Randomly Noted

Day 2 of Australian government officials speaking frankly, and sharply, about the shameful sham Shanghai trial of Australian citizen Stern Hu and three Rio Tinto colleagues who are Chinese citizens. Monday, when the sentences came down against the Rio Tinto Four, Australian foreign minister Stephen Smith rightly described them as “harsh.”  Today came Prime Minister Kevin Rudd saying China failed to “demonstrate to the world at large transparency that would be consistent with its emerging global role.” As I’ve said again and again, we know nothing – at most next to nothing – about the case. We don’t know if the four Rio employees are guilty as charged. All we know is they were denied due process at every stage of the case, from their detentions last July to the lengthy prison sentences handed down this week. For its part, Rio Tinto is so eager to remain in China’s good graces – the mining company makes a lot of money there – that it has fired the four defendants while declining to speak out on their behalf. At least Australia’s government is saying what needs to be said.

The trial of the Rio Tinto Four has come to an ugly end with lengthy prison sentences for the Chinese-born employees of the big miner, including Australian citizen Stern Hu. Reporters were allowed to witness the trial’s final day via closed-circuit TV – but no further details about the alleged crimes were forthcoming. We really have no insight into what the four people allegedly did, nor do we know who was on the other side of alleged bribes and exchanges of commercial secrets. As Australia’s foreign minister, Stephen Smith, lamented, “there are serious unanswered questions” about the charges relating to theft of commercial secrets such that “the international business community will want to pursue with China.” Little was heard from Rio Tinto itself – the Australian company has left public statements to Canberra during the eight-month process, and in the past week seemed to distance itself from its employees. This even though the workers’ guilt was by no means established via an open and transparent proceeding. With the exception of Google, Western companies are much too eager to remain in Beijing’s good graces.

My colleagues report that some or all of the four Rio Tinto employees on trial in China for alleged bribery said they accepted payments of one sort or another. Given the  lack of clarity and transparency in the process – which began with their detentions last summer – it’s impossible to know whether the defendants are acting voluntarily or under duress. Also, we don’t know what has happened to the alleged bribers – the employees of Chinese steel mills who offered the alleged bribes to the Rio Four. Are they getting away with alleged crimes? Have they been secretly detained, tried and punished? Why is it we know about the people who allegedly accepted bribes but not those who paid them, and whose enterprises allegedly benefited? You may recall that the saga began last July when China imprisoned the Rio employees – one Australian citizen and four Chinese nationals – on allegations they stole national secrets. Later, Beijing decided it was a routine criminal matter. Even as the closed trial began today in Shanghai, Rio Tinto’s CEO Tom Albanese was shaking hands with Chinese Premier Wen Jiabao in Beijing’s Great Hall of the People.

The Rio Tinto four will go on trial next week – finally – after sitting in jail since last summer without due process, without any clarity about their alleged misdeeds. This is how China operates, and as a result multi-national corporations are finally starting to wise up. I’ve long been amazed at the slavish way in which Western businessmen deal with Beijing. Chinese business and political interests trample all over multi-nationals – and yet their CEOs keep coming back for more. “But China’s HUGE, companies can’t afford NOT to be in China, the Chinese economy is growing FAST even as the West stagnates”  - so goes the conventional wisdom dating back 15 or so years. Perhaps the sobering reality circa 2010, as freshly reported in today’s WSJ, is a sign of a new sobriety about China. Maybe companies will now start looking at China as it really is: an economy with limited opportunities for certain companies and industries, with an awful lot of risk for many.

An emerging theme at The Wall Street Journal’s ECO:nomics energy conference is that a lack of action by the U.S. government on climate change legislation creates uncertainty for utilities to embark on major, long-term investments.

Skepticism has been frequently expressed at the conference in Santa Barbara, Calif., that Congress and the administration will be able this year to pass legislation that essentially sets a price for carbon emissions.

Michael G. Morris, chairman and chief executive of American Electric Power, which he described as the largest coal burner in the U.S., supported the notion of a carbon price set by the government as it would allow businesses to “be better about your planning,” he said.

“The more uncertainty that can get sorted out, the more willing” companies will be to make big, long-term investments, said Lewis Hay III, chairman and chief executive of FPL Group.

“Some sort of price signal” about carbon is needed for investment certainty, said Tom Albanese, chief executive of Rio Tinto. He said his “preferred view” is a cap and trade system, as opposed to a carbon tax.

DJN colleague Elisabeth Behrmann reports China’s probe of the four Chinese nationals and the Australian – all employees of giant miner Rio Tinto – will conclude Jan. 11. This comes from the Australian government, not China, which means, of course, their ordeal may not end next week. Moreover, it’s not at all clear that Chinese authorities will disclose details of the charges against the four. Our story says “further extensions to the police probe are possible.” Here’s a recent blog on the subject.

