Employees are seen at Rio Tinto's Shanghai office on July 8, 2009, days after China detained four Rio Tinto workers
Sometime in the afternoon of July 5, agents from the Shanghai State Security Bureau — the agency that pursues cases of espionage within China — arrested and detained Stern Hu, an Australian citizen who is a senior Shanghai-based executive for Anglo-Australian mining giant Rio Tinto. Three of Hu's deputies, who are Chinese, were also detained that day. On July 8, Rio confirmed that Hu and his colleagues had been detained on suspicion of selling "state secrets." The Chinese government confirmed the detentions only on July 9, and the Australian Consulate in Shanghai said its representatives would be able to visit Hu on July 10.
Those are the facts known to date about what, at another time and involving other people and another company, might conceivably be a relatively ordinary case of suspected industrial espionage. But the timing, the people and the company involved in this case make it anything but routine. The arrests have thrown already-fraught relations between Australia and China — its largest trading partner — into an uproar, and for good reason: Stern Hu and his deputies were in charge of Rio Tinto's negotiations over the price of iron ore with Chinese steelmakers. China is now the word's largest consumer of iron ore, and Rio its largest supplier — shoveling vast amounts of high-quality ore from its huge mines in western Australia. The price negotiations were ongoing at the time of Hu's arrest, and are hugely sensitive in China. Indeed, TIME has learned that on the Chinese side, they were effectively being run out of the office of Prime Minister Wen Jiabao, though representatives of China's Iron and Steel Association were the front men at the negotiating sessions. China was demanding price cuts of up to 44% per ton of iron ore this year — about 10% more than the cuts Japanese and Korean steel producers received.
That alone would make the timing of the arrests interesting, at minimum. But they also come just weeks after Rio Tinto ultimately snubbed what would have been China's largest foreign direct investment ever: a planned $19.5 billion stake that Chinalco — Beijing's largest state-owned aluminum company — had offered Rio late last year, when prices for the commodities it mines had hit rock bottom as the global recession took hold. Since then, prices for iron ore and other commodities have rebounded, in no small part because of demand from China, which is in the midst of a huge, government-led investment spree to combat the recession. Rio spurned Chinalco, did a joint venture with international competitor BHP Billiton, and announced a rights issue to raise capital.
The Chinalco deal died mainly for economic reasons, but that didn't mean the Chinese were happy about it. In fact, an investment banker close to the proposed deal says "they were furious — not just the company, but the government." The banker notes that Chinalco CEO Xiong Weiping was in Australia offering to amend the terms of the deal in order to salvage it just before Rio demurred.
To have Rio Tinto's point man on the iron-ore price talks arrested now, on charges of violating the state-secrets law, stunned Canberra — as well as much of the foreign business community in China. "People here are intensely interested to see if there's any substance to these charges, and to what extent the government will make them public," said the director of one foreign-business association in China, who did not want to speak on the record. "If this is seen as political, it could obviously have a chilling effect." A Rio spokeswoman said the company "is aware of no evidence that would support such an allegation."
The state-secrets law China invoked is notoriously murky. Lawyers and human-rights groups have long said the government uses it capriciously in order to silence its perceived "enemies." In 1999, for example, Beijing used the same law to arrest Uighur activist Rebiya Kadeer, now living in exile in the U.S. The crime for which she spent more than five years in prison: clipping a newspaper article in China and sending it to her husband in the U.S.
Australian Foreign Minister Stephen Smith tried to douse the immediate, widespread suspicion that the Chinese were using mafia-like tactics to make a business point. "I see no basis in any of that speculation," he told reporters in Perth yesterday. He was saying what he had to say publicly, but the truth was exactly the opposite. Barring new information as to why, exactly, Hu and his team were arrested, the only basis for speculation as to the motive behind the detentions necessarily revolved around China's anger at Rio Tinto. And until and unless Beijing can put what the foreign-business association representative called "some meat on the bones of this allegation," that's a problem for China.