China's Rio Tinto Case Gets Uglier

By Austin Ramzy / Beijing Thursday, July 16, 2009

Greg Wood / AFP / Getty Images

Australian Prime Minister Kevin Rudd speaks to the media during a joint press conference with former U.S. Vice President and climate-change campaigner Al Gore (unseen) in Sydney

Australian Prime Minister Kevin Rudd has warned that the detention of an Australian mining executive in Shanghai on espionage charges has the potential to upset China's trade relations with his nation and the rest of the world.

Speaking to reporters yesterday, Rudd issued his toughest comments yet in the case of Stern Hu, a Chinese-born Australian executive with mining giant Rio Tinto. Last week the Shanghai State Security Bureau arrested Hu and three Chinese colleagues on suspicion of industrial spying and stealing state secrets related to iron-ore prices. The arrests came amid acrimonious ore-price negotiations between Chinese steelmakers and global mining companies.

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"Australia of course has significant economic interests in its relationship with China," Rudd told reporters on July 15, "but I also want to remind our Chinese friends that China too has significant economic interests at stake in its relationship with Australia and with its other commercial partners around the world."

Rudd, a Mandarin speaker who once served as a diplomat in Beijing, has pushed for closer relations with China, Australia's biggest trading partner. Until now his government has avoided "megaphone diplomacy" in the Rio Tinto case, but pressure from the opposition has led Rudd to take a much tougher stand as Hu nears two weeks in detention. "A range of foreign governments and corporations will be watching this case with interest and be watching it very closely," Rudd said. "And they'll be drawing their own conclusions about how it is conducted."

(Read "China Buys Australia On the Cheap.")

U.S. Commerce Secretary Gary Locke added his concerns, telling CNN that he raised the issue with Chinese officials during his visit to Beijing this week. "We need to have transparency. We need to have assurances and confidence that people working for these multinational companies, international companies and American companies will be treated fairly," Locke said.

China's Foreign Ministry rejected the criticism. "We attach great importance to the stable development of economic and trade relations, but we are firmly opposed to anyone stirring up the case and interfering with China's independent judicial authorities," said spokesman Qin Gang, according to the Associated Press. "This is not in the interest of Australia."

Secrecy in China's criminal-justice system has made it difficult to find out the specifics of the charges against Rio Tinto employees. But China Daily, a state-run newspaper, reported yesterday that the multinational company's representatives allegedly bribed officials from 16 Chinese steel mills who were participating in negotiations over iron-ore prices. The story quoted an unnamed manager at a large steel company who said that Rio Tinto paid for industry data, which was "an unwritten industry practice." Rio Tinto officials denied its employees stole state secrets and said the company's ethics policies forbid bribery.

The arrests come weeks after the collapse of a bid by Chinalco, a state-owned Chinese aluminum manufacturer, to invest $19.5 billion in Rio Tinto. That timing prompted some observers to suggest that the arrests were retaliation for the spurned investment.

(Read "Another Deal Blown, Where Will China Invest Now?")

But developments this week suggest the Rio Tinto case may be just a part of a crackdown on corruption launched by Chinese authorities in one of the country's most important industries. Domestic media reported this week that at least five Chinese steelmakers and the China Iron and Steel Association are under investigation, and the scope of the inquiry is expected to widen. A senior investment banker with close ties to the Australian mining industry says that eight to 10 Chinese steel executives have been detained, adding that the relationship between Australian ore producers and the Chinese steel industry is now in "utter chaos."

Despite periodic campaigns to stamp out corruption, bribery is widespread in Chinese industry. Just this week, a Beijing court sentenced Chen Tonghai, former chairman of the state-owned oil giant Sinopec, to death with a two-year reprieve for taking $29 million in bribes.