Thursday, August 13, 2009

From Political to Economic Wrongs--The Rio Tinto Prosecutions in China

I have written about the arrest of Stern Hu, general manager of Rio Tinto's Shanghai office and three of his Chinese co-workers Liu Caikui, Ge Minqiang and Wang Yong. See Larry Catá Backer,State Owned Enterprises and the Integrity of Private Markets and Commercial Activity: On the Arrest of the Rio Tinto Executive, Law at the End of the Day, July 10, 2009.
When the character of commercial activity, even wrongful activity, changes character from an economic to a political crime, the distinction between private and public spheres is more likely to collapse. Thus, . . . the actions were not directed against the state, as sovereign. But it does appear that the activity was intended to advantage Rio Tinto in its dealings with competitor enterprises in markets that touched on Chinese state economic policies affecting enterprises controlled by the state. That had the effect of transforming competitive market activity into anti state activities. That is certainly how the Chinese officially saw it. . . . . Yet that transformation might well produce collateral effects--from a suspicion of the integrity of markets, to the inability of the Chinese state apparatus to convince others that its enterprises are not public interventions in otherwise private markets. Moreover, the privileging of this political transformation also hides the commercial issues underlying the events--recent attempts to purchase a large stake in Rio Tinto by Chinalco, a Chinese State Owned Enterprise, had been resisted. And on the eve of the arrest, Chinalco was again attempting to increase its stake in Rio Tinto. Id.
I suggested that "the rise of great sovereign industrial giants under the framework rules of economic globalization, including the United States and China, the haphazard amalgamation of sovereign and market power, when directed to the benefit of sovereigns as market participants, bodes ill for the preservation of market integrity and the maintenance of level playing fields in the economic sphere." Id.

Today, in a perceptive article, Vivian Wai-yin Kwok chronicles a sensible reconsideration of the issues raised by the possible prosecution of these individuals under the political crimes provisions of Chnese law. Vivian Wai-yin Kwok, China Lightens Up on Rio Tinto,, Aug. 12,2009. "Four employees of Rio Tinto have been charged by the Chinese government of illegally obtaining corporate secrets and bribery. The four were expected to be charged with violating more serious state secrets laws." Id. Instead, relying on a "statement of China's Supreme People's Procuratorate, state media Xinhua reported Wednesday that prosecutors found evidence to prove that they were involved in commercial bribery, and investigations have also revealed that there were suspects in China's steel and iron enterprises who were providing commercial secrets for them." Id. The change in charge is significant. "The penalty for stealing business secrets is much lighter than the maximum penalty of stealing state secrets, which could be life imprisonment." Id.

Ms. Kwan noted quite correctly noted the belief among a segment of the international community that the change in charging strategy was "an attempt to assuage growing unease within the foreign investor community over the blurred line between what is considered standard commercial information and state secrets, particularly given that a large number of companies are still controlled by the government in China." Id. (referencing the analysis of Sarah McDowall, an analyst with IHS ( IHS - news - people ) Global Insight). She also noted how others within the international community have suggested that China is responsible for the actions of Mr. Hu and his associates--as a necessary strategy for private enterprises to compete against the use of state power in market participant activities by the state. "Legal expert Daniel Rosen, Visiting Fellow at the Peterson Institute for International Economics, said Beijing is partly responsible for the aggressive market research efforts both domestic and foreign are forced into, whether legal or not, because legitimate economic information on demand and supply, inventories, and plans that will impact markets are unnecessarily opaque and inaccessible." Id.

And there is a politics to this decision, though it is consequential. "Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics, told that China's dropping charges on State Secrets Law is a welcome sign." Id. This is especially important in defining the course of future Sino-Australian relations. But more than that, "'It provides a means of continuing to build a separation between political and economic action. The great fear of other states has been a conflation of state and market activity.'" Id. (quoting Larry Catá Backer).

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