Detention Of Rio Execs May Signal Shift In China’s Economic Security Policy

In any commercial negotiation, intelligence about the other side’s intentions is invaluable. At some point gathering information becomes corporate espionage. Where the line between the two is drawn is rarely clear, and in China, perhaps, murkier than in most places, and more a political than legal decision.

The detention without charge of Rio Tinto’s chief iron-ore salesman in China, Stern Hu, and three of his Chinese colleagues from Rio’s Shanghai office is a case in point. It is making many multinationals operating there look again at the security of their communications, while Australia’s foreign minister, Stephen Smith (Hu is an Australian citizen) has warned that it puts at risk a wide range of business dealings with the country. But this may all be more about internal politics than international trade.

The case is complex and unclear. The four men, all involved in negotiations earlier this year with China’s steel companies over iron ore prices, were detained on July 5th. They are accused of stealing state secrets and bribing Chinese steel makers for information. Chinese officials have given no details (there is no charge yet, so no evidence to support it is necessary, though the government says it has it: Catch-22; Chinese law lets people be held for investigation for some time with charges being brought).

Chinese press reports say the four Rio executives acquired information about an internal meeting of the China Iron and Steel Association regarding the price negotiations. Other press reports say that their computers have been seized, which could contain details of Rio’s negotiating tactics and other commercially sensitive information. (Rio hasn’t said anything publicly about computers as far as we can tell.) Yet more press reports say several Chinese steel executives are also being investigated and that one, from Shougang, China’s eighth-largest mill, has been detained.

The detentions also followed the collapse of a proposed $19.5 billion investment in Rio by Chinalco, Rio deciding late on to raise capital through a rights issue instead, and to strike an iron ore production joint venture with BHP Billiton, decisions that sat ill with Chinalco. That adds grist to the conspiracy theorists’ mill.

But the collapse of the Chinalco Rio investment was followed by the establishment of a top-level committee to take a tighter strategic policy grip on investment deals with the Party’s standing committee taking a leading role. President Hu Jintao appears to have endorsed the detention of the Rio four (the same President Hu who bailed from the G8 meeting in Italy last week to deal with the Urumqi riots; these days, we are seeing less of the once ubiquitous Prime Minister Wen Jiabao, and more of Hu.) Ever since the global financial crisis hit China hard last September, Chinese economic policy has become a national security concern (for the economic prosperity/social instability/political legitimacy nexus we have outlined frequently before). The Party’s survival strategists — the political risk managers and security people — not the economic planners and reformers are in charge. They appear to be moving from the macro — the 8% target growth rate, the 4 trillion yuan stimulus package to deal with the collapse of the real estate market, the fall in share prices on the Shanghai and Shenzhen exchanges, and the unemployment in the export workshops of the Pearl River Delta and other coastal regions — to the micro. While the reasons for that are only to be guessed at (anything from internal power struggles in the run up to the changing of the guard in 2012 to defense of regional fiefdoms to just old habits dying hard) if the Rio four’s detention turns out to be anything more than an anomaly, this is a significant policy shift.