Saturday 18 Aug 2018 | 04:24 | SYDNEY
Saturday 18 Aug 2018 | 04:24 | SYDNEY

Chinese mines and misdemeanours


Graeme Dobell

18 February 2010 08:29

As Chinese prosecutors step up their case against Stern Hu and his three Rio Tinto colleagues (ed. note: Rio Tinto is a corporate member of the Lowy Institute), it's worth pointing to the story of a senior Chinese bureaucrat who set out to gain Chinese dominance of an Australian mining company. According to evidence heard in the Federal Court, when spurned, the bureaucrat turned the media against the Australian company.

A few days before Christmas, the Federal Court in Perth delivered a spectacular defeat to the corporate watchdog, ASIC, the Australian Securities and Investments Commission. The Court found that Fortescue Metals Group (FMG) and its CEO, Andrew Forrest, did not engage in misleading and deceptive conduct or fail to comply with their continuous disclosure obligations. ASIC is appealing the decision.

ASIC brought the case because of a series of announcements FMG made to the market in 2004 concerning framework agreements with three major state-owned Chinese companies. FMG told the markets it had binding contracts with the Chinese firms. The ASIC argument was that FMG had misled the market about the legal standing of the agreement with the Chinese firms.

Most Australian media commentary about the case focused on the decision as a huge loss for ASIC. But for Australia's relations with China, the real meaning of the judgement is the detail it offers of the machinations of a Chinese official, Mr He Lianzhong, the Deputy Director General (Foreign Capital Utilisation Department) of the NDRC, the National Development Reform Commission.

Mr He asked Andrew Forrest to allow China to take a majority holding in FMG. When refused, Mr He set out to attack FMG by leaking a story to the Australian Financial Review. The article suggested that Fortescue did not have firm contracts with China, contrary to statements given to the market.

Mr He did not win his main goal — majority Chinese control — but Fortescue and Forrest were put through legal agony for three years, courtesy of ASIC.

As the Federal Court judge, John Gilmour, makes plain in his decision, the story in the Fin Review...

...was engineered by Mr He of the NDRC as a blunt commercial tactic in an attempt to wrest majority control of the Project from FMG. This was quite contrary to the clear understanding which existed prior to the execution of the framework agreements that FMG would never agree to this but that a minority equity position would be given to a Chinese entity.

The Gilmour judgement is lengthy and dense, as is the way of the Federal Court. But search through it using 'Mr He' and you'll quickly get a sense of the games the Chinese bureaucrat was playing. The judge politely calls Mr He's actions 'unwarranted' and quotes the FMG submission that the bureaucrat 'provided an array of misinformation'.

At a meeting with Forrest in August 2004, Mr He told the Fortescue CEO that China wanted to invest not just in FMG's port and rail infrastructure but also in the mines. Forrest responded that only a minority interest in FMG or its mines was available and that no joint venture partner could ever challenge the sovereignty of Australia's interest in the mines. While Mr He twice acknowledged that the Chinese entities would not seek majority control of FMG, as negotiations developed he reneged and made clear that majority control was the aim.

The judge referred to evidence from Lawrence Xin, a businessman experienced with the Chinese Government, that Mr He was 'difficult to deal with', with a reputation in the Australian mining industry of 'being nasty'.

Evidence was given by Xin, who had had known Mr He for decades. As the judgement says, 'Xin explained in his statement that Mr He informed him in late February 2005 that: "the Chinese companies wanted control of FMG and as FMG was resisting, we would teach them a lesson."' The judge goes on to quote Xin's account of a statement by Mr He:

...He, at that time, when I talked with him he used the Chinese words called the “zhou han”, which is very unusual. He said Andrew “bu shi” - Forrest “shao han zhou han”. That means that's a semi-underground word. That means in my territory somebody try to challenge me...He used a word, very offensive, whatever, that means “zhou han” means, you know - normally it's a Mafia or underground word. So I thought he is very hostile. So I told Andrew [Forrest], I said, “You’re in trouble,” so he is so angry at you people.

None of this will help Stern Hu. But it points to the reality that the actual offence in the Rio Tinto case may not be spying or corruption. Rio Tinto walked away from the embrace of state-run Chinalco, a deal which would have given China an important presence in Australia's resources sector.

The business atmosphere in China at the moment is captured in this piece by the former chairman of the American Chamber of Commerce in China, James McGregor, who says that in two decades in China he has seldom seen the foreign business community more angry and disillusioned:

Visiting CEOs' banquet-table chatter is now dominated by swapping tales of arrogant and insolent Chinese bureaucrats and business partners. The litany includes purposefully inconsistent and nontransparent enforcement of regulations, rampant intellectual-property theft, state penetration of multinationals through union and Communist Party organizations, blatant market impediments through rigged product standards and testing, politicized courts and agencies that almost always favor local companies, creative and selective enforcement of WTO requirements...The list goes on.

Australia is hoping for a speedy and transparent trial for Stern Hu. There's not much hope, though, for justice.

Photo by Flickr user Sheep"R"Us, used under a Creative Commons license.