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China’s 7.9% Triumph Tarnished by Rio Tinto Mess: William Pesek

July 20, 2009

Commentary by William Pesek

July 17 (Bloomberg) -- Anyone wondering about corruption in China should consider the number 21.

That’s China’s ranking among 22 economies assessed as part of Transparency International’s latest bribe payers index. Only Russia has a lower score than the world’s third-biggest economy. That deflates the Chinese government’s claim that Rio Tinto Group executives may have engaged in bribery.

No formal charges have been filed in this case, one that risks pitting Australia against its biggest trading partner. Rio Tinto executive Stern Hu, an Australian national, was detained on July 5 with three others from the company. Officials in Canberra are fuming; Beijing authorities aren’t talking.

There’s been considerable soul-searching about what this brouhaha means. To me, it shows that China just isn’t ready.

Yes, its $3.2 trillion economy accelerated to an impressive 7.9 percent in the second quarter. Yes, its 1.3 billion people have vast potential. Yes, China’s financial clout is increasing, as shown by its foreign-exchange reserves now topping $2 trillion. Yet is China comfortable with its status as a global power? Not if the Rio episode is any guide.

Pundits are being too hard on Kevin Rudd. Australia’s Mandarin-speaking prime minister has avoided politicizing the issue. Perhaps he’s recalling how France last year found itself on China’s grudge list for supporting Tibet’s spiritual leader, the Dalai Lama.

Balancing Act

It’s an impossible balancing act for Rudd. China’s demand for commodities helped Australia avoid recession in the first quarter. Biting your best customer’s hand is never a good move.

At the same time, many suspect the detentions were retribution for Rio abandoning a $19.5 billion investment from Aluminum Corp. of China, or Chinalco, in June. Criticism that Rudd is naively cozy with China means he must take pains to avoid appearing weak. Rudd also must consider the possibility that the bribery allegations are true and serious. Who knows?

If so, China has done itself no favors with the opaque way in which it’s dealing with things. Rudd isn’t exaggerating when he says the world is “watching closely how this case is handled.” U.S. Commerce Secretary Gary Locke added: We “should urge greater transparency and following due process. Until people have the full set of facts, how can we make any judgments?”

And that’s the rub. China’s claims that the actions of Rio Tinto executives harmed the nation’s economic interests and security don’t help business people wondering where the boundaries lie. It’s no longer clear what constitutes a state secret.

Business Confusion

The confusion is a warning to companies doing business in China that they are now operating in a different environment. What is regarded elsewhere as commercial information is instead seen as a state secret. Since companies are owned and run by the state, China’s legal system is getting murkier. The message is clear: Executives must play by China’s unique set of rules.

It’s a high-stakes game, though. Three news items this week remind us why the world needs China. First, its stockpile of currency rose by a record $178 billion in the second quarter. Its continued support will help the U.S. sell unprecedented amounts of debt as it seeks to boost the biggest economy.

Second, China’s latest gross-domestic-product data. They showed how its 4 trillion-yuan ($585 billion) stimulus package is providing the world with the closest thing it has to a growth engine. The U.S. and euro area remain mired in recession.

Third, China overtook Japan as the world’s second-largest stock market by value for the first time in 18 months. It’s but the latest sign that China is eclipsing Japan’s larger economy.

Alienating Investors

Even so, China can’t afford to alienate investors who now may look elsewhere. The most immediate side effect of the probe of Rio and the iron-ore market may be a decline in shipping costs and Chinese imports of the raw material for making steel. Another question is whether Rio takes a much tougher stance in iron-ore negotiations, or starts to freeze the Chinese out.

The bigger risk is the chilling effect on Chinese business. It’s not in China’s best interest if foreign businesses feel an increasing degree of legal and political uncertainty. International companies will be less willing to base executives there. It could mean a less dynamic economy and reduced prospects for job creation.

Notice, for example, that Chinese Foreign Ministry spokesman Qin Gang said yesterday “the employees of Rio Tinto caused harm to China.” In any of the world’s 20 biggest economies, the word “allegedly” might appear somewhere in there. He called Australia’s public opinion on the Rio affair “noise” that interferes with China’s judicial sovereignty.

Had China handled things better -- at a minimum, specifying the evidence in question -- it wouldn’t have imperiled relations with the biggest shipper of iron ore. How China can feed its boom without the raw material is anyone’s guess.

It’s accepted wisdom that China is skilled at taking the long view. That’s being challenged by the short-sighted handling of a case drawing more headlines than officials in Beijing may realize. Rapid growth can’t mask how ill at ease China is looking with its rising global status.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net

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