China arrests raise tension

Beyond triggering a growing chorus of international criticism, China’s detention of an Australian mining executive is a reminder that doing business here carries risks not found in other major economies.

The controversy has sparked heated exchanges between Chinese and Australian officials in recent days, with Australians complaining that the Chinese have not released any evidence backing the charges against Stern Hu, an iron ore negotiator for mining giant Rio Tinto.

The dispute threatens the $54.5-billion trade relationship between the two countries, built on China’s soaring demand for resources.

More broadly, however, the case underscores the challenges foreign companies face in navigating the Chinese legal system.

China may have a solid case against Hu, but the government’s lack of transparency breeds distrust, experts say.

“These are, of course, of great concern with respect to U.S. investors, multinational companies from around the world that have projects here,” U.S. Commerce Secretary Gary Locke, who is visiting China this week on a trade mission, said in a televised interview Thursday.

Locke said he would discuss the treatment of foreign companies with his Chinese counterparts in light of the Rio Tinto probe.

“We need to have transparencies. We need to have assurances and confidence that people working here . . . will be treated fairly,” he told CNN.

The flare-up began July 5, when Chinese authorities detained Hu, an Australian citizen born in China, and three Chinese employees of Rio Tinto. The four were accused of stealing state secrets.

The Chinese government has not released any evidence backing the charges or revealed any details about the probe. But Chinese media aligned with the government have reported that Hu obtained pricing strategies of Chinese steel firms in order to win better terms in negotiations.

Many of the Chinese reports used unnamed sources and alleged rampant corruption in the steel sector. An article in the China Daily newspaper Wednesday cited an “industry insider” saying Rio Tinto had bribed all 16 Chinese steelmakers involved in negotiations to set benchmark prices for iron ore, the key ingredient of steel.

The news of the detentions came as a bombshell in Australia, where only last month Rio Tinto shocked Beijing by rejecting a $19.5-billion bid by Chinese state-owned mining company Chinalco to more than double its existing stake in the Anglo-Australian firm. The deal faced fierce opposition from Australian lawmakers wary of China’s growing reach into the nation’s natural resources.

The timing of the investigation fueled the perception that China detained the Rio Tinto workers in retaliation for the scuttled deal with the world’s third-largest mining company.

Australian Prime Minister Kevin Rudd warned Beijing that foreign governments and corporations would be closely watching how China handles Hu’s case, suggesting that much was on the line for Beijing.

“Australia, of course, has significant economic interests in its relationship with China, but I also want to remind our Chinese friends that China, too, has significant economic interests at stake in its relationship with Australia and with its other commercial partners around the world,” Rudd said.

Chinese Foreign Ministry spokesman Qin Gang fired back at a news conference in Beijing on Thursday, saying Australia was interfering with China’s judicial independence.

“Comments from Australian officials will have no impact on how China handles the Rio Tinto case,” Qin said.

He warned foreign companies that they must adhere to Chinese laws.

“Every gentleman loves treasure, but one has to obtain it through a good way,” Qin said, using a Chinese saying. “We ask foreign companies to do business with trust and conduct business following moral standards.”

Foreign direct investment in China dropped in June for the ninth consecutive month, though the rate of decline was not as sharp as before. Still, Chinese officials have found themselves needing to defend China’s place as a prime destination for overseas investment.

“The confidence of foreign investment in China’s legal environment has strengthened during China’s 30 years of opening up,” Commerce Ministry spokesman Yao Jian said. “This single case won’t affect China’s trade and capacity of attracting foreign investment at all.”

In being accused of stealing state secrets, Hu is snared in one of China’s most notorious legal binds. The vague and broadly applied law provides scant legal recourse, experts say.

It can be difficult, especially for overseas companies, to determine what information is secret. Sensitive materials are rarely stamped “classified” or “confidential.” And companies that appear to be private sometimes have government backing, which makes sharing information risky.

“To say it’s complex and ambiguous is an understatement,” said Jerome Cohen, a professor specializing in Chinese law at New York University. He called China’s state secrets law a morass, “an elaborate and illogical hodgepodge of many laws.”

Hu could be detained as long as a year before his case is concluded. Authorities can choose to deny him access to a lawyer during the investigation period. And even if he is allowed an attorney, the details of the state secrets don’t have to be revealed.

“In state secrets context, you’re facing the worst,” Cohen said. “You’re left on your own for many, many months. You’re up against an extremely unfair procedural system.”

Despite assurances of greater independence for China’s state-owned companies -- which dominate almost all key sectors of the Chinese economy, from energy to aviation -- the handling of the Rio Tinto case suggests that the central government still controls much of the decision-making behind the scenes.

“State-owned enterprises are not independent, although the appearance may be that they are independent,” said James Zimmerman, a partner in the Beijing office of the law firm Squire, Sanders & Dempsey. “Centralized policy, planning and control is still the norm.”

A public security official speaking on condition of anonymity said economic policy was now being vetted by state security officials. He said the Rio Tinto probe had approval from the highest echelons of the central government because Hu was an Australian passport holder.

The Sino-Australian relationship had prospered in the last decade as China became a major buyer of iron ore. The commodity found in abundance in Australia was needed to gird China’s dramatic modernization.

About 40% of China’s iron ore imports come from Australia, and last month, imports of the material jumped 46% from a year earlier.

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david.pierson@latimes.com

Tommy Yang and Nicole Liu in The Times’ Beijing bureau contributed to this report.