July 12, 2009 ☼ Australia ☼ China ☼ commodities ☼ Foreign Affairs ☼ free trade ☼ geoeconomics ☼ geopolitics ☼ India ☼ United States

Raging in Beijing

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

This is an archived blog post from The Acorn.

“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.

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