The New York Times

April 3, 2010
I.H.T. Op-Ed Contributor

China Gets Tougher


HONG KONG — The 7-to-14 year sentences for corruption and theft of commercial secrets handed down on Monday by a Shanghai court to four former executives of the mining giant Rio Tinto have sent shock waves through the foreign business community in China.

The severity of the sentences came as a surprise, given that Rio appeared to have patched up its relationship with its largest customer. The Rio chief executive, Tom Albanese, had recently made a high profile visit to Beijing and Rio had announced an agreement to sell Chinalco, the Chinese state metals giant, a 47 percent stake in a huge iron-ore venture in Guinea.

As a result, many are seeing the harsh sentences, following a mostly closed trial, as evidence of a shift both in China’s attitude to big foreign businesses and in the balance of commercial power in the mining business.

Take a step back. The surge in China’s ore demand spurred the global mining industry out of 20 years in the doldrums. An eat-or-be-eaten frenzy took hold, which for Rio culminated in its acquisition in 2007 of Alcan. Rio itself then became the target of BHP Billiton, but the financial crisis intervened, saving Rio from BHP but leaving it with a mountain of debt.

Chinalco arrived as Rio’s savior, with $19 billion in cash in return for direct stakes in some of Rio’s operating companies and management. China thought it was getting a good investment and, critically, an indirect influence on iron ore production and pricing.

But in the face of opposition from other shareholders and Australian politicians, Albanese backed out of the deal. Chinalco, a company with extensive Beijing political connections, was furious. So were China’s official media and unofficial bloggers. Rio’s chief executive in China, Stern Hu, and three colleagues were arrested.

Whatever the full truth of the charges against them (Hu pleaded guilty to a corruption charge but not to charges involving commercial secrets), corruption in the iron-ore business in China was known to be rife due to an import licensing system which favored a few major steel producers and created a two-tier price structure.

The ore trade in China may be cleaned up, following a change in the pricing system announced March 30, but foreigners in other businesses are left worrying.

In addition to the threat of criminal action for commercial ends, there is concern that the businesses may become caught up in Chinese political infighting, in which corruption accusations are a common weapon. Hitherto, senior personnel of big foreign companies have been largely exempt from criminal charges.

Many see the Rio case as a sign of increased self-confidence in China; a feeling that foreign capital is less needed now. That Hu was born in China and had emigrated to Australia may have added an element of personal retribution.

The fact that the trial was closed for the most part suggests that China does not care too much about how its delivery of justice is perceived. This is not new.

What is new is that China feels able to turn the tables on major foreign suppliers, in this case both jailing their former executives while at the same time pursuing deals like Guinea.