Stern Hu Formally Charged

Stern Hu and his three other Rio Tinto colleagues have been formally arrested on charges of  infringing trade secrets and bribery.  This is a major breakthrough in a scandal that has severely damaged goodwill between Australia and China.  The timing of the formal arrest and the details released indicate that the Chinese authorities have retracted accusations involving state secrets.  The Rio Tinto employees are now charged in accordance with normal criminal procedures. 

The Charges

According to a Xinhua press release, the Procuratorate issued a statement late yesterday to confirm the formal arrest.  Yesterday was the deadline under PRC criminal procedure law for the Procuratorate to approve and explain the arrests.  This deadline would not have applied if the accused were investigated for stealing state secrets.

The charges are in relation to Article 219 of the PRC’s criminal law code concerning commercial secrets.  There are also allegations of commercial bribery, even though no specific legislation has been cited.  The Chinese version of the Xinhua release further suggests that the Procuratorate is in the process of charging other suspects from China’s steel and iron industry.  [I am quoting from the Chinese version of the report because some essential information is missing in the English version.]

What does it mean for Stern Hu

Stern Hu will now be entitled to legal representation.  His lawyer can once again lodge a bail application.

The prosecutor will be given two months’ time to prepare the case and to provide details of the charges to Hu’s lawyer.  The prosecutor, based on the complexity of the case, can apply for an extension of up to seven months.  If the prosecutor is unable to build a case by then, Hu can conceivably be released without charges.  However, between now and four months prior to the trial, the prosecutor can, at his discretion, make changes to the charges.

If found guilty, Hu will face a maximum jail sentence of 7 years.  He will also be asked to pay a fine.

What should Rio and the Australian Government do

Rio Tinto should see to it that its employees are receiving legal advice as soon as possible.  It is also important for the Australian Government to continue to put pressure on its Chinese counterpart to ensure the case continues to be handle expediently and transparently.  This can prevent Chinese authorities from trumping up additional charges against the accused and against Rio Tinto.

Just a word of warning for Rio Tinto: the PRC’s criminal code on commercial secrets contains two parts: Article 219 and Article 220.  The former deals with charges against individuals implicated in a crime.  The latter allows Chinese law enforcement agencies to lay charges against a company and to arrest its senior executives.  So it would be advisable for Rio Tinto to make sure that it does not place any more of its senior executives under Chinese jurisdiction.

Global Times Advocates Detention of All Rio Tinto Staff in China

Global Times, an ultra-nationalistic CCP controlled tabloid attached to People’s Daily, claimed that public opinion demand to see all Rio Tinto staff in China placed under detention.

There is nothing new about Global Times’ pouring gasoline onto the flames of ignorant anti-foreigner rage.  So I’d like to advise our readers to bear that in mind when you proceed to read this blog post.  When I first read this Global Times report, I intended to disregard it, as I usually disregard everything published in that Chinese tabloid equivalent of the Nazi Party’s Voelkische Beobachter.  This time, however, my co-blogger Ned Kelly has convinced me to write a post about it, just so that our readers will be more informed about why and how public opinion is manipulated in China.  Articles like this one will never make their way to the English language newspapers published in China.  The Communist Party’s US-based public relations agent would have weeded them out.

Global Times conducted an online survey in response to Rio Tinto’s move to recall all its research staff from China.  The online survey contains only one leading question, which reads: “Do you agree that Rio Tinto staff and its senior management of exploration should be temporarily restrained from leaving this country?”

In a subsequent report published this morning, Global Times claims that 91.6% of respondents approved of stopping Rio Tinto staff from leaving China, 6.5% disapproved and 1.9% abstained.

Global Times also quoted netizens’ comments in the report to indicate that Rio Tinto’s announcement of recalling its staff has been interpreted as an admission of guilt.  Some netizens are advocating the detention of Rio Tinto staff as a revenge against the US for the conviction of Dongfan Greg Chung, a former Boeing engineer who has been found guilty of stealing space shuttle secrets for China.  Chung’s conviction has been interpreted in China as a case of miscarriage of justice.  Incidentally, I also noticed that the news about Rio Tinto has now been placed “strategically” next to the news about Chung’s conviction.

