Rio Tinto, state secrets, smoke and mirrors

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.