Instant View: China convicts four Rio Tinto executives

SYDNEY (BestGrowthStock) – A Chinese court convicted four employees of global miner Rio Tinto of taking bribes and stealing commercial secrets.

Australian citizen Stern Hu, Rio’s top China-based iron ore salesman until his arrest last year, was sentenced to 7 years in prison on charges of accepting bribes and 5 years on charges of stealing commercial secrets, while the other defendants were sentenced to between 7 and 14 years in prison.

Investors have said that China’s handling of the case will come under close scrutiny and influence foreign investors who are worried about China’s often murky marketplace where legal boundaries can be vague and courts closely tied to the state.

The verdicts come at a sensitive time for iron ore talks as the world’s top three miners who dominate the $80 billion iron ore business are pushing for a revamp of the decades-old annual pricing system and possibly for the highest-ever price hike as spot iron ore has doubled since early September.

COMMENTARY

DONG ZHENGWEI, BEIJING ZHONGYIN LAW FIRM:

Hu’s sentence of 7 years for bribery (based on the 6 million yuan figure) is a medium or slightly below medium sentence… overall I don’t think it’s a harsh punishment. The verdict sends a message to all multinationals operating in China that if they don’t discipline themselves or they abuse commercial morals they will face similar punishment. The case sets a milestone in that sense.

JINGZHOU TAO, PARTNER, JONES DAY LAW FIRM, BEIJING

“When a case has become high-profile, the judgment will get less lenient. Foreign government involvement more often backfires. The “commercial secrets” charge raised concerns among the foreign business community and I do not recall any other commercial secret cases where the sentence was so high. This case also illustrates the importance of internal auditing and corporate compliance for foreign companies operating in China.”

XIANGFANG REN, ANALYST WITH IHS GLOBAL INSIGHT IN BEIJING:

“The impact was already felt by companies when the initial arrest was made. It was a big shock. But after half a year, the shock has been buffered. I think there will be second thoughts for companies (looking to enter China) and they will include this into their global strategy when looking at operational risk in China. Overall, I think it will factor into their evaluation of the country.”

“The impact will be quite different depending on what sector you are in. For highly sensitive sectors like energy and resources, I think they will be sensitive to this kind of news and will reach more strongly. But for other sectors like manufacturing, the impact will be quite minimal.”

PERTH-BASED IRON ORE MINING EXECUTIVE

“There’s been a sentiment going around Perth among the miners lately that this is how it would turn out, with a jail sentence, and that it’s in essence the only outcome available for Stern, Rio and the Chinese. Rio’s reaction is now what’s left. The lesson here in negotiating with the Chinese: play it by the book, always by the book.”

DR MALCOLM COOK, AUSTRALIA’S LOWY INSTITUTE EAST ASIA DIRECTOR “I think it might make business more cautious about having major sensitive negotiations in China. The benchmark iron ore negotiations, that were in Shanghai last year at which time Stern Hu was arrested, this year are taking place outside China despite China being the largest buyer. So we can already see a kind of risk mitigation. At that level of business practice, there might be some changes, as well as more consideration about having ethnic Chinese as senior negotiators in such kids of tense negotiations as well.

“In terms of the broader economic (China-Australia) relationship, I don’t think it will have too much impact. The corporations in Australia that are dealing with China are usually pretty big and probably already have a good idea of how things work.”

PAUL BARTHOLOMEW, AUSTRALIA MANAGER WITH STEEL BUSINESS BRIEFING

“I’m surprised by the length (of Stern Hu’s sentence). The two sides have been steadily improving their relationship after all the problems last year, especially after the deal signed by Rio Tinto with Chinalco earlier this month, and this can’t do either side much good. A slap on the wrist might have been expected, with both sides trying to put this behind them as soon as possible, but this is far longer than we thought.”

JAMES WILSON, RESOURCE ANALYST DJ CARMICHAEL & CO

“If I was a mining executive working in China now, I’d certainly be lining up all my ducks in a row and making sure any negotiation that I would have had were iron clad. Also, I’d make sure that the conduct of my employees was closely monitored and was within the letter of the law. Who would want this sort of thing thrust upon their company?”

TIM SCHROEDERS, PORTFOLIO MANAGER, PENGANA CAPITAL:

“Clearly it’s not a slap on the wrist. It’s something a bit more severe than that… There may have to be a change in (Rio Tinto’s) monitoring of business practices on a regional basis. But I don’t see a huge shakeout as a result of this. The appropriate investigations have probably already been undertaken and remedial action put in place already. I doubt there’ll be a knee-jerk reaction as a result.

“I don’t think (there will be any impact on Rio’s shares.) There’s no implication that Rio Tinto was involved directly in what transpired. This will probably allow one lingering doubt to be resolved and people to focus on the fundamentals of the company.”

ANN KENT, AUSTRALIAN NATIONAL UNIVERSITY’S COLLEGE OF LAW

“Outstanding issues remain as to the conduct of the trial, including the lack of detailed information on the nature of the charges, the lack of transparency about the material evidence, the failure to reveal the reasons behind the apparent guilty pleas, and the lack of cross-examination of the witnesses.

“There had been an expectation that the Chinese legal system was becoming more transparent and accountable, however on the evidence to date this trial has not met these expectations.”

“I regard it as a very heavy sentence. I think it sends a very strong message to foreign investors and foreign companies to be very wary of this market and their activities in China. They should be particularly wary about appointing executives who are Chinese nationals. Rio has already moved a lot of its operations to Singapore and appointed a head of operations in China who speaks Chinese but is not a Chinese national.”

Investing Analysis

(Reporting by Beijing, Sydney, Melbourne, Canberra bureaus)

Instant View: China convicts four Rio Tinto executives