What is this telling us?  From what I can see, the Chinese authorities have not been able to find any evidence against the Rio Tinto staff now under detention.  Rio Tinto’s refusal to back down and the Australian Government’s stepping up of international pressure are creating further complications for the industry regulator China Iron and Steel Association (CISA).  If Gordon Chang’s prediction is correct (and he usually is), some members of China’s Politburo Standing Committee are already using the Rio Tinto scandal as a pretence to launch a full scale investigation into the iron and steel industry.  China’s top organ of political power has a track record of using charges of high-level corruption to sideline adversaries.  The way Global Times attempts to manipulate the incident for a domestic audience has all the typical signs of how struggles within the Chinese Communist Party are usually handled.  As Gordon Chang has put it: “Chinese leaders seem to be knifing each other at this moment, and they probably don’t care what foreigners think. This is not a particularly good time to be doing business with, or in, China.”

Simon Crean snubbed by China

www.smh.com.au

It is common knowledge in Australia that the Chinese government is very protocol conscious, particularly when it is dealing with officials from other countries.  So when Australian Trade Minister Simon Crean arrived in Shanghai and made representations on behalf of Rio Tinto with regard to the arrest of its staff, Australians expected China to send a ministerial level official to meet with Crean.  That didn’t happen.  Instead, he only had a chance to meet with a mid level provincial CCP member.  This gesture is now widely interpreted in Australia as China’s continuing attempt to humiliate Australia, in retaliation against both the Chinalco fallout and the CISA’s inability to secure a sale contract with Rio Tinto.  Simon Crean is not only the third most senior minister in Kevin Rudd’s Labor cabinet, he is also a former Labor Party leader and a politician respected by most Australians.

China’s way of snubbing Simon Crean has triggered widespread condemnation in the Australian media.  The mood is best captured in this report in The Australian:

Trade Minister Simon Crean has made representations on Hu’s behalf, but was given a mid-level official to deal with. The Chinese seem determined to continue to humiliate Canberra.

The bottom line is clear – if Hu is not released, our relationship with China is shattered and the Rudd government will be profoundly embarrassed and seen to have no influence in Beijing.

According to this report, China’s act of humiliating Australians has been interpreted as a deliberate act of intimidation.  The report therefore calls on the broad Australian civil society to demonstrate its shock and anger at China’s crude tactics.  Only by doing so would there be a chance that cooler heads in Beijing might see the damage these outrageous actions are doing to China’s reputation internationally, as well as its interests in Australia.

The report also suggests that the Australian Government may need to step up pressure on China through issuing travel warnings to Australian businessmen against the danger of arbitrary arrest.  The report says:

There is always a bureaucratic temptation to sacrifice the individual for the sake of stability in any bilateral relationship.

To do so in this case would be to accept China’s right to arbitrarily punish any Australian involved in a business deal that China Inc does not like. It would permanently and radically tilt the playing field against Australia in any future business negotiation if the Australian side is always to labour under the fear of arbitrary imprisonment in China.

If this is the case, then the Department of Foreign Affairs and Trade should issue a travel warning pointing out to Australian businessmen that they face the danger of arbitrary arrest and lengthy detention in China if they, their company or even the Australian government displease the Chinese.

At the time of this writing, Stern Hu and his colleagues have not yet been charged.  Chinese authorities have yet to release information about the allegations made by their Foreign Affairs spokesman.  In the meantime, China’s intelligence agents and police have confiscated all documents and computer equipment at the Rio Tinto Shanghai office.  They are biding their time going through all details with a fine comb to find evidence to support their claim.  This is not investigation.  It is government sanctioned stealing of commercial secrets.

UPDATE

Forbes quoted a Reuter report to say that the probe into Rio Tinto was a part of a new economic management strategy endorsed by President Hu Jintao.  This new strategy will see spy and security agencies playing more prominent roles in overseeing economic activities.  It’s really alarming (and disturbing) if it’s real.

The Forbes report also shares my concern about how computers were removed from Rio’s Shanghai office.  This could potentially exposed Rio’s negotiating strategy and contractual terms with its customers.

 

The Rio Lesson: Ignore it at Your Own Peril

Thanks to JR at JustRecently’s Weblog for this excellent follow up on a previous discussion about the Rio Tinto spy scandal.  For those who intend to do business with China, please take note of the various case studies quoted in JR’s post.  You ignore it at your own peril.

Today, a Bloomberg report suggests that the spying charge against Rio Tinto staff is related to a set of internal meeting notes of the Chinese negotiation team that Rio staffs have allegedly obtained through illegal means.  As a result, Rio Tinto would be able to know the “bottom line” of the Chinese companies in the talks.  What do you think has been cited as “sensitive information”?  Let me surprise you: financial data, production schedules, stockpiles, raw-material costs, gross margins and other details of the Chinese steelmakers, the report said.

