21 July 2009

"Kill Chickens, scare Monkeys" China, Rio, Stern Hu and the new realities..

A letter from an aussie to Supkis.........

The excellent article “KGB INTERROGATION: Cheng Li” (http://www.businessspectator.com.au/bs.nsf/Article/KGB-INTERROGATION-Cheng-Li-pd20090716-TZ9D7?OpenDocument&src=sph) is the first insightful and sophisticated discussion towards understanding what is happened. We should expand the context by considering the Chinese perspective and some aspects of geopolitical realities as well. Unfortunately, our parochial political and media commentators need to be less self absorbed, partisan and shallow in their analysis.

I am a retired Australian expatriate previously employed by a major US Corporation and experience shows that major corporations do get involved in corruption to further their commercial by necessity in countries such as China.

It is unavoidable and mostly done indirectly with great care…..so why is China’s claim with regard to Rio Tinto dismissed out of hand?




Australia’s small prosperous population was made possible by living on a huge continent using imported capital to export raw mining and agricultural commodities. In addition, we relied on US economic and military hegemony to underpin our peace of mind and manage the rise of Chinaand Asia.


Hence we fought with the US in the Vietnam war of independence, participated in the neo-colonial oil wars in Iraq and Afghanistan; created with Japan APEC in a vain attempt to counter ASEAN; and with US support tried to prevent Asian countries from establishing a rival institution to the IMF post Asian Crisis including the now reality currency swaps between East Asian and Asean countries.


Our recent Defence White Paper whilst founded on capabilities based calculus implies continued desire to contain China.

The WA state government awarded the Oakajee Port & Rail tender project to Japan at the expense of China under controversial circumstances. Now Canberra has allowed multinationals to determine our national interests by default and created a defacto RIO+BHP monopoly controlling circa 70% of global exported iron ore at the expense of China’s national interest under humiliating circumstances.


Kevin Rudd tries to ignore the China leader during the recent photo-op in London. Australia’s economy will be devastated should China play hardball whilst their economy only suffers marginally. Our historically high private debt per capita exceeds even depression levels and debt de-leveraging drives our slowing economy as a subset of the global economic crisis.


The US and UK are debtor nations with notionally insolvent financial industries hoping China will provide capital on one hand but on the other hand wish to maintain their hegemonic powers….a very delusional thought process indeed.

The Chinese and the majority of other countries outside the “international community” (code for the usual suspects US/UK/Canada/Australia) represent largely victims of centuries of western hegemony and note our behaviour referenced to their own histories.


China invests in energy and mining infrastructure in Latin America, Asia, Africa and Central Asia to gain access to host country mineral resources in a win-win relationship. In contrast the US and the west merely focusing on the extractive sectors – oil, gas, minerals etc.


Latin Americans, Asians, Africans and the Central Asians take note of the West’s exploitative instinct. Now it is beyond doubt that external forces have muddied the waters of disaffection in Xinjiang increases China’s determination to protect its national interests. We need to avoid hypocrisy and recognize the West also have blood on our hands thru war and human rights crimes the latest including supporting Israel’s colonization at the expense of Palestinians to killing civilians and colonial wars in Iraq/Afghanistan/Somalia/Pakistan etc as well as protecting the corrupt Middle East regimes.


We are not morally superior and it can be argued inferior….despite rampant corruption in China.

The rise of creditor nations amongst the economic debacle in the west means China’s views now have impact simply because their narrative has more economic and political weight. We as a nation need to grow up and not hide behind self serving myths.


We conveniently forget that China’s leadership is patently more capable and sophisticated than our own based on benchmark degree of difficulty comparisons such as sheer achievements over significant hurdles.




China has a growing USD 2 trillion surplus and underpins our nation’s prosperity. This ancient civilisation has fought western hegemony to rise to its present position in spite of internal and external obstacles by developing its own particular solutions. It has avoided the US leveraged debt and speculative capitalism free of regulation by maintaining some aspects of controlled economy mechanisms.

