China Fights against Economic Spies

Rio Tinto spy case was an alert over China’s economic safety. China must take some measures to fix the loopholes in its economic decision-making structure and to raise the national economic safety level.

The engagement of Rio Tinto’s employees in the “spy case” shocked the Chinese steel industry and the foreign-funded enterprises in China. it proved that some Chinese steel enterprises and foreign enterprises collaborate to commit illegal actions to intervene in Chinese economic decision-makings and affect China’s economic sovereignty.

According to the report from Xinhua News Agency, Rio Tinto spy case is only a tip of iceberg. Actually, the espionages of the multinationals in China are already “open secrets”. The disclosed information relates to the strategic advanced manufacturing industries, the ordinary industries and the technology of traditional handicraft industry. The multinationals engaged in espionages include Wal-Mart, Lucent, Merck Sharp & Dohme, Nippon Paint and Siemens, etc.

Those espionages are usually related with the corruption of the Chinese government officials or senior executives of the state-owned enterprises. According to the data from a private-funded company, the number of bribery cases of multinationals in China has been increasing in recent ten years. Among the 500 thousand corruption cases in China, 60% are related with foreign trades or businessmen.

It is said that the Chinese State Secrets Bureau is conducting an investigation of secret-keeping which is rarely seen in 20 years. From this March, the Organization Department of the CPC and the State Secrets Bureau united many other departments to issue notices, requiring the secret-related personnel in Party or administration organizations at different levels, as well as the public service units to sign on the Confidentiality Undertaking Letters. Some important secret-related departments printed the Secrecy Booklet which can be read inside those departments.

From last February to September, 90 Party or state organizations made a survey on the secret-related computers and portable storage devices. At least 22 people were found to have problems in keeping secrets and they might be subject to criminal prosecution.

Damages from the “Economic Spies”

Since the reform and opening up, the western countries and multinationals have been sending more and more commercial spies to pry for Chinese economic secrets. Some high-ranked government officials corrupted and became the accomplices of those spies. They disclosed the Chinese economic secrets to the foreign countries or multinationals, resulting in great loss in China’s economy.

Several years ago, Fang Fuming, former Director and Chief Engineer of Zhejiang Electric Power Bureau became the General Manager of a Hong Kong-based electric company. He divulged the bottom line of purchasing the significant equipments of Chinese electric power system to the foreign companies, causing huge loss for China.

Some government officials even become the representatives of the multinationals in the Chinese government. They intently leave loopholes or provide convenience for the foreign companies when formulating policies and laws. Guo Jingyi who was arrested in 2008 was a typical example. He was an expert in international commercial laws and was always a member of formulating and amending laws about foreign investment during his 22 years’ tenure in the Ministry of Commerce. When he was drafting the regulations about the foreigners’ acquiring Chinese enterprises, he set rare restrictions on the foreigners’ acquiring the Chinese leading enterprises of various industries. Then he was accused of taking briberies in the formulation of laws and leaving legal loopholes for foreigners’ acquisitons in China. All the mergers and acquisitions done by foreigners in China may get engaged.

Now, four Rio Tinto’s employees were arrested for being suspected of stealing state secrets, and Tan Yixin, General Manager of China Shougang International Trade Engineering Company Mining Import and Export Corporation, was also detained for commercial crimes. The experts said that the government must be alert over the actions of the four Rio Tinto’s employees.

The fast development of China brings about growing demand for the iron ores. As the largest importer of iron ores, China should enjoy favorable prices. However, China can exert little influence upon fixing the prices of iron ores and is always the losing side in the negotiations. The Chinese steel enterprises have to buy iron ores with high prices. The top three mining giants – BHP Billiton, Vale and Rio Tinto – seem to know clearly about the bottom line of China.

From the year of 2003, the global mining companies made use of China’s growing demand for iron ores to raise the price and have gained huge profits for several straight years. In 2008, the prices of iron ores from Brazil and Australia respectively increased by 65% and 79.88%, which was the historical high. The Chinese steel companies and the industrial associations tried in vain every means to stop the price surge.

In these 6 years, the Chinese steel enterprises have paid extra 70 billion yuan (USD 10.25 billion) because of the increase in prices, twice of their total profits in the same period.

What’s worse is that the divulgence of the secrets of steel industry may result in the exposure of military secrets. According to an anonymous source, the steel industry is the strategic industry concerning national interests and people’s livelihood. Therefore, the production arrangement and burden ratio of steelmaking are the interior secrets of steel enterprises. The information agencies can know the situation of a country’s national economic development and event the information of warships or military planes from those data.

Divulgence of Core Macroeconomic Data

On July 17, the National Bureau of Statistics (NBS) published the macroeconomic data of the first half year. The data about GDP, CPI and so on were published on the same day.

However, the UK Reuters published an article in its Chinese version website on July 8, quoting “two official sources” and saying that the CPI of China in June increased by 7.1% year on year and the half year’s CPI increased by 7.9%. On July 15, Reuters published another article indicating that China’s GDP in the first half year increased by 10.4% compared with last year. The numbers of these three important macroeconomic indexes are exactly the same with the ones issued by the NBS on July 17.

“The investment institutions can buy more in the foreign exchange market in advance should they be able to know the interior information,” said a foreign exchange analyst.

