What’s the deal with China’s arrest of Stern Hu?

July 14th, 2009

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Last week’s arrest of Stern Hu, Rio Tinto’s iron ore negotiator in China, on ‘espionage’ charges had caught many by surprise. Curiosly, the charges that were laid on him were, in the eyes of the Chinese government, matters of national security. In Western standards, such charges (e.g. bribery to obtain information on bargaining position), even if substantiated, are deemed commercial in nature.

What is going on? Why is the Chinese government doing that? Good questions. In fact, there are more questions than answers in this case.

Whatever turns out to be eventual outcome for Stern Hu, one thing is clear- the annual iron ore price negotiation is currently frozen indefinitely. The Chinese steel industry, before this incident, was a fragmented bunch of mob. Some of the steel makers wanted to break ranks and cave in to a smaller price cut. But with a few of the Chinese steel executive arrested too (this fact is overshadowed by the arrest of Stern Hu), it seemed that the Chinese government is imposing discipline on their own steel makers to force them into line. Only then can the Chinese steel industry present an united front against the pricing power of BHP-Rio. Currently, there are investigations being carried out at steel mills in China as the industry wondered whether more arrests are to follow.

Obviously, the impact on Rio Tinto is not good. As long as this incident is not resolved, it will imply revenue loss for Rio Tinto. The impact on China, however, is less clear. If this incident is a calculated move by the Chinese government, then it is likely that they are already prepared for an extended impasse. As we wrote before in Australia is a pawn in the international game of commodities,

Over the weekend, Michael Sainsbury wrote in The Australian that China has stockpiled a remarkable 100 million tonnes of iron ore. It?s one thing to stockpile copper, but iron ore is not easy to store in such huge quantities.

But is this move made by the Chinese government to gain merely a commercial advantage? If so, then it’s a very clumsy way of achieving a commercial goal. By using the national security apparatus on a common bribery case (who don’t bribe in China?), the Chinese government is politicising a commercial issue. This issue seems to be more than just a commercial matter. As this article reported, it was the Chinese president who endorsed a probe into Rio Tinto. Professor Yu Ping, an expert on Chinese criminal law said here,

My experience is the people working at the Shanghai State Security Bureau [who arrested Stern Hu] are well educated. Many speak English and are more competent and more aware of the national interest than their counterparts at the Public Security Bureau,” he said.

You have to assume that detaining Mr Hu is a calculated decision knowing full well the international political sensitivities of doing it during the iron ore negotiations.

The fact that the Chinese government did not bother to inform the Australian government of the nature of the charges (and Australia’s foreign ministry had to scour the official Chinese media to learn of that) shows that China is, for whatever reason, deeply offended with Australia.

Not only that, why would China want to elevate this issue from commercial matter to a national security issue?

As this news article reported,

The investigation into Rio appears to be part of a realignment of how China manages its economy in the wake of the global financial crisis, with spy and security agencies promoted to top strategy-making bodies.

The nine-member standing committee of China’s Communist Party, led by President Hu, had taken more control over economic decisions at the expense of the State Council, led by Premier Wen Jiabao, it said, quoting anonymous Chinese economic advisers. The president endorsed the Rio investigation, it said.

International security analyst Clive Williams said every country, not only Australia, now faced difficulties dealing with China, because of the country’s looming economic problems and leadership sensitivities about them.

Coming from a resource-rich lucky country, it is easy for people like us in Australia to see the world as one of plenty. In fact, relative to its small population, Australia has a glut of natural resources. China on the other hand, relative to its colossal population, sees the world as one of scarcity. Therefore, in our eyes, the Chinese government is over-reacting over a commercial dispute. As we wrote before in Nations will rise against nations,

Therefore, outwardly, the world may be at peace. But inwardly, we believe there will be jostling for power, influence and resources between the major nation blocs. Bigger nations will use smaller nations as pawns, international armed non-state groups will intensify their activities and inter-ethnic conflicts will arise. We have no doubt that there will be plenty of Black Swans appearing in the days to come.

Certainly, there is more than meets the eye in Stern Hu’s arrest.

