Harsh lessons from Stern Hu's trial

There are two important lessons to be learned from the treatment and trial of Rio Tinto executive Stern Hu and his three colleagues.

The first is that China will act swiftly and harshly against those it deems to threaten its economic interests.

The second is that Australia has been exposed as having little or no influence with the leadership of the Communist Party - revealing Kevin Rudd's exaggerated past claims of a special relationship.

Throughout the 2007 election campaign, Mr Rudd carefully cultivated the impression that because he spoke Mandarin and had lived in Beijing he was best placed to manage Australia’s bilateral relations with China.

Mr Rudd constructed a political narrative that suggested he would have unparalleled access to the Chinese leadership and he would even be able to open doors for the United States in its pursuit of deeper engagement.

His claims were highly misleading and misjudged the political reality of what constitutes effective engagement with China.

In that context it is instructive to review the circumstances of Stern Hu's original arrest in early July 2009.

Reports at the time said Mr Hu was arrested on suspicion of espionage and stealing state secrets.

The arrests occurred weeks after the collapse of a proposed $20 billion investment by State-owned Chinalco into Rio Tinto and during increasingly acrimonious negotiations over the price of iron ore which broke down only a month after the arrests.

Authorities in China reportedly claimed that billions of dollars in damage were inflicted on the Chinese economy from the actions of the Rio Tinto employees, portraying it as a matter of national security.

This claim purportedly related to the payment of higher iron ore prices than China deemed necessary.

The charges against Stern Hu and his colleagues were later changed to corruption and stealing commercial secrets.

In open court Mr Hu confessed to receiving bribes but disputed the amounts involved and he reportedly pleaded not guilty to the charges involving commercial secrets.

Without making any judgments about the guilt or otherwise of the Rio Tinto employees, it is difficult to view this case in isolation from the tensions involving the iron ore negotiations.

China's ongoing economic expansion requires vast quantities of steel - and iron ore prices are obviously critical in terms of the strength of that growth, particularly in the wake of the global financial downturn and a massive domestic stimulus spending on infrastructure.

At the time of Stern Hu’s initial detention I called on Mr Rudd to use his claimed special relationship with China to contact the highest levels of the Chinese leadership to clarify the nature of the charges - and to express Australia's concern the arrest was politically motivated.

Mr Rudd refused to directly contact the Chinese leadership, preferring instead to talk tough to our local media but not actually contact his counterpart in China.

After the trial had concluded Mr Rudd did make a public appeal for leniency in the sentencing of Stern Hu, which appears to have been ignored with a sentence of 10 years in prison.

It is essential that Australia aims to ensure that its relationship with China is based on mutual respect.

The decision of Chinese authorities to not observe the terms of the Consular Agreement and banning our officials from access to all of Mr Hu's court proceedings is not only a breach of the Agreement but also is not in the spirit of mutual respect.

The Rudd Government must urgently review the status of the Consular Agreement which can affect the rights of Australians living and working in China.

Of particular concern is the fact that the charges involving stealing commercial secrets were closed to the public and to Australian officials, making it impossible to judge the nature of the charges or what Chinese authorities deem to be commercial secrets.

According to a specialist journal in Chinese law “Almost any type of information of any subject matter maintained by a company can potentially be a commercial secret”.

As to the bribery charge, while Stern Hu confessed to receiving a sum of money from Chinese entities, there is little understanding as to what constitutes a bribe.

The head of the Hong Kong-based Red Flag Group, which specialises in helping companies avoid corrupt activities in China, recently said "In a country where the provision of gifts and lavish meals is a routine part of the business dealings, companies more than ever need to make sure they can keep track of and maintain thorough records of all gifts, entertainment and travel it provides to business relationships. It is only then that managers can have the information they need to spot red flags early, and prevent activity from occurring that incurs the full wrath of Chinese fraud investigators."

Companies from Australia and around the world operating in China will have taken close note of the arrest, trial and conviction of Stern Hu and would be well advised to exercise a high degree of caution in their business dealings in future.