China lost a great deal of its credibility in the world business markets when it accused several Rio Tinto (RTP) employees of industrial espionage. The accusations were vague. Australia, Rio Tinto’s home country, pressured the Chinese for details about the charges and got nothing.
The Chinese charges came within weeks of Rio Tinto rejecting a $21 billion investment from government-controlled mainland metals operator ChinalCo. Rio was encouraged to walk away from the deal by the Australian government, which did not want the Chinese the control of one of its key industrial sectors to be in the hands of another sovereign state.
The Chinese maintain that the disintegration of their deal to buy into Rio Tinto (RTP) has no relationship with the spying charges. However, it is extremely hard to imagine China bringing accusations against an employee of a huge international company if it was the largest investor in the firm.
China has now supplied more details about its case involving Rio employees. The Wall Street Journal reports that the central government claims that over a period of six years, the metals company engaged in “winning over and buying off, prying out intelligence, routing one by one, and gaining things by deceit” to the extent that China was charged $102 billion too much for ore by Rio Tinto alone. The central government has since said that the views come from only one official. In China, were the government’s position can change hour-to-hour that claim may be short-lived
It cannot be true that the Chinese metals industry let that much money go missing in such a short period of time. Rio Tinto would have had to conduct a fraud of tremendous proportions that went both undetected and unreported, although it would have had to be known by hundreds of people, given its alleged scope. The company would also have had to commit an unheard of level of securities fraud by hiding billions of dollars in revenue for several years in a row without it being detected by either its auditors or reported by any one of the scores of employees working in Rio’s financial departments.
The most stunning part of the entire affair is that China imagines that it can convince the world that a fraud that could not possibly have avoided detection did avoid detection for a period of years. This leaves only one conclusion. The Chinese government is lying and does not care. China is prepared to show the world that it will get revenge for any significant slight or strategic move by another nation that the world’s most populous country believes is not in its best interest. The fact that China had to go through the process of having a major transaction broken by a country of modest size like Australia must have been terribly humiliating.
China maybe entering a new period of isolationism in which it will play a game of engaging the rest of the world’s powers in economic treaties and agreements and allow modest investment in firms inside its borders by interests from outside China. Chinese state-backed companies will continue to shop for firms and assets outside its borders to secure important assets like petroleum. China may even attempt to buy its way into international industries like the automotive or technology sectors. Many of these deals will be killed by local governments who do not trust the Chinese motives. Nations that want to tap the huge financial resources of the mainland will do so at their own risk. Countries like Brazil have proved so far that Chinese capital is more important to them than the risk that goes with it. China is now Africa’s largest trading partner. China may even appear to keep a fairly benign stance as a member of the world’s business community.
But, in reality, the stakes of doing business with China have risen rapidly, in just a matter of months. The central government has obviously concluded that brazen and aggressive behavior will teach the world that trifling with China’s business interests will be met with swift and vengeful action.
China had moved closer and closer to becoming the world’s banker, especially as the recession has caused major governments to raise debt in the capital markets. A China that will use legal leverage and stunning accusations to sow chaos with businesses and countries which have challenged its supremacy is a China that will consider using the leverage that it has by owning huge pools of sovereign debt. China has begun to play the bully as publicly as it possibly can, a nearly certain indication that this is the national economic policy of its future.
Douglas A. McIntyre
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