In any other country, with any other company, at any other time, it might be considered a routine case of corporate espionage. But the arrests earlier this month of four employees of the mining giant Rio Tinto have thrown relations between China and Australia into an uproar and cast a dangerous chill on China's foreign business partners. On July 5, the Shanghai State Security Bureau arrested Rio Tinto executive Stern Hu, a Chinese-born Australian, and three Chinese employees on suspicion of stealing state secrets. While China's murky criminal-justice system makes it difficult to unearth any specifics of the charges, the state-run China Daily reported on July 15 that the Rio Tinto representatives allegedly bribed officials from 16 Chinese steel mills during negotiations over iron-ore prices. Chinese media also reported that at least five Chinese steelmakers and the China Iron & Steel Association are also under investigation. Rio Tinto has denied any wrongdoing by its employees.
China's wide-ranging state-secrets law has been used to prosecute economic crimes before, but usually in cases involving people seen as threats to the ruling Communist Party. Turning it on China's foreign partners, Western observers say, could undermine global commerce. Australian Prime Minister Kevin Rudd, who has made a point of burnishing his country's links to China, said the detention of Hu jeopardizes China's trade relations with his nation and the rest of the world.
The stakes are high on both sides. Given the importance that Beijing places on China's economic development, commodity-price data could be considered vital and sensitive information, says Joshua Rosenzweig, Hong Kong--based manager for the Dui Hua Foundation, a human-rights group. "The success of China's economy is tied up with the legitimacy of the government in a very big way," he notes. Foreign mining companies--very much including Australian ones--have profited greatly by feeding China's ravenous appetite for raw materials. But recently, wild fluctuations in commodity prices and friction over trade deals have increased tension between overseas iron-ore suppliers and China's steel producers. The arrests came weeks after the collapse of a bid by state-owned aluminum company Chinalco to invest $19.5 billion in Rio Tinto; the timing has prompted some observers to suggest that the charges are retaliatory.
Meanwhile, negotiations over iron-ore contracts, an annual ritual that has been particularly heated this year, may be another factor. Chinese steel producers have been pushing for a discount of up to 50% on the price agreed on last year with Rio Tinto. But with the negotiations stretching long past their original June 30 deadline, steadily climbing prices for iron ore have steelmakers sweating. "Clearly the Chinese insistence that the price be cut further no longer can be sustained," says Jim Lennon, a Macquarie Bank analyst, who notes that talks "have gotten increasingly acrimonious."
Whatever the cause, the case against Hu and his colleagues remains serious, although Australia's Foreign Minister noted on July 20 that the four could conceivably be spared the espionage charges and tried for lesser criminal misconduct--which would go a long way toward smoothing the waters. Healing the wider mistrust between China and its trading partners will be harder.