WSJ: China spy charges roil Australia

JULY 9, 2009

China Raises Stakes in Espionage Case

By ANDREW BATSON, ALEX WILSON and RACHEL PANNETT

China said a detained Australian mining executive and three colleagues "stole Chinese state secrets for a foreign country," escalating Beijing's business dispute with a major supplier and straining the economic relationship between two nations that depend on each other for growth.

Authorities have held four Shanghai-based employees of mining giant Rio Tinto PLC since Sunday. China's government broke its silence on the case Thursday, with foreign ministry spokesman Qin Gang saying prosecutors have evidence that the employees stole state secrets, "which hurt China's economic interests and economic security."

Mr. Qin didn't say what secrets are alleged to have been stolen. Reports in the Chinese press Thursday, which an official at the State Security Bureau in Shanghai said were accurate, said the allegations relate to the employees' actions in negotiations -- which have yet to be resolved -- between Rio Tinto and Chinese steelmakers on the price of iron ore.

Adding to tensions, Rio Tinto last month walked away from a $19.5 billion deal to expand an alliance with Aluminum Corp. of China, or Chinalco, in favor of a tie-up with fellow Anglo-Australian miner BHP Billiton Ltd.

The Australian government had played down suspicions that the case is related to Rio Tinto's business dealings in China.

Three of the detained employees Chinese citizens; one of them, Stern Hu, general manager in China of Rio's iron-ore division, is an Australian of Chinese descent. The broad reach of China's state-secrets law, which has in the past been used to jail journalists and scholars, means it could cover the commercial information of state firms.

The detentions have stunned the Australian mining industry and sparked a fierce reaction from opposition politicians. In Australia, anti-China sentiment has been simmering for months as some worry about a surge in Chinese firms buying into Australian resource companies.

China has had mixed diplomatic success as it scours the world to secure energy and materials to feed its fast-growing economy. It has spent the past several years trying to build up better relations with resource-rich nations in Africa and Latin America. It has offered aid and investment to developing countries poorer than itself, and a sympathetic ear to governments not well received in the West. But China's business dealings haven't always been welcome in other countries, and the Communist Party has often not been adept at swaying foreign public opinion.

"China is now facing a great challenge. Its economy is expanding, its ties with other countries are getting closer, but frictions are also increasing," said Jia Qingguo, professor of international studies at Peking University. "It is very difficult for China to convince other countries of its good intentions."

The economic interests of China and Australia are now locked together, with Australia's iron-ore miners and China's steel industry depending heavily on each other. Australia is the world's biggest exporter of iron ore, expected to account for 40% of global seaborne iron ore produced in 2009, while China is by far the biggest importer, set to account for 62% of imports of seaborne ore this year, according to Goldman Sachs JBWere.

China has built up the world's largest steel industry to supply its voracious demand for the metal as it expands its cities and adds roads, bridges and other infrastructure.

Scholars in both China and Australia say that economic interdependence will likely push the two governments to find a way to work through the current problems. "Even if the charges are found to be unfounded, it won't make a really serious dent in the nature of the relationship which at this stage is economic and strategic," said Michael McKinley, an expert in global politics at Australian National University.

Yet increasing tensions with China aren't what most people expected from Australian Prime Minister Kevin Rudd when he and the center-left Labor Party won office in November 2007. Mr. Rudd, a former diplomat in China and fluent Chinese speaker, was expected to forge closer ties with China and de-emphasize relations with traditional allies like the U.S.

Mr. Rudd has indeed sought to engage with China, meeting with President Hu Jintao and Premier Wen Jiabao on his first overseas trip in April 2008. But he has also been careful to stress that China's rise as an economic power poses challenges for Australia. In May, his government unveiled plans to beef up defense spending over the next two decades, in part to counter China's increasing military presence in Asia.

Mr. Rudd, who is in Italy for a forum on the sidelines of the Group of Eight meeting in L'Aquila, hasn't directly intervened in the detention of the Rio employees. He told reporters he has no plans to call his Chinese counterparts to discuss the situation and is leaving it to the foreign ministry.

On Friday, Australian consular officials will be able to visit Stern Hu, the Australian citizen detained in the investigation.

Mr. Rudd's government has been wrestling with how best to handle a surge of investment by Chinese state-owned enterprises in Australia's mining sector. So far this year, more than $6 billion of such investments have been announced, more than double all of last year. The detention of Mr. Hu and the other Rio employees, who are Chinese citizens, could complicate the situation for Chinese firms now going to Australia's Foreign Investment Review Board, analysts say.

"It is bad for anybody who is Chinese and in front of FIRB at the moment," one person with experience of Chinese investment in Australia said. "Until the Australian government understands what China is trying to do with the Australian citizen who has been arrested I can't imagine they will be clearing anything," this person said.

One company in the application pipeline is Lynas Corp., a rare-earth miner that is seeking approval for a 500 million Australian dollar (US$386.5 million) investment from China Nonferrous Metal Mining (Group) Co.. The FIRB declined to comment.

The strains with a key trading partner aren't unprecedented in Australia. In the 1970s, Japanese companies were investing in Australian resources for the same reasons China is now. At the time, Japan's involvement raised the ire of some Australians -- but has since been broadly recognized as providing much-needed funds for development.

"The current situation is largely the same," said Hou Minyue of the Australian Studies Center at East China Normal University. "There is a process the two countries need to go through to understand each other."

-Aaron Back contributed to this article.