July 8, 2010
by John Lee
As Rio Tinto executive Stern Hu sat in the Shanghai No. 1 Intermediate People's Court in March 2010 facing charges of stealing industrial secrets and receiving bribes--having been initially detained under the State Secrets Act in July 2009--Rio Tinto boss Tom Albanese was in Beijing declaring it "was business as usual."
"Together with China," he said, "we can both continue to prosper and grow." But if foreign businesses were hoping that the Stern Hu saga was an isolated case made worse by Western media hysteria and misunderstanding, the sentencing of IHS' American Dr. Xue Feng under the state secrets law is another illustration of the unique risks for international companies working with Chinese state-owned companies or in sectors deemed vital to the country's "national interests."
The similarities in the two cases are striking. Both Hu and Xue were born in China and knew the social and cultural terrain of the Chinese market well. Both were in possession of seemingly legitimate information about the state-dominated industries they dealt in, obtained from the normal course of business activities. For Hu it was information about the Chinese steel industry that he apparently received while attending a conference; for Xue it was a database giving the coordinates of more than 30,000 oil and gas wells belonging to China National Petroleum Corp. and listed subsidiary PetroChina.
Both were detained under the State Secrets Act, although Hu was eventually charged with stealing "industrial secrets" (in addition to receiving bribes). In reality, the distinction between "state" and "industrial" secrets is much less important now that draft regulations released by Beijing in April have declared that industrial secrets of major state-owned companies explicitly qualify as state secrets--a convention that was in place even before the clarification.
It is this intersection between the operation of the State Secrets Act and what should be "normal" business activity in China that is of concern.
First, the Chinese secrets law is written so broadly that it can be selectively applied to suit the commercial or political purpose of the state, its agencies and its enterprises. In particular, state agencies can retrospectively deem a piece of information as an "industrial secret," which can then be declared a "state secret." In Hu's case, it was the Chinese Iron and Steel Association that triggered the application of the State Secrets Act in motion. The CISA was the same body negotiating contract iron-ore pricing with the Rio Tinto team led by Hu. In Xue's case, it was reportedly the State Assets Commission that began the process.
And observers can't simply dismiss these two cases as unfortunate events that occur at the lower-levels of a rapidly changing political-economic system. In Hu's case, the CISA was stacked with high-ranking Chinese Communist Party (CCP) intelligence and political figures, and the CISA was an ad hoc body that operated directly out of Premier Wen Jiabao's office. Likewise, Xue's case fell under the purview of Zhou Yongkang, a member of the all-powerful Politburo and the country's public security minister from 2002-2007. In other words, the decision to invoke the State Secrets Act, especially when applying it to foreigners, is often approved by those at the very top.
Second, once a case reaches the courts at this level, around 98% of defendants are found guilty. Their lawyers face severe limitations in calling witnesses, cross-examining the prosecution's witnesses or presenting evidence. The defendant's lawyers are given very limited access to the prosecution's documents. Indeed, Chinese trial lawyers widely admit that the defendant's time in court is more about sentence minimization--through admissions of guilt or prepared statements that suit the state's accusations and narrative--than it is about establishing innocence or guilt.
Furthermore, courts remain explicitly under the jurisdiction of the CCP, all judges are appointed directly by the CCP, and court decisions are subject to ratification by a panel of Party officials. The inescapable conclusion is that one ought to be very worried should serious disputes arise in the course of doing business in one of China's state-dominated sectors.
True, there are many foreigners doing business in China, and only a small handful fall foul of the State Secrets Act. But these cases have relevance for how we view Chinese state-owned enterprises (SOEs) and the country's political economy.
Much of the economy resembles a messy, mafia-style structure within which unaccountable Chinese officials occasionally run amok. But when it comes to the enormous, centrally managed SOEs such as Chinalco and PetroChina, the system is better described as a Leninist Corporate State.
Yes, limited free-market principles apply. But the CCP is methodically building up "national champions" and reserving the most important sectors of the economy for these champions in order to strengthen the economic relevance and political standing of the Party. This is quite explicit in central CCP doctrine, and the mindset and structure is messily replicated all the way down the six layers of government. In the country's new business-technocratic merit system, the most common way for local officials to climb CCP ranks is on the back of SOEs doing well under their watch.
For foreign executives competing in these state-dominated sectors, they had better watch out. "Getting the better" of negotiations with state-owned companies at any level will likely upset political interests, aspirations and expectations.
By all accounts, Xue was a hard-working geologist doing due diligence for his company IHS. He is seemingly paying the price for a job too well done.
John Lee is a Hudson Institute Visiting Fellow and an Adjunct Associate Professor and Michael Hintze Fellow for Energy Security at the Centre for International Security Studies, Sydney University. He is the author of Will China Fail? (CIS, 2008).
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