China will not follow in our image and will develop their version of capitalism just as Japan has. The world has become a multipolar world. China feels threatened by the monopolistic multinationals and is commercially discriminated by the US andAustralia….despite their status as the major customer in Australia.

China is a complex nation that is still developing facing serious internal and external challenges …it is not heaven on earth. This nation is in the “robber baron” era just as the US was and we were during the pre federation era. Its foreign policy in Africa, Middle East, Central Asia and littoral Asia has been pragmatic and built on mutual benefit rather than the US rabid and coercive ideology. US crony capitalism and the preferential treatment by IMF of western debtor countries in strive is noted.


The era of western dominance is ending and the multipolar world is taking shape. Australia has to come to terms with its geographic destiny and re-examine its pathway to future prosperity. China will exert greater influence on our prosperity and our nation needs to find ways to respect their needs without compromising our own sovereignty. In the past, we provided fealty to the UK then the US in return for protection… convenient because we share the same civilisation and broad cultural values.
We have tried to be the intermediary between a rising China and the US Empire in decline to protect our national interest…this strategy is reaching its use-by date. Japan may end up coming to terms with China because their US and European markets are wilting?

We need to respect reasonable China needs and develop a deeper and more mature relationship whilst protecting our sovereignty….this transferring our fealty to China is impractical. The re-assessment should include review of our economic structure that is too reliant on mining the soil and earth.

All of Asia wants to counterbalance rising China harmoniously as good economic neighbours. Modernising China is presently co-operative but history shows that when nations become hegemons they become tyrannical to their victims….read UK, US, Ottoman history.


Stop bleating about “International Community” meaning western countries not trading with China as a threat…..its rhetoric.

Block the RIO-BHP production JV and workout a pragmatic strategic frame work between Canberra-Beijing based on real-politick and mutual respect.

Educate the average Australian on today’s realities.

China just needs respect recognising its hard won status and not patronising noises.

More on China and Hu...

Alan Kohler: What we’re trying to do is understand the detention of Stern Hu. We’ve seen reports that President Hu of China signed off on that decision. We’re also hearing reports that actually it’s a lower level thing, involving the iron ore and steel negotiations. Should we see this as a big change in the way that China will deal with businesses around the world or is it something less than that?

Cheng Li: Well, the answer is yes and no. First of all I think that the most recent news from China is that the spokesperson of the Foreign Ministry said that the rumour that Hu Jintao was personally involved or sent an order to arrest, is not true. I don’t know whether you have seen that or not. Now, in terms of a bigger change, I would not say this is a turning point, but on the other hand in the broader context, yes, because the Chinese economy has been doing well. China has already emerged as an economic giant, not only in terms of the China Australia economic relations, but also virtually everywhere, including the United States, EU and Japan.

So in that context China certainly can afford to be tough and also sometimes it wants to make rules in its own way, not just as it was before when it has sometimes been too accommodating in using other leaders’ words. Now, they want to sit on the head table and in the driver’s seat and that’s the change.

AK: Don’t you think that whatever they intend this event will have a big impact on China’s business relations with the world?

CL: No. I mean, first of all this is largely Chinese/Australian economic relations. In many other parts of the world it’s not made it to the top five news items in the United States and also within China it could not even make it to the top 10 news stories. So different countries have different perspectives.

Now, to a certain extent, the industrial espionage or corruption with foreign companies and this kind of thing is happening all the time, but certainly this incident affects Australia in a direct, very strong way, so in Australia certainly many people are concerned for the right reasons. For the international communities, this is one of the many episodes.

Robert Gottliebsen: Just how much have the events in China changed the power structure at the centre? Here in Australia we’ve seen a very different face of China and now all of a sudden we’re seeing this tougher China. Does this mean we’re going back to what it used to be 10, 20 years ago?

