Last week a story broke involving the arrest of four Rio Tinto employees in the Shanghai office, including Stern Hu, the General Manager and an Australian national. Media accounts continue to offer new and potentially troubling clues as to the reasons behind the arrests. According to Reuters and the New York Times, executives from several Chinese steel mills have leaked sensitive information to the Rio Tinto negotiating team. One of these steel mill executives has also been arrested.
A Reuters story suggested that the information actually leaked is regularly sought by industry analysts and researchers. According to the Reuters article, the sensitive information includes steel mill production plans, stock levels around raw materials such as iron ore and maintenance plans. In short, the information appears to look a lot like what many of us industry analysts, consultants, banks and market participants track on a regular basis to better understand market dynamics. Apparently steel industry conference organizers assume state officials attend the conferences to listen for individuals who have disclosed too much information. In turn, Chinese research firms end up averaging numbers for things like production costs so as to avoid any potential conflicts.
Apparently, according to yet another account in the New York Times, an array of corrupt practices have gone on for years including iron ore deals off the books and the exchange of confidential market data that Beijing now considers state secrets. This has led to worries throughout the industry and some fear more arrests may be forthcoming according to the New York Times article.
In our post on this story last week, we quoted the Wall Street Journal, The case is an unusual example of China’s secretive national-security apparatus becoming involved with a multinational company. The line between commercial information and state secrets is often not clear in China, where many major companies are controlled by the government. The implication that this will have a potential chilling effect on foreign trade relations, is exacerbated when one considers the wider application of how those rules are applied. According to this article from China Herald blog (Hat Tip: Richard Brubaker):
“It certainly raises an issue for foreign investors, which is the definition of state secrets in China includes a lot of commercial information in state enterprises,” Dragonomics managing director Arthur Kroeber said.
“If you take information out of a state enterprise and give it to any kind of foreign party, you can under Chinese law be accused of violating the state secrets law.”
Last week we posed these questions:
- Did Rio obtain information illegally during its discussions with smaller steel producers and violate company or state secrets?
- Were bribes involved?
- Or, is this a case of CISA and China as a whole, losing so much face in the negotiations that the Chinese authorities had to do something drastic?
Today we’ll add some broader implications:
- Have we westerners minimized the potential political risk of doing business in China? In other words, have we in recent years become so relaxed about the risk of doing business with a tightly controlled Communist regime?
- Now that the US government is taking substantial ownership stakes in key US companies, will we also see a chilling effect as to what information will be released to our public?
- If getting good information from China is challenging today, how will we be able to glean better information if research analysts and industry pundits are effectively controlled by the Chinese authorities?
Scary stuff. Leave a comment and let us know what you think.