Two Hus, and China's hardball trade game

China's form of economic hardball is possibly unique in these times, a game that has emerged from a specific set of temporal factors, including their culture and their current global economic status.

The immediate context for this is the arrest in China of Stern Hu, an Australian executive of mining conglomerate Rio Tinto. Hu has been accused of, but not yet charged with, espionage. The Chinese government said Hu and three other Rio Tinto employees arrested "have already broken Chinese law and have violated international business ethics".

This was preceded by pricing negotiations that ended up being more favourable to Australian resource companies than had been generally expected. Further, on 5th June Rio Tinto backed out of a $AU25 billion deal with Chinalco, and instead joined forces with rival BHP Billiton. China's burning need for raw materials makes major dealings with resource companies extremely sensitive. Upon the deal's collapse the Chinese immediately convened a high-level political task force to "assess the political and economic risks" of large outgoing investment deals.

Yet: "This is certainly not 'revenge' for the Chinalco deal not going through," said a Chinese Government source. "It is part of a considered, all-of-government response to the general resources question that was made after considering the likely international response."

Maybe not specifically, but it could well be a tactical manoeuvre underpinning the Chinese government's overarching strategy on resourcing.

What happened is not clear yet. But it's obviously tied to the dangerously tricky nature of doing business in China.

The Sydney Morning Herald's John Garnaut noted : "Rio Tinto has strong rules and a strong corporate ethos that should mean that China's 'conclusive evidence' about the company paying bribes turns out to be unsubstantiated." But between Rio's official policy and China's "enormous system of laws that are seldom enforced", there is the traditional Chinese way of business. Another Herald journalist commented:"The immediate very public escalation of the arrest issue makes discreet high level use of guanxi - the uniquely Chinese concept of personal relationships - extremely difficult".

There is thus a wide chasm between the customary way of doing business, and how it should be done if legally enforced. That chasm constitutes an enormous manouvering space under the direct control of the Chinese government. So they are deciding when to enforce practices that would usually be seen to be corrupt or involving undue personal influence.

The deliberate revelation that President Hu Jintao personally approved the "investigation" that led to the arrest, signals an escalation in the politics of trade. Until the Chinese government becomes obliged to close the gap between customary practice and law in a uniform way, they control the playing field. Internation economic and political pressure will force the issue, but until then the Chinese government will be taking full advantage of it.


16-Jul-09 Update: Although PM Kevin Rudd's (public) response to the arrests has been characterised as lukewarm to date, as a sinophile ex-diplomat he is probably better versed than most in the intricacies of communication at that level. But his public words are now somewhat stronger: the world is watching. Meanwhile, a Chinese newspaper quoted an unnamed industry source that Rio had bribed executives of 16 steel mills to get access to industry data "which has become an unwritten industry practice" - which begs the question why those executives weren't also arrested. Lastly, the incident has caused a spike in the spot price for iron ore. Whilst economists can always give explanations for a sudden price jolt in either direction, in this case it could be said to reflect perception that the cost of doing business (with China) is higher than previously expected.