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Defence, Economics, Governance, Investing

Costello on doing business with China

Doing business in China is not as we Westerners know it
Peter Costello 15 July 2009 The Age

When corporations are state-owned, everything is a government secret.

IN FEBRUARY I raised concerns about the proposal by Rio Tinto to sell a 30 per cent stake in its Pilbara iron ore mines to the Chinese state-owned company Chinalco. I urged Treasurer Wayne Swan to look at it carefully under the foreign investment law, which I used to assess Shell’s proposal to takeover gas producer Woodside in 2001.

At that time most of the business and economic writers supported the Chinalco deal on the grounds that Rio needed money and Australia needed Chinese foreign investment. One Asia specialist, Professor Peter Drysdale of the Australian National University, who supported Chinalco’s bid, described my criticism as “grubby”.

But when Rio’s iron ore negotiations manager, Australian Stern Hu, was arrested in Shanghai no one was suggesting the Chinese leadership was “grubby”. You don’t talk like that in China. Even back here in Australia Chinese specialists will be careful how they talk. And this is the nub of the issue. Business in China is not conducted as it is in a Western democracy.

Hu has been arrested and held since July 5 for allegedly stealing state secrets. We don’t know the details of the charges or the evidence against him. If this had happened in Australia, there would have been a bail hearing before an independent magistrate and the charges laid out.

If it was thought Hu was a flight risk his passport would have been seized and he would now be out on bail. In China he continues to sit in the State Security Detention Centre.

Stealing state secrets is not a common crime in Australia, and it is certainly not a crime to obtain information about your customers and how they might approach a commercial negotiation.

If you do obtain such information, it can’t be a state secret because Australian companies are privately owned. In China, where the state owns so many companies, commercial information becomes a state secret, which tells you that these are not corporations in the normal way we understand them.

Chinalco was even more intertwined with the Chinese Government since its chairman was an alternate member of the central committee of the Communist Party.

We should remember the Australian Government did not rule that the Chinalco bid was contrary to Australia’s national interest. It never expressed a view about the application. Rio itself pulled out of the proposal under pressure from its shareholders.

As it turns out, it could raise money elsewhere. And it recognised there was more benefit from an association with Australian producer BHP than Chinalco – an association it had previously spurned.

The Government was relieved of a hard decision and in my view the outcome was in Australia’s national interest. But it is fair to say the Chinese Government was not happy with Rio.

I can say that when Shell’s application for Woodside was ruled out, the company was not happy. It may have taken some countervailing action in foreign exchange markets, but there was never any risk that the British or Dutch governments would take action against Woodside or its employees.

Has the Chinese Government decided to respond because Chinalco was spurned by Rio Tinto? We do not know. And there is not much prospect we ever will. In our country a minister would be grilled in an open news conference over this, with hostile journalists looking for any skerrick of a connection. That does not happen in China.

Since Hu is now in detention, someone else will have to lead Rio’s negotiations with the Chinese steel mills. My guess is that they will not push negotiations as strenuously as Hu.

In China you are doing business with state-owned enterprises subject to political control in a country that does not tolerate political opposition or a critical press. And the legal system is not independent from government.

China has made great strides in the direction of liberalising its economy, but the process is still in transition. It is in the global community’s interest to encourage the process to continue.

But it is also incumbent on our leaders to remember the differences when considering Australia’s national interest. In sensitive foreign investment decisions, it’s worth remembering that Chinese state-owned enterprises do not operate in the same way as our private corporations.

Peter Costello is MHR for Higgins.

Full article here

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About steveblizard

Steve Blizard commenced his financial planning career in 1988 from a background of life insurance broking, a field in which he still works. He is a member of the Financial Planning Association and the Responsible Investment Association. His experience ranges from administration of Superannuation to advice regarding insurance, retirement, remuneration and investment planning. Steve is an accredited Remuneration Consultant, specialising in salary packaging. He is a columnist for the Swan Magazine and the WA Business News

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