March 27, 2010
There's a major faultline in Australia's relationship with China, and ignoring it is dangerous politics, writes John Garnaut.
On Monday at 5pm, Australian time, when the Shanghai No. 1 Intermediate People's Court hands down its judgment, the Australian Stern Hu along with three Chinese colleagues - Wang Yong, Liu Caikui and Ge Minqiang - could be convicted of bribery as well as stealing commercial secrets.
The fact that those alleged secrets are nothing more than "ordinary commercial information", according to one lawyer in the case, Tao Wuping, is just one of the reasons that China's Rio Tinto spy case is a greater mystery now than when it began.
The same might be said for China's internal and international machinations.
But the Hu case has put not just China under the spotlight.
Australia's management of its own relationship with China is now also under scrutiny, with some suggesting the crisis need not have blown up to the extent that it did had Australia been more skilful in its China diplomacy. Others are arguing that Australian efforts at damage control have now taken it too far in the other direction.
None of which was much help to Hu last year as he tried to negotiate iron ore contracts with Australia's biggest trading partner.
By late June, iron ore price negotiations had dragged three months beyond the annual contract starting date and a large proportion of those contracts were about to expire.
Rio Tinto's normally unflappable iron ore co-negotiator was under pressure and he knew his company was under tight surveillance. But he had no idea that he was, in fact, the target.
Speaking by phone to the Herald on June 29, Hu acknowledged that the previous year, too, things had been slow to move. ''Last year everything happened at the last moment,'' he said, ''but there is no sign of any movement at all this time around." And then he added: "I'm sorry, John, I can't talk much now, we think our phones are being bugged."
Six days later, agents from China's state security apparatus arrived at Hu's Shanghai apartment and took him away. If Hu was confused by the mysterious machinations of China's highly politicised steel industry nine months ago, then he must be doubly so now.
Hu and his Chinese colleagues have admitted to accepting bribes - and many observers would accept that they should be punished in accordance with Chinese law. But receiving bribes was not among the reasons for elevating the case into one of national security - and an international incident - by arresting Hu and three colleagues in the first place.
On July 9, a Ministry of Foreign Affairs spokesman told reporters that Hu and his colleagues had been arrested with ''sufficient evidence to prove that they had stolen state secrets and that this represented a huge loss to China's economic security''.
One official associated with the Chinese State Secrets bureau published a report claiming that the crimes of Hu and his colleagues had gouged 700 billion yuan from China.
But the "proof" of stealing state secrets and pillaging China's national wealth never materialised, despite one of the largest and most forensic investigations that has ever taken place in China.
Steel industry officials and iron ore traders claim investigators had a witness list of 1000 names. They joked about measuring their relative importance by the number of days of their interrogations. In retrospect, that first week of July was the beginning of a major fracture in China's relations with the world.
On July 3 senior Chinese and Australian officials met to plan an important visit to Australia by the Vice-Premier and presumed future premier, Li Keqiang. Two days later Hu was arrested. That afternoon the city of Urumqi in China's far west erupted in the bloodiest violence witnessed in China in 20 years, and the weight of political power in China lurched further in favour of political hardliners.
A month later, with China's racial, political and nationalistic wounds still red-raw, filmmakers chose Melbourne to launch a favourable documentary about the exiled Uighur leader Rebiya Kadeer - and Kadeer chose to attend.
The front page of the Global Times - a popular but outrageous tabloid with financial and personnel links to State Security - blasted Australia for three days in one week.
"Australia erects a stage for Xinjiang separatist," said one headline.
Other state-run newspapers ran stories demanding trade sanctions against Australia and accusing Australia of "siding with a terrorist". Chinese diplomats were sent out to make a flurry of protests, China's informal army of patriotic hackers attacked the website of the Melbourne Film Festival, and by August 19 the Australian ambassador, Geoff Raby, was back in Canberra for crisis talks.
Hu and Kadeer were the triggers for the crisis, but problems had been festering for months. When the flashpoints came, Australia's standing was already sufficiently weakened that there was no one in China who was prepared to stand up for its interests.
The Rudd government had been tightening its foreign investment regime towards China's state-owned companies for some time. It had released a hawkish defence white paper and backgrounded journalists that it was designed to counter the military challenge of rising China. Kevin Rudd had talked publicly about China's human rights problems, including in ways that appeared insensitive to Han Chinese people who had died in the Xinjiang riots. Canberra signalled that it supported the Rio Tinto-BHP Billiton iron ore joint venture - which was built on the ruins of a $US19.5 billion ($21.4 billion) investment bid by Chinalco.
Since August, officials in Canberra and Beijing have worked frantically to repair the damage and they more or less have done so. China has gone on to assert its new-found confidence and vent its fury on bigger targets, such as the United States.
The iron ore cargo carriers headed for Rizhao, in northern China, never wavered from their course and China's rivers of investment dollars have grown only bigger. China reclaimed its place as Australia's top trading partner and shot to second place on the list of overseas investors. Australia is China's single most important investment destination, according the Heritage Foundation.
This week, yet another $US50 billion Australia-China export contract with Liquefied Natural Gas Limited was signed. Australian and Chinese officials have gone out of their way to avoid inflaming the other side. Behind the scenes, it was China that moved to repair the damage by reinitiating the visit by Li Keqiang in late October.
"It was interesting that the big initiative to put things back on track came from the Chinese side," says Stephen Fitzgerald, Australia's first ambassador to Beijing, now research strategy director of the China Research Centre at the University of Technology, Sydney.
Before Li's visit, China made various demands of Australia, many of which Australia refused, while agreeing to some. Three big investment proposals were ticked off by the Foreign Investment Review Board after long delays. Australia had been going to wave them through anyway, but China might have seen that as a gift.
