China Security Memo: July 23, 2009

[Teaser:] Operating in China presents many challenges to foreign businesses. The China Security Memo tracks and summarizes key incidents throughout the country over the past week. (With STRATFOR Interactive Map)

Saving Face on the Rio Tinto Deal

On July 5, when the Chinese Ministry of State Security detained Stern Hu, general manager of Rio Tinto’s iron-ore division in China and an Australian citizen, it claimed he was being investigated for bribery and espionage having to do with contentious iron-ore price negotiations. On July 21, news started trickling out that Chinese Vice Foreign Minister He Yafei had told Australian Foreign Minister Stephen Smith on July 17 that Chinese officials were now emphasizing only the bribery charges and not the espionage charges pertaining to national security. This was a significant shift, even though He[or Yafei?] made sure to say that commercial matters could still fall under the Chinese definition of state secrets.

It is likely that the charges against Hu will be considerably less than if he were tried for espionage, which can result in a death sentence. The most likely scenario is that Hu will be given persona-non-grata status and shipped back to Australia, unable to return to China. This is a relatively common punishment for foreigners accused of espionage, as seen in the 2001 cases of Chinese-Americans Wu Jianming and and Li Shaomin, who were deported after being convicted of spying for Taiwan. It appears that China is trying to dampen the worldwide fervor raised by Hu’s detention, which very quickly became a diplomatic row between Australia and China, with most of the Western business community citing China’s behavior as cause for concern.

Although this case is unlikely to change major trading relations between Australia and China, it did put a spotlight on China and even President Hu Jintao, who sanctioned the investigations. In the midst of China’s economic turmoil, Hu and the central government want to recentralize economic power and emphasize that no one is immune from the current crackdown on corruption. But they also don’t want to rock the boat too far from their own shores.[negatively impact domestic or foreign business operations?]

China will not let this matter go without some form of punishment for Hu and the other three Rio employees detained. To do so would cause China to lose face amid criticism from around the world that China’s actions were solely self-serving attempts to intimidate a foreign company in order to give domestic companies an edge. However, if the Australians can find a compromise -- possibly getting Rio to soften its stance in the iron- ore price negotiations -- then it looks like China may be willing to play nice. Implications of Another Bribery Case

Like China, Namibia also is in the midst of an anticorruption drive, and on July 17 authorities announced that three people had been charged with bribery in a case involving the Chinese company Nuctech. The company supplies security scanning systems to airports and harbors, and it used to be run by Chinese President Hu Jintao’s son Hu Haifeng. Last year, Hu [Haifeng?] was elevated to the position of Communist Party secretary of Tsinghua Holdings, the state-controlled company that runs Nuctech, among other firms. We know, however, that Hu was president of Nuctech at least until the beginning of April 2008, if not longer, suggesting that he may have knowledge of the incident, since the contract to install the scanners[where? awarded by whom?] was signed in May 2008 after Nuctech won an uncontested bid.

On July 15, Namibia’s Anti-Corruption Commission arrested Yang Fan, Nuctech’s African representative, along with Teckla Lameck and later her partner Kongo Mokoxwa, who were serving as consultants to Nuctech. Although details are still unclear, Nuctech [allegedly?] was paid a $12.8 million “manufacturing deposit” [by whom?] in February 2009 immediately after winning the bid, and the deposit was then transferred[it was in fact, or thought to have been?] to a company called Teko Tradin CC, owned by Yang and Lameck. The money was then allegedly distributed to several individuals, including a special adviser to former Namibian President Sam Nujoma and another individual said to be very close to the current trade and industry minister (and former prime minister).[we need to make sure we know the difference between known facts and allegations in this graph]

Namibian Prosecutor General Martha Imalwa is said to have traveled to Beijing to interview Hu Haifeng -- as a witness, not as a suspect. Nevertheless, all Internet stories on the case are blocked in China (as are emails containing any reference to the case, according to STRATFOR sources), most likely because of the proximity of the case to the president’s son. As China conducts its own anticorruption crackdown against officials throughout the country -- implicating foreigners such as Stern Hu -- it would be embarrassing for the president’s son to be similarly implicated for corruption in another country. It would also underscore the fact that corruption is widespread in China and infects even those at the highest reaches of power.

Typical Bribery Scenarios

Bribery is indeed ubiquitous in China, and its most common form occurs between local business owners and local government officials. Obtaining permits, registering businesses and obtaining land are all interactions that require money or some other form of incentive to close the deal.

STRATFOR sources tell of a few typical bribery scenarios. The first is when a business operator approaches an official with a “hong bao” -- a little red envelope for money that is typically given at festivities but has now become a symbol of corruption (the hong bao can sometimes be substituted with luxury items such as cars or houses). Officials may ask for a hong bao outright, or they can levy certain “fees” for various services. Often, in addition to the hong bao (and sometimes in lieu of it), business operators may spend money to lavishly entertain officials, plying them with delicacies, drink, dancing girls and other enticements (Karaoke bars, also known in China as KTV, are popular places for such entertainment, with private rooms, expensive food and drink and prostitutes).

An official’s cut is often built into the business contract. For example, the official may be a silent partner on a real estate project, as in the recent case of the party secretary in Macheng city, Hubei province, who was ordered to resign after he was exposed for taking bribes from real estate developers for giving them preferential treatment.

