Leadership in Beijing unhappy about possible global damage to its reputation

The leadership in Beijing is clearly unhappy about the possible global damage to its reputation [ INVESTMENT IN THE EAST ]

Continued from page 37

The background to these accusations 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. However, private foreign companies are suffering.

The chamber called on Beijing to better define its "national interests" following the arrest of Stern Hu. Wuttke said European businessmen have concerns they could end up in trouble with the authorities simply by not understanding Chinese law. "It would be helpful to get a more candid definition of what 'national interest' is," he said.

The chamber cited the case of a European company that was a top supplier of encryption products for Chinese banks and other companies. It was forced out of the market after Beijing imposed a requirement for government certification and failed to approve any foreign suppliers.

The EU is not alone in finding fault with policies. The American Chamber of Commerce in China said in April that it saw "signs of protectionist policies" and appealed to Beijing and Washington to avoid hampering trade and economic growth.

Some analysts say China is taking its revenge for the collapse of a bid by the Chinese state company Chinalco to buy a $19.5

The Chinalco deal was the latest setback to China's image as a place to do business. In March, China rejected Coca-Cola's $1.6 billion (€1.1 billion) bid to buy China Huiyuan Juice Group under an anti-monopoly law.

The EU chamber said the Chinese failed to adequately explain its decision to reject this deal. The blocking of the bid was a blow to foreign businesses hoping to make big acquisitions in China, who felt it would have a longer-term impact on foreign investment in China.

And there has been trouble on the ground, too.

In August, the government called off the takeover of state-owned Linzhou Steel Corporation by a private firm, Fengbao Iron & Steel, in central Henan province, after workers protested and trapped an official in the factory office for four days.

This followed an incident in July where a crowd assaulted and killed an executive who was managing the acquisition of state-owned Tonghua Steel in northeast Jilin province.

Australian foreign minister Steven Smith said the detention of Stern Hu was one of the difficulties in Australia's relationship with China right now.

Australia needs China, the world's biggest consumer of iron ore and its biggest trading partner. But China also needs Australia, and ultimately it needs foreign markets to start growing again and buying Chinese goods.

The leadership in Beijing is clearly unhappy about the possible global damage to its reputation and it now looks like the government is trying to save face in the affair. But at the same time, it is keen to make the point that companies operating in China have to follow the same rules as Chinese companies.

"China has been dealing with the Rio Tinto case in strict accordance with China's law and the China-Australia consular agreement. I believe it is in the long-term interest of foreign companies in China that the Chinese government handles the case according to law to safeguard the rule of law, and a fair and sound business environment," government spokesman Jiang Yu said.

He added he had not heard of a "single case" of a European firm reconsidering its China presence following Stern Hu's arrest.

China has promised to avoid protectionism in response to the global downturn. The consensus is protectionism could hamper a global recovery.

However, Beijing is also alert to signs from abroad of similar impulses. Beijing criticised Washington for proposing "Buy American" provisions in its stimulus plan and complained in August that a US trade complaint about Chinese tire imports was protectionist.

By showing foreign companies are also liable to prosecution on corruption charges, the Beijing government is making a political point for domestic consumption that no one is above the law. However, the lack of transparency in the Rio Tinto case has clearly irked the international community, and has not helped China's image as a place to do business.