Behind Chinese walls

The detention of Rio Tinto employees in China has worrying implications

Published on The Economist.com, Shanghai, July 13, 2009.

THE detention of four executives of Rio Tinto, an Anglo-Australian mining giant, has transformed an industrial spat to a big test of how China intends to pursue its economic objectives. It has also sent a shudder through Chinese employees of Western companies in any area that is deemed important to the country’s welfare.

News only began to emerge on Tuesday July 7th though the government picked up Rio’s employees two days beforehand. After nearly a week details still remain sketchy. Despite the government’s being barraged by inquiries, there has yet to be any official comment …

… This year, the failure to reach agreement has not been without benefits for the miners. Spot prices, which guide the annual benchmark, have risen steadily. And Chinese steel mills have been forced to make purchases on the spot market. Here prices are currently not only significantly above what they had hoped to pay, but approximately 7% more than what the Japanese and South Korean mills have agreed to under their annual contracts. This has put the Chinese producers at a disadvantage at a time when they felt their heft should give them a preferred rate in the annual negotiations.

That, say many in the industry, has resulted in the disastrous Chinese negotiating strategy—playing tough while prices were rising. There is widespread speculation that this has been enough to prompt embarrassed officials to attack Rio by alleging that Rio’s employees engaged in the theft of “state secrets”, presumably meaning the production targets of state-run Chinese steel mills. In a further twist, as part of the investigation into Rio, Chinese authorities are said to have seized information which may provide insight into the mining firm’s production costs and capacity.

Whether any of this is useful to China is questionable, but without a doubt the recent events could carry a high cost. The mysterious nature of the arrests has raised widespread concerns within foreign companies attempting to operate in China. If state espionage charges are used in a case stemming from a commercial contract negotiation, the worst fears of foreign companies and countries about the Chinese companies will be justified. In June, the Australian government rejected an offer by Chinalco a state-controlled aluminium company, to raise its stake in Rio to 18% on the grounds that its state ownership raised concerns about its ability to operate under normal business principles, rather than an as agent of the Chinese government. The Chinese government was irate, but the detention of the Rio employees would seem to justify some of Australia’s concerns. (full text).

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