The Foreign Affairs Minister, Stephen Smith, made a last-minute request for the Australian National University to provide a forum for him to make a speech on relations with China - the first such statement from the Rudd government since it was elected.
Australia also tied itself to a "joint statement" that received almost no coverage in Australia but was trumpeted as a diplomatic victory in China's media as being "worth a thousand pounds of gold".
Australia has made other concessions, too. The Prime Minister still avoids meeting the Dalai Lama, and while his ministers expressed "disappointment" at being locked out of part of the Hu trial this week, they took things no further.
This was left to two American authorities on China's legal system, Jerome Cohen of New York University and Donald Clarke at George Washington University, who this week separately criticised the Australian government for not only accepting but also endorsing that China had a legal right to exclude Australian diplomats from the Hu trial.
On Thursday, the Treasurer, Wayne Swan, was asked whether the China-Australia relationship was back on track. "I don't believe it was ever off track," he replied But some analysts fear that pretending that last year's diplomatic war did not exist increases the risk that it will happen again.
Fitzgerald says the bilateral relationship was in deeper trouble last year than at any time since he arrived in Beijing as Australia's first ambassador to the People's Republic in 1972 - except for the 1989 Tiananmen massacre.
"We still have a significant problem at the Australian end,'' he says. "I have no doubt the Chinese government has a strategy [about] Australia, not just economics and their access to guaranteed resources, but across the spectrum including the political and geopolitical. And I have seen still no evidence of such a strategic policy on the part of the Australian government."
Richard Rigby, who was responsible for analysis of north and south Asia at the Office of National Assessments, warns that Australia needs to address the dearth of analytical expertise on China's traditional and Communist Party political workings.
"The trick is to avoid falling into the trap of allowing individual problems to hijack the overall relationship," he says. "And we need to be more aware of what we can influence, and what we can't."
Stephanie Kleine-Ahlbrandt, China adviser for the International Crisis Group, says Australia is not the only country finding diplomacy with China difficult.
"The first step is to thoroughly assess Chinese positions, calculations, tactics and strategy on the issue," she says, adding that the chess game of China diplomacy needs to be be played out "several moves in advance''.
Fitzgerald, the former ambassador, says the Rudd government has been "more disciplined" of late and is no longer accidentally inflaming conflicts. But he says there is still no sign of a desperately need overhaul of the strategic framework.
"You need to start your strategy starting from a whole range of domestic issues in China and how they might possibly work out in the future," he says.
But that is not always easy. Nine months after his arrest, analysts in China and around the world still cannot say why Hu was put in jail.
On the weekend after the arrests, an official from one of China's security agencies met the Herald in Beijing with this message: the decision to arrest a foreign executive from the world's third-largest mining company had not been taken lightly.
He said it had been signed off by the Communist Party's nine-member Standing Committee, including President, Hu Jintao. The security official said the Rio Tinto investigation had been going on for more than a year following complaints from the Ministry of Commerce (then responsible for China's iron ore and steel industry) that Australian negotiators always knew China's negotiating position ahead of time.
But the problem with this rationale was the assumption that the rising price of iron ore could possibly be explained by inside information - rather than that mining companies could not keep up with Chinese steel factories, which were adding 50 million tonnes of steel production a year.
Some analysts in Australia saw the Rio arrests as "revenge" for the failed Chinalco deal. But policymaking in China is seldom so crude or straightforward.
Others saw it as an attempt to intimidate Australia's iron ore negotiators into capitulating for lower prices. If so, it didn't work. Australia's post-Hu negotiators are looking forward to a price rise of more than 50 per cent this year.
Another view was that the officials were hoping to scare China's 540-odd steel companies enough to make them fall in behind the industry association and present a united front for negotiating and importing iron ore.
But there has been no follow-up. China's steel industry is today more free-wheeling and fragmented than it has ever been.
It is not easy to find a coherent explanation for how China's Communist Party ever thought that arresting Hu could be in the national interest. Or maybe the national interest was always a cover for a murkier and more personal game.
At the time of the Rio Tinto arrests a Chinese leadership succession struggle was under way. The President had used his control of the Communist Party's internal discipline commission to arrest China's richest man, the electronics magnate Huang Guangyu. And that had led to a series of arrests in Guangzhou, Shenzhen and Beijing that all involved close allies of President Hu's predecessor and factional rival Jiang Zemin, and Jiang's closest ally in the Standing Committee, Zhou Yongkang.
Zhou Yongkang commands the powerful Politics and Law Committee, which overseas China's state security, public security and legal apparatus. The equivalent position in Shanghai is controlled by Jiang Zemin's nephew, Wu Zhiming.
Together, they had power to initiate the Rio Tinto investigation and manage how it played out. And that's why industry observers in China were intrigued this week to find that of all the myriad bribes allegedly paid to Rio Tinto salesmen only one name ever made it into the light of day.
Du Shuanghua, who in 2008 was listed as China's second-richest man behind Huang Guangyu (who has his own corruption problems), reportedly provided written testimony that he had paid a $US9 million bribe to the Rio Tinto salesman Wang Yong.
Du has recently enmeshed his financial interests with a Hong Kong company called Kai Yuan. A director of that company is President Hu's cousin, Hu Jinxing. Cousin Hu's son is the company chairman. And Du has been milking the family's presidential connections for all they are worth.
''The broad social network in the mainland of Kai Yuan's chairman Mr Hu, and the company's solid foundation is the focal point of this investment," said Du in a statement posted on the company's website, explaining why he made a strategic investment in the company back in November 2008.
Through whatever combination of bad luck and design, the fact that Du Shuanghua appears to have admitted paying bribes to a Rio Tinto staffer does not help the internal position of President Hu Jintao.
And Australia's relationship with China remains fragile, but on slightly firmer footing.
John Garnaut is the Herald's China correspondent.