CL: Well, it’s not so much about the conservatives, but China has reached a different economic stage. Since 1978, China has opened up. At that time, China desperately needed foreign cooperation. Particularly, they wanted foreign capital, foreign know-how, foreign technology, etc. Chinese leaders, decision-makers including Deng Xiaoping and later Premier Zhu RongJi, they said very clearly that China wants to trade its market for technology, for foreign capital. Now, that period is over.

You can say the leaders have become conservative, but I think probably ‘conservative’ is not the right word because China has been very successful. The period as a learner, as a student, is over. Now, they want to be an equal partner. They want to be in the driver’s seat, so whether you want to come to terms with that reality, it’s your problem; it’s not China’s problem. I’m not saying that they are doing the right thing, but that’s what they think. But I probably would not say it’s ‘conservative’ or ‘liberal’, but the reality is those who have power, have the resources, have the economic strength, can do what they want. Other parties maybe have to come to wear that reality.

RG: There’s a big difference between equal partners and one of the parties, in this case China, being in the driver’s seat and I think you’re really saying that rather than being equals, China wants to be in the driver’s seat.

CL: Yeah. To a certain extent, but at the moment China’s economic strength has its own limits, so therefore what I said earlier, President Hu Jintao according to China’s spokesperson, he cannot say that he personally endorsed all this. This actually leaves the door open. This is an important signal from China.

Again China also needs Australia, although you can debate which country needs the other country more, but the fact is that both need each other. At the moment, I think that China is already the largest global market and also is the leading trading partner for Australia. So again we need to put that in perspective.

I think both sides should manage this important relationship in a careful way, so both sides should cool down a little bit. China certainly sent a signal and of course these four people are still under arrest. They should do more, but at the same time the international community, particularly Australian leaders and the media probably also, should have a better understanding of what’s going on there.

AK: You say that it’s purely between China and Australia this, not the rest of the world. It’s not really getting much airplay in the rest of the world, but surely other business executives in China from elsewhere in the world must now be wondering what is a state secret and what they can do without getting locked up.

CL: The Chinese use the saying ‘kill chicken to scare monkeys’. You’ve probably heard of that phrase. This is precisely the intention of the Chinese government and you know it if you wanted to do business with China, you need to follow Chinese rules and regulations, whether you like it or not.

Now, again I do not know details. I do not know facts. Maybe these four people are guilty. Maybe they’re not. Of course we can complain about the lack of transparency in China’s legal system. We can complain that maybe it’s unfair at the moment, but we do not have enough facts. There could be some problems, real problems, but we don’t know.

Other companies may be scared, as you said very correctly, but this in particular is China’s intention, because China is in the mood for rapid economic development and they now have leverage, they have strength. If you want to be a partner with China, China wants you to follow their regulations, their norms and their law and again, sometimes they make mistakes, sometimes they overreact, but on the other hand you do see that in a big country in the midst of major development. Sometimes espionage, sometimes corruption with foreign companies, certainly it’s a possibility.

Stephen Bartholomeusz: Professor Li, while accepting China’s economic strength relative to the west at the moment, there are some domestic and political and economic tensions within China. You’ve referred in the past to the Chinese political regime as being ‘one party, two coalitions’ and said that there is an even balance between those who represent in effect the coastal entrepreneurial regions of China and the poor people of China. Is what we’re seeing a change in that balance?

CL: I really don’t want to go too far at this point in saying that that incident reflects the section of politics and maybe later on there will be different views of how to deal with this particular incident. Certainly they will not want the international community to know that, but on the other hand the two sections or two different leaders may be on the same page in terms of protecting China’s domestic interests. China’s rise is in everyone’s interest from their perspective. All Chinese leaders want to share the same aspiration, but sometimes they have different views.

