Thursday, July 16, 2009

Ulterior Motives

The ongoing Rio Tinto case has multinational companies in China carefully watching the events unfold and wondering what implications it has for them.
As far as we know, four employees were taken into Chinese custody on July 5, and one of them is Stern Hu, a Chinese-born but naturalized Australian citizen a lead negotiator for Rio Tinto.

China now accuses the iron ore giant for bribing all of the country's 16 big steel makers in exchange for confidential industry information.

However, things have become murky with the disclosure that President Hu Jintao himself authorized the investigation into Rio Tinto.

The incident comes at a bad time, as the iron ore company last month rejected a $19.5 billion bid from China's Chinalco, to have a big stake in the mining giant.

Australian Prime Minister Kevin Rudd has weighed in, saying, "Australia of course has significant economic interest in its relationship with China," he told the media in Sydney. "Let me also remind our Chinese friends that China, too, has significant economic interests at stake in its relationship with Australia and with its other commercial partners around the world."

As China is Australia's biggest trading partner, Rudd's critics are calling for him to do more. Lu Kewen, or Rudd, is known for his fluency in Mandarin, and members of the opposition are saying the prime minister should pick up the phone and personally call President Hu and find out what's going on.

However, while Rudd says he's personally involved in the matter, he is leaving it to be handled at the consular level.

What's particularly interesting is Stern Hu's nationality -- when he becomes an Australian, it means he has renounced his Chinese nationality, as Chinese law forbids dual citizenship. So why, according to Chinese law, was he not immediately granted access to consular officials, a lawyer, or his family?

The most troubling aspect of this case is, what is the aim of detaining these people? Is it really because Rio Tinto bribed officials, which the company denies? Or is it to clean up the industry and use Rio Tinto as an example?

The problem with doing business with China, is that everyone knows palms need to be greased, one way or another. Entertaining officials seems to be the norm to get anything done. But, as one businessman put it, "If I host some officials for a dinner, is that a bribe?"

It will be difficult for these four employees to be released soon as President Hu ordered the investigation; what does Hu want to prove? Is he personally punishing the company for calling off the deal with Chinalco? Or is he trying to root out corruption in the sector with a particular official or group of officials in mind?

Regardless, it sends a chill down the backs of multinational executives who are trying to do legitimate business in China. Will they be next? Or does this mean the rules have have changed?

This is another sign that the country's rule of law is not followed properly or waived when the president says so.

If this is the way China intends to do business, it really isn't bargaining in good faith.

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