Business: Google, Rio Tinto's Trouble With China

Earlier this week, 60-some international executives met a beaming Chinese Premier Wen Jiabao, flanked by an unusually large number of cabinet ministers. He went out of his way to make the foreign executives feel welcome. "It's important to reinforce your confidence in China," he said, "and I believe we can do it." It was the first time foreign media were permitted to observe the premier answering questions from international business representatives in such a setting.

While Premier Wen exuded cordiality, there was distinct chill blowing through China's Western business community. Wen's Q&A session didn't discuss the fact that, earlier in the day, Australian mining executive Stern Hu of Rio Tinto went on trial, accused of taking bribes and revealing commercial secrets. It didn't delve into Beijing's ugly clash with Google Inc., which this week shut down its mainland-based Chinese-language search engine rather than submit to Beijing's censorship rules. Nor did it address a new survey by the American Chamber of Commerce in China showing a startling increase—from 26 percent in December 2009 to 38 percent in early 2010—in the percentage of U.S. IT executives surveyed who felt "increasingly unwelcome to participate and compete in the Chinese market."

If it seems that China is sending mixed signals, that's because it is. The backdrop to Chinese officialdom's apparent schizophrenia is a behind-the-scenes tussle over how best to deal with the outside world. To outsiders, China's governmental departments may appear to be a highly disciplined monolith. In fact, the country's bureaucracy is much less monolithic and less predictable than many outsiders imagine. These days, hardliners in China's party and security apparatus seem to be gaining influence over authorities with a more moderate and "internationalist" background. This explains the nationalistic tone of many Chinese officials' statements recently, and their tendency to perceive Western conspiracies lurking behind events. The lack of transparency in China's top-level decision making is exacerbated by the fact that the Foreign Ministry may not always be up to speed on what other parts of the bureaucracy are up to. The ministry's diplomats hold regular press briefings and are key channels through which Chinese policies are conveyed to the international community.

But unlike the U.S. State Department (where the secretary is No. 3 in line to succeed the president), the Foreign Ministry is a comparatively junior player in terms of policymaking clout. At least initially, some of its diplomats have been caught unaware by developments in military- or security-related sectors, such as China's first successful test of an anti-satellite weapon in space in 2007 or recent allegations of cyberhacking. When the U.S. government responded critically several days after the January 2007 anti-satellite test, the Chinese Foreign Ministry should have had a prepared response. Instead, it required 12 days to react, behavior that one former U.S. defense attaché likened to "a deer in the headlights, completely caught off guard."

Indeed, the story behind the story of Google versus China is how hardliners are trying (with apparent success) to make cybersecurity one of Beijing's "core issues," alongside perennial irritants such as Taiwan and Tibet. The real powers that be apparently believe that Web censorship is necessary to keep China from succumbing to the "color revolutions" that have toppled autocratic rulers in post-Soviet states. The "Twitter revolution" unfolding in Iran has underscored Chinese officialdom's paranoia about the power of the Web; authorities virtually shut down Internet services to the western region of Xinjiang after deadly riots erupted there last year.

Against this backdrop, mandatory self-censorship was always part of the price for Google's Chinese search engine to be able to do business on the mainland. The company had conformed to Beijing's rules for four years. But censorship guidelines had grown more and more stringent. And Google's clash with the regime was precipitated by the hostile hacking of Google's networks, which two months ago the U.S. firm's representatives said they'd traced back to two mainland schools; they maintained the attacks were conducted at the behest of Chinese authorities. (Access to Google's Gmail accounts of human-rights activists was the apparent target of the hacking.)

In response, Google pledged to stop self-censoring content on its Chinese-language search engine, a move that was certain to trigger a virulent reaction from Beijing. And it did. Shortly before Google began redirecting millions of Chinese users to its Hong Kong Web site Tuesday, the official Xinhua News Agency and other local media blasted the U.S. firm for its allegedly "intimate" ties with U.S. intelligence. On Wednesday the official mouthpiece, People's Daily, escalated the tirade against Google's so-called "cooperation and collusion with the U.S. intelligence and security agencies" by speculating that the Google spat could be an "exploratory predawn battle" in an American-led "Internet war."

Then there's the Rio Tinto trial, which raised questions about whether some Chinese apparatchiks are utilizing criminal charges as another tool to help keep even big-name foreign businesses in line. Rio Tinto, an Anglo-Australian firm that supplies China with much of its iron-ore imports, had negotiated long and hard with Chinese state-owned steel mills last summer over the iron-ore purchasing price; the arrests of four of the company's employees were seen as a gauge of Beijing's anger over the high prices it had to pay. Recently, Chinese government researcher Hu Jiangyun claimed that Beijing lost more than $100 billion in 2009 due to the "Rio Tinto espionage event." Rio Tinto executive and Australian national Stern Hu and three Chinese citizens were first arrested in July and accused of espionage. Later they were formally charged with bribery and stealing commercial secrets.

On Monday, Hu and his associates reportedly confessed to taking bribes (although no Chinese entities are known to have been charged with paying such bribes). Meanwhile, an Australian Consulate observer was barred from Tuesday's court session involving the commercial-secrets charge, an act that U.S. legal expert Jerome A. Cohen says is in violation of the Australia-China consular convention. The lack of transparency and questions about due process are among the reasons why many foreign business executives in China are feeling more and more uneasy. In the recent AmCham survey, of the respondents who felt increasingly unwelcome in China, the majority (58 percent) said it was due to "inconsistent regulatory interpretation and judicial treatment."

Paradoxically, just as the Rio Tinto court session ended on Wednesday, an Australian firm signed a multibillion-dollar, 20-year deal to provide liquefied natural gas to China's offshore oil and gas giant, CNOOC, another reminder that Beijing's voracious appetite for Australian natural resources had helped float the economy Down Under during the global financial meltdown. (A verdict in the case is expected shortly.)

On the Google front, Foreign Ministry officials are awkwardly trying to smooth over tensions with the United States. Ministry spokesman Qin Gang said Google's exit wouldn't affect Sino-U.S. ties "unless someone politicized the issue." Never mind that Chinese media and other bureaucratic departments had already politicized the case by alleging that Google was the Pentagon's Trojan horse. Switching its rhetoric from warm to cold is proving to be normal for the ministry. Perhaps, to Beijing, it's just doing business as usual.