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  • David

    Dear CIJ,
    Well, this is interesting, if it is not a one time thing. The rule of law seems no more operative in China than in the US. Is this a sign that China is willing to flex it’s muscle now and we will see evidence of this in other ways as well (Military, Reserve Currency, Etc)? Or is this a sign of desperate political leadership in China, which is facing a huge export problem now that The West can’t afford to spend at its previous level (overcapacity of Chinese Manufacturing)? Or is this an internal power struggle between President Hu and Premier Wen Jiabao that has bubbled up into the public arena? How will China fit into the new economy that will rise from last year’s disasters?

  • David

    Dear CIJ,
    Well, this is interesting, if it is not a one time thing. The rule of law seems no more operative in China than in the US. Is this a sign that China is willing to flex it’s muscle now and we will see evidence of this in other ways as well (Military, Reserve Currency, Etc)? Or is this a sign of desperate political leadership in China, which is facing a huge export problem now that The West can’t afford to spend at its previous level (overcapacity of Chinese Manufacturing)? Or is this an internal power struggle between President Hu and Premier Wen Jiabao that has bubbled up into the public arena? How will China fit into the new economy that will rise from last year’s disasters?

  • Hi David!

    Well, this is interesting, if it is not a one time thing. The rule of law seems no more operative in China than in the US. Is this a sign that China is willing to flex it’s muscle now and we will see evidence of this in other ways as well (Military, Reserve Currency, Etc)? Or is this a sign of desperate political leadership in China, which is facing a huge export problem now that The West can’t afford to spend at its previous level (overcapacity of Chinese Manufacturing)? Or is this an internal power struggle between President Hu and Premier Wen Jiabao that has bubbled up into the public arena? How will China fit into the new economy that will rise from last year’s disasters?

    Good questions.

    We believe the positive economic numbers from China is likely to be doctored statistics. The increased Chinese demand for commodities is likely due to speculation/hoarding from relaxed lending standards (as part of the economic stimulus). We guess there’re still economic stress in China.

    Problem is, the truth cannot be dug out because they’re state ‘secrets.’

  • Hi David!

    Well, this is interesting, if it is not a one time thing. The rule of law seems no more operative in China than in the US. Is this a sign that China is willing to flex it’s muscle now and we will see evidence of this in other ways as well (Military, Reserve Currency, Etc)? Or is this a sign of desperate political leadership in China, which is facing a huge export problem now that The West can’t afford to spend at its previous level (overcapacity of Chinese Manufacturing)? Or is this an internal power struggle between President Hu and Premier Wen Jiabao that has bubbled up into the public arena? How will China fit into the new economy that will rise from last year’s disasters?

    Good questions.

    We believe the positive economic numbers from China is likely to be doctored statistics. The increased Chinese demand for commodities is likely due to speculation/hoarding from relaxed lending standards (as part of the economic stimulus). We guess there’re still economic stress in China.

    Problem is, the truth cannot be dug out because they’re state ‘secrets.’

  • Temjin

    Hi Ed,

    I’ve been following this news with extreme interest laterly. I read from an article where someone was stating that Hu IS NOT an Australian from the Chinese government’s respective. He is a Chinese National and thus, should place loyalty with his birth of place over his company. In other words, they would seek to punish those who dare to betray their nation. This place a huge implications on people like us, who are born in China but is an Australian citizen and is representing an Australian company to do business in China.

    So what now? Make sure all executives / representatives to be pure Aussie from now on?

    I agree with you that this is a calculated move. The Chinese aren’t dumb enough to not know the political sensitivity behind this move. They have an agenda and they are surely not letting everybody knows about it.

    Temjin

  • Temjin

    Hi Ed,

    I’ve been following this news with extreme interest laterly. I read from an article where someone was stating that Hu IS NOT an Australian from the Chinese government’s respective. He is a Chinese National and thus, should place loyalty with his birth of place over his company. In other words, they would seek to punish those who dare to betray their nation. This place a huge implications on people like us, who are born in China but is an Australian citizen and is representing an Australian company to do business in China.

    So what now? Make sure all executives / representatives to be pure Aussie from now on?

    I agree with you that this is a calculated move. The Chinese aren’t dumb enough to not know the political sensitivity behind this move. They have an agenda and they are surely not letting everybody knows about it.