For heaven’s sake, am I correct in suggesting that most of these so-called “sensitive information” can be obtained through many other public and legitimate means as well?  But then of course the “ultimate crime” is that “Rio knows our bottom line”.  Big deal!  Chinese steelmakers are known to be willing parties in “informing” the media about their 33% cut bottom line.  As a matter of fact, many small to medium size steelmakers in China are unhappy with the inefficient way CISA is going about with price negotiation, which only benefits a few large steelmakers of so-called “high-end” products.

Some Chinese sources I consulted today suggest that the evidence against Stern Hu will be confined to his role in the 2009 price negotiation.  The fact is: Mr Hu has been negotiating prices for Rio for almost ten years.  Why is it that there is only evidence of wrong doing in 2009?  In the meantime, Chinese government owned online financial publications such as China Security Journal has suddenly published a large number of Chinese articles elaborating on Mr Hu’s “alleged crime and corrupt behaviour”.  I have a horrible feeling that the poor guy has been set up to take the blame.

Meanwhile, according to an ABC Radio report, Stern Hu’s detention is testing the limits of Australia’s relationship with China. Australia’s Foreign Minister Stephen Smith has expressed exasperation that he’s had to glean information about the allegations from public sources – a foreign ministry media conference and a state security public website.  Its information he says should be coming through official channels, where many requests have been and continue to be made.

Rio Staff made scapegoat for CISA’s incompetence

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More evidence has emerged today to indicate that the Rio Tinto staff detained for spying allegations have been made scapegoats for the Chinese Government’s lack of competence in consolidating China’s fragmented steel industry.  However, in the course of covering up to save face, China has jeopardised its already fragile relationship with Australia.  The incident has also alarmed many potential investors, who feel increasingly uneasy about China’s legal system, particularly its murky state secrets legislation.

A China Daily report insinuated that Mr Hu’s arrest was related to Tan Yixin, a senior executive of China’s major steel maker Shougang Group, who was detained on 7 July in Beijing for alleged “commercial crimes”.  The report further accused Mr Stern Hu from Rio Tinto of violating Chinese law by soliciting individual supply contracts among small steelmakers in China.  The report said:

In April, Stern Hu went to Shougang Group to negotiate the price of iron ore price.

In China, steel makers are banned from signing long term iron ore supply contracts with foreign suppliers such as Rio Tinto without permission.

China Iron and Steel Association (CISA), the industry regulator, has vowed to punish any companies that sign such agreements secretly.

Rio signed a 10-year contract with Jiangxi’s Ping Xiang Iron & Steel Co. Ltd at the end of last year, with Stern Hu as Rio’s representative. CISA was strongly against this agreement.

“The detention of Shougang’s executive may be just a beginning. Steel makers in Shandong and Hebei Province will be investigated, too,” the insider said.

Australian diplomats in China are not allowed to meet with Mr Stern Hu till later today (Friday 10 July).  So it is not sure whether Mr Hu did play a role in gaining long-term iron ore contracts from smaller Chinese steel producers outside of the CISA negotiations.  Even if he did, I really doubt in what way this would constitute breaking the law.

CISA, from its own admission, is a consultative regulatory body, the membership of which is entirely voluntary.  In other words, it can give advice and it can even laid down regulations.  But ultimately its member organisations can choose to accept or reject its rulings.  So even if the supply agreements between Rio and CISA members have undermined CISA’s role in the negotiation process, there is not much CISA could do about it.  The problem is obviously associated with a dysfunctional regulatory procedure, which needs to be reviewed in consultation with all stakeholders.  This is usually how problems of this nature are handled in a country like Australia where the rule of law actually means something.  It is an entirely different story in the People’s Republic of China,

Chinese Foreign Ministry spokesman Qin Gang said in a press conference today, “Competent authorities have sufficient evidence to prove that they have stolen state secrets and have caused huge loss to China’s economic interest and security.”  ABC’s Stephen McDonell is correct in pointing out:

China’s internal spy agency must think that it has a rock-solid reason for putting these men in jail for a long time. For this reason, the hearing will probably happen quickly, though they can technically be held for many months without trial. China cannot afford to be wrong in this matter and that will worry Rio Tinto. They would not risk losing face on the international stage, unless they really wanted to put Stern Hu and the others away.

