurring. That the focus of the investigations is not solely of executives of Rio Tinto.

    R

  8. Rob says:

    July 18th, 2009 at 5:47 am

    I have travelled in China reasonably extensively although I certainly don’t claim to be an expert to the degree of those here, I merely base my opinions on conversations I’ve had with other foreigners in China.

    Not specifically pertaining to this case my general opinion of the chinese legal system as well as many other asian legal systems is that there are typically numerous laws on the books that are typically not enforced or only enforced selectively. The upshot of this is that people are drawn into business or personal activities that are technically illegal but unofficially condoned right up until you tread on someones toes or someone doing something similar does something to embarrass the powers that be and suddenly those laws are enforced. It comes down, essentially to control, the government would like the tools necessary to exercise control over people and so they build the tools with which to do it.

    In this case I’d suspect that if the Australians didn’t feel that there was some significant political element to this arrest they wouldn’t have made that comment. If as you suggest it was a purely anti-corruption drive and the net caught some foreigners then I don’t believe you’d have got the reaction you did from the Australians. You could almost say that the arrest the crime and the people involved are irrelevant, the message had to be sent, first by the chinese and then by the Australians.

  9. Bill says:

    July 20th, 2009 at 5:11 pm

    My diagnose of this case is as follows:
    1. China created an opportunity for monopoly for steel supply in China through a very small number of firms allowed to deal directly with international suppliers.
    2. By creating a very small number of steel distributors to steel product manufacturers, the steel distributors become the middleman in the transaction, not the consumer, and can pass on whatever price the international suppliers wants to charge, and profit just from the margin.
    3. The great increase in demand for steel in the world in the past years created an apparent shortage which allowed the steel suppliers and the Chinese steel distributors to raise prices, which were willingly accepted by Chinese steel consumers.
    4. International steel suppliers found out this unique loophole in the Chinese steel industry and chose to exploit this Chinese characteristic.
    5. International steel suppliers use industrial intelligence (spy) means to explore the artificial price bottom line which doesn’t exist in other countries, due to competition, and multiplicity of buyers.
    6. Knowing what the Chinese distributor wants – a profit, and continue status as steel distributors in China, and what they don’t need – a good price – International steel suppliers than give them the status ( and face, a very important commodity) and a healthy profit, at an acceptable price.
    7. Chinese government after loosing face in failing the Rio take over, need to find way to gain face. Hence the arrest.
    8. Since this is all about face, international community should offer an apology of some sort to give face to the Chinese government, in exchange for the release of the employees.

    This case is not a “legal” case, or has anything to do with “corruption”. It is about face.

    The moral of the story is: use face as a trading commodity when dealing with Chinese. It is what Guanxi is all about. Face – appearance, not real value.

  10. Lisa Reisman says:

    July 31st, 2009 at 4:21 am

    I would agree with Bill and Rob’s assessment. In this case, CISA (China Iron and Steel Association) had hoped to consolidate buying power to negotiate the world’s best iron ore price, below that of Korea and Japan. That was CISA’s primary goal. To that end, it failed as the more than 112 Chinese iron ore importers started hammering out separate deals with Rio and BHP effectively eroding CISA’s aggregate buying power.

    CISA made a very strategic negotiating error in that it entered the negotiation with a very hard line stance that made negotiation extremely difficult. Add in all of the side deals and splintering and it’s easy to see what happened here. I believe this also all about face.