China: Rio Tinto Convictions Imply Belief in Continued Growth

China: Rio Tinto Convictions

30 March This year. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

When four executives through Rio Tinto, the giant Anglo-Australian mining company, had been arrested last July upon charges of stealing commercial secrets, as well as taking and receiving bribes from Chinese officials,

30 March 2010. By David Caploe Expert degree, Chief Political Economist, EconomyWatch.com

When four executives from Rio Tinto, the giant Anglo-Australian mining organization, were arrested last This summer on charges of robbing commercial secrets, as well as getting and receiving bribes from Chinese officials,

most Westerners interpreted the move because trumped-up retaliation for the debt-strapped company’s rejection of a 19.5 billion All of us dollar cash injection from the state-run Chinalco final June,

since Rio Tinto is one of China’s greatest suppliers,

helping it import tens of vast amounts of dollars worth of iron ore every year — a vital component for metal that is fueling its flourishing economy.

Given the deep inter-relationship between organization and  country, the confrontation was highly charged from the beginning.

But when the run-up to the trial began, as well as the highly un-transparent proceeding itself, the situation became even stranger,

culminating in the announcement of unexpectedly harsh prison sentences of seven to 14 years for the 4 executives for taking bribes and stealing commercial secrets.

According to the New York Times account of the verdict,

The case heightened the fears associated with foreign investors doing business here because the four were initially arrested on espionage charges,

fueling concerns that the prosecution was politically motivated, intended to punish Rio Tinto for its clashes with Chinese companies.

Until the actual verdict, Rio Tinto — one of the world’s greatest producers of iron ore — had strongly defended its employees.

But the organization issued a statement late Mon saying it had chose to immediately fire the 4 employees,

describing the evidence released throughout the trial that they had accepted about $13.5 million within bribes as “beyond doubt.”

The verdict, which will come shortly after Google decided to pull its search engine out of China,

appears to be the latest indication that China is taking a harder line with foreign companies doing business here.

Rio Tinto was not charged in the case, however in announcing its verdict Monday,

the court essentially accused the company of using stolen information to damage China’s economic interests,

costing about 20 of this country’s steel generators an extra $150 million last year alone.

For reasons we discuss by the end, this in fact appears to be the essential issue in the case.

But before explaining why, it also makes sense to check out several of the OTHER strange facets of this situation,

notably the announcement through Rio Tinto, just before the trial was set to begin in late 03,

that it and Chinalco had signed the non-binding, 1.35 billion US dollar deal to help develop a massive mine in Guinea, closing a period of turbulent relations using its biggest shareholder.

According to Rio leader Tom Albanese at that time, "We have lengthy believed that Rio Tinto and Chinalco could work together on major projects for mutual benefit".

In that context, this looked as if the test would conclude with a simple slap on the wrist or even two.

But once it actually started, as this earlier New York Occasions article notes, a lot of "filthy laundry" on both sides began to appear,

and this became clear that more what food was in stake than simply some relatively minor disagreements among close business associates.

Stern Hu, an executive at the British-Australian mining giant Rio Tinto, said in court he accepted two large bribes at the end of 2008 and early 2009 totaling about $1 million from Chinese steel mills in exchange with regard to agreeing to sell them long-term supplies of iron ore, his lawyer Jin Chunqing said.

Although the four Rio Tinto executives on test here on charges of bribery and stealing commercial secrets had admitted taking bribes,

the revelation shed new light on why they did and just how corruption in the Chinese steel business worked …

“Two small companies bribed Stern Hu to get a long-term contract with Rio Tinto, which normally is not available for medium- and small-sized businesses,” Mr. Jin said.

“It was throughout the economic crisis in late 2008 which large-scale steel companies were struggling with continuing their deals with Rio Tinto. That’s when the small companies decided to get involved, causing a corruption of the system.”

Steel industry experts say bribery has grown widespread here in recent years as Chinese steel mills have competed for valuable imports of metal ore, much of it controlled through foreign suppliers.

Analysts said a chaotic pricing system had made a two-tiered market, fueling corrupt deal-making.