In the next few days as more evidence may come to light, I’ll be in a better position to give a more detailed analysis of CISA’s possible role in the Rio Tinto spying scandal.  But for now, I’d like to quote Stuart Harris from Australian National University’s China Institute, just to remind our readers of the dire predicament facing Mr Stern Hu and his colleagues.  Mr Harris is a former Australian Foreign Affairs chief.  This is what he says in an interview with ABC (please click the video link titled “Aussie arrest in China over spy claims”):

CISA is taking a big defeat on this so it is possible that China will seek revenge against Rio Tinto.  Australia’s effort to help the accused will fall on deaf ears while China is pre-occupied with the strife in Xinjiang.  Once the dust settles on the ethnic conflict, they will have to take into account that these allegations are going to have a very serious impact on the whole issue of foreign investment.

Last but not least, my sincere thanks to MyLaowai for his generosity.  Thanks mate.  The next martini is on me.

 

China’s Version of “Soft Power” (UPDATE)

This is an update on the previous post titled: China’s Version of “Soft Power”

Xinhua has just filed a report from its Canberra office with regard to the arrest of Rio Tinto staff in Shanghai.  In the report Xinhua refers to Mr Stern Hu, the Australia staff of Rio Tinto under arrest, as “an Australian passport holder”.  As the Australian has pointed out, Chinese authorities often resort to dirty tactics of treating foreign citizens of Chinese descent as PRC nationals in order to justify imposing dubious charges on them.

Mr Hu is not a junior member of staff who may have strayed over a nebulous line by mistake.  He is the second most senior Rio Tinto executive in China, in charge of marketing and price negotiation with Rio’s biggest buyer.  At this stage, both the Australian government and Rio Tinto appear to be downplaying this incident.  I reckon this is wrong.  They are playing into the hands of Chinese authorities.  For Mr Hu, the best hope of a fair treatment is for his case to be widely publicized.  I am therefore calling upon fellow Australian bloggers (and others who are concerned) to spare some thoughts for Mr Hu’s predicament in your next blog post.  Many thanks!

China’s Version of “Soft Power”

China has demonstrated once again to its trading partners the risk of doing business in a country where the rule of law will not protect foreign companies from arbitrary State interference in business transactions.

Australia’s Foreign Affairs Minister Stephen Smith has confirmed that an Australian employee of mining company Rio Tinto has been arrested in Shanghai on suspicion of spying and “stealing state secrets”, whatever the hell that means.  Three other Rio staff have also been detained since Sunday.  It is widely speculated that the arrest is in retaliation against Rio Tinto for ditching a deal with a Chinese state-owned mining company Chinalco, and for subsequently refusing to acquiesce to Chinese steelmakers demands for unreasonable cut in contract price.

So this is how it works: if you can’t steal someone else’s company or force them to go bankrupt, then you get your big boss involved and bang them up in jail.  Now that will teach you foreign devils a lesson about how to show RESPECT for your future masters!  After all, Australia is just China’s backyard.  You can’t stop us from getting what we want.

Most importantly, this is not the first time China has turned hostile in face of major setbacks in a business deal.  According to a Reuters report,  Chinese authorities arrested a Chinese manager of Shell in 1996 and charged her for stealing state secrets regarding plans by Royal Dutch Shell to build an oil refinery in southern China.  The putative “secrets”, according to media reports, involved information on the financing and environmental implications of the project. The arrest was in retaliation against Shell for pulling out of a business venture with the state-owned China National Offshore Oil Corporation.

The following is an excerpt from the Reuter report.  I am joining the author’s call for the Chinese government to immediately explain why the Rio staff, who are part of its iron ore sales team, have been held:

Chinese anger at Rio Tinto for reneging on a deal with aluminium group Chinalco and opting instead for an iron ore joint venture with BHP Billiton last month was understandable. Indeed, China has good reason to question the Rio-BHP JV on competition grounds.

But the detention of four Rio Tinto employees, on suspicion of espionage according to Australia’s foreign minister, bang in the middle of sensitive negotiations on iron ore exports to China is a dangerous step in the wrong direction. Beijing must either justify the arrests publicly or release the Rio staff immediately.

Rio is locked in tough negotiations with China’s massive steel sector following its refusal to agree to Chinese demands for a bigger cut in contract prices. As a result, Rio is for now at least charging its Chinese customers spot market prices, which are considerably higher.

Meanwhile the world has been given every reason to expect China to continue developing its legal system in accord with the Daffy Duck school of jurisprudence and forensics.