Tuesday, July 14, 2009

Rio Tinto and China’s State Secret Law – the business bribery/state secrets nexus – expanding or contracting?

by M. Ulric Killion

Borrowing from the title of a recent New York Times article, "China widens investigation of steel industry" (Barbazo, 2009). The title and article reflect the growing (both domestic and international) concern with the ongoing investigation and detention of workers, managers and investors, in relation to the allegation that workers from Rio Tinto, an Anglo-Australian company, conspired to steal state secrets.

For those unaware of the situation that Rio Tinto and its workers find themselves in, David Barboza, in a recent New York Times article, presented a brief introduction to the pending crisis and the players involved in the controversy.

Some key points or excerpts from Barboza's New York Times article read as follows:
"SHANGHAI — The Chinese authorities have detained or questioned at least seven Chinese steel industry executives in a broadening corruption investigation connected to the detentions last week of four employees of the mining giant Rio Tinto, state-controlled news media reported Monday. The investigation, which began with accusations that the four Rio Tinto workers had conspired to steal state secrets, has rapidly widened, according to accounts on government Web sites and in Chinese news media.

It now includes accusations of widespread bribery in business dealings, as well as allegations that the four workers paid for detailed government trade and manufacturing data to give Rio Tinto executives an edge in iron ore negotiations with Chinese state-controlled steelmakers. . . Those being questioned include shippers, traders and steel-mill managers. . . .

Experts on China's large steel and iron ore industry say corrupt practices have gone on for years, including iron ore deals off the books and the exchange of confidential market data that Beijing now considers state secrets. . . Then focus shifted to Rio Tinto's part in negotiations between iron ore suppliers and Chinese steel mills over ore prices. The talks failed to yield a long-term contract, and that could force the mills to pay higher prices this year. . .

Beijing officials deny that politics is involved, and they say the case will not harm China's relations with Australia. . .

Beijing has officially said very little about the case, which is before the Ministry of State Security and therefore confidential. But facing growing concerns that the spying accusations might have been retaliatory, the government has been allowing the state-controlled media to reveal more and more details. . ." (David Barboza, China Widens Investigation of Steel Industry, NY Times, July 13, 2009).
In particular, Larry Catá Backer's articles are very insightful, while also presenting a unique perspective on the ongoing crisis of Rio Tinto and others. Backer's articles are also informative regarding not only about the current crisis of Rio Tino, but also the history and historical problems that associate with China's State Secrets Law, such as "its vagueness and broad sweep" (Backer, July 11, 2009). Then there is the problem of the state's participation in the market (Backer, July 10, 2009).

As Backer (July 10, 2009) succinctly observed:

"What makes the case interesting is the conflation of a state and market activities. When the state is participant in private market activities, actions that might be considered good or bad business practice can be transformed from economic to political criminality. The stakes become much higher for private market participants, but only in their interactions with states as private actors in markets. . .

When the character of commercial activity, even wrongly activity, changes character from an economic to a political crime, the distinction between private and public spheres is more likely to collapses. Thus, "Rio Tinto made no comment Thursday, but a day earlier, it issued a statement saying the company did not believe any of its employees in China had engaged in espionage." And that may be true enough--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" (Backer, July 10, 2009).

In this respect, the draft of the new State Secrets Law (Killion, July 4, 2009) becomes increasingly important, especially as a potential remedial or corrective remedy to the problem of the state's direct participant in the private market. The latter problem (i.e., state participation in the private market) is, actually, a remnant of the legacy of both Mao Zedong's earlier administration decentralization and Deng Xiaoping earlier regional decentralization.

This is because, "many Chinese and Western authority deem much-needed administration decentralization as not having actually occurred until after economic restructuring in 1978, which is when the 1978 Third Plenary Session of the 11th Committee of the CCP adopted a policy of restoring the construction of a socialist legal system. However, Deng Xiaoping's regional decentralization was actually no more than a process continuing Mao's earlier administration decentralization. In this respect, Deng Xiaoping's contributions of regional decentralization and fiscal federalism to economic development may be an overstatement. Such contributions may have been attributable, simply, to the inheritance of bad aspects of Mao's decentralization. . . " (Killion, 2006).

In terms of the problem of state participation in the private market, more particularly, "A consequence of the bad aspects of what is deemed Mao's administration decentralization, which was a process continued under the reign of Deng, was actually a delay in the formation of an integrated national market. A continuing problem is that Deng's path to open market reform manifests a Chinese dual approach to development. In addition, the Deng era shared two fundamentals of both Stalin's and Mao's socialism, which were the party's monopoly of political party and dominance of state-owned enterprises (Guoyou qiye) (SOEs), such as, joint state-state enterprises (Guoyou lian ying qiye), enterprises directly under Central Government (Zhongyang zhi shu qiye), and urban collective-owned enterprises (Chengzhen jiti qiye). All of which resulted in China's dualist approach to development, with government institutions using their dual positions as regulation makers and enforcers, while also acting as economic players pursuing state opportunism. In addition, China's government continues to extend considerable effort in maintaining these SOEs" (Killion, 2006).

For these reasons, and as earlier mentioned, the new draft of China's State Secrets Law becomes increasingly important. This is because it is an importance that directly relates to the issue of whether, as a courtesy of China's new State Secrets Law, China's business bribery/state secrets nexus will, ultimately, experience an expansion or contraction, in its intended effect.


David Barboza, China Broadens Steel Inquiry Beyond Rio Tinto, NY Times, July 13, 2009.

David Barboza, China's Detentions of Executives Rattle Investors, NY Times, July 12, 2009.

Ulric Killion, Modern Chinese Journey to the West: Economic Globalization and Dualism (2006).

Larry Catá Backer, Opening Up the Process of Reforming China's State Secrets Law, Law at the End of the Day, (July 11, 2009).

Copyright © Protected - All Rights Reserved M. Ulric Killion, 2009.

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