    Temjin

  • Pete

    As I have been saying in CIN, I think this is China’s way of stopping trade with BHP/Rio.

    I don’t think they can impose trade sanctions on BHP/Rio without sparking trade issues with the USA and so on. The last thing China would want is for the USA to have a justified reason for protectionism.

    However if they have a different reason restrict BHP/Rio, such as ‘spying’…then it is not ‘protectionism’ or anything like that, it is in fact just an issue of national security.

    That is how I see it.

    But I do very much like your take CIJ on the ‘world of scarcity’. Could this be another way of bringing BHP and Rio into line?

    Personally, I think BHP and Rio’s future’s sit on a knife edge. Without China, they will both suffer greatly and Rio would be lucky to survive as a company (due to it’s debt).

    From China’s perspective, if you wanted a big stake in iron-ore in Australia (and already tried and failed), and you actually could think longer-term than a typical western-style election cycle, what strategy would you take?

    Well, knowing that Australia is completely relying on a Chinese commodity boom, a strategy to consider:
    – stockpile resources using USD (tick)
    – majorly reduce trade with Australia, in a politically acceptable way (tick)
    – wait for Australia to suffer
    – offer to buy even larger stakes in our companies for less, including some Government incentives*
    – enjoy the cheap resources for many years to come

    *Incentives include:
    – a Gov that will desperately need cash
    – a Gov that will desperately need increased revenues from resources
    – Chinese investment means that China would feel ‘comfortable’ trading with Australian companies now, because the spying issue is partly mitigated
    – a Chinese ‘partnership’, which means that Australia would benefit as China grows (at the moment we just think we have this).

    For the last decade China has needed Australia to provide resources for it’s own economic growth. They would have known that it put them in a tight situation, when BHP/Rio were in the driving seats, but would have carried on with business because they were still making money. However now that a crisis has occurred, they have a golden opportunity to rewrite the rules of resources trade in their favour.

    I am making some assumptions that Chinese political and trade strategists are intelligent and capable though. Maybe they are stupider than most of us believe.

  • Pete

    As I have been saying in CIN, I think this is China’s way of stopping trade with BHP/Rio.

    I don’t think they can impose trade sanctions on BHP/Rio without sparking trade issues with the USA and so on. The last thing China would want is for the USA to have a justified reason for protectionism.

    However if they have a different reason restrict BHP/Rio, such as ‘spying’…then it is not ‘protectionism’ or anything like that, it is in fact just an issue of national security.

    That is how I see it.

    But I do very much like your take CIJ on the ‘world of scarcity’. Could this be another way of bringing BHP and Rio into line?

    Personally, I think BHP and Rio’s future’s sit on a knife edge. Without China, they will both suffer greatly and Rio would be lucky to survive as a company (due to it’s debt).

    From China’s perspective, if you wanted a big stake in iron-ore in Australia (and already tried and failed), and you actually could think longer-term than a typical western-style election cycle, what strategy would you take?

    Well, knowing that Australia is completely relying on a Chinese commodity boom, a strategy to consider:
    – stockpile resources using USD (tick)
    – majorly reduce trade with Australia, in a politically acceptable way (tick)
    – wait for Australia to suffer
    – offer to buy even larger stakes in our companies for less, including some Government incentives*
    – enjoy the cheap resources for many years to come

    *Incentives include:
    – a Gov that will desperately need cash
    – a Gov that will desperately need increased revenues from resources
    – Chinese investment means that China would feel ‘comfortable’ trading with Australian companies now, because the spying issue is partly mitigated
    – a Chinese ‘partnership’, which means that Australia would benefit as China grows (at the moment we just think we have this).

    For the last decade China has needed Australia to provide resources for it’s own economic growth. They would have known that it put them in a tight situation, when BHP/Rio were in the driving seats, but would have carried on with business because they were still making money. However now that a crisis has occurred, they have a golden opportunity to rewrite the rules of resources trade in their favour.

    I am making some assumptions that Chinese political and trade strategists are intelligent and capable though. Maybe they are stupider than most of us believe.

