Raging in Beijing

Rio Tinto is the latest of a series of mistakes that China has made recently. Why, and why now?

“Drawing that direct link” the Wall Street Journal says “between the fortunes of (Chinese) steel mills and the interests of the Chinese state has alarmed foreign officials and businesspeople.” It refers to the arrest—on espionage charges—of four employees of Rio Tinto, a British-Australian mining company, amid tense negotiations over the price of iron ore. Coming as it does a few weeks after Australian shareholders rebuffed an attempt by China’s state-owned aluminium company to acquire a bigger stake in Rio Tinto, the possibility exists that China’s move was in part motivated by a sense of retribution.

It is not uncommon for big commercial negotiations to involve an element of trying to find out what the other side’s positions are. Sometimes, the methods used can cross the line of legality and become criminal acts. But to term such acts as stealing “state secrets” and assert that they harmed China’s “economic interests and economic security”, while being technically correct, are clearly the use of state power in the service of the commercial interests. By implication, the commercial interests of China’s state-owned firms are in the service of state power.

One key risk for Beijing is that its actions will set back years of efforts to persuade the world that Chinese state-owned enterprises are independent, commercially run entities, lawyers say. Cash-rich Chinese state companies, scouring the world for deals, must present themselves as profit-driven independent entities to overcome suspicions that they are fronts for the Chinese government.

But the Chinese government’s argument that these companies’ interests are identical with that of the state could now be undermining that effort. [WSJ]

That’s bad news for those who took that argument at face value, and there certainly were many of those. But the reality is, as fellow INI blogger V Anantha Nageswaran has argued, “right now, China has neither a command economy nor a market economy. It has a political economy.” Or Greg Sheridan, one of the most perspicacious Australian commentators, puts it baldly: “One of the most important lessons to come out of this mess is the absolute shattering of the myth that Chinese government-owned commercial entities are not part of China Inc.”

The Rio Tinto case should sensitise the Australian government to the folly of a natural resource exporting economy depending on one big buyer.

But the more important question is: why has China shed the pretence now? It is unlikely that China’s leaders would want the “peaceful rise” theory to be shattered over relatively trivial matters as the price of iron ore. Or for that matter, over an ADB loan programme to India. China cannot aspire to topple the US dollar as the world’s reserve currency unless it has the support of countries such as India and Australia.

One explanation is that it’s gone into their head and the Chinese leadership is flexing its muscles ignoring Deng Xiaoping’s advice to “keep your head down” (of course, his aphorisms were a lot less prosaic).

The other is that the balance of power within the ruling Communist party has become unstable—the factional intrigues within the leadership have resulted in several embarrassing or self-defeating incidents in recent months: making the ADB a platform to push a bilateral dispute ended in China’s total isolation; a poorly-conceived, poorly executed internet monitoring policy that ultimately ended up sparking a trade dispute with the United States; Pyongyang’s belligerence has killed the six-party talks, and undermined China’s regional standing; ethnic rioting in Urumqi and Hu Jintao’s absence at the G-8 summit prompted renewed concern over China’s political stability; and, of course, haggling over the price of iron-ore has successfully alienated the most China-friendly Australian government in more than a decade.

So much bungling in such a short period of time—from a regime that is seen as a deliberate, strategic player—rules out mere incompetence. While an outright leadership struggle is be unlikely, it could well be that a fratricidal war of succession is raging in Beijing.

6 thoughts on “Raging in Beijing”

  1. A guy in Chinese Embassy in Delhi published a leader in The Hindu on Urumqi riots. This seems to be an invited article. An interesting excerpt:

    “People may wonder what China has to say about the concerns of some foreign human rights groups that those arrested might face unfair trial or even persecution by the Chinese government. Why are these so-called human rights advocacy groups not expressing any sympathy for those innocent civilians who fell victim to the brutal criminals?”

  2. Now you think security establishment had a reason to worry about Huawei getting contracts to implement IT/telecom infrastructure backbone or chinese companies operating ports!

  3. @Chandra

    Do not forget the non-approval by the FIPB of the share acquisition by the renowned blue-chip private equity giant, Blackstone Group on two occassions now as China’s new sovereign fund, the CIC has a substantial chunk of the equity in the Blackstone Group and in recent weeks has been planning to invest another US$ 500 million in its hedge fund unit. Expect the Hindu Business Line to come out with some articles about the benefit of having the Blackstone Group invest in nascent Indian companies and also expect it to have no scruples in publishing an editorial about the recent lackluster budget and then using that to make a subtle reference to the negative attitude of the current UPA government to foreign investment (where it will conveniently cite the recent vetoing of an acquisition attempt by the Blackstone Group).

  4. “One of the most important lessons to come out of this mess is the absolute shattering of the myth that Chinese government-owned commercial entities are not part of China Inc”

    for those in the know, there was nothing to be shattered. Only the naive believed in that myth. Pl. see this post published in TGS when the Chinalco – Rio deal broke up: http://tgs.nationalinterest.in/2009/06/14/chinalco-rio-deal-breakup/

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