Stern Hu, an Australian citizen and Rio Tinto executive that China accuses of bribery and espionage, was detained earlier this month along with three Chinese colleagues. As the drama unfolds in the coming months, there is more at stake than the fates of four individuals or even the China-Australia relationship.
This story began several years ago, when Chinalco, China's largest (state-owned) producer of aluminium, began working against a potential merger of Rio and BHP Billiton, Rio's larger Australian rival. The two are among the largest iron ore exporters in the world. In February, Chinalco solidified a 9% stake in Rio, and talk emerged thereafter of China's largest-ever foreign investment: $US19.5 billion to raise Chinalco's stake from 9% to 18%, as well as interests ranging from 15-50% in numerous Rio assets.
Economic and political factors immediately burdened the bid. Shareholders were unhappy with Chinalco's two board seats and acquisition of convertible bonds. Chinalco received a lukewarm reception among Australians skeptical of an enterprise that is supported by a government interested in lower Rio import prices. The deal slowly died as markets rebounded and, on June 5, Rio announced a joint-venture with BHP and a world record $US15.2 billion rights issue. In attempt to maintain its 9% stake, Chinalco has registered to participate in the rights issue.
Many have speculated that the detention of Rio's employees this month was retaliation for last month's disappointment. This cannot be proven, of course, and nor is it the point.
Shanghai's State Security Bureau insists that it has "ample" evidence that Mr. Hu stole "state secrets" by bribing internal staff of Chinese steel companies during iron ore negotiations. It is no surprise that accusations of bribery are present. The corruption plaguing the iron and steel industries in China is well-known. One problem is that import licenses only go to the largest and most-favored Chinese companies, and excess imports go to those willing to pay for them.
For foreign observers, the peculiarity is that Mr. Hu is also under investigation for espionage, not just commercial bribery or stealing business secrets. Chinese officials argue that Mr. Hu obtained critical information about China's iron and steel markets, as well as negotiating strategies, and this caused a "huge loss to China's national economic security and interests."
The business world is rightly concerned. Should foreign companies view negotiations or relationships with Chinese state-owned enterprises as interaction with the Chinese state and any criminal act therein, regardless of its commercial nature, as potentially a crime against the Chinese government? Even more troubling, does the Chinese company necessarily have to be a state-owned enterprise?
As with any country, China takes its secrets seriously. One estimate is that each year China has 1 million classified documents, as compared to an estimated 100,000 in the U.S. But the law does not yield much guidance for outsiders (or Chinese, for that matter) on what or where these secrets are.
Focus on state secrets began in 1988 with the passage of the Law on the Protection of State Secrets. Even Chinese scholars criticize the vagueness of the law, which defines "state secrets" as "secret matters" in major policy decisions, the armed forces, diplomatic activities, economic and social development, science and technology, safeguarding state security, as well as "other matters".
The National People's Congress recently revised the law for the first time, but the draft law has not yet been passed. One major impetus for the revision is that technology has overtaken the law and Chinese have been leaking state secrets over the internet too easily. The draft law improves protection of state secrets by strengthening management and imposing a system of accountability, but unfortunately does not delineate more clearly where, for instance, a business secret ends and a state secret begins. Moreover, in practice, information can be classified as a state secret not only by the relevant government agencies, but also by government officials who work in trade associations or are high-level business executives. Along these lines, the draft law requires businesses or enterprises that have access to state secrets to obtain an accreditation of state secret protection.
As China ramps up its spending spree around the world, it is problematic that the line separating the activity of Chinese enterprises and the projection of state power is blurring. There are two primary problems. First, there is nothing indicating which companies have state secrets or what precautions foreign entities should take to avoid being accused of theft. Second, information can still be classified as a state secret retroactively. In other words, information that has already been made public can suddenly be deemed secret. This has huge implications, as it too easily allows law to become a political weapon.
Numerous other Chinese laws involve state secrets, including the State Security Law, the Criminal Law, and the Criminal Procedure Law, but they only muddle an already confusing situation.
What will happen to the Rio employees in custody? There are still many unknowns, but if the Chinese government is at all concerned about the backlash that a state secrets conviction might create in the business world, it seems likely that the detainees are slapped with the less serious commercial bribery charge.
Even if the case's sensitivity grants the detainees leniency, the Rio drama may enter new circles. The Rio-BHP joint-venture may need to be approved by China's new antitrust regime, which, through its recent rejection of Coca-cola's bid for a Chinese juice company, has been viewed as a mechanism erected to protect Chinese interests. Additionally, China may broaden its investigation to include the rest of the iron and steel industries. If the number of Chinese nationals under investigation escalates, it will become harder to label this case one of political retaliation.
In the coming months, the issues underlying this Rio spat could become topics of much debate. As China seeks more friends and resources abroad, its officials must remember that legal and political ambiguity is precisely what discourages deeper engagement by foreign companies with their Chinese counterparts and leaves foreign polities wary of China's rise.