Rio Tinto arrests reveal China has growing-up to do

By Arthur Kroeber

Is China turning into Russia? After last month’s arrest of the head of Rio Tinto’s iron ore business in China, reportedly on suspicion of spying, one could be forgiven for thinking so.

By Russia, we mean a country in which ordinary commercial negotiations are routinely subject to interference by state security forces, where foreign companies face constant risk of arbitrary abrogation of contracts and expropriation of assets, and business executives quite rationally fear for their liberty and occasionally their lives.

Fortunately, it appears that a lot of people within the Chinese government were asking exactly the same question, and desperately trying to convince their superiors that the correct answer ought to be “No.”

On August 11 the Chinese government finally levelled formal charges against the four Rio Tinto executives arrested in Shanghai on July 5. The indictments were for theft of business secrets and bribery – substantially less serious than the originally threatened charges of stealing state secrets, which were tantamount to espionage.

But the case serves as a timely reminder to enthusiasts inside and outside China who have been busy trumpeting the “Chinese century” that China has a tremendous amount of growing-up to do before it can begin to be taken seriously as a true leader in the global economic order.

Historically, China has done a good job of not letting its opaque authoritarian political system and vast legal grey areas get in the way of business. Annual foreign direct investment flows that now exceed US$100bn testify to China’s success in creating a stable and predictable business environment, despite well-advertised corruption problems.

The Rio Tinto detentions, which elevated an acrimonious but ultimately quite ordinary commercial dispute into a matter of national security, threatened to destroy, at one stroke, an imperfect but notable reputation for reliability built at great cost over three decades.

The bland denouement averts that catastrophe. The coda will likely be a quick trial in which Stern Hu, Rio’s Australian-citizen iron-ore negotiations boss, will be convicted and then immediately repatriated to Australia, probably on some spurious health grounds; his three less fortunate Chinese-national colleagues will likely receive relatively light sentences of a couple of years.

In short, the Rio case illustrates why China is not Russia.

Unlike Russia, which is in essence a strongman state where rules and laws are the barest fig leaves for the naked exercise of arbitrary power by a small group of people, China has a sprawling bureaucratic system characterised by balance-of-power politics between different political groupings, bureaucratic institutions, and commercial interests.

Power is distributed thinly enough among a variety of actors that only rarely can any single actor impose its will unilaterally; complex negotiated solutions are more common, and in these solutions commercial considerations weigh heavily.

So should we cheer? Not really. If the best that China can say about itself is that it is not as bad as Russia, it has a ways to go before it is entitled to be taken seriously as a “responsible stakeholder” in the international economic order, let alone the global leader that some of its more enthusiastic publicists would claim it already is.

The failure to meet even the most minimal developed-country standards of transparency in what can only with extreme generosity be called the “legal” proceedings against the Rio executives is a dismal reminder that Chinese law is more a matter of closed-door bureaucratic negotiation than due process.

China isn’t Russia – but it isn’t yet a modern country either.

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