Q&A: China detains Rio Tinto execs for spying

Thu Jul 9, 2009 4:41am EDT

By Lucy Hornby

BEIJING (Reuters) - Four Shanghai-based employees of global mining firm Rio Tinto were criminally detained this week on charges of stealing state secrets.

The case has rattled the Australian dollar, and points to the risks for foreigners of doing business in China, a country run by a single party with no independent judiciary.

WHAT HAPPENED?

Stern Hu, Rio's head of iron ore marketing in China, and three other members of the iron ore team were detained over the weekend for "stealing state secrets."

An iron ore executive from China's eighth-largest mill, Shougang, was also taken into custody, Chinese media reported. Iron ore executives from other large Chinese mills are also rumored to be in custody.

The arrests came as a Shanghai paper reported Chinese steel mills had given in on annual iron ore prices, agreeing to the same 33 percent cut other Asian steelmakers set earlier.

That capitulation would be a loss of face for the state-backed Chinese Iron and Steel Association, which had vowed to the central government it could achieve a deeper discount.

However, both Chinese and Rio Tinto officials have denied an agreement was reached.

WHAT ROLE DOES RIO'S CHINA TEAM PLAY?

Rio Tinto's annual iron ore price negotiations with all Asian steel makers, including those in China, are headed up by a team based in Singapore.

Traditionally, all steel mills accept whatever deal is first settled between any mill and any of the big three miners, Rio, BHP Billiton and Vale. This year, the Japanese and Korean mills have already settled.

The China team is responsible for carrying out the operational details of term contracts. They might also negotiate new term contacts and the desired volume with term clients.

The miners rely on their China-based team for predictions of China's future iron ore demand and steel capacity, as well as for information about the current market.

WHAT IS A STATE SECRET?

It's a secret.

Chinese law is vague on what constitutes a secret, and the charge has been variously applied to academics, executives, journalists and dissidents.

Economic data, particularly involving gold holdings, currency movements, and key economic indicators, have at different times been deemed state secrets as have more traditional matters involving the military or movements by China's top leaders.

WHAT MIGHT BE THE LONG-TERM CONSEQUENCES?

The episode has put the steel industry, which relies on open market information for trading and pricing, in an "ice box," said one Chinese iron ore industry analyst.

"Right now everyone in the industry is afraid. No-one really knows if it's for commercial reasons, or something else," he said, declining to be identified due to the sensitive nature of the case.

The developments highlight the risks to foreign companies, who increasingly rely on mainland-born Chinese with foreign citizenship to run their China operations. "Returned Chinese" are far more vulnerable than foreigners to Chinese charges of spying.

(Reporting by Lucy Hornby; Editing by Jerry Norton)