U.S. Forces To Australia And Beijing’s Response

This Bystander is shocked, shocked to find that geo-politics is going on in the region!

Xue Feng, Stern Hu, State Secrets And China’s Rule Of Law

When is publicly available information a state secret? When it is business information held by China’s state-owned firms. The sentencing of Xue Feng, a 44-year old Chinese-born American geologist, to eight years in jail in China for stealing state secrets, which in his case involved an attempting to buy data about the oil industry for the U.S. energy consultancy he worked for, follows the 10-year sentence given in March to Stern Hu, formerly of the Australian mining firm Rio Tinto, for accepting bribes and dealing in state secrets.

It doesn’t take much to draw comparisons between Xue and Hu’s cases. Both involved men who had gone abroad, gained a second nationality and then returned to work in the country of their birth as executives for a foreign company. Both have received exemplary sentences in comparison with those handed down to the Chinese nationals tried alongside them (three in both cases). Both were working in what are regarded as strategic natural resources industries (oil and steel respectively).  Both cases strained relations between Beijing and a foreign government (the U.S. and Australia) that had raised the cases at the highest levels; handing down the sentencing of Xue on the same day that the U.S. was celebrating its own Independence Day holiday was a particularly pointed rebuff, especially as Washington had not publicized Xue’s case previously in the way that Canberra had done with Hu’s.

The lessons to be drawn from all this, for foreign businesses at least, is that those competing in any of the 20 industries that China has designated as strategic and in which it is grooming national champions need to remember that the line dividing market intelligence from industrial espionage is a fine one and that the one dividing market intelligence from a state secret finer still. And while it might appear to foreign companies that the distinction is vague, it is not to Chinese law makers: draft regulations released earlier this year defined business information held by state firms as state secrets.

Second, that Chinese-born foreign nationals who return to work in China for foreign companies are seen as a special kind of threat; those operating in sensitive industries doubly so (Reuters has a list of a dozen or so examples of ethnic Chinese punished for stealing secrets and spying here). Third, that the due process of law in China — which has been applied in both these cases (more or less) — is still the application of a rule of law in which law is regarded as an agency of the state.

China and Rio Tinto: Coinhabiting Parallel Universes

While gathering our thoughts for a preview of Monday’s start of the Rio 4 industrial espionage trial, we received word of Rio Tinto’s $1.35 billion iron ore joint venture with Chinalco in Guinea. Having slept on it for more than 24 hours, this Bystander still can’t make anything out of it that isn’t surreal. Perhaps it is just another example of China’s remarkable ability to operate in parallel universes.

We had assumed that the trial of Australian Stern Hu and his three Chinese colleagues at Rio would proceed to its predetermined conclusion, with a routine sentence to follow. The main point the court proceedings are meant to be making is that China follows the administration of its law–not the same thing as following the rule of law, of course–and that nobody is above the process. With a host of domestic corruption cases in train, no foreigner, especially an ethnic Chinese one like Hu, can expect much by way of favors. Foreigners routinely underestimate how signals they assume are directed at them are really more for domestic consumption.

The case has strained though not severed relations between Beijing and Canberra. Those were further frayed last June when Rio Tinto pulled the plug at the eleventh hour on a $19.5 billion cash injection from Chinaclo that would have increased the state-owned aluminum giant’s 9% stake in the Anglo-Australian miner. A revisionist view of the causes of Rio’s change of heart more favorable to the company has taken hold in Beijing. Last year Rio’s sales to China accounted for a quarter of the company’s revenue.

The new joint venture between the two in Guinea gives Chinalco a 47% stake in Rio’s Simandou project which involves infrastructure work Chinese firms are well practiced at in Africa, building a mine, a port and a railway to connect the two. Last October, China signed a $7 billion mining and energy deal with Guinea’s military rulers, so it makes a well-connected partner for Rio in a project that has run into local political problems. The joint venture also gives China a voice on the sellers’ side of the table at the iron ore price negotiations where it is already sits on the other side as the buyer. More parallel worlds.

Rio 4 To Stand Trial

The industrial espionage case involving four employers of the Anglo-Australian mining company Rio Tinto  has entered its next phase. The four, who include an Australian citizen Stern Hu, have been indicted on on charges of bribery and stealing business secrets, Xinhua reports. They will stand trial in Shanghai in what promises to be another test of relations with Australia, and of the nerves of foreign investors which have been rattled by what seem to be a number of strikes at foreign companies in recent months. If found guilty, the Rio 4 could face up to seven years in jail on the commercial secrets charge, and up to 20 years on the bribery charge. Last week, Rio appointed Ian Bauert to run its operations in China. An old China hand, Bauert set up the company’s first China office more than 25 years ago.

Palmer Faces The Perennial China Question: When Is A Deal A Done Deal?

How binding is an agreement of intent? Not an uncommon question when doing business with Chinese companies. Australian multimillionaire Clive Palmer’s trumpeted agreement with China Power International to sell it coal from the new Galilee Basin coalfield in northern Queensland turns out, it seems, to be more of a framework than a final contract.

Palmer and Queensland Premier Anna Bligh announced at the weekend what they said was Australia’s biggest export contact, worth $60 billion over 20 years. Hong Kong-listed China Power International Development, the named customer, issued a statement on Tuesday denying that it had reached such an deal. Palmer’s company, Resourcehouse, then said had got the name wrong. It had struck the agreement  with CPID’s parent state-owned China Power International Holding in Beijing. A CPIH executive then described the agreement as a framework.

Xinhua has reported that the two companies have signed “an agreement of intent” but have not yet started price negotiations. Premier Bligh is reported in the Australian press as saying that she had seen the contract and while it did not mention dollar totals, it did mention tonnages. Resourcehouse is now saying the price will be linked to market prices and casting the $60 billion figure as its estimate over the life of the agreement.

