When Chinese police detained four Rio Tinto employees – including an Australian national – for allegedly stealing state secrets, a chill ran down the spines of many foreign investors.
Given its timing shortly after Rio aborted plans to take a £12bn investment from Chinalco, the state-owned metals producer, many initially suspected it was retribution for that debacle. Australia was quick to suggest it could affect the international business community’s perceptions of the world’s third largest economy.
Today the latest round of a war of words between the two governments over the spying allegations deepened as it emerged that China has told the Australian government that it has “sufficient evidence” to support the accusations.
He Yafei, China’s vice-minister of foreign affairs, said: “I stressed that we have sufficient evidence showing that the individuals involved obtained China’s state secrets using illegal means. The case has entered the judicial process and I requested the Australian side to respect China’s judicial sovereignty.”
Rio has denied the claims that its employees have been involved in any kind of spying or bribery in China.
Canberra said that it would “take some time” to resolve the crisis, which has seen Rio’s top iron ore executive in China, Australian Stern Hu, held for 18 days along with three colleagues. Stephen Smith, the Australian foreign minister, said he still hoped to meet his Chinese counterpart to discuss the matter.
China is Australia’s biggest trade partner, with trade worth $53bn (£32.3bn) last year. Last week Simon Crean, its trade minister, warned that the case was “important as a signal to all people seeking to do business in China” and called for the matter to be handled quickly.
With the case still under investigation, no one can be sure of the precise details of the allegations; still less of whether they have foundation. Rio Tinto has stressed that it believes its staff “acted at all times with integrity and in accordance with Rio Tinto’s strict and publicly stated code of ethical behaviour” and denied claims that they bribed steel companies.
But most now believe the issue is in effect an inquiry into the operations of a complicated and often shady steel industry rather than any espionage or national security matters. The problem is that in China, the distinction is not so clear. The case centres on negotiations between Chinese steelmakers and iron ore producers, led by Rio Tinto, and the information used in those talks. Because so many Chinese companies are partly government-backed, and because steel is a strategic industry, it has become far more than a purely commercial matter.
“This case illustrates some of the uncertainty of getting involved in business in China,” said John Frankenstein, assistant professor of economics at the City University of New York. “A Chinese lawyer once told me ‘basically, the state can legitimately intervene in any deal at any time under any pretext’.”
“There are a lot of multinationals who came to China and have a fact-finding, commercial information arm. For those people it’s certainly worrying,” added Tom Miller, of the Beijing-based economic consultancy Dragonomics.
“If you are in the kind of business where you think there might be an overlap between commercial information and state secrets, you would be concerned. The problem is that Chinese law on this is very, very oblique and frankly no one knows what a state secret is.”
The worst fears of foreign investors appear to have been mitigated by the emerging details of the Rio case.
“I don’t think it’s as alarming as it looked on day one,” said one business adviser who asked not to be identified; several people were reluctant to speak on the record, or had been instructed not to do so by their companies, in a sign of the case’s sensitivity.
“There is obviously a degree of political motivation; it’s impossible to say it’s pure coincidence.”
But he pointed out that the inquiry had expanded with the investigation of executives from steel firms, suggesting that the authorities were not simply targeting Rio Tinto and that they were concerned about the “notoriously corrupt” industry and its possible skewing of development. “Using legal means to intimidate or pressurise companies in business negotiations at lower levels is not at all surprising; it happens quite a lot. But to happen on that sort of stage would be unusual,” he added.
The case is so sensitive that it was reported that president Hu Jintao personally approved the decision to press ahead. But Steve Dickinson, a partner at the law firm Harris & Moure in Qingdao, believes the issues it raises are not new.
“The old notion used to be that foreigners got a free pass – the worst that would happen was that you would be told to go home. That is not the rule now,” he said. “People who conduct industrial espionage and bribe people and obtain information illegally should not set foot in China.
“One guy said to me ‘everyone does that in China’. But people also go to jail and get executed for doing this in China. People do it and think ‘see, nothing happened’. The only time things happen in China is when things go sideways.”
Many complain that the market for illicit information has been created by China’s failure to establish legally compliant information agencies. “Government and enterprises should realise that by [providing] publicly available information, they can to a large extent satisfy the demand for commercial intelligence … and reduce the space available for corruption and espionage,” the Beijing-based economic consultancy Anbound said.
Dickinson acknowledges many clients chafe at obeying laws that they can see competitors flouting. “Foreigners have pressure to get information through improper means … [But] If you can’t do things any other way – go home. It’s not worth being arrested for,” he added.
Whether companies take his advice remains to be seen. “I doubt this will put them off coming. Most of the world economy is still in the doldrums; China is one of the bright spots,” said Miller, speaking days after new figures showed that GDP growth rose to an unexpectedly high 7.9% in the second quarter.
Experts also play down suggestions that an increasingly mighty China is brushing aside the firms it used to woo. “There’s anxiety that China is not interested in foreign investment any more,” pointed out Professor Li Wei, of the Cheung Kong Graduate School of Business in Beijing and the University of Virginia.
“I would discount that. It doesn’t care much about financial resources foreign companies can bring, but access to foreign markets remains important. I don’t expect major changes.”
Tania Branigan, China correspondent for the Guardian.