For those CPI-related financial products, the foreknowing of short-term CPI changes is quite important. Guo Tianyong, a professor from the Central University of Finance and Economics, said that the Treasury bond futures are a kind of this product. “When the Treasury bond futures were issued a few years ago, all the banks’ relevant departments were busy calculating the CPI every day, with the purpose of taking advanced market measures based on accurate forecast.”

The price of the Treasury bond futures is determined by the rate of the state subsidies for the commercial banks in maintaining value. The rate depends on the monthly CPI. Therefore, CPI directly determines the price of the Treasury bond futures.

“If the banks can foresee the increase of CPI in the next month, they can buy the bond futures in advance and successfully realizes the arbitrage,” said Guo Tianyong. He also said that this is more suitable for short-term data.

In truth, in recent years, it is quite frequent that the core economic data and the guiding principles and policies of China are foreseen by the foreign-funded institutions.

Last May, the detailed information that China would increase the stamp duty was disclosed by a foreign investment institution, several days before the official publication by the Ministry of Finance. In this January, the US Dow Jones Newswires took the lead in issuing the data about China’s foreign trade of the whole year of  2008, one day before the General Administration of Customs.

“Fortune Teller” of Chinese Policies

Last October, JP Morgan’s economist Frank Gong gave out a report, saying that the Chinese government was working out an economic stimulus package with the total investment amount of 20 billion to 40 billion yuan (USD 2.93 billion to 5.86 billion) and the measures for reducing tax, stabilizing the domestic capital market and supporting the healthy development of the domestic property market would be implemented. The report also said that the government would use some foreign reserves to set up a fund to stabilize the stock market.

Though Frank Gong later said that the report was his own opinion instead of the government’s, many people thought that this was a cover for the foreign institutions to withdraw from China. The large investment banks were not single international financial institutions. They have already infiltrated into the economic lifeline of different countries and try every means to earn profits.

Even the famous economist Wu Jinlian was involved in this matter. Wu was once said to be a “spy” at that time and it was him giving Frank Gong the information. Later, the State Council’s Development Research Center which Wu worked for openly denied this saying.

One month after Frank Gong’s report, the People’s Bank of China (PBOC) as the Chinese central bank decreased the reserve against deposits for several times. Then, the State Council officially issued the four-trillion-yuan economic stimulus package in last November and began to save the capital market from last September. Most of those tallied with Frank Gong’s forecast. Therefore, Gong suddenly became famous and was dubbed “the most wizardly forecaster”.

The financial commentator Ye Tan said that Frank Gong’s report showed that the Chinese financial policies and operation ways are familiar to the foreign investment banks. “The information disclosed by those banks is the same with the official data, which is really stunning.”

How Are the Secrets Divulged?

In addition to the traitors who should be blamed for the divulgence of secrets, many national organizations directly cooperated with the foreign companies to compile the statistical data. For example, the Chinese Macroeconomic Climate Index is developed by the China Economic Monitoring & Analysis Center and Goldman Sachs (Asia). People can’t help but wonder that the Chinese relevant departments may not do the job alone. And such a kind of cooperation is the best way for foreign companies to know the Chinese economic secrets.

 When the Bank of China and Sinopec went public in foreign stock markets, they chose famous foreign investment banks as their sponsors in order to get the trust of the international investors. But the Chinese financial and energy firms’ core data are also in the hands of foreign investment banks.

Jiang Yong, Director of the Economic Research Center of the Chinese Institutes of Contemporary International Relations, said that some foreign research institutions, companies and industrial associations invite the government officials to give out consultancies, or buys off the relatives of high-ranked government officials to acquire a lot of data and information about the Chinese national economy.

Some foreign commercial chambers in China hold many seminars, to which they invite the important media, scholars and department leaders and exert their influence upon the formulation of significant laws and policies.

The Chinese companies lack the consciousness of keeping or gaining commercial secrets. According to Zou Zuye, who is called the originator of the Chinese competitive informatics, said that many foreign companies have their own information agencies. But the Chinese enterprises do much worse jobs in this respect. Even the big companies like Haier have no special information agencies.

In many multinationals, the information work has been playing an important role in the company’s strategic decision-makings. They have the Chief Knowledge Officer (CKO) and the higher-ranked Chief Information Officer (CIO), who is responsible for the business information. The CIO is as important as CFO and even CEO. According to the survey, all the Top 500 enterprises in the world have their own competitive information agencies.

Economic Policies Concerns State Security

According to the report from an Australia newspaper, China’s economic decision-makings are the authorities of the State Council led by Premier Wen Jiabao, but now the Standing Committee of the Political Bureau of the CPC which is the core group of Chinese politics takes part in the decision-makings more and more frequently. The survey result of Rio Tinto spy case, once coming out, must be approved by the Chinese president Hu Jintao. A source said: “This is not the revenge for Rio Tinto’s breach of the Chinalco-Rio Tinto investment agreement. The government has fully considered the resource safety problems and then made out such decisions.”

It was also reported that the Chinese government formed a team after the breakdown of the bid to evaluate the political and economic risk of the state-owned enterprises’ large overseas investment. This team consisted of the vice ministers from many state ministries, which reflected the significant changes to China’s economic decision-making structure.

China began to raise the economic policies to the highest concern of national security from the second half year of 2008. At that time, the stock market in China saw a drastic decline; the property market was depressed and the export-oriented enterprises were struggling to survive. The financial crisis made things worse. Michael Pettis, a Visiting Professor of the Guanghua School of Management, Beijing University said: “This may reflect that the Chinese top leaders have more concerns about the economic safety.”