Rio spying case shows risks of doing business in China

By Ben Blanchard

SHANGHAI (Reuters) - China's booming economy is a magnet for foreign firms, but the saga of four Rio Tinto executives detained for spying shows the risks of doing business in a tightly controlled country run as a one-party state.

Despite the glitz and glamour of Beijing and Shanghai, with their chic boutiques and towering steel skyscrapers, China is still governed by a Communist Party which brooks little dissent and controls many aspects of life, including the economy.

That economy, now the world's third largest, remains "pretty much ruled by political diktat," said Matthew Crabbe, managing director of research firm Access Asia.

"It has to be understood it is still a Communist country. There is still in effect a command economy."

Chinese authorities detained Stern Hu, Rio's top iron ore salesman in China, on Sunday on suspicion of stealing state secrets, Australia Foreign Minister Stephen Smith said this week. Three Chinese nationals on Hu's team were also detained. [nSYD468995]

China's Foreign Ministry said on Thursday said the four had hurt "China's national interest and security." [nSP478784]

The detentions came as a Shanghai paper reported Chinese steel mills had given in on annual iron ore prices, agreeing to the same 33 percent cut that other Asian steelmakers set earlier.

That capitulation would be a loss of face for the state-backed Chinese Iron and Steel Association, which had vowed to the central government that it could achieve a deeper discount.

RAISING THE STAKES

The detention of the executives is not without precedent.

Chinese and foreign business people have been detained or even kidnapped in China during the course of business disputes, for alleged customs or tax evasion, or as a pressure tactic by government bureaus or state-backed rivals.

But the formal acknowledgement by the Chinese government, and the allegations of spying, raise the stakes in this case.

Historically, mainland Chinese who have taken foreign citizenship are particularly vulnerable to detention in China.

That poses a problem for the many foreign multinationals who have increasingly promoted and relied on returned Chinese like Hu for their unique familiarity with both Chinese and Western business cultures.

Another issue is that almost anything can be termed a state secret in China, especially when it comes to economic data.