The news that Stern Hu has been found guilty of both charges (he voluntarily pleaded guilty to bribery) and is facing ten years in jail is in the middle range of what was possible. Hu could have received up to 11 years for bribery and corruption and 7 years for stealing commercial secrets.
Beijing feared that anything close to the maximum might appear vindictive but anything too lenient would make it look like it had folded to international pressure. Moreover, the judgment?s reaffirmation that Hu and his three colleagues ?have seriously damaged the interests of the Chinese steel enterprises and put those enterprises in an unfavourable place? is Beijing?s attempt to reaffirm that the Shanghai Security Bureau was always justified in detaining Stern Hu back in July 2009. In reality, given that Chinese leaders including Premier Wen Jiabao already declared that Hu was guilty of these charges months ago, the verdict had to reflect both Hu?s guilt and emphasise the seriousness of his purported crimes (Full coverage: Stern Hu).
Publicly, foreign companies will deny that the verdict indicates a deteriorating operational environment by reassuring shareholders that it is ?business as usual? in China. After all, companies such as Rio Tinto can ill-afford to ?do a Google? and contemplate any pull-out of the Chinese market.
At the same time Stern Hu was sitting in the Shanghai No. 1 Intermediate People?s Court last week, his company's chief executive Tom Albanese was in Beijing to declaring that "Together with China, we can both continue to grow and prosper", on the back of an earlier announcement that Rio Tinto and Chinese state-owned company Chinalco had signed a $US1.3 billion deal over a Guinea iron ore deposit.
Albanese is paid to be a pragmatist. But even he knows that the Chinese market entails unique risks (Time to rethink China operations, March 3). China?s rise might well be the most spectacular one in history. But the romance of its rise is dying. If entering the Chinese market is still viewed as a matter of commercial necessity, it will no longer be seen as a market of choice for foreign companies. This is particularly the case for those businesses that deal with state-owned companies or sectors deemed vital to China?s ?national interests?.
Only the willfully stubborn or the ignorant will argue that Stern Hu?s admission of guilt on the charge of bribery means that concerns held about the Chinese economic legal and political environment arose out of western hysteria or else misunderstanding. Instead, a number of lessons are worth noting.
First, be very worried if any civil or legal disputes arise. I have previously written for Business Spectator about the less than adequate judicial independence and poor adherence to due process and to rule-of-law in the Chinese system in the context of the Hu case (Why China is stepping on toes, March 23). Ask any lawyer in China who has represented a private client against any serious civil or criminal charge brought by a state- or Chinese Communist Party (CCP)-controlled organisation and they will tell you that if the matter goes to court, the primary strategy is almost always about damages or sentence mitigation. One of Stern Hu?s lawyers, Duan Qi Hua, is known for using connections and developing effective ?face saving? strategies to minimise sentences for clients rather than a detailed knowledge of the Chinese criminal code. In this respect, Hu chose his lawyer wisely.
Likewise, for high-profile cases: once the trial concludes judges put as much thought into weighing up the political ramifications for innocence or guilt and imposing a harsh or lenient sentence, as they do the legal merits of the case itself. After all, court decisions have to be explicitly ratified by a committee of CCP officials. In Stern Hu?s case, very high ranking officials who answer directly to the Chinese Politburo will have been the ones who ultimately determined his sentence.
Second, whenever negotiations involve state-controlled entities (and this is almost always the case in China?s state-dominated economy,) assume that one is ultimately dealing with the state. Even if Stern Hu is actually guilty of receiving bribes, remember that he was initially detained by request of the Chinese Iron and Steel Association (CISA) under the Secrets Act for ?espionage? and ?stealing state secrets? back in July 2009. The CISA ? filled with political and intelligence officials ? operates out of Chinese Premier Wen Jiabao?s office and is the very same organisation that was undertaking a high-stakes round of negotiation with Stern Hu?s team to determine iron-ore contract prices for the next 12 months. The CISA would have had to obtain the explicit permission from the Chinese Premier to activate the Secrets Act in this context in the first place.
A related point is that China is no longer ?communist? but neither is it ?capitalist? or a ?free market?. The best way of understanding its political-economy is to see it as a ?Leninist corporate state?: the CCP is building up national champions such as Chinalco and reserving the most important sectors of the economy for these state champions in order to strengthen the economic and political standing of the Party. This is quite explicit in modern CCP doctrine and the mindset and structure is messily replicated all the way down the layers of government. Local officials frequently climb CCP ranks on the back of SOEs that do well under their watch.
The implications for foreign businesses of this are significant. In China?s state-dominated system ? much of it resembling a messy mafia-style structure within which unaccountable CCP officials control much of the country?s resources, access to markets, land, labour in addition to influence over the police and courts ? foreign companies need to tread carefully. For example, ?getting the better? of negotiations with state-owned companies at any level will likely upset political interests, aspirations and expectations. In China?s dog-eat-dog markets, getting in bed with a local private company will often mean frustrating the ambitions of a state-owned competitor. This gives the notion of ?negotiating political minefields? added meaning and makes the forming of long-term strategy for the Chinese market impossible.
China is still developing and Beijing still needs foreign companies ? especially those with resources and technology ? even though foreign companies are increasingly complaining about the deterioration of the operating environment and the increase in instances of R&D and technology theft by Chinese SOEs (e.g. intellectual property theft and illegal ?reverse engineering? of patented hardware.) Will we see foreign companies resort to the ?Stern Hu? precedent and bring criminal charges of stealing ?industrial secrets? against Chinese SOEs? Not likely.
Dr John Lee is a foreign policy fellow at the Centre for Independent Studies and a visiting fellow at the Hudson Institute in Washington. He is the author of Will China Fail?
