Rio, China and the question of state secrets: John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

By John Kemp

LONDON (Reuters) - Online comments in a magazine sponsored by China's National Administration for the Protection of State Secrets (NAPSS) accusing Rio Tinto (RIO.L) employees of using bribes to obtain confidential information as part of iron ore negotiations over six years, costing China's steelmakers 700 billion RMB (around $100 billion) in higher prices, have brought new heat but little light to the bitter dispute between China and the major iron ore suppliers.

No charges have been brought and there are reports the article has been withdrawn from the internet, with the author denying any personal knowledge of the case, saying the information was from other state media and industry reports.

Rio said last month "Rio Tinto believes that the allegations in recent media reports that employees were involved in bribery of officials at Chinese steel mills are wholly without foundation. We remain fully supportive of our detained employees, and believe that they acted at all times with integrity and in accordance with Rio Tinto's strict and publicly stated code of ethical behavior."

COLD WAR REACTIONS

The arrest of four Rio Tinto employees, one an Australian citizen, has brought a predictable round of China-bashing in the western media (resurrecting colorful cold-war stereotypes about secret policemen) as well as flag-waving response in Australia.

Gallons of ink have been spilled discussing collateral questions on whether this is retaliation for Chinalco's failure to secure an increased stake in Rio; whether the data in question should be considered a state secret or commercial information; and whether China should have provided swifter notification to the Australian authorities that it had detained an Australian citizen.

But the fundamental question is very simple. Rio and other mining companies have invested significant time and resources in acquiring market research and information on the production plans and likely import requirements for China's steel producers to help plan their production and investment decisions and give them an edge in the annual negotiations. The question here is how that information has been collected.

If it was obtained through bribes, inducements or any promise of favors to officials at China's steel companies, the behavior was probably illegal under Chinese law, and would be considered illegal (a criminal matter) or at least unlawful (a civil matter) under the laws of most other nations. If it was obtained from public sources or without any improper inducements, from authorized sources, the behavior was probably not criminal in China and would be considered innocent elsewhere as well.

This is a straightforward factual question, the stuff which forms the basis of thousands of court cases around the world every day -- though widespread doubts about the independence of China's judicial system mean that we may never know convincingly what happened, even if the case eventually comes to trial, because few people will trust the conclusions.

Other issues about consular representation, the definition of "state secrets", and the chilling effect on western business negotiations in China are diversions -- a smokescreen erected by public relations agents, diplomats and commentators who prefer to resurrect cold-war rhetoric than wait for the evidence to be tested. They are all efforts to create a fog in which the specific issue can be lost in more general ones (a standard tactic in international diplomacy).

LASHING OUT IN ANGER

Most observers see a link between the detentions and Chinalco's failed attempt to up its Rio stake. While a direct link is hard to prove, there is no doubt the allegations have been prompted by high-level frustration at the way the annual ore negotiations have been conducted.

From China's perspective, the iron ore market is a monopoly in which just three mining companies supply around 70 percent of the world market for seaborne ore, wielding significant pricing power during negotiations with a relatively fragmented customer base.

China's effort to level the playing field by organizing a buyers' cartel (the China Iron and Steel Association, CISA) has been undermined by independent merchants (who import spot market volumes on a speculative basis) and the steel mills own tendency to strike bilateral deals outside the CISA framework.

Now China's security apparatus is arguing the attempt to coordinate negotiations has also been subverted because Rio had obtained detailed data on the steelmakers' production plans and import requirements, and may have used improper means to do so. Several steel industry executives have also been detained as part of the widening probe, accused of revealing China's "bottom line" in the negotiations.

AN UNFAIR POKER GAME

Matters have been brought to a head by CISA's failure to secure a bigger price cut for 2009-2010 despite the global downturn. As a result, there is a bitter sense that the pricing system is loaded against China; the miners successfully push for large rises during boom times, and are then able to resist similar falls during a contraction.

China's bid to break this monopoly by buying into Rio has been rebuffed, and coordinated negotiations have not worked.

This has fueled a suspicion the talks are like a rigged game of poker -- in which the miners play with their cards hidden while China is forced to put theirs on the table because of the information flow from Chinese firms to their Australian counterparts.

China's authorities are now trying to plug the leaks. Practices which formerly attracted little official attention are being investigated vigorously to staunch the information flow.

INFORMATION SECURITY

The Rio case reflects a number of wider trends as well:

(1) It is a bid to send a strong message to employees and businesses across China to be more conscious and scrupulous in handling commercially sensitive information during dealings with western firms.

In China, with a long history of corruption, there is a high risk that enterprises become "porous" as employees leak information in the hope of securing some favor in return. The current crackdown is a blunt effort by the security apparatus to remind everyone of their duty of confidence and reduce porosity to ensure China's firms are not at a disadvantage.

(2) Like other countries, China is also irritated by signs the benefits of "domestic" stimulus are leaking abroad, lining the pockets of mining company shareholders rather than supporting local jobs. The extra steel demand created by the stimulus package is directly responsible for pushing up spot iron ore prices and undermining CISA's attempt to force down the benchmark.

China is not alone in resenting this. No country likes to think taxpayer funds expended for the sake of domestic employment are leaking abroad. The U.S. Congress attached "buy American" provisions to the stimulus bill, and signs of economic nationalism have been common in many of the financial bailouts.

There is little wonder that China feels resentful when western governments press for it to stimulate its economy -- only for their carefully protected commodity firms to use that higher demand as an opportunity to push through price increases.