Revenge is not sweet

July 12, 2009 at 2:30 am 2 comments

In a recent post, I said that I thought China would retaliate somewhere, somehow for the collapse of the Chinalco deal with Rio Tinto. To refresh our memories, Chinese companies are snapping up mining and energy assets around the world, including copper mines and were salivating at the thought of investing in Rio Tinto who own 30% of the Escondida copper mine in Chile. But Rio Tinto ditched its proposed deal with Chinalco and eloped with BHP Billiton. The Chinese weren’t happy and let’s not kid ourselves: Chinalco is a state-owned company, which would have meant China extending a political influence over Australia. An indication of just how pissed off they were over Rio Tinto’s snub was glaringly obvious when China’s official Xinhua news agency accused Rio of “perfidy” for scrapping the deal.

And let’s face another fact (one which I mentioned in this post) – that if Australia is being buffeted less than many Western democracies during the GFC, it’s largely thanks to our biggest export customer, China. Prior to March 2009, we were pocketing AU $2 billion to $3 billion per month from our exports to China but in March our earnings jumped to a record $4.3 billion. Economist, Tim Harcourt, refers to this as “bamboo shoots” –  meaning that our increasing exports to China has saved Australia from a technical recession.

But back to retaliation. This week, we heard that an Australian citizen, Stern Hu, who is a highly respected businessman was nabbed by Chinese secret police on July 5 whilst he was in China engaged in sensitive iron ore price negotiations. And for which company do you think Mr Hu works for?  None other than Rio Tinto, where he is the head of Rio’s iron ore operations. The Chinese are busy accusing him of stealing their State secrets and bribing Chinese steelmakers to obtain summaries of meetings by Chinese negotiators. From what I’ve read, there are a number of issues at play:

  • Rio Tinto is engaging in intensive talks with the Chinese over lucrative iron ore contracts (iron ore of course is used to make steel and China is the world’s biggest steel producer. The Chinese have not been happy with repeated price hikes for iron ore)
  • Rio refused to kowtow to Chinese demands for a 40% haircut in price
  • Not only were the Chinese red-faced over Chinalco’s failed massive $19.5bn investment bid in Rio, they weren’t particularly pleased with the Defence White Paper that suggested Australia’s future defence plans need to take into account an increasingly aggressive China; and the Chinese government regime has been protesting against the Parliamentary delegation visiting India and its meeting with the Dalai Lama. And of course, they were insulted when our PM, Kevin Rudd, raised human rights issues in Tibet.
  • Then Mr Hu is nabbed. Join all the dots – an interesting sequence of events don’t you think?
  • Mr Hu is being held without charge and our Foreign Minister, Stephen Smith, is reduced to finding out about Mr Hu’s welfare from Chinese websites because Australian Government and consular officials had so far been unable to talk with or see Mr Hu (I believe they’ve now seen him)
  • Apparently, Mr Hu was worried telephones were being bugged so there is a suggestion that China is using its spy agencies to interfere with what should be commercial negotiations
  • China claims it has evidence against Mr Hu but Australia remains in the dark. And this is shaping up to be a big cat fight that will surely test our Mandarin-speaking PM. I’m sure most Australians thought that Kevin Rudd, who served in the Australian Embassy in Beijing, would have few problems dealing with the Chinese.

China is giving Australia the finger. You can sniff the air of contempt. The fury of a China scorned signals something I think we need to think deeply about. Our relationship with China has taken leaps and bounds economically speaking but our cultural and legal relationship is lagging behind. Stephen Smith says:

“China has its own laws about state secrets. They are clearly broader than the view that Australia might take. Frankly, it’s difficult for a nation like Australia to see a relationship between espionage or national security and what appear to be suggestions about commercial or economic negotiations.

But China’s legal view of what it regards as “State secrets” could very well lead to the death penalty for Mr Hu under Chinese law. An Australian expert in international law warns: “China has some of the most extensive death penalty provisions in the world, including for white-collar crime, security breaches and espionage..We certainly cannot rule out the death penalty in this case, or a lengthy jail term.

This is a Chinese temper tantrum that very clearly sweeps away any pretense that China is a free-market economy. It shows us that the lines are blurred between the Chinese regime and business – China Inc is very real and the Chinese regime interferes with strategic business decisions. There is no separation of the State from the business world. Their standards of business practice and ours are not the same. I think this is a very serious miscalculation on Beijing’s part and will damage China’s global interests as it seeks to sink its surplus cash into resources and foreign companies rather than depreciating US government paper. And if our PM can’t secure Mr Hu’s release, then China’s message to Australia is clear – piss off, you have no influence with us, all we want is your country’s resources and mines.

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2 Comments Add your own

  • 1. Sean  |  July 19, 2009 at 8:27 pm

    Why all the fuss? I have a simple solution for all this mess.

    1. Revoke all business dealings with China. Don’t sell them a thing, let alone Australian’s most precious resources, right? Keep it with yourself and eat it too.

    2. Declare a war on China. and better yet send your commandos to save Mr Hu. No balls?

    3. Stop pretending to be Americans or deserve to be snubbed.

    Reply
  • 2. thinkingshift  |  July 20, 2009 at 3:55 am

    Can’t say I disagree with you Sean, except for the part about us pretending to be Americans & having no balls. We’re allies but we don’t pretend to be you :)- I think there are many subtle political and economic factors at play here. Not the least of which is that we sell our iron ore to China who are demanding better prices; and also the “awakening tiger” is wanting to flex it’s muscles. Also the Chinese do not recognise dual citizenship. Mr Hu was born in China and has Australian citizenship – but the Chinese don’t recognise this, so to this is also a very difficult diplomatic situation.

    Reply

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