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.

Rio 4 Trial: Look It Up Once It’s Done

Stern Hu, head of Rio Tinto’s Shanghai office, who stands accused of taking bribes and engaging in industrial espionage, has admitted taking bribes, though he contests the size of them. We know that via one of the attorney’s representing one of Hu’s three colleagues who are also on trial. Proceedings, which are expected to last three days, are closed, even to Australian consular officials for most of the time. The part dealing with infringing trade secrets charges is expected to start sometime on Tuesday. As Lu Zhian, an associate professor at Fudan University’s  Law School, told Xinhua, if we want to find out what went on, we “can refer to the court’s hearing records after the trial and appeal”.

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.

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.

The Battle For China’s Steel

The Economic Observer says the investigation into the leaking of China’s negotiating position at the iron-ore price negotiations earlier this year that has resulted in the detention without charge of four Rio Tinto employers has widened to include Baosteel, the largest steel company. (China Daily has reported that all 16 of the leading steel mills are implicated, though this remains unconfirmed.)

The Economic Observer also lays out the way the government stepped in to take control of this year’s annual price negotiations, dissatisfied that the individual companies were consistently getting the worse of each year’s deal, with the consequent impact on the economy of higher steel prices. By having the China Iron and Steel Association handle a collective negotiation, the government thought it could hold a tougher line on prices and stop the negotiating tactics leaking out by cutting the steel companies out of the picture. But what the Economic Observer suggests is that it was not price but quota size that mattered most to the larger steel mills. So secret side deals that have always taken place between the mills and the miners continued, and with them the mutually back-scratching relationships necessary to facilitate them. So in what has become a political power battle between government and the state-owned steel mills, officials are cracking down in the only way they know how, hard.

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.

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.