Echoes in all of this of the Australian securities regulators’ failed case against Fortescue Metals Group, which was accused in 2006 of overstating agreements with three Chinese companies to finance its Pilbara iron ore project. (The regulators are still appealing the ruling against them.)

This Bystander’s two-cents’ worth is that a final contract with China Power International will eventually get signed; China needs the coal and there is a lot of construction work for Chinese firms tied up in the deal.  But Resourcehouse has clearly jumped the gun, for which there will likely be a negotiating cost. It has also been left with some egg on its face that will need to wiped off before its possible initial public offering in March.

$60B Australian Coal Deal Is Good Business For China

It is being billed as Australia’s biggest export contract, but by any measure it is a whopping deal. China Power International Development, an arm of China Power Investment, owner of Hong Kong-listed China Power, has contracted to buy $60 billion-worth of coal over 20 years from privately held Resourcehouse, starting in 2014.

Resourcehouse will be suppling 30 million tones of coal a year from the new Galilee Basin coal field in northern Queensland. The company is reported to be now planning its delayed initial public offering in Hong Kong for March to help fund the $8 billion development of the field. Much of the work will be done by Chinese companies. Metallurgical Corporation of China will build the mine and associated export infrastructure which includes a port and new rail link. Sino Coal International Engineering. China Communications Construction, and China Railway Group will be sub-contractors on the project. Export-Import Bank of China is providing $5.6 billion of financing.

Resourcehouse’s owner, Clive Palmer, who is one of Australia’s 30 richest men with fortune of $420 million, according to Forbes, has previous with China. In 2006 and 2007, he sold iron-ore-deposit leases to Citic Pacific for $415 million.

For all China’s plans to switch to green energy technologies, it is still heavily dependent on coal for power generation. The deal also suggests that relations between the two countries are back on a reasonably even keel following the so-called Rio 4 industrial espionage affair and a number of other points of conflict including Chinalco’s rebuffed attempt to buy into Rio Tinto and the visit to Australia of exiled Uighur activist, Rebiya Kadeer.

Keeping the project a largely all-Chinese affair won’t have hurt it either. But it does raise a question about how many of the expected 6,000 jobs that are forecast to be created by the deal will go to Australians.

No Progress In Rio 4 Case

Kevin Rudd, Australia’s prime minister, seems to have to no change out of his Chinese counterpart Wen Jiabao when the two discussed the case of Stern Hu and three of his Rio Tinto colleagues who were detained by Chinese authorities in July on suspicion of stealing state secrets. Speaking on the sidelines of the ASEAN meeting in Thailand, Rudd said only that the case, which has strained relations between Canberra and Beijing, continued to be the subject of “intense and continuing discussion” between the two countries’ foreign ministries. Deciphering the diplomatic body language, those discussions aren’t making much progress. The four were  formally arrested in August on charges of stealing commercial secrets, but not on the more serious one of stealing state secrets.

Rio Four Formally Charged

The Rio Four have finally been formally arrested on charges of  infringing trade secrets and bribery, Xinhua reports. A statement from the Supreme People’s Procurate said prosecutors approved the arrest of the four Rio Tinto employees, that investigations had showed they obtained China’s commercial secrets through improper means and that there was evidence of bribery involved.

The four, Stern Hu, who is an Australian citizen, Liu Caikui, Ge Minqiang and Wang Yong, were detained in Shanghai in early July. Rio has said its employees did nothing “unethical” and did not bribe Chinese steel mills for information.

Given the prominence of the arrests, formal charges hardly come as a surprise, though this Bystander notes in passing that the four were not charged with the more serious crime of stealing state secrets, which carries a potential life sentence on conviction. Stealing commercial secrets, our learned friends advise us, carries a sentence of up to three years imprisonment and/or a fine.

What to watch for next is which executives of which Chinese steel companies get fingered.

A Clue To When The Rio Four Will Be Charged Or Released?

Conspiracy theorists start here: Xinhua has a report on the growing dispute with Australia over the detention without charge of four Rio Tinto executives, one an Australian citizen, on allegations of stealing state secrets. It is titled, China Striving To Create Fair Trading Environment, so you get its drift. But it concludes with the following tantalizing final paragraph:

But the spying case has cost the mining giant 100 billion yuan ($16 billion), with its market share dwindling by as much as 30 percent, according to a report by the China Times.

That is only $3 billion shy of the $19 billion that Chinalco was going to invest in Rio, before the mining company pulled the plug on the deal at the last minute, much to the chagrin of Chinalco and Beijing.

Could it be there is a measure there for how much longer the Rio Four will be held without charge?

Canberra Getting Antsy Over Rio 4

Australia trade minister Simon Crean has called on Beijing to lay charges or release detained Rio Tinto sales executive Stern Hu, an Australian citizen, and three Chinese colleagues. The four men are accused of stealing state secrets in connection with the iron-ore price negotiations earlier this year. Rio had denied the allegations. The quartet has been in detention since July 5th without charge as Chinese law allows.

Trade relations between the two countries increasingly risk being harmed, Crean says, without the case being settled one way or the other. The Australian met his Chinese counterpart, Chen Deming, at the APEC trade ministers’ meeting in Singapore, where the issue came up and we understand Crean made his government’s position crystal clear.

China is Australia’s biggest trade partner, with iron ore exports to China accounting for $14 billion of $53 billion in bilateral trade, so the case is more likely to proceed at China’s pace than Canberra’s. And with the iron-ore price negotiations dragging past their June 30 deadline, no bargaining chips are going to be given away cheaply.