The decision to arrest these four people, along with several Chinese managers in the steel factories, it means they probably reached a consensus, maybe in the Politburo among these 25 policymakers. Again, I will not go too far. These state security people actually carry out orders. Another thing is they always follow the party line. Sometimes they do extraordinary things, but it would be too much to say it’s because of the security people. Actually, the Chinese government would love to hear that, because then they could just blame everything on the security people. They want to confuse the outside international community, but the reality is it’s their decision, the party leaders.

SB: The current Chinese leadership is committed to sharing some of the benefits of Chinese growing prosperity to those who so far haven’t participated as intensely as those on the coast. There have been some issues with the stimulus package and the infrastructure development program. A spiking in the price of iron ore or a relatively high iron ore price doesn’t help. I suppose I was trying to put it into that sort of context. Are we seeing the current Chinese president and those who want to see greater socialisation of the benefits of prosperity now starting to flex their muscles?

CL: It’s more to do with what they call China’s ‘national interest’. They want to protect China’s major firms. They want to protect the last of China’s assets. This is their perspective. I’m not saying whether they have legitimate reason or not, but this is their concern. I would not go too far in reflecting on that section of policy in relation to this particular incident.

RG: I want to take you back to that remark about being equal or being in the driver’s seat and it’s one thing to try that out in Australia, but do you think they’re going to try it out in the US and that this is a forerunner for a change in US relationships as well?

CL: Well, in the past few years there’s some incidents that certainly many US companies unhappy. The most recent one is the Coca-Cola monopoly case. It’s not just killing chickens – maybe you want to kill monkeys to scare some elephants! Maybe this is the saying! [Laughter]

We do not know much fact, but there could be a combination of factors, not just retaliation or revenge with this particular company, but it could be to express some unhappiness from the Chinese leadership perspective of something seemingly remotely related. For example maybe the Defence White Paper, maybe the incident a couple of months ago about the espionage charge of the Chinese/Australian woman [an apparent reference to the controversy around the relationships between former defence minister Joel Fitzgibbon and wealthy Chinese/Australian businesswoman Helen Liu]. I don’t know. We are still in a stage of speculation. Maybe it’s nothing related to that or maybe it’s related. We do know that this particular decision was carefully made. It’s not by local officials or by just a small number of state security people.

AK: So, how do you think Australian companies, or any companies, should respond to this in the way that they deal in China?

CL: Well, I think that it seems to me we overreacted a little bit in saying that it has ‘completely jeopardised’ Chinese/Australian economic relations. First, we need to know facts. We could complain publically or privately through governments, through the media about this, but we still should look at the big picture. The big picture is that to a certain extent the peace and the prosperity in our lifetime largely depends on whether China acts like it is a problem or tries to find a solution. My answer to this is should be treated like a solution.

Now, look at today’s world. There are so many issues, whether it be security, whether it be terrorism, whether it be environmental change, climate change, the public health; we need China to play a constructive role particularly on the economic recovery.

Five years ago Chinese banks were in big trouble, because of the extension to the WTO. So many people predicted that the Chinese state banks would collapse, but ironically now look at the world’s top 10 banks today. Four of them are Chinese banks including number one, number two and number three.

Now, again we’re really still in the early stage to Chinese economic rise and that still provides a huge market. Now, the nature of competition is that would change. Now, in the manufacturing sector probably we will face tough, tough challenges, but in the terms of resources, in terms of for service sector, in terms of the environmental products, it’s still the early stage. Now, if Australian companies do not take that opportunity, many other companies in other countries will do, so we should not lose that big picture.

RG: Do you think that in Australian iron ore and coal negotiations in the future, the price will now have to be based on the market? Because it really will be quite impossible to have a negotiation on price, because there’s a great danger that the negotiators might be jailed if they don’t come to the right conclusion?

CL: Well, I agree with you.

RG: So, this means that we we’ve got to divorce the question of price from any negotiations that are at all sensitive in the Chinese arena.

CL: Well, yes because again we’re talking about negotiation. Negotiation has two parties. We need to compromise for both parties and if we can reach agreement, it would be great; if we could not reach agreement, there will be loss. The question is which party will lose more? This is subject to change. It depends on when and where you talk, what you talk about, to what scale and also related to politics, international relations and many other things.

