China Tells

(WUSHU) The Rio Tinto Spy Case has caught large attention of international media recently. It is largely reported that China government claims to have obtained clear evidence that 1) Rio Tinto employees have got highly classified secret of China’s steel industry, which is even not accessible to some of the top management of Chinese steel companies. Following that logic, Rio Tinto’s alleged employees have stolen the national security secret; 2) Rio Tinto employees are susceptible to have bribed the Chinese officials of steel companies to get these secrets. On the other hand, Rio Tinto clearly denied all the charges and called their expatriates employees in China to leave the country.

Whether the Rio Tinto employees are guilty is beyond the scope of this article. However, clearly there is a smokeless battle taking place between the Chinese media and western ones. Such a battle is intensified when Mr Kevin Rudd, the prime minister of Australia, chided China for using its political might to get its own way in business dealings.

Mr. Rudd’s toughen stand is well supported by some of the western media. For example, both Wall Street Journal and Financial Times have published opinions to sympathize what Rio Tinto had gone through and questioned the decisions of Chinese government. There are a few points to support their view. First, the timing of the espionage allegation happens right after Rio Tinto rejected the acquisition bid from Chinalco. It is highly susceptible that Chinese government is taking revenge through political channel on a commercial dealing. Second, there is structural room for corruption among Chinese steel industry. Chinese government only issues import license to 112 big state owned steel companies, while there are more than one thousand steel companies in the country. Under that structure, those companies without import license will have to buy spot on the international market, which in most case is more expensive and volatile than what the big state owned companies can get. Therefore some state owned companies started to import more than what they really need, and trade the extra quota or imported iron ore with the smaller ones. Such inter-trade brews the room for corruption, and this is a problem for Chinese steel companies, instead of foreign suppliers such as Rio Tinto. Last but not least, such a strong allegation from Chinese government might frustrate foreign companies such as Rio Tinto to take any further interest in doing business in China, which will back fire Chinese economy in the long run.

There are merits in the above argument. However, I am not sure whether it is the most effective way to solve the problem. First of all, the public statement that Rio Tinto makes, and then its decision to call back all its expatriate employees, gives people a clear impression of playing the hardball. Not surprisingly, most people’s reaction to a hardball player, is to hit back hard. Rio Tinto’s strategy so far implies such a belief that China is highly dependent on her to import large volume of high quality iron ore. As a matter of fact there are only very limited suppliers in the world for high quality iron ore, and Rio Tinto is one of them. Such a strong supplier power is strengthened after the merge between Rio Tinto and BHP. Some of the numbers do support such conclusion. For example, China imported about 400 million tons of iron ore in 2008 and 55% of that is coming from Australia. During January to June 2009, China imported 297 million tons of iron ore, with 63% as Australia origin. Australia iron ore is in better quality than Indian or Chinese domestic ones, and has a great freight advantage compared to Brazil. It seems that there is no way that Chinese steel companies can survive without Rio Tinto (and BHP)’s iron ores.

However, if we take a look at the other side of the same coin, things might not look that rosy for Rio Tinto. For example, since 2007, China has become the top trading partner of Australia. The total volume of two-way trade between China and Australia has reached about 64 billion Australia dollars, which is about 13.2 percent of Australia’s total trade volume for the whole year. Among Australia’s top export commodity, Coal and Iron Ore account for about 21 percent of its total export. Without exaggeration, it is fair to say that Australia need China as a strategic partner at least as badly as China need Australia as a strategic supplier.

I am not sure who suffers more if Australia-China trading relationship is disrupted. However, it seems obvious to me that it would be a painful battle for both. If both parties think of the big picture and make an effort to build a win-win scenario, then incident such as Rio Tinto spy case might be solved in a different manner. For the moment Rio Tinto seems to have gained an advantage on media support (ie, questioning from Western media on Chinese government). However, such an advantage shall not be abused and might be temporary. By taking a harsh stand on such issue, Rio Tinto might fall into a trap of gaining little while losing big such as the understanding from Chinese people. After all, China prefers to buy high quality iron ore from Australia, but it is not a life blood that Chinese can not survive without. In fact, Rio Tinto’s harsh stand might push Chinese steel companies to either seek alternative supply (eg., Brazil, India or domestic) or simply reduce the demand. The bottom line is, Australia and China have become so dependent on each other that the only way to benefit both is to work together, discard the mistrust, and move forward.