The stir caused by Jiang Rujin, a former provincial-level security boss, in an online article about the Rio Tinto spying case, says less about the case itself than it does about not just one but two power struggles within China's bureaucracy.
The first is around Beijing's attempt to control the country's fragmented steel industry, so important to an industrializing country like China.
For some years, the steel companies handled price negotiations themselves for their raw material, iron ore. The economic bureaucrats in Beijing have been getting increasingly angry that the individual companies were consistently getting the worse end of each deal, with the consequent impact on the economy of higher steel prices--$100 billion worth of damage over the past six years, according to Jiang.
So the planners tried to cut out the steel companies by having the China Iron and Steel Association handle a collective annual negotiation with the main foreign suppliers, Rio Tinto , BHP Billiton and Vale . The association, they reasoned, could hold a hard line on prices and keep the lid on their negotiating tactics.
What the planners missed, however, was that it was not price but quota size that mattered most to the larger steel mills. Secret side deals that have always taken place between the mills and the miners continued, as did--on the evidence of weeks of strong hints in Chinese state media that industrial espionage in the steel industry is widespread and long-standing--the mutually cozy relationships necessary to facilitate them.
When this was realized, the bureaucrats in Beijing came down in the only way they know how, hard, with Rio taking the brunt of it in public, but with executives from all 16 of China's leading steel mills breathing uneasily. Last month, the Economic Observer said all 16 companies were implicated, and China Daily has reported on five specific investigations of executives. Jiang's article suggests they may be the tip of the iceberg.
The second and more significant power battle his article highlights is that between the Communist Party's survival strategists--its old guard and hard-line political risk and security managers--and the economic planners and reformers. Jiang, a former director of the Huai'an State Secrets Bureau in Jiangsu, a wealthy industrial province on the east coast, was speaking directly to that internal debate when he called for the central government to tighten its control of commercial information, already generally considered a state secret.
Since the global financial crisis hit China hard a year ago, economic policy has become a national security concern for Beijing. The party's legitimacy to rule is predicated on its continued delivery of rising living standards to all Chinese. The global recession has made that more difficult. Increasing incidents of social instability have further rattled a Beijing already concerned about the growing wealth gap between urban rich and rural poor. Hence the importance of restoring at least 8% GDP growth this year.
The Rio case suggests that the political risk managers and the security officials are in the ascendancy. Another sign: After the collapse in June of the proposed $19 billion investment in Rio by China's largest aluminum company, Chinalco, a top-level committee was set up to take a tighter strategic policy grip on investment deals. The party's standing committee, its most powerful body, has taken the leading role on this.
The Hu-Wen leadership is counting down to the 2012 end of its 10 years in office, and succession battles anywhere can open unexpected fronts in the in-fighting. National security has always had a broader interpretation in China than in other large economies and has a long history of being deployed for political purposes.
Two years ago, Jiang Yong, director of the Economic Security Research Center at the China Institutes of Contemporary International Relations, which does policy research for the government, argued in a paper titled "Economic Security: Redressing Imbalance," that foreign capital was supplanting domestic ownership in strategic industries and had reached the critical level in many of them, which, even then, was seen as threatening China's national economic security. While his paper concentrated on the financial sector, it highlighted another industry of concern: steel.
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