Hu's been bribing who?

Who's who - Stern Hu, Hu Jintao and Hu Heifeng

In the past few weeks Western media in particular has been focused on the arrest of an Australian national accused by China of industrial espionage and bribery. Stern Hu, a former Chinese citizen, and three Chinese colleagues were arrested earlier this month after China lost its bid in lucrative iron ore mining rights.

Detained by authorities on 5th July, the issue made front page headlines in Australia and around the world as speculation grew over how business relationships in China might be affected in the future. Information found stored on Hu's personal laptop, seized by investigators, allegedly contained confidential business information of several dozen major business partners of Rio Tinto, including storage levels and sales plans, deemed much too specific and precise to have been acquired through legal means.

This information, in the opinion of Chinese investigators, demonstrated that Rio Tinto, an exporter of iron ore and Stern Hu's employer, had an unfairly sophisticated and questionably thorough level of understanding of the Chinese market.

As such authorities suggest that such information could only have been obtained through bribery and other illegal means. "Competent authorities have sufficient evidence to prove that they have stolen state secrets and have caused huge loss to China's economic interest and security," the Chinese Foreign Ministry spokesman Qin Gang said shortly after Hu's arrest.

Political representations

Expressions of concern came swiftly fro Hu's former boss John Dougall and Australian Prime Minister Kevin Rudd, and a former diplomat to China, came under increased pressure from other politicians to make representations to the Chinese government. Rudd has failed to intervene on a personal level and been widely criticised in Australian media.

Opposition leader Malcolm Turnbull openly criticised Ruddd for failing to intervene. On Friday 17th July he told reporters in Brisbane that Australians should be disappointed their own prime minister and foreign minister had failed to become involved. As the US commerce secretary headed to Beijing to discuss the situation, Australia had remained distinctly quiet, Turnbull asserted.

"What we've seen over the last day or so is the prime minister engaging in what he said he didn't want to do, which is megaphone diplomacy, issuing one press statement after another," he said. "It's better doing what we encouraged him to do right at the outset, to very quietly and very deliberately pick up the telephone, talk to his counterpart in Beijing and express the very deep concern that Australians have about the way in which Stern Hu has been detained. "There is no doubt that the Americans have stepped in where Kevin Rudd is afraid to go."

When Gary Locke, the new US commerce secretary, touched down in Beijing to lobby on behalf of American trade interests, he also carried with him a brief representing the interests of a third country. Locke had promised to raise with Beijing's leaders the case of Stern Hu, the China-based Australian executive of Rio Tinto. "All we can say right now to the Chinese government . . . [is] simply urge greater transparency and following of due process," Locke said in a Bloomberg Television interview. "Until people have the full set of facts, how can we make any judgments?"

Following his meetings, the US Commerce Secretary said he had raised the case with Chinese officials, but not with Premier Wen Jiabao at a meeting in Beijing. Speaking at a news briefing, Locke said the United States had urged China to follow "due process" and communicate with the Australian government in the Rio Tinto case. He failed to elaborate, however, on the nature ofthe allegations or the veracity of the claims.

Retaliation

But speculation was already circulating as to the real reasons why Stern Hu had been detained. And Rio Tinto, concerned for its other employees, advised many to leave the country. While sources told the Wall Street Journal that a number of staff had been told to leave or not return to China, Rio Tinto's London office declined to elaborate. "We still have a number of staff in China," said Nick Cobban, a spokesman for Rio Tinto. Meanwhile the head of the company's iron-ore operations, Sam Walsh, has insisted allegations that Rio staff had bribed officials at Chinese steel mills were "wholly without foundation."

The sharpest criticism has been reserved in the press. "What makes it so sensational is the combination of a highly publicized major commercial negotiation that has failed with the immediate arrest of a principal figure, raising the possible inference of retaliation," Jerome Cohen, a leading expert on the Chinese legal system, told Forbes.com.

Many analysts support the retaliation theory. The four arrests came just days after the iron-ore price negotiations between China's steel industry and Rio Tinto and other producers ended without agreement. Rio Tinto also rejected Beijing's recent attempt to take a big ownership stake in the mining giant. On the face of it, the arrest of the four employees appears like an attempt to teach a foreign company a "brutal" lesson.

Hu's involvement

There is much speculation that Hu Jintao, China's president, ordered the arrests personally, though the Chinese Foreign Ministry has denied any such involvement. Such rumours persist however, and there is also a growing belief that internal political posturing may also have some bearing on the case.

Senior Chinese leaders are going after all parties, not just the foreign ones, in the iron-ore negotiations, Forbes.com's Gordon Chang writes. The Party's fight to reassert control comes at the same time fresh rumors of unhappiness with Premier Wen Jiabao's management of the economy are beginning to emerge. Chang suggests that President Hu may even be attempting to undermine Wen, in what may be the initial stages of a blame game for the country's recent economic difficulties.

Such infighting may grow as senior officials ready themselves for the next leadership transition, scheduled to to take place at the Communist Party Congress in the fall of 2012. In the past, members of the Politburo Standing Committee, the top organ of power in China, have used charges of high-level corruption to sideline adversaries, Chang says. With Premier Wen in charge of the economy, he would be the obvious target of allegations of corruption at important commercial enterprises. But of course much of this is conjecture, but political infighting may make doing business in China all the more difficult.

Blurred lines

To conduct business in China, it's all about relationships. There may be rules and regulations, but long-time China hands will tell you it can be a complicated and often frustrating experience. So one needs to find the right person, either in government or the private sector, and that person must like you.

