Rio spying case shows risks of doing business in China

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.

"This really does highlight, possibly more than any other case in recent years, the potential vulnerability to the law being interpreted very flexibly, and the huge grey area especially around information and what constitutes a state secret," said Andrew Gilholm, Control Risks' senior analyst for China and Northeast Asia.

"FDI (foreign direct investment) is already down. Although we don't anticipate this will really deter investors, people will be watching very closely. Any sign that this is the start of a trend would be very concerning and could have a real impact on investor attitudes."

These detentions happened at a time of tension between China and Australia.

Rio Tinto last month ditched a planned $19.5 billion investment by state-owned Chinese metals firm Chinalco, increasing strains between two trading partners just as iron ore term price negotiations were nearing their June 30 deadline.

The detentions could give ammunition to politicians and the general public in Western countries, who are already skeptical of the independence of Chinese corporations trying to buy valuable assets, one analyst said.

"This gives a lot of credence to the argument that it is 'China Inc.' People who might not have seen it that way before will now swing over," said an Australian industry consultant, who asked not to be identified citing the case's sensitivity.

(Additional reporting by Lucy Hornby in Beijing; Editing by Nick Macfie)