China’s national security laws getting in the way of development?

China went headlong into globalization after Deng Xiaoping’s speech in 1978, and has been one of the major builders and beneficiaries of globalization since that time.  However, there is a somewhat strange relic of the old, paranoid approach to the world that is risking unravelling all that progress that China has made along those lines.

National secrets about natural resources.

Basically, now that Stern Hu, Rio Tinto’s lead China businessperson, has been arrested (with the support of President Hu Jintao), the world is starting to realise that China has some pretty scary national security laws that are not only getting people arrested, are indeed holding up Chinese development.  In this case,

Mr Hu, who was in charge of Rio Tinto’s iron ore sales to China, was arrested a week ago. Days later the Chinese Government issued a statement saying he and his colleagues had “caused huge loss to China’s national economic security and interests”, and “have already broken Chinese law and have violated international business ethics”.

Chinese Government sources say the investigation of Mr Hu began before Rio Tinto broke off its $US19.5 billion ($A25 billion) investment deal with Chinalco and joined iron ore production forces with BHP Billiton on June 5.

The government says that it’s not revenge for Rio Tinto’s Chinalco snub, but we’ll never really know the truth about that.  The coincidence, however, is very convincing.

What’s the best way to avoid messy problems like this?  Why not open up the natural resource sector from secrecy?  By closing information off, it might seem to China that it can maintain some sort of advantage over international predators.  Yet, by maintaining secrecy, (a) foreign countries and companies simply don’t want to cooperate with China because it is difficult to trust (let’s say this is the Rio Tinto/BHB rationale for not working with Chinalco); or, (b) as China would suggest in their arrest of Mr. Hu, that people will find out about China’s resources anyway through espionage or other illegal means.

By opening up information about resources, China will be able to rationalize its resource use through the use of regulation and licensing, rather than ham-fisted avoidance.  Instead of controlling prices and markets through promoting absence of information, the government could control market through a rationalized approach where all players know what is available, and know what they are competing for.  As we’ve seen in the auto industry, foreign companies can play well in China, to the benefit of China.

By promoting secrecy about resources, China is losing out on opportunities to gain partnerships and thus management experience and technology transfer in the global economy.

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