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.