Foreign firms have long complained that China’s capricious legal system hurts business in the country. Underpinning these complaints, though, is the recognition that business is good. Compared with many of its neighbors, China is a relatively safe and stable place to operate.
At the very least, few worry about being detained for stealing of state secrets, a fate that befell Stern Hu, Rio Tinto’s iron ore marketing man in Shanghai, and three of his Chinese colleagues. Australian officials say the case is a criminal one, and not espionage-related, but the truth remains obscured.
The severity of the allegations against Hu, an Australian national, and the secrecy surrounding his case threaten the peaceful and profitable coexistence between enterprises and the state. Foreign employees at certain multinational firms are following the case with a mixture of interest and anxiety, concerned about further detentions or investigations.
We cannot say whether Hu and his staff are guilty of their alleged crimes. For China, his guilt may be beyond the point. The timing of the arrest – months after a failed bid by Aluminum Corp of China (Chinalco) to acquire a large holding in Rio, and amidst heated negotiations between the miner and Chinese iron ore buyers – suggests causality.
At issue are the intentionally vague accusations. If Hu had committed commercial crimes, such as bribery or corporate spying, then he should be accused of those crimes. By treating him – at least initially – as a spy, Beijing only fuels the conviction that there is no division between business interests and state interests. Enter this market at your own peril.
It is unfortunate for China that the detentions come at a time when domestic companies are aggressively seeking to acquire overseas assets. Approaching any sizeable or sensitive acquisition, Chinese firms have long had to overcome suspicion that they were operating on Beijing’s orders. The goodwill certain players have built up might swiftly disappear should Hu be jailed on trumped up charges.
The issue is hardly going to stem the flow of foreign investment into China nor curtail Chinese outbound investment. But with this move, China has given overseas politicians more ammunition to use against the country, and as such erected another hurdle its own firms must overcome to become true global players.