Playing hardball will not deter West

Recent cases involving Google and Rio Tinto have seen the business climate change in China, writes CLIFFORD COONANin Beijing

BARELY INTO a traditionally lucky Tiger year in the Chinese lunar calendar, these have not been auspicious weeks for China’s image as a place to do business.

A trial on graft charges of Stern Hu, an Australian citizen working for the mining giant Rio Tinto, alongside three colleagues, took place without any diplomats allowed to be present, and a verdict could be harsh, their confession to bribery notwithstanding.

Then Google decided to relocate its Chinese unit google.cn to Hong Kong (google.hk), complaining that censorship makes it impossible for it to operate there.

Can the West still do business with China given its arbitrary legal system and its punishing censorship rules?

China certainly believes the West can, and appears to be shrugging off the Google debacle.

And western businesspeople operating in China also believe the situation has not changed fundamentally in terms of how foreigners are seen.

“People who come to China are greedy to make money. They don’t care about Google or Rio; they’re here to do business,” said one leading Irish businessman, who requested anonymity.

The foreign ministry in Beijing last week said Google’s departure was the “individual act” of one company, and said China remained welcoming to foreign investors.

That China is non-democratic, a country that locks up its dissidents, is hardly news to anyone coming to China. In the interests of engaging with rather than isolating China, business delegations from some of the world’s great liberal democracies have been coming to pay their respects for many years. They engage in warm relations with an authoritarian single-party communist government that took power by force and has never been elected.

However, the Google and Rio Tinto cases appear to have had a strange effect, and attitudes and the climate appear to be changing.

Rio Tinto is a case of the communist-ruled government showing that it is subjecting foreign companies to increasingly close scrutiny, and that they have to follow the rules of engagement in China. The secrecy rules that Mr Hu and his colleagues are being charged under are not public knowledge – they are secret.

Australia’s Mandarin-speaking prime minister Kevin Rudd put it very succinctly when he said: “It’s not just Australia that’s watching this trial very closely, but the eyes of the world are focused on the way in which this trial is conducted and what happens as a result of it.”

But without selling iron ore to China, western Australia would collapse. The Chinese know this, and its stance is but one illustration of a hardening of Chinese attitudes of late.

A British drug smuggler who appeared mentally ill was executed at Christmas, despite calls by British prime minister Gordon Brown for him to receive an appraisal. China also played hardball at the Copenhagen talks on climate change, prompting accusations by the British that China had hijacked the talks and allowed them to fail.

In the EU and US there are growing trade tensions over what the West sees as the unrealistically low value of the Chinese currency. While it has risen slightly in recent weeks, China effectively keeps its currency at a low level, which benefits its exports and angers the Europeans and Americans endlessly.

Both US president Barack Obama and European Commission president José Manuel Barroso went to China last year to meet the Beijing leadership, and those meetings were rendered difficult because, in both cases, China rebuffed calls to allow its currency to rise.

There are other examples of Chinese recalcitrance. China’s image as a place to do business has suffered numerous setbacks in recent months. In March last year, China rejected Coca-Cola’s $2.3 billion (€1.7 billion) bid to buy China Huiyuan Juice Group under an anti-monopoly law that has been criticised for a lack of openness. The blocking of the bid was seen as a blow to foreign businesses hoping to make big acquisitions in China, and it was felt it would have a longer-term impact on foreign investment in China.

China remains the world’s most attractive large market and fastest-growing major economy. This economic muscle puts it in a strong position at a time when the rest of the world is hurting. The country’s economy is managing to keep growing strongly through domestic stimulus, despite the collapse of export markets.

China remains a powerful draw because no other country in the world can combine cheap labour, great infrastructure and an easy regulatory environment in quite the same way. India is not there yet, Vietnam is too small, and Malaysia and Indonesia can’t compete with China, not yet anyway.

It’s also important to recognise that the background to much of the recent actions by China’s leadership is a campaign designed for domestic consumption rather than an international readership. There is a nationwide clampdown on graft in China. Corruption, especially by Communist Party cadres, is regularly cited as the chief source of unrest, and the Chinese president Hu Jintao has led a campaign to punish officials on the take.

The Stern Hu/Rio Tinto case is the leadership showing, in a very public way, that foreigners are not above the law.

China has done much to introduce the rule of law in recent years, especially with the introduction of legislation to make investment easier, to help firms – domestic and foreign – set up factories and produce goods. However, there is a suspicion that the Rio case was an attempt by the state to intervene against a foreign company to gain advantage for local firms.

“These issues like Google won’t have any effect on how we do business here, but it will have a big effect on China. It will create dissatisfaction among the people about how the Communist Party is running the country,” said the Irish businessman.

“When I ask my international staff if they are proud of their country, the Chinese are always very positive. But they’ll be a little less proud.

“This means the Chinese were not as on a roll as they were, and this has knocked the polish off that. But the government has lost huge credibility domestically.”

This is more serious, as internal discord is something the party fears. The departure of Google may have set something in train in terms of how western companies view China, but the West needs China and China knows it.