Handling a dragon that has fried its own foot
Sydney Morning Herald
Saturday July 11, 2009
THE Chinese Government has revealed its charges against the Rio Tinto executive Stern Hu, but the information does not add a great deal to the enigma that his arrest and those of other members of his team have created.Mr Hu, a respected and long-serving executive of Rio Tinto, has, the Chinese Government says, stolen state secrets, bribed staff of Chinese steel companies, and caused huge loss to China's economic interest and security.The arrests follow a rocky period in China's relations on several levels with Rio Tinto and Australia. The Chinese state-owned metals company Chinalco had bought a substantial share in the company early last year. Then in February Rio Tinto, burdened with debt, turned to it for help and negotiated a controversial share issue and asset sale deal worth nearly $30 billion.The Australian Government, which had to approve the deal, delayed its consideration, and Rio Tinto's fortunes recovered far enough to allow shareholders subsequently to block it.That outcome, though not specifically directed by Canberra, suited Australia's interests. In general the market should decide the worth of mergers, but Chinalco is not a free-market company, and was undoubtedly hoping to use its effective control of Rio and its mining assets to push its prices down. Australians would be troubled if substantial influence over export prices was handed to what is in effect a commercial arm of the Chinese government.Subsequent developments have gone similarly badly for Chinalco. Having almost won control of Rio assets, including iron ore mines in the Pilbara, it watched Rio conclude a joint management deal for those assets with BHP Billiton precisely the connection which China fears.In subsequent negotiations with large mining companies, Chinese negotiators were hoping for big price cuts because of the worldwide downturn bigger than the 33 per cent cut obtained by Japanese and other steelworks. It has not yet obtained them. Rio Tinto, of course, was also a party to those negotiations no doubt an additional irritant.To outsiders the series of events is just another chain of market vicissitudes, but it appears that for the Chinese it represented a substantial loss of face, and not only at the level of the enterprise involved. Many commentators have seen in the legal action taken against Rio's executives evidence that China's national pride has been wounded.That the whole episode from start to finish intended to lower the price China's steel makers pay for raw materials has been poorly handled at a senior level within China's bureaucracy does not reduce the problem. Quite the opposite.For China, as commentators have observed, it is already a large step to accuse a foreign business executive of a major company of spying.It is a position which cannot be easily relinquished without further loss of face. That makes the task facing our diplomats and consular officials particularly tricky. To put the issue on the same level as the Chinese have and confront it directly as a matter of Australian national pride as some notably the Opposition Leader, Malcolm Turnbull, and his deputy, Julie Bishop, as well as the Greens leader, Bob Brown have been recommending, is likely to entrench the Chinese in their position, and make an eventual solution harder to achieve.It should not be forgotten that, though Mr Hu is an Australian citizen, the core of China's argument is with his company, and with the operation of commodities markets in general, and only peripherally with Australia and its marginal role in the failure of the Rio-Chinalco deal. Many Rio shareholders, who voted against the merger, are Australian, but many more are not. Australia does not control, nor does it wish to, the commodities markets. (Nor, of course, does Australia wish anyone else to control them.)It is quite legitimate, therefore, that in approaching this problem Canberra does not assume China's opaque and unpredictable actions against Rio Tinto's executives are a direct challenge to Australia. Australia must, of course, stand firmly behind Mr Hu, insist that his legal rights be respected and that any court procedures be transparent. But it should resist the temptation to thump the table. For the moment, the Prime Minister's diplomatic instincts, to play things down and deal with it as a consular matter, are the right ones.
© 2009 Sydney Morning Herald
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