A little wining and dining may not seem unreasonable in order to build on that relationship. Entertaining a senior member of the Chinese team which negotiates the price of iron at a luxury box during the Olympics, as BHP did last year may seem appropriate. It's not illegal, but it is a legal grey area, says Xianfang Ren, a senior analyst with Global Insight. Talking to CNN, he says, "The line between entertainment, public relations, and government relations and bribery, commercial bribery it's kind of blurred here in China...Especially in a country where good government relationships are important in getting deals and contracts."

So is it just sour grapes and a form of retaliation by the Chinese? Derek Scissors from Heritage says the situation can suddenly change, especially during high-level iron ore negotiations where billions of dollars are at stake. "The international message they're sending is, if things get ugly enough and important enough we're going to break the rules. We'll follow our rules not international rules; we're not going to respect the rights of multinational executives'," Scissors tells CNN.

The line of acceptable behaviour may have been redrawn. Guanxi, or "developing good long-term relationships", is now a more difficult and more dangerous minefield. Xianfang Ren suggests that foreign companies stick to their own high standards. In short don't do in China what you wouldn't do back home, even if it seems as though everyone else is doing it.

No level playing field

But the difficulties of doing business in China have existed for a long time, and there is no level playing field. "This case illustrates some of the uncertainty of getting involved in business in China," says John Frankenstein, assistant professor of economics at the City University of New York. "A Chinese lawyer once told me 'basically, the state can legitimately intervene in any deal at any time under any pretext'."

"There are a lot of multinationals who came to China and have a fact-finding, commercial information arm. For those people it's certainly worrying," says Tom Miller, of the Beijing-based economic consultancy Dragonomics. "If you are in the kind of business where you think there might be an overlap between commercial information and state secrets, you would be concerned. The problem is that Chinese law on this is very, very oblique and frankly no one knows what a state secret is."

The worst fears of foreign investors appear to have been mitigated by the emerging details of the Rio case. "I don't think it's as alarming as it looked on day one," said one business adviser who asked not to be identified. In fact many people are reluctant to speak on the record, or have been instructed not to do so by their companies, in a sign of the case's sensitivity.

It's a case that may be long running. Under Chinese law, Stern Hu may be held for up to 7 months before being charges. And some recent reports suggest he may face life imprisonment if convicted. This doesn't bode well for those involved in a little 'guanxi'.

Hu Jintao's son

But for China the issue of bribery came knocking a little closer to home this week after a company linked to Hu Jintao's son became involved in controversy. Two Namibians and a Chinese national were arrested last week in Namibia as part of a probe into bribery allegations involving Nuctech, a company which until last year was headed by Hu's 38-year-old son, Hu Haifeng.

Nuctech representative Yang Fan and two Namibians, Teckla Lameck and Jerobeam Mokaxwa, were arrested after Namibia's Anti-Corruption Commission (ACC) discovered that a 12.8 million US dollar down payment on 13 scanners had been diverted to a firm called Teko Trading owned by the two Namibians. Nuctech, which provides security scanning equipment, has a Namibian government contract to supply equipment in a 55.3 million US dollar deal, paid for with a Chinese loan granted when the Chinese president visited the country in 2007. Investigators say the down payment was diverted to Teko Trading between March and April. All three of the accused later drew large sums from the Teko account, with Yang taking 16.8 million Namibia dollars (2.1 million US dollars), most of which he is said to have paid into an investment fund, investigators say.

Hu Haifeng was president of Nuctech, which provides scanning technology, until last year, when he was promoted to Communist Party secretary of Tsinghua Holdings, which controls Nuctech and more than 20 other companies.

Hiding the news

While Hu Haifeng's link to the company, and the alleged bribery, is tenuous, the media have pounced on the story, especially in the light of recent allegations surround Stern Hu. But while in China, there is much discussion about the Stern Hu case, attempts to read developments over Hu Haifeng's connection with Nuctech and the alleged briberay allegations are much harder to come by. Searches for information on the case turn up error messages such as, "The search results may contain content not in line with relevant laws, regulations and policies." More sites were added to China's hit list on Thursday as it attempts to stifle the information flow of anything it deems counter-productive to its interests.

In the last two months sites such as Facebook, YouTube, Blogger and Twitter have been blocked as censors seek to limit information flowing out of China concerning the Xinjiang riots and the 20th anniversary of the Tiananmen Square 'incident'. China's mainstream media which is tightly controlled by the government, and newspapers as well as television news have made no mention of the Nuctech case in recent days.

Last week Gary Locke, the US Commerce Secretary, also raised issues over control of the Internet in China, including problems that Google Inc. faces as well as the proposed Internet-filtering software called Green Dam-Youth Escort which Beijing recently tried to introduce. He said he brought up the issue with officials from China's industry ministry and with Commerce Minister Chen Deming. Google's YouTube and blogging service Blogger, including its own official page, have been blocked in China for some months.

What with uncertainties over 'guanxi', the difficulties of understanding Chinese law and continued disruption of the Internet, business in China is not getting any easier. Australia's Prime Minister Kevin Rudd has already warned Beijing the world is watching, and that China too had big economic interests at stake in its relationship with Australia. Financial Services Minister Chris Bowen and Foreign Minister Stephen Smith have both said China may harm its international reputation through the Stern Hu issue. But it seems China is not in the mood to ease its approach, insisting that they have "sufficient evidence" to show Stern Hu had obtained state secrets by illegal means. Maybe the world isn't being stern enough with China.

Hu Jintao's involvement in Stern Hu's arrest remains unclear. Stern Hu's fate is meanwhile extremely uncertain. And there is little talk of Hu Haifeng and his father, China's president Hu Jintao, who may or may not have anything to do with bribery allegations in Namibia. The speculation and mud slinging is likely to continue for some time to come.

Update: Hu stern was convicted in March 2010 and sentenced to 10 years imprisonment. [Wikipedia: Hu Stern / Rio Tinto espionage case]

tvnewswatch, Beijing, China