China Resorts To Old School Tactics After Rio Tinto Rejection

It is possible that several employees from global mining company Rio Tinto (RTP) were spying on the Chinese to gain an advantage through access to secret iron ore price information which could be used in negotiations with mainland steel mills. It is also possible that the Chinese are trying to send a message by holding four of the company’s workers on what appear to be charges of espionage. Rio Tinto walked out on an investment of over $19 billion by the communist nation’s Chinalco, a large state-owned metals company. The Australian government had been uncomfortable about a mainland-based firm owning so much of Rio Tinto because metal ore could be considered a strategic national asset. Rio did a joint venture with rival BHP Billion (BHP) to partially offset the loss of the Chinese investment. BHP may be a rival of Rio’s, but at least it is based in the West.

The AP reports that Australian Foreign Minister Stephen Smith has not been able to get much information from the Chinese government about the reason for the detention of four Rio Tinto employees. China is not likely to give him any because it does not have to. China can hold onto the Rio people and delay charging them and trying them, perhaps for months.

The concern about the actions of the Chinese government is that the detention of the Rio employees is a brutal and not terribly subtle way to demonstrate to the world that the government of the world’s most populous nation does not have to participate in the rule of international law.  Chinalco labored on its Rio Tinto investment for almost a year.  China would have obtained preferential access to critical raw materials if it had been able to close the deal.
China has been marching toward its coronation as the world’s most powerful economy. Some legitimate estimates are that China’s GDP could move ahead of the US’s before mid-Century. The inevitability of that path may be undone by the Chinese themselves.

China continues to exhibit behavior in the way that it operates its government which could prevent its growth from continuing at its current pace. China already faces the potential issue that its export-based economy could be hobbled for years by the global recession. The nation’s $585 billion stimulus package seems to be working, so far, based on a look at China’s 7% GDP growth. But, the supply of stimulus capital is not limitless.

Recent ethnic violence in the regional capital of Urumqi has killed 184 people and injured at least 1,600. That unrest is unlikely to be over. China may only be at the beginning of its problems with two groups within its borders. The first of these is with the populations of regions of the country that are not part of the largely homogeneous China. The second is with workers who are being pushed out of factory jobs because China’s export rate is slowing. Those workers have already begun to agitate for lost wages. The economy does face a potential recession if stimulus money runs out before the world’s economy has fully recovered. Some of the largest cities in China’s interior are populated in large part by people who were brought from rural parts of the nation to work in manufacturing facilities which are needed to keep the country’s GDP moving up.

Another habit that the Chinese government cannot break is the one that makes it believe that it can intimidate foreign interests by acting based on its own rules, no matter how distorted and phobic those decisions based on those rules may be. China is simply demonstrating that no matter how advanced its economy has become, its political center is still ruled by actions that it has been using for decades, actions that the government believes give it leverage with foreigners but actually only makes outsiders alarmed when they think about doing business with Beijing.

China’s brazen rejection of working with other nations to resolve disputes based on normal business and legal doctrines must be a sign that it believes the world needs China more than China needs the world. There is some truth to that. China has become the major source of finished goods for Japan and the West. China has become essential to the ability of these countries to keep their consumer spending at robust levels by providing products at prices much lower and in greater abundance than is available anywhere else.

The Rio Tinto incident has the chance of becoming a defining moment in the West’s commercial relationships with China. Detaining four people from an overseas business may not seem like much, but the Australians will almost certainly find rigorous sympathy in America and the UK. China may soon realize that its actions are the beginning of a modest but increasing abhorrence toward its practice of turning business issues into legal ones.

China’s central government obviously feels that it can act with impunity and that a nation the size of Australia will have no recourse. This assumption will turn out to have been a severe miscalculation.

Douglas A. McIntyre