China's detention of a top Rio Tinto PLC executive on suspicion of espionage and stealing state secrets could unravel the country's ambitious efforts to boost investment in foreign resources if the allegations prove unfounded.
It is unlikely that China would take such serious action against Stern Hu and three other Rio employees without strong evidence, experts said yesterday. The Asian superpower is under intense scrutiny as it increases its foreign commodity holdings and negotiates contract iron ore prices with offshore producers, including Rio.
"They know if they really don't have evidence at this critical time, they are going to really damage their image, which they don't want to do. They have been improving their public relations skills," Na Liu, China strategist for Scotia Capital Inc., said in an interview.
Mr. Hu, an Australian citizen who heads Rio's Chinese iron ore operations, could face charges of spying or other criminal allegations, an Australian government official said yesterday.
The incarceration comes during a crucial period for the world's largest commodity buyer, which has stepped up efforts to increase foreign business ties and allay concerns about its rising investments in overseas mining companies.
"It is not positive arresting four executives from Rio. Was there a real crime committed? Maybe there is a signal being sent," Michael Deng, China special situations analyst at Canaccord Adams said in an interview. China is currently locked in tense and protracted negotiations with London-based Rio to set a contracted benchmark price for iron ore, the key ingredient needed to make steel, a commodity which China desperately needs to fuel its unwavering building boom. Chinese steel makers are reportedly seeking a price cut of more than 33 per cent from last year, which would represent the first contract price decline in six years.
Mr. Hu and the three other Rio employees were taken into custody by police on Sunday, little more than a month after Rio scuppered a proposed $19.5-billion (U.S.) investment by state-controlled Aluminum Corp. of China (Chinalco). Instead, Rio struck an iron ore joint venture with long-time rival BHP Billiton Ltd., an arrangement that drew criticism from Chinese steel makers and government officials who fear it will tighten the companies' stranglehold on prices.
China's suspicions that Mr. Hu has been spying and stealing state secrets were disclosed Wednesday by Australia's foreign affairs minister, Stephen Smith. While Mr. Hu is understood to be Rio's top negotiator in the iron ore price negotiations, Mr. Smith said he did not believe that the detainment was related to the talks or Rio's decision to scrap the Chinalco investment.
"I've seen no evidence and I've seen no basis for any such speculation," Mr. Smith said.
A Rio spokeswoman called the allegations "surprising," and said the company is not "aware of any evidence that would support such an investigation."
China has been ramping up its investments in foreign commodity producers in an effort to secure supply of the materials needed to fuel its fast-growing economy. But the acquisition attempts have not always met with success and the country has had to scale back its ambitions to complete many deals.
In 2004, a bid for Canada's Noranda by state-backed China Minmetals Corp. fell apart amid pressure from Canadian politicians to scrap the takeover.
In 2005, China National Offshore Oil Corp. pulled an $18.5-billion offer for Unocal Corp. following a firestorm of opposition from U.S. legislators.
Australia recently blocked a $1.7-billion bid for Oz Minerals by Minmetals citing national security concerns. The deal had to be restructured to exclude a key mine asset near an Australian military site.
Following the collapse of Chinalco's proposed $19.5-billion investment in Rio, China Investment Corp. (CIC), the massive Chinese sovereign wealth fund, unveiled a $1.74-billion deal last week to become the largest B-class shareholder in Teck Resources Ltd., Canada's largest base metals miner.
CIC stressed the private share purchase was made as a "long-term passive financial investor," and said it did not want representation on Teck's board of directors.
Scotia Capital's Mr. Liu said Chinese government officials are "very conscious in terms of their image right now," and would not risk the prospect of future foreign resource acquisitions with baseless allegations against Mr. Hu and the other Rio employees.
With files from Dow Jones and New York Times News Service