Rio Tinto 'spy' case unsettles business community
SHANGHAI: Banquets, karaoke and drinks have long played a part in Chinese deals but the high-profile arrests of Rio Tinto executives may force companies to rethink how they do business, experts said.
Since authorities arrested Stern Hu, the Australian head of the miner's Shanghai office, two weeks ago, accusing him of bribery and other illegal means to gather state secrets, a chill has run through the business community.
Rio Tinto on Friday dismissed the claims as "wholly without foundation", saying Hu and three other detained Chinese colleagues followed the company's ethics code at all times.
But the mystery surrounding the case -- combined with selective law enforcement, Chinese firms' government ties that mean commercial data can be a state secret and an emphasis on building relationships -- has sowed confusion.
"It will be a very uncomfortable episode for every foreign business here," said Xianfang Ren, a Beijing-based analyst at IHS Global Insight.
"There are lots of hidden rules in China, like having to develop connections with government agencies, 'guanxi', to get deals," she said.
Executives working in China say the pursuit of personal connections can often lead to karaoke parlours and other uncharted territory for Western business people.
"Chinese business is often done on the basis of trust," said Paula Beroza, a founder of investment firm Sierra Asia Partners.
"The evening entertainment of drinking and karaoke is a way to get beyond the purely business issues and show yourself as a person.
"Drinking has always been a means of bonding and it can be quite awkward if you don't drink with Chinese hosts."
Tracey Wilen Daugenti, an American executive and author of the book "China for Businesswomen" said she had been invited to meetings at massage parlours by Chinese executives.
"Basically you go to a massage parlour and have a foot massage and discuss business," she said.
Since Hu's arrest, Chinese state media have turned a spotlight on multinationals' bonding efforts, suggesting Rio Tinto is not alone in nestling up to Chinese executives, citing lavish forms of hospitality.
The coverage has only further blurred the lines between what is entertainment and what is bribery.
However, Wilen Daugenti said there were guidelines.
"Guanxi is creating networks, connections, relationships to get things done and can be very time consuming and could require personal favouritism," she said.
"Bribery is about self interests or monetarily benefiting from the relationship."
Andre Chieng, vice president of the Paris-based France-China Committee, which works to promote economic relations between the two countries, said companies offering "commissions" would not necessarily benefit.
"Yes, there are corruption activities in China, with commissions received in exchange for contract signings," he said.
"Does this make things more difficult? No, because the Chinese buyer takes the same commission from all businesses, and there is therefore no distortion of competition."
Another problem in China is the large degree of discretion authorities can use in enforcing laws, according to Gary Liu, who runs the case study centre at the China Europe International Business School in Shanghai.
"Rio's staff could have been 'spying' but the authorities just let them be. But then they suddenly took action and detained them. This is quite common in China," Liu said.
"Property developers that have been offering bribes or corrupt officials have been abruptly detained after a particular incident. It's selective law enforcement.
"For multinationals, the best practice is to keep your nose clean. You cannot protest after being detained that others got away with it."
The state secrets aspect to the Rio Tinto case adds to the degrees of greyness and means the public may never know what lines were crossed, said Zhang Xin, professor of public administration at Beijing's Renmin University.
"If it involves state secrets, the trial is unlikely to be open to the public," Zhang added.