Many large state-run metal companies in China agree to long-term contracts at a set price with foreign suppliers,

while smaller metal mills compete to buy materials on the open market, frequently for higher prices.

“Desperate steel mills would do anything to call supplies,”

said one steel industry professional in a telephone interview on Friday,

speaking on the condition of anonymity for fear of government retribution.

“There was a huge potential for mischief and a huge incentive to bribe.”

Getting a discount on the open market price could mean saving tens of millions of dollars, experts say,

giving tremendous power to iron ore salesmen working for companies like Rio Tinto.

In this particular context, the verdicts raised one immediate question:

If the Rio Tinto executives were guilty of accepting bribes, what about the companies that offered them ???

The Shanghai No. 1 Intermediate People’s Court partly answered that question on Monday, launching it would soon charge at least two Chinese steel industry officials with passing trade secrets to Rio Tinto.

But that certainly doesn’t finish the questions, not just with regard to Rio Tinto, but ALL Western companies either actively doing or seeking to do business in China.

By the time of the convictions, there is a general consensus the convictions had been significant not so much for the company, even though it certainly complicates its connection with China,

but for the general state of China’s often tough discussions with foreign suppliers over iron ore prices.

Before the detentions, China’s steel business association had repeatedly attacked Rio Tinto and other foreign iron ore providers for driving up the cost of iron ore and negotiating unfairly.

On Monday, the court confirmed that metal ore negotiations were at the center from the case

and insisted that Rio Tinto employees had been passing secrets to top arbitrators for the company.

It said that in 2009, Mr. Hu and Mr. Wang obtained confidential information from the China Iron & Steel Association,

the government physique that negotiates iron ore prices with foreign suppliers.

The court said the actual Rio employees had “damaged” China’s interests.

In this context, the MOST important take-away from the Rio Tinto case, at least to this point —

there is, in the end, the possibility that, having made its toughness clear, China will decide to soften the suddenly stiff sentences —

seems NOT to be, the la Google, that Traditional western companies seeking to do business in China had better watch their own step,

although there’s little doubt the actual surprisingly harsh convictions perform, in fact, underline such a information, at least for now.

But if the whole issue area of iron ore prices Or availability / negotiations is really the central issue here,

then the REAL significance of all this drama lies in its ramifications for what most observers from the global political economy see as THE key issue of the moment:

Is China’s financial growth likely to continue — or is it going to crash, whether in a hard or gentle landing ???

If the country is willing to make such a stink about the whole area of iron ore —

which, remember, is really a key factor of production within the making of steel, The important component in almost all manufacturing —

then it’s hard not to infer China’s leaders are in fact certain growth is going to continue,

and it is therefore in the country’s short-, as well as medium- and long-term, curiosity to strike as hard a bargaining position as it can about prices / availability etc.

This being said, it wouldn’t end up being beyond the Chinese leadership to realize that most shrewd observers would in fact infer this from the hard-line outcome of the trial,

and take advantage of that inference to increase the credibility associated with projections of the country’s continued growth

as prelude to what they know is, in fact, going to be a slowdown associated with some sort, whether hard or soft.

But it could also mean what it appears to mean:

China’s leadership is quite certain growth is going to continue, and they want to safe the most advantageous negotiating placement as possible,

with not just Rio Tinto and other companies, but also the other countries who serve as the ultimate supply of that key ingredient.

Given the actual crisis in the Eurozone and, doctored BLS figures aside, the on-going problems of the US,

China’s short-term economic profile remains key to the immediate future of the world political economy.

And if the Rio Tinto case is any indication — which, again, it may or may not be —

then one would have to figure the Chinese leadership, at least, is confident about the country’s ability to continue its remarkable growth,

even within a general global framework of weakness at greatest and steep recession from worst.

They could, of course, be arrogantly wrong in this assessment.

But the fact they’d even take such a position —

given all the complications it will obviously bring with one of their most significant private-sector partners —

is definitely a fact really worth pondering.

David Caploe PhD

Chief Political Economist

EconomyWatch.com