As we contemplate China’s continued economic ascent this New Year, let’s not forget what it means to do business in China. In July, four Rio Tinto employees were detained. The three Chinese citizens and one Australian, Stern Hu, remain in prison on vague charges of bribery and theft of commercial secrets. Life goes on for their colleagues; Rio Tinto and other international miners have begun a fresh round of iron ore price negotiations with China Inc. – while the four languish. One trusts Rio and the Australian government are still doing what they can, behind the scenes, to secure for the detainees a modicum of legal and procedural transparency – if not their complete release. The lesson of the Rio Tinto four is simple: If you do business in China and vex someone in power, your employees may be in jeopardy. It’s not unlike Russia, except, as I’ve blogged in the past, China is essential to many Western companies’ growth plans whereas the Economy of Putin can be avoided. As the 2010 iron ore talks heat up in coming weeks, we’ll keep an eye on how China comports itself and how the four Rio Tinto detainees – victims of last year’s aborted round – fare.

Australia has everything going for it: abundant natural resources coveted by the world’s foremost industrial powers; banks that didn’t take stupid risks with customers’ money; a front-loaded stimulus-spending scheme that appears to have worked; a robust economy recovering so decisively that the central bank is well into a rate-hike cycle; and a decent pension and healthcare system. All this is demonstrably true (with the usual caveats) and it’s also the script to which Chris Bowen, the country’s financial services minister, is hewing to on a trip to New York City and London this week. What’s more, Australia has a refreshing, pragmatic and probably wise attitude toward foreign investment. One hears not a peep of protectionist rhetoric out of the lefty government  - which stands in contrast to their American counterparts. Chinese money has flowed into Australia in recent years as government regulators okayed the lion’s share of acquisitions of resources firms, notes Bowen, whose boss is the Mandarin-speaking Prime Minister Kevin Rudd.  Stern Hu (no relation), the Australian citizen and employee of Aussie-based mining giant Rio Tinto, languishes in a Chinese prison with three Chinese colleagues under the murkiest of circumstances. But Bowen is adamant the case won’t weaken Australia’s approach to China as a foremost trading partner. No doubt the Rio Tinto 4 is “a sensitive issue” in Australia, and Bowen says the Rudd administration “made our views very clear that the Chinese government needs to consider this is not good for their reputation in terms of doing business in China.” Chinese government officials continue visiting Australia, he adds, and “we make the point about Stern Hu on those visits. But you can’t let that downgrade the importance of the relationship.” Asked about foreign money flowing into Australia’s already frothy property market – and the sense one has that some of that money is coming from China – Bowen says, “That’s something we’re relaxed about.” Continue reading…

Nearly unnoticed yesterday (Monday) was a signal from China that it intends to continue backing away from the Rio Tinto case in which the state security apparatus detained four Rio employees in China on suspicion of espionage linked to global iron ore talks – and on behalf of another country, as reported by China’s domestic media. As Rio has a base of operations in Australia and one of the four, Stern Hu, holds an Australian passport, Beijing’s finger seemed pointed at Australia, from which China purchases massive amounts of natural resources. Unspoken but not forgotten as the news developed and Australian politicians expressed dismay was the sense that China was retaliating against Rio Tinto for walking away from a  $19.5 billion deal with Aluminum Corp. of China (known as Chinalco) earlier in the year – a major stake sale to Chinalco which might have helped ease China’s concerns about slaking the country’s massive appetite for natural resources.

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You’d think China Inc. might have learned from its manipulative missteps of recent months – ill-conceived moves which forced Beijing to reverse its Green Dam web-filtering decision and reduce charges against the Rio Tinto four; these are just some of the about-faces we’ve documented in earlier blogs. But now comes news that the Beijing government is pumping money into a weak Australian miner called Fortescue Metals Group in exchange for securing a mere 3% iron ore price discount for the rest of the year. Fortescue provides only 7% of the world’s iron ore output, all of which will now go to China, which will in turn extend loans of up to $6 billion. Now in hock to Beijing, Fortescue has relinquished pricing leverage over its customer, China, which continues to negotiate prices with the world’s three most powerful miners – Rio Tinto, BHP Billiton and Vale – representing some 70% of global output. It’s a futile effort by China and a desperate move by Fortescue’s impetuous CEO, Andrew Forrest. Moreover, it will only aggravate foreign firms’ concerns about doing business in China. Overseas investors should now assume Beijing can at any time pit them against each other in unpredictable ways, and by extension should view their Chinese investments as riskier than they were, say, last week. All this follows China’s biggest fiduciary misstep of the summer – its decision to prolong iron ore price talks with the big miners even as spot market prices rose, forcing Chinese steel companies to pay more as the weeks passed and “giving iron-ore miners little incentive to lock in cheap prices,” as my colleagues report today. Supporters of the Fortescue-China deal argue it will alter the dynamics of the iron ore negotiations in coming months and years. But this hinges on Fortescue’s ability to expand fast and effectively enough to deserve a place at the bargaining table with Rio, BHP and Vale. The loans of $5.5-$6 billion from China will certainly help but they don’t guarantee world-class production in short order. And as Chinese interests continue scouring the globe for resources firms to buy, the Fortescue pact will only foster suspicion among target companies and governments that China’s priority is securing the lowest-possible prices for domestic consumers – not ensuring the health of acquired companies, their employees and shareholders. It all comes down to this: A state attempting to manipulate the shape of global commerce is folly and will fail.