  • David

    Pete’s last point is very interesting. He wrote “I am making some assumptions that Chinese political and trade strategists are intelligent and capable though. Maybe they are stupider than most of us believe.”

    I often hear how the Chinese think in the long term that they plan for decades, that in short, they know what they are doing. Maybe it looks that way to us (they’ve got what we haven’t got: money, manufacturing, domestic growth potential). But they are in just as bad or worse position than the west, they have our debt, which might be worth very little, they planned on us buying their stuff for the next 20 years, but we can’t now, they have a society that needs 8% growth not to blowup–is that possible. I don’t think they were any better prepared than the rest of the world for what is going on now and the domestic political problems they face are bigger than anywhere else in the world. Last year they reported 10,000 incidents against the state, what is the real number. If a mob attacked a police station in the US or Australia it would make the international news, like the protests in Iceland that brought down the government. China doesn’t have a system where bringing down the government can easily happen with most social institutions remaining unchanged. China has a big problem if things go south. I don’t see how they get around that and I don’t see how they can have 8% growth over the next 5 years with the West in depression and domestic Chinese demand slow to change.

    Certainly the Chinese don’t think one quater at at

  • David

    Pete’s last point is very interesting. He wrote “I am making some assumptions that Chinese political and trade strategists are intelligent and capable though. Maybe they are stupider than most of us believe.”

    I often hear how the Chinese think in the long term that they plan for decades, that in short, they know what they are doing. Maybe it looks that way to us (they’ve got what we haven’t got: money, manufacturing, domestic growth potential). But they are in just as bad or worse position than the west, they have our debt, which might be worth very little, they planned on us buying their stuff for the next 20 years, but we can’t now, they have a society that needs 8% growth not to blowup–is that possible. I don’t think they were any better prepared than the rest of the world for what is going on now and the domestic political problems they face are bigger than anywhere else in the world. Last year they reported 10,000 incidents against the state, what is the real number. If a mob attacked a police station in the US or Australia it would make the international news, like the protests in Iceland that brought down the government. China doesn’t have a system where bringing down the government can easily happen with most social institutions remaining unchanged. China has a big problem if things go south. I don’t see how they get around that and I don’t see how they can have 8% growth over the next 5 years with the West in depression and domestic Chinese demand slow to change.

    Certainly the Chinese don’t think one quater at at

  • David

    I was trying to conclude that any planning over 3 months might look like decades to the west, but that is because we see the world through very distorted glasses, not because the Chinese are incredible strategists. Any country with so many Dollars in Forex doesn’t seem like a good strategist to me……

  • David

    I was trying to conclude that any planning over 3 months might look like decades to the west, but that is because we see the world through very distorted glasses, not because the Chinese are incredible strategists. Any country with so many Dollars in Forex doesn’t seem like a good strategist to me……

  • Pete

    David: As a counter argument, perhaps the Chinese have a lot of US dollars because:
    – they believe it is important to slowly let down their manufacturing/export sector, rather than completely smash it, or
    – they want control over the US (if they keep buying bonds, the US has to be nice to them)
    – they wish to contribute to the downfall of the US. Rather than have the US crumble and start again (Austrian economics style), the might be helping them to ruin themselves by drawing things out slowly
    – they see diminishing USD reserves as a political leverage, rather than as savings (like us individuals). They may be happy to lose accumulated wealth if it fits their longer-term political needs.

    That said, I do not necessarily disagree with you. It is just some counter points to consider (and I am sure there are more). I think for any of us to make assumptions on China could be our folly. The reality is that we don’t know that much about China. They could be playing stupid, reactive games with no longer term goal in mind. Or they could be brilliant political and trade strategists that are putting one over the entire global economy. The communist Gov. makes things a bit tricky too, because we are used to western-style politics and democratic-style control of the masses.

    At this stage, we just don’t know. I think there are definitely cases for and against the notion of Chinese economic ‘intelligence’, but at the moment it appears too complicated to determine.

    That said, the US arguably(?) has/had some of the most brilliant economic thinkers of this decade, and look where they are now.

