When in China, do as the Chinese do

The latest commotion with regards to Rio Tinto’s espionage allegation has put more strain on the already rocky relationship with Australia as well as on the fragile state of the global economy.

However, I am a bit surprised by the overwhelming amount of criticism directed at the secretive way in which China is dealing with the matter, yet so little has been given to Rio Tinto’s increasingly monopolist tendency and the possibility that the accusation might be true.

A retrospective review on the past six month suggests the scenario might have an intriguing twist:

Rio started what has turned out to be the longest iron ore negotiation in the history with China, the talks later came to a stalemate as neither of the parties agreed to budge.

In February, Rio then officially announced the US$19.5 billion deal with Chinalco in an attempt to pay down its debt obligations.

In June, Rio succeeded in pressuring Korean and Japanese steelmakers into accepting a 33% discount on iron ore. Meanwhile, China was still taking a firm stance on the 45% price cut.

Rio walked away from the deal and paid US$200million to Chinalco in compensation. Rio chose to raise funds through equity market and went on to form a joint venture with rival BHP Billiton.

Rio took advantage of the strong iron ore demand from Chinese steel industry through negotiating directly with domestic steelmakers, which has undermined the country central authority’s negotiating power on metal prices.

In July, Rio requested china’s suppliers to pay a penalty of 9billion for not honoring their pre-arranged contracts.

China authorities detained 4 of Rio’s employees on grounds of trading proprietary information on Chinese steel companies.

Rio gave itself a lot of wiggle room in the run-up to its final break-off with Chinalco. From the moment when it’s handed a life jacket to when it was rescued and threw the jacket back into water. The acquisition was intentionally dragged on for so long which allowed Rio to observe the public reaction and wait for a possible rally in the market. The boost stimulated by the possible white knight helped install confidence and increase market value of the company. Then, under the guise of national interest and concern for the state owned enterprise independence, Rio advanced its scheme by breaking off the deal and joining forces with rival BHP to form a monopoly.

Rio had never wanted to be held in the hands of Chinese. It didn’t even have to have anything to do with the Chinese investors should it not happen to run tight on cash. But China can not hide its resource dependency. Rio managed to hold up everyone’s appetite for a while and worked it to its advantage. It seems all of a sudden the company’s survival has made everything else irrelevant, the break-off penalty, the damaged relationship and the broken trust.

When a foreign affairs expert suggested that China still has a lot to learn about doing business with the West, because the government can’t seem to draw the line between national interest and commercial confidence; on the other side of the fence, Chinese think the West has a lot to learn about understanding the Asian mentality, because their companies can’t seem to grasp a simple concept: when in China, do as the Chinese do.

Furthermore, Rio’s accusation is not entirely unfounded; Stern Hu had traveled in the Chinese steel industry circle for quite some time. For someone who’s a native Mandarin speaker, it’s not only easier when rubbing shoulders with the Chinese, it’s also a big plus in terms of finding hidden opportunities in areas where foreign expatriates wouldn’t dare to look into, such as areas where corruption runs rampant and bribery being norm of the game.

By now if you are good at analyzing the Chinese psyche, you should have some confidence in those words coming out of the central government and realize this is more than a just retaliation. The guys up there hardly ever give out proclaims with no substance (8% GDP growth anyone?), and more or less they will be backed with hardcore evidence.

If a country’s president has endorsed a probe into your business dealings, you can guarantee you are a dead meat.