Prime Minister Kevin Rudd鈥檚 warning to Beijing that the world is carefully watching the trial of Stern Hu is not an overstatement. The international business community is still assessing what this extraordinary episode means for foreign companies doing business in China.
After all, Hu was detained while leading multi-billion dollar negotiations for Rio Tinto against the Chinese Iron and Steel Association (CISA). He was initially detained on 鈥榥ational security grounds鈥� and arrested for 鈥榮tealing state secrets鈥�. It was only after international political pressure, mainly by American Secretary for Commerce Garry Locke, that Hu鈥檚 charges were downgraded to those of 鈥榬eceiving bribes鈥� and 鈥榯heft of industrial secrets鈥�. When the dust eventually settles after his 鈥榯hree day trial鈥�, the international business community will take a significantly dimmer view of both China鈥檚 business environment and of the country鈥檚 political-economy.
The dominant narrative is that authoritarian China has been an enormous beneficiary of economic globalisation and is rising as a responsible stakeholder within the global economic system. Since the mid 1990s, Beijing has promoted China as dependent, and therefore, welcoming to foreign businesses. Beijing鈥檚 message has been that its political values will not detrimentally dilute the existence of a pragmatic rule-of-law environment within which foreign businesses operate.
For the most part, especially in the low-technology manufacturing and export industries, this remains true. But as the Stern Hu situation attests, problems potentially arise when foreign companies engage with state-owned champions, or else operate in the dozen or so sectors that Beijing deems vital to China鈥檚 national interest.
Beijing will protest that Stern Hu has admitted to accepting bribes and that his trial is therefore legitimate. True, but bribery is so widespread in China that the decision to prosecute is almost always a political rather than judicial one. But two aspects of Hu鈥檚 predicament and trial remain of enormous concern. First, there is the question of timing. Hu was first detained once it became obvious that the CISA were 鈥榣osing鈥� in their negotiations with Rio Tinto. It also occurred at a time when tensions between Beijing and the Rudd government began to surface. Second, there is still the significance of the initial charge of 鈥榚spionage鈥� which was then downgraded to stealing 鈥榠ndustrial secrets鈥� (Full coverage: Stern Hu).
This will feed a number of growing uncertainties for the business community.
Chinese laws are written so broadly that they can be selectively applied to suit the commercial or political purposes of the state and its agencies. It is no coincidence that Hu was detained after it became apparent that the CISA had been out-negotiated by a Rio Tinto team that possessed superior tactical information about Chinese steel mills. Moreover, state agencies such as the CISA can retrospectively deem a piece of information as a 鈥榮tate secret鈥� or even an 鈥榠ndustrial secret鈥�. It is no surprise that the part of the trial to assess whether Hu was in possession of an 鈥榠ndustrial secret鈥� will be held behind closed doors.
The issue of the lack of 鈥榙ue process鈥� in China鈥檚 legal system is also set to become more prominent. The trial, which ought to be a complex one, will last two or three days. Hu鈥檚 lawyers face severe limitations in calling witnesses or in cross-examining the prosecution鈥檚 witnesses. His lawyers have been given only limited access to the prosecution鈥檚 documents. More broadly, courts explicitly remain under the authority of the CCP and all judges are appointed directly by the CCP. Court decisions are also subject to ratification by the Party.
International observers will reach the conclusion that state-owned champions remain agents of the state and Party. The vast majority of senior management of these SOEs are CCP memebrs; and board members CCP officials (The other side of Chinese business, March 23). The CISA which negotiates on behalf of China鈥檚 state-owned steel mills is stacked with CCP political and intelligence officials. The decision to first detain Hu on grounds of espionage, and then to pursue him on the lesser charges were made by high ranking political officials rather than lawyers. Indeed, Beijing has consistently reiterated that securing a cheaper price for long-term iron ore contracts is a matter 鈥榯hat goes to the heart of national security and interests鈥�.
These realities have certain ramifications. For example, it will influence the way foreign governments and regulatory authorities view take-over bids by Chinese SOEs. Foreign businesses will also realise that their chances of access and success in the Chinese market may be partially dependent on the status of their government鈥檚 relationship with Beijing. For companies with operations already in China, deteriorating relationships with government officials entail personal and corporate risks.
Finally, the episode hints at what could be a broader development--the regulatory, protectionist and political environment in China is becoming increasingly difficult for foreign companies. A number of memos and articles indicate that many CCP officials believe that the Chinese economy is less reliant on foreign companies--resource companies an exception--to help it develop and modernise than it once was.
Foreign companies are increasingly complaining about rising Chinese protectionism, lack of market access and even the absence of token efforts by officials to protect intellectual property rights. Many executives sense that there is now less emphasis on promoting the attractiveness of 鈥榖rand China鈥� to foreign companies. If so, foreign companies who have been at the forefront of advocating closer political and economic engagement with China in order to get a slice of the pie could soon change their tune