  • Pete

    David: As a counter argument, perhaps the Chinese have a lot of US dollars because:
    – they believe it is important to slowly let down their manufacturing/export sector, rather than completely smash it, or
    – they want control over the US (if they keep buying bonds, the US has to be nice to them)
    – they wish to contribute to the downfall of the US. Rather than have the US crumble and start again (Austrian economics style), the might be helping them to ruin themselves by drawing things out slowly
    – they see diminishing USD reserves as a political leverage, rather than as savings (like us individuals). They may be happy to lose accumulated wealth if it fits their longer-term political needs.

    That said, I do not necessarily disagree with you. It is just some counter points to consider (and I am sure there are more). I think for any of us to make assumptions on China could be our folly. The reality is that we don’t know that much about China. They could be playing stupid, reactive games with no longer term goal in mind. Or they could be brilliant political and trade strategists that are putting one over the entire global economy. The communist Gov. makes things a bit tricky too, because we are used to western-style politics and democratic-style control of the masses.

    At this stage, we just don’t know. I think there are definitely cases for and against the notion of Chinese economic ‘intelligence’, but at the moment it appears too complicated to determine.

    That said, the US arguably(?) has/had some of the most brilliant economic thinkers of this decade, and look where they are now.

  • David

    Hi Pete,
    Thanks for the comments. I think you hit the nail on the head: what can we really be sure of about China, and what motivates her actions? Therefore how can we even begin to predict what she will do next and why. As the Chinese curse goes: May you live in interesting times. I think these times may just about qualify and as the GFC continues to unfold things may get even more interesting…

  • David

    Hi Pete,
    Thanks for the comments. I think you hit the nail on the head: what can we really be sure of about China, and what motivates her actions? Therefore how can we even begin to predict what she will do next and why. As the Chinese curse goes: May you live in interesting times. I think these times may just about qualify and as the GFC continues to unfold things may get even more interesting…

  • anon

    As a Chinese – and having been in the West for decades, I must say that most Western commentators have little understanding as to how China ‘plays the game’ (so to speak), and what fundamentally motivates them.

    One oft-quoted sentiment among the Chinese community is that, “It takes a Chinese to know a Chinese”. I’m no Chinese chauvinist (I’ve visited communist China and thoroughly loathe it) – but having a rudimentary grasp of the language (a la Rudd) is far from sufficient. Everything is veiled in linguistic subtleties, and metaphorical jabs.

    Here’s a decent speech on the Chinese by the Singaporean Foreign Minister.

    I should add that the Chinese have an abiding fear of ‘luan’ (chaos) – especially after almost a century of incessant political/social upheaval; and memories of the opium wars significantly drive Chinese policy.

    Another thing is that in the wake of the communist experiment (cultural revolution, et al) has left a moral and cultural vacuum in mainland China – some mainland Chinese would readily admit that Taiwan is “more Chinese than mainland China”. To have almost destroyed 5000 years of civilization in 1-2 decades – you’ve gotta give it to Mao for that.

  • anon

    As a Chinese – and having been in the West for decades, I must say that most Western commentators have little understanding as to how China ‘plays the game’ (so to speak), and what fundamentally motivates them.

    One oft-quoted sentiment among the Chinese community is that, “It takes a Chinese to know a Chinese”. I’m no Chinese chauvinist (I’ve visited communist China and thoroughly loathe it) – but having a rudimentary grasp of the language (a la Rudd) is far from sufficient. Everything is veiled in linguistic subtleties, and metaphorical jabs.

    Here’s a decent speech on the Chinese by the Singaporean Foreign Minister.

    I should add that the Chinese have an abiding fear of ‘luan’ (chaos) – especially after almost a century of incessant political/social upheaval; and memories of the opium wars significantly drive Chinese policy.

    Another thing is that in the wake of the communist experiment (cultural revolution, et al) has left a moral and cultural vacuum in mainland China – some mainland Chinese would readily admit that Taiwan is “more Chinese than mainland China”. To have almost destroyed 5000 years of civilization in 1-2 decades – you’ve gotta give it to Mao for that.

  • Hi anon!

    You may want to follow the discussion at How does China ‘save?’ Story of the circuitous journey of a US$.

  • Hi anon!

    You may want to follow the discussion at How does China ‘save?’ Story of the circuitous journey of a US$.