Stern Hu, Rio Tinto and China

Rio Tinto, along with BHP Billiton, dominates Australian iron-ore exports to China, the world’s largest purchaser of iron ore. In November 2007, Chinese leaders were alarmed by an aborted BHP takeover bid for Rio. They feared that Australia would develop an iron ore monopoly capable of wielding significant pricing power over the Chinese steel industry.

In February 2009, with Rio struggling to pay debts incurred before commodity prices crashed during the Global Financial Crisis, the Aluminium Corporation of China (Chinalco), the largest Chinese state-owned aluminium company, made a US$19.5 billion offer to increase their minority stake in Rio. The proposal would have been the largest corporate investment in Australian and Chinese history. While there was considerable wariness within political and media circles, the Australian government did not appear to oppose the deal.

In early June 2009, following a turnaround in global commodity prices, the Rio board withdrew its support for the Chinalco deal and instead announced a US$15 billion rights issue and a new joint venture with BHP. The timing of this announcement meant that the Australian Foreign Investment Review Board (FIRB) never released its judgement on Chinalco’s bid. Chinalco executives were furious, and blamed the Australian political establishment for the failure of their bid. Reports claimed that the Chinese government was incensed, and other media outlets suggested that Rio was considering an A$120 billion merger with BHP.

On 5 July 2009, four Rio employees were detained in Shanghai on suspicion of spying and stealing state secrets. One was Stern Hu 胡士泰, Rio’s Chief Representative in Shanghai and a Tianjin native who became an Australian citizen in 1994. The other three were Hu’s Chinese deputies Wang Yong 王勇, Ge Minqiang 葛民强 and Liu Caikui 刘才魁.

The detentions were confirmed on 9 July and became front-page news in Australia and China, as well as attracting significant international media attention. Many Western commentators considered Hu’s detention to be a politically motivated response to the failed Rio-Chinalco deal. Rio denied its employees had done anything wrong. Great emphasis was placed on the fact that Hu and his deputies were in charge of Rio’s extremely sensitive negotiations with Chinese steelmakers over iron ore pricing, with Rio representing a consortium of iron ore producers including BHP and Vale.

The Australian government summoned the acting Chinese Ambassador to Australia, but the then prime minister Kevin Rudd resisted pressure to intervene in the case personally, and he strongly criticised the Australian media and Opposition for politicising the issue.

Chinese state media claimed that Hu had bribed executives at all sixteen steel mills involved in the iron-ore price negotiations in order to obtain confidential business information, which had been found on his personal computer, causing massive economic losses for China.

However, when the Rio four were formally arrested on 19 August, Chinese prosecutors downgraded their charges from stealing state secrets to the significantly less serious accusation of obtaining business secrets and engaging in commercial bribery. Charges of paying bribes were also modified merely to accepting bribes, meaning Rio was no longer implicated in sponsoring bribery.

In the months following Hu’s detention, tensions between Rio and China cooled considerably. On 15 March 2010, an internal Chinese investigation exonerated Rio of blame for the Chinalco bid failure, instead citing economic conditions and a negative Australian political and media atmosphere stirred by BHP. On 16 March, Rio and Chinalco announced a US$1.35 billion deal to co-develop the Simandou iron-ore project in Guinea.

On 29 March 2010, Hu was found guilty of accepting US$935,000 in bribes and stealing commercial secrets and sentenced to a ten-year prison term and RMB1 million fine. His three colleagues were handed prison sentences of between seven and fourteen years, and fines totalling RMB6.7 million. All had confessed to receiving bribes from small private steel mills in exchange for providing access to regular iron-ore supplies at cheaper prices than from state-run mills. The presiding judge Liu Xin stated their actions caused over RMB1 billion in economic losses for China to Rio’s benefit.

Neither Hu nor the Australian government challenged the verdict — Hu reportedly accepted his sentence after being promised by the Chinese authorities that a guilty plea would lead to immediate deportation. (However, Hu is still imprisoned in China). Both Rudd and then foreign minister Stephen Smith played down any impact of the case on Australia-China relations, but described the sentence as harsh and expressed concern that Australian consular officials were permitted only minimal contact with Hu and were denied access to the closed industrial espionage session of his trial — a violation of the Australia-China consular agreement. China’s Ministry of Foreign Affairs replied that Australia should respect the result and ‘stop making such irresponsible remarks’. Opposition foreign affairs spokesperson Julie Bishop said ‘Kevin Rudd has been exposed as having little or no influence with the Chinese leadership’.

Rio promptly fired all four convicted employees, citing ‘clear evidence’ of bribery occurring ‘wholly outside’ its systems, despite allegations that Rio executives had quashed internal suspicions about the company’s China operations and used information classified as ‘business secrets’ in court. It was also reported that, following Hu’s arrest, Rio paid US$5 million for the advisory services of former US secretary of state Henry Kissinger. He counselled Rio to build trust with the Chinese Communist Party by ‘avoiding criticism and showing unwavering commitment to the relationship’ and conveyed Rio’s undertakings to then vice-premier Wang Qishan 王岐山. Since then Rio has sponsored party events, procured Chinese equipment and established joint ventures with Chinese state-owned companies. It remains very profitable in China.

The Rudd, Gillard and Abbott administrations have all privately lobbied the Chinese government for Hu’s early release, but to no avail. It is alleged that Zhang Dejiang 张德江, now China’s third-ranked leader, is resistant because he was responsible for Hu’s arrest.

Links:

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