Chinese Retaliation - Detained Rio Executive Should Make Us Nervous

Rio Tinto (RTP) was one of those companies which levered up just as the economy was turning down, rushing its bottom line and forcing it into the hands of Chinalco, a large Chinese commodities company. However, as commodity prices have turned up and investors have simultaneously started buying shares, Rio was able to escape the Chinalco deal and link up with rival BHP Billiton (BHP).

The Chinese are naturally sour, despite earning a nice deal breakup fee. The question is whether their displeasure has taken a dangerous turn. At the weekend, four Rio executives in China were detained. Now, one is being held on suspicion of spying.

An Australian Rio Tinto employee has been detained by Chinese state authorities on suspicion of espionage and stealing state secrets, Stephen Smith, Australian foreign minister, said on Wednesday.

Stern Hu, an Australian citizen who is working as a marketing executive with the miner and currently living in Shanghai, is one of four Rio employees detained by Chinese authorities since Sunday.

Mr. Smith ruled out any commercial link between the surprise detention of Mr. Hu and his three colleagues and any commercial matters concerning Rio’s, bitter rejection of a $19.5bn deal with the Chinese state-owned minerals giant Chinalco last month.

They would say that, wouldn’t they. The sequence of events should make one sceptical about why Mr. Hu is being detained. Until this matter is adequately explained, we should all be very nervous about what it portends regarding future Chinese retaliation for protectionist measures.

Apropos protectionism, the German government has now confirmed an official bid for automaker Opel by a Chinese car company, Beijing Automotive Industries (BAIC). As the Chinese have become noted of late for being the high bidder, I suspect BAIC has put in a goo offer. To be sure, the Austrian-Canadian auto parts maker Magna (MGA) is on the verge of finalising its bid. Nevertheless, the Germans are going to need to treat the Chinese bid with diplomatic aplomb. We have already seen enough protectionism against Chinese companies. Another slight of this nature would be proof positive that Chinese money is considered no good for buying top-tier western companies.

Source

Rio executive held by China on suspicion of spying – FT

Comments

[Graham and ...:]

"Stealing state secrets" is a very serious charge. It is basically equivalent to "treason"--for a foreigner.

Jul 08 10:00 AM

[nun:]

This bogus charge is yet another reason China should never have been permitted to join the WTO without conditions.

Jul 08 10:30 AM

[nobby73:]

Also today President pulled out of the G8 citing the troubles in Xinjiang province.

But, there were reports that Italy's handling of G8 preparations were so chaotic, the US stepped in to organize the agenda. Interesting that there was nothing covering China's desire to discuss replacing the US Dollar as the global reserve currency.....

Jul 08 10:47 AM

[mdmrjsds:]

Edward Harrison wrote:
"""
Another slight of this nature would be proof positive that Chinese money is considered no good for buying top-tier western companies.
"""

And with good reason. Unlike their western counterparts which are considered separate from the government, no Chinese company can be considered independent of the government. These aren't business entities, they are government agencies. Looked at in that light, it is no wonder that democratic countries have a problem with Chinese ownership of crucial resources.

Jul 08 12:55 PM

[Canadian Re...:]

Let's not jump to conclusion. The charge may or may not be bogus. Only time will tell. The guy might be having a few drinks and karaoke with his counterparts after work and tried to pump them for information. That may be construed as trying to steal state secret. Whatever.

Yap, many China state owned companies do do the biddings of their government. How sure are we that our supposedly private companies do not support the wishes of the government. A good case in point is Petrocanada in its early days.

The use of security reason to prevent Chinese companies from buying into western companies is a smokescreen. Let's say a Chinese company buys up a Canadian company with oil and gas properties in Canada, what are the Chinese going to do with the Canadian oil and gas properties if we should go to war with them. The oil and gas stay in the ground. We can always nationalize the properties.

If Chinese companies want to pay good money for western companies, let them buy the companies and allow the shareholders to enjoy the gain. Let the shareholders vote on the sale if we truly believe in capitalism.

Jul 08 07:40 PM

[Tony Petroski:]

At least the detained haven't been shot yet, so far as we can tell. Has anyone seen the managers of the tainted milk factories lately?

Jul 08 08:28 PM

[Spook:]

Agree with what Canadian Re..... says, news only state of 4 Rio employee being arrested and no mentioned of non Rio personnel. If the Stern Hu is indeed stealing state secret, then there must be an accomplice who have access to state secret, whoever this person may be is probably being sentence for execution.

But lets look at this as "what if this is a real case of spying?",
* February 12, Australian stimulus plan fail in senate,
* February 13 China announce a $19.5 billion bid, the same day Australian senate pass the stimulus plan,
* March 25th, Australian government approved Chinalco bid,
* June 5th, the Chinalco-Rio Tinto deal collapse,
* June 30, the iron ore price negotiation between China and Australia pass without a resolution
* one week later China announce it will stop stockpiling of iron ore
* following day, China arrest 4 Rio Tinto employees

Too coincidental? somehow Australia must have known some critical information in order to walk away from all these deal.

Jul 09 05:14 AM

[coreopsis:]

On Jul 08 12:55 PM mdmrjsds wrote:

>And with good reason. no US company can be
> considered independent of the government. Citibank, AIG, GM, these aren't business entities, they are government agencies. Looked at in that light, it is no wonder that democratic countries have a problem with US business practices and the toxic economic meltdown.

Well-observed.

Jul 09 09:40 AM

[Ricard:]

I agree with the reasoning in this article. It's a good analysis of the diplomatic situation surrounding business deals with this 'non-aligned' nation.

Perhaps the best thing the Chinese can learn from this situation is that instead of resorting to such dramatic tactics (if they are indeed in response to the ACH/Rio deal), they should insist on an ironclad contract in the beginning a la Rohm and Haas and Dow Chemical. Rohm shareholders walked away with a very sweet deal due to their insistence that DOW not be allowed to walk away without major legal ramifications. China's move here, while somewhat predictable, side-steps the legal realm into dangerous diplomatic territory. The last thing they need is a competition with North Korea for the most repressive state apparatus.

One last comment - according to this WSJ article, the BHP deal was far superior in terms of increasing Rio Tinto shareholder value. That alone would be good enough reason for Rio to legitimately walk away from the ACH deal, although one really has to question the timing of it all.

online.wsj.com/article...

Jul 15 01:41 AM

[Ricard:]

On Jul 15 01:41 AM Ricard wrote:

My apologies, wrong article:

online.wsj.com/article...

Jul 15 01:41 AM