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Rio Tinto, state secrets, smoke and mirrors

By Arthur Thomas - posted Friday, 17 July 2009


Stealing state secrets is a convenient charge usually reserved for journalists, activists, and whistleblowers in China.

While Stern Hu may be an Australian citizen with immediate family in Australia and potentially free from "pressure" within China, the same does not apply to his three colleagues who have also become pawns: they have with extended family in China and consequently are open to pressure.

What is a state secret?

The State Secrets Law and related Implementing Regulations provide a list of categories that include what only may be state secrets.

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The lists are catchalls, deliberately broad and vague and encompass virtually all-conceivable information.

The law specifically proclaims that information is not classified a state secret unless it is determined to be a state secret in accordance with legally defined procedures or knowledge of it is restricted to a defined scope of personnel for a defined length of time.

It is not just content that categorises information as secrets; it is how the Ministry of State Security and the Chinese Communist Party perceives possible use of that information.

A state secret is anything the Chinese government wants it to be.

It is any matter "relating to the security and interests of the nation" as perceived by the Ministry of State Security and the CCP. The emphasis being on what Beijing construes as "interests of the nation".

It is not restricted to information categorised or stamped secret.

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A state secret also applies to information that may question the credibility of the CCP leadership and policies, or undermine confidence in the CCP and/or individual officials.

Even though information may not be marked "secret", the Supreme People's Court is clear: "Any person who knows, or should know that any information, even though it is not marked secret, relates to the security and interests of the nation." Disclosure will make them criminally liable for passing on that information to a foreigner. Tourist photo and video images are also included.

For the foreign journalist it is a minefield. The State Secrets Law clearly requires that information be restricted in order to be a state secret. The same law however places the burden for determining whether or not, information is a state secret, squarely upon those intending to write about, talk about, or publish it.

It is also a minefield for the locals. The regulation proclaims that any person who talks to the media, and in particular the foreign media, without first securing clearance from the government may be subject to prosecution.

A state secret can also be the result of using official data released for domestic and foreign media and analysts, to correctly arrive at a conclusion that contradicts or questions the veracity of official policy or data.

So what of Stern Hu?

His role as a senior executive is to have a firm understanding of the global iron and steel market allowing him to provide the ore best suited for an individual steel mill's requirements.

It is a simple matter of due diligence, not espionage, to accurately assess China's steel mills capacity, technologies, costs and weaknesses. This would be well known by any professional in the ore mining and foreign steel industry.

It is therefore a daunting and dangerous task for Stern Hu to exercise his responsibility to provide the ore best suited to meet his clients' needs since under the law in China, knowing the technical specifications and capability of the state-owned pillar industries is classified as a state secret.

Since BHP-Billiton, Vale, Murchison, Fortescue, and every other miner have the same information, why not incarcerate their local executives?

It is possible that Stern Hu's incarceration is due to his Chinese ethnicity and therefore charged with ignoring his loyalty and responsibility to China before his duty to his employer and shareholders.

It is more likely he is the pawn to exert pressure on the ore majors into dropping their multi billion-dollar claims for breach of contractual obligations by China's iconic steel industry majors.

Such action will focus the attention of the global media on China's steel industry to seek the reasons for breaching obligations of international supply contracts.

Is there another reason?

State media has been trumpeting a booming steel industry and Beijing's expectations for an economic revival due to China’s stimulus package.

Iron ore stockpiles, however, reached around 34 days supply and steel mills are incurring increasing losses. Coal and coke shipments were also on the decline in volume and price due to falling demand. Since the end of December 2008, China has been deferring, cancelling, and refusing to accept some deliveries of iron ore.

Such data may be construed as indicating a difficult period for China's steel industry and the economy in general, both of which are reliant on a rapid turnaround in the global economy, and that is a state secret.

Shoring up confidence in the CCP

It is unlikely Stern Hu's arrest has anything to do with espionage and more to do with shoring up confidence in the CCP and Hu Jintao's personal credibility.

Since November 2008, state media has been regularly headlining Hu Jintao's demands that the global iron ore giants cut their prices to meet China's demands or suffer the consequences.

To boost the CCP's domestic image as a global power capable of dictating price, the state formed the China Iron and Steel Association to take charge of negotiations from the major mills.

Despite Hu's high profile uncompromising stand, and direct government involvement, iron ore price negotiations dragged on and failed, undermining the new association's credibility and faith of many mills in the association's ability to perform.

More importantly, it was also a failure of a Hu Jintao initiative resulting in loss of mianji (face) for both Hu Jintao and the CCP.

Steel is the pillar industry in China and a major employer.

Cutbacks affect large numbers of jobs, and the longer the global downturn continues, the more costly it is to retain workers. Because of the sheer size of the industry in China, if you cut steel capacity, you will also cut coal, coke, transport, and power generation triggering the potential for a ripple effect in both up, and downstream unemployment, triggering the prospect for rising civil unrest.

State media continues to highlight the restructuring of the steel industry with a myriad of mergers and acquisitions proclaiming a strategy to improve efficiency and maintain China's competitive export pricing.

Closer examination of this restructuring however, reveals that it is more akin to paper shuffling by transferring assets onto bigger mills balance sheets ahead of IPOs or capital-raising, and not shutting down redundant facilities, inefficient capacity or excess labour.

The stimulus package has created demand for construction steel produced by the smaller mills rather than the speciality steels produced by the major mills.

There are increasing signs that the global recession has hit China much harder that Beijing will admit, and the longer the global economy continues remains flat, China's economy is highly vulnerable.

Problems in selling the US$30 billion in central government-backed bonds to help local government fund their 76 per cent contribution to the stimulus package however, reflects the slowing confidence in China's short term recovery.

Hu Jintao's sudden return from the G8 in Italy was most unusual. While he would certainly face criticism on policy to reduce global warming, the reason for his return was unrelated.

Hu is a strong supporter of Li Dezhu's repressive racial policies. He supports the qiangren (strongman) and "strike hard" policies implemented by his protégés Wang Lequan and Zhang Qingli in Xinjiang and Tibet.

These repressive policies have only succeeded in polarising the situation in both regions and drawing international sympathy for Tibet and raising the profile of the Dalai Lama. This recent repression and demonising of Rebiya Kadeer has given the Uyghurs what has been missing in their struggle, a high profile leader figure.

This is not the time for Hu Jintao to be associated with any other bad news in China, and the return may have been to fend off rising criticism from within the CCP.

A different perspective

Is it really just about Rio Tinto?

The arrest of Stern Hu on charge of stealing state secrets is a red flag for foreign companies with offices and staff in mainland China. The charge, relating to national and security grants the Chinese government unprecedented and unrestricted access to a company's premises and records, including confidential and highly sensitive material.

Such information could have the potential to provide China with a commercial, (or even a political) advantage in negotiations and/or operations with existing mining partners in Australia. It would be a serious advantage when negotiating possible future investments in Australia's resources.

Is it about Hu Jintao?

The highly publicised arrest could serve two purposes for the Chinese people.

The state media could present the case as the cause of the failure of Hu Jintao's efforts to secure China's demands in the iron ore price negotiations and cast doubt on Rio Tinto's honesty and integrity after its withdrawal from the landmark Chinalco Deal and venture with BHP-Billiton. Failure to secure the price cut would affect the viability of China's steel industry, and that in turn, will affect China's economy

This is not the time for Hu Jintao to be associated with any other bad news in China and this arrest would shore up support for Hu Jintao.

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About the Author

Arthur Thomas is retired. He has extensive experience in the old Soviet, the new Russia, China, Central Asia and South East Asia.

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