There are rules and regulations that criminalize these activities, but they are not uniformly enforced. It all depends on who is in charge of the investigations, their political motives and affiliations, and if they are interested in pocketing money themselves by overlooking such activities.

July 16

 Local media reported that Zhang Tao, vice president of the [municipal?] supreme court and former director of the city executive bureau in Chongqing, is being investigated for disciplinary violations. He is suspected of improperly profiting from a land auction three years ago.

 An employee of Foxconn Technology Group in Shenzhen, one of Apple computer’s chief suppliers in China, killed himself by jumping off a 12-story building after the company[Foxconn?] investigated him for losing one of Apple’s new fourth-generation iPhones. A local newspaper reported that Foxconn security guards had previously searched his apartment and beat him.

July 17

 More than 100,000 residents of Chongqing’s Nan’an district evacuated a bus station[the area?] after police received an anonymous call warning that a bomb would go off at the station. No explosion occurred nor were any suspicious packages found.

 The Yunnan provincial committee secretary announced that the former chief of the Yunnan treasury office, Xiao Xiaopeng, is being detained for allegedly taking bribes amounting to 3.38 million yuan during his term. The Yunnan provincial government has removed Xiao’s political rights as well as his membership in the Communist Party.

 Coast guardsmen cooperated with Shenzhen police in breaking up a large human- smuggling ring in the Nan’ao coastal waters near Shenzhen. Four ring leaders and 13 foreign subordinates were arrested on charges of helping people illegally cross the border into Hong Kong.  Chongqing airport security personnel arrested a man whose carry-on baggage contained more than 29 bundles of fake 100-yuan notes worth 320,000 RMB. The contents were discovered during x-ray screenings. This is the largest counterfeiting case in the airport’s history.

 Local media reported that over 1,000 parents surrounded the local government building of Yibin, Sichuan province, to protest a recent research institute’s allegedly exposing healthy children to the blood of an HIV-infected child during blood tests. More than 600 children, including the HIV patient, were involved in the tests. The parents clashed with police and a number of people were injured, including the local district mayor, who was badly beaten. To help quell the disturbance, police arrested five employees of the research institute.

 An estimated hundreds of thousands of villagers fled Kaifeng, Henan province, after a rumor spread that several explosions had occurred in the local irradiation plant. Before fleeing, many bystanders watched as government workers used robots to fix a broken cobalt-60 irradiator.

July 18

 Guangzhou police arrested two drug traffickers holding foreign passports in a rental home in the Baiyun district. A total of 6.73 kilograms of heroin were seized in the raid.

July 19

 Shenzhen police arrested seven men in connection with the attempted assassination of Hong Kong’s pro-democracy leader Martin Lee, local media reported. Police allege that the suspects are also linked to the triads.

July 20

 A man in Hefei, Anhui province, incinerated himself on the west facade of the Anhui provincial government building for unknown reasons. The middle-aged man was rushed to the hospital but died later. Police are investigating.

 The Ministry of Public Security in Beijing announced the latest results of a crackdown on gun-related crime and human trafficking in the run-up to China’s national holiday Oct. 1. In the past four months, police confiscated nearly 19,000 guns and 5,000 explosives, rescued 829 children and 1,403 women, broke up 355 trafficking gangs and detained of 2,417 suspects.

 A trial was held[it lasted only a day?] in the Hangzhou people’s court in Xihu district for a May 7 vehicular manslaughter incident involving 20-year-old Hu Bin, a son from a wealthy family. He had been speeding in a luxury sports car with other friends when he killed a 25-year-old pedestrian in a case that has caused a national uproar. Hu was sentenced to three years in prison; his family had already paid 1.13 million yuan in compensation to the victim’s relatives.

July 21

 A Beijing court found four government officials guilty of smuggling people to Japan for work. Among the guilty were an employee and the former vice director of the Foreign Business Exchange Center as well as two representatives of the department of Japan affairs in the Beijing-based Longma Limited Corporation. On two separate occasions in 2005 and 2006, the four officials traveled to Japan under the pretext of conducting business inspections.

 A trial began in a Sichuan Guang’an intermediate court of 13 suspects tied to a family drug-trafficking business. Police initially arrested three suspects in August 2008 for selling heroin. The traffickers reportedly diluted their samples in order to sell greater quantities and make more money.

 Several domestic computer manufacturers, including Acer, Sony and Lenovo, revealed that the Green Dam porn filter will be included in their latest computer models. The Ministry of Industry and Information Technology originally mandated the installation of Green Dam in all new PCs sold in mainland China starting July 1, but the date [has been?] postponed indefinitely.

July 22

 The Kunming people’s intermediate court began the trial of Chen Shaofei, vice president of Yunnan Copper Co., who is linked to the use of as much as 760 million yuan in public funds to speculate in the stock market. Chen, who is also Yunnan’s chief accountant and secretary of the board of directors, is the third senior-level employee from the company to be investigated by the court. According to knowledgeable sources, this is the largest corruption case involving public funds in the province’s modern history.

 The ongoing investigation of Guo Jian, vice presiding judge of the Jinhua city people’s Wucheng district court, has been handed to Huzhou city investigators, the Zhejiang provincial bureau of investigation announced. Guo, associated with a previous sex scandal, is being investigated for corruption and bribery amounting to more than 10,000 yuan. He is also charged with abusing his judicial powers to facilitate the illicit transfer of money to select bank accounts and to conceal and hoard the court’s administrative fees.