Rio Tinto: Will China's detention of employees scare off foreign firms?

When China detained an executive from the Aussie-Anglo mining giant Rio Tinto for stealing state secrets earlier this month, a predictable outcry ensued.

Analysts didn't quibble with China's right to investigate Stern Hu as part of a crackdown on bribery involving negotiations for iron ore – the raw material used in China's steel industry, the world's largest.

Instead, they criticized a heavyhandedness and a lack of transparency in China that they say could scare away foreign businesses used to the rule of law.

On July 5, Shanghai state security detained Mr. Hu, a China-born Australian, and three Chinese colleagues, sparking weeks of diplomatic pleas for openness in handling their case. Australian Prime Minister Kevin Rudd warned China that the world was watching.

Yet the pleas were rebuffed by Beijing, where spokesmen for the one-party government said simply that the case is a matter of "internal affairs."

Some observers say they see the detentions as retaliation for Rio Tinto's refusal to be bought by China's state mining giant, Chinalco, in June. But Chinese and Western analysts both say China is acting within the law, and agree that Hu's case is just the latest in an anticorruption sweep led by the ruling Communist Party.

The Rio Tinto employees face possible formal arrest and charges of spying on and bribing iron-ore buyers at China's steel mills, where graft, analysts say, is widespread already.

Charges are virtually unknowable

One Western lawyer based in China, who asked to keep his name out of print, said the Rio Tinto traders are "guilty, at least of crimes of hubris."

But he bemoaned China's courts and the country's state-secrets laws which, in combination, make the charges and the evidence in the case virtually unknowable at this stage.

Right-wing Chinese pundits explain the timing of the case as proof of Beijing's commitment to ridding the country of corruption. That Hu is a China-born Australian national working for a company with which China's been doing battle is a coincidence, they say, and none of the West's business.

Wang Xiaodong, coauthor of the 2009 nationalist bestseller "Unhappy China," is baffled by calls for transparency in the case from Australian Foreign Minister Steven Smith and US Commerce Secretary Gary Locke.

"The Rio Tinto case actually focuses on China's internal affairs. It is a big move on the Chinese domestic problems, including corruption and bribery in the state-owned enterprises," Mr. Wang says. "Why do foreigners always interpret the case from the angle of foreign affairs? Foreign affairs are small things compared with serious domestic issues."

Steve Dickinson, an American lawyer who has worked in China since 1984, agrees.

Against the backdrop of a faltering global economy, Mr. Dickinson says that the case has to be about something internal and is not a vendetta against Rio Tinto for turning down Chinalco, nor is it revenge for Rio's recent hardball stance on iron-ore prices.

"Beijing is trying to reestablish control on core businesses in China," says Dickinson, a partner at the Seattle firm Harris & Moure. "These strikes against corruption and industrial espionage are about something going on internally, not what's going on in the outside world."

But this is proving frustrating for impatient Western companies desperate to gain a foothold in the world's fastest-growing major economy nearly eight years after it joined the World Trade Organization. To them, the Rio Tinto case seems to many to be proof that China remains opaque.

State security: Why the public fuss?

Because China's state security is used to doing whatever it wants, says Jerome Cohen, a Chinese law expert at New York University, "The Shanghai division of the secret police must be surprised by all the public fuss around this case. They would just as soon have done all of this quietly."

Against that fraught backdrop, it could be optimistic for Australia's Smith to claim, as he has, that all soon will become clear.

In China, Mr. Cohen says, "there is always ambiguity when people refer to 'charges.' "

That sometimes refers simply to the decision to make a formal arrest, a move that could happen in the Rio Tinto case by mid-August.

But, he notes, "the more meaningful stage, when we might properly expect greater knowledge of what the accusations are, is the issuance of the indictment after the prosecution, having reviewed the police request to indict, announces the formal charges and some details, not many, to support the charges. That time may be many months away."

And even then, clarity may be lacking. Referring to earlier cases he worked for multinationals trying to save their employees from Chinese prison, Cohen says, "Not all the evidence was clear even once an indictment was handed down."

Still, none of this troubles Song Xiaojun, coauthor of the book in which he and Wang urge China to reject outside influence and stand up for itself.

"China is rising," he says. "The Western countries don't want to see that. Thus, they must use all of the methods, including intelligence strategies and spies that they used during the cold war, in the commercial war with China."