RG: Do you think that the Chinese understand that that Chinalco deal was a very bad deal? There were six hundred pages of side deals which gave Chinalco control of Rio Tinto and so it really had no chance of being accepted by the government.

CL: Well, I’m not an expert on this deal, but you express your view. You express it in a very eloquent way, but it’s your view. The Chinese may not share that view. They have a different perspective.

SB: Professor Li, one of the things that the Chinese have been encouraging in recent years has been external investment by their state-owned enterprises; people like the BaoSteels and the Chinalcos. This incident tends to suggest that the argument that the SOEs were putting forward that they were operating like normal commercial entities at arm’s length from the State isn’t quite as convincing as they would have liked us to believe. Is it going to be damaging? Is it going to be damaging to the ability of those SOEs to make direct investments outside China?

CL: Again, it’s the Chinese mood. They think the state-owned enterprises should be enhanced, rather than privatised. Look at today’s world. When you look at the financial crisis, when you see that the American banks were nationalised, at least there’s some trend. Why should they go back? They think it’s their strength not their weaknesses. I’m not saying they’re doing the right thing, but this is their thinking.

The government will continue to help, to strengthen these state firms, particularly gigantic ones, whether it be oil or resources or other things. They will use their foreign capital and reserve to trigger more acquisitions, more mergers, more foreign investments etc. They’re in this kind of mood. Of course we can challenge that. We can ask questions. Maybe in five or ten years the situation will be different. Again, China really should introduce some incentives, should help small or medium-sized businesses to develop, not just use its monopoly power to do so. But at the moment I cannot say that there are strong signs for that. The reality is that these gigantic state-owned enterprises, particularly Chinese called SASAC [State-Owned Assets Supervision and Administration Commission], around 65 companies, will be very, very aggressive. They have the backing of the Chinese government.

AK: What is your advice to the Australian prime minister about how to deal with this crisis?

CL: I think that he should use his leverage to talk to the Chinese, mainly privately rather than publically, to express concerns, to express that there may have been some misunderstandings, but also to express the strong view that Australia welcomes China’s economic growth and understands China’s concerns. But at the same time, as Australia is a country that has a good relationship with China, you want to maintain that good relationship. We should leave the door open, leave communication open and show goodwill, rather than point the finger. I think it’s important.

We should also look at a recent development in the United States. The Obama administration is really quite humble when it comes to China, because in many areas we need China’s cooperation. Yes, we have different views on certain issues, whether it be Dalai Lama or Tibet or whether it be China’s economic policies, whether it be market excess and whether it be the foreign exchange rate or global environmental concerns. In all these areas we should go through negotiation compromise, rather than just point the finger at each other or use some kind of a shock policy or surprises. We need a kind of a humility, rather than just to blame the other side.

RG: I think in Australia we’ve acknowledged our dependence on China for quite a time and we are very much on the China bandwagon, but I don’t know that that’s as widely held a view in the US. What I think you’re really signaling is that we’re actually beginning to see a change in the guard and China’s going to become more and more important not just for Australia, but to the US and to the rest of the world.

CL: Yes, but of course China has its own problems. Look at China’s economic expansion. Certainly that’s a big thing in our time, but at the same time China’s political system is still a liability and its image in today’s. What countries are really China’s friends? Not many. Right now even Chinese/Pakistan relations have some problems. Recently Turkey, Iran and Indonesia all criticised China for what happened in Xinjiang region. Chinese leaders need to adjust their foreign policy.

Certainly, we can also say what happened with Australia during the past week also means that China cannot really express itself well to other foreign countries, particularly for the foreign business community and also the general public. They have their own problems and that’s for sure, but again it’s not helpful, it’s not constructive if we just talk about China’s problems.

The reality is we should come to terms with China and at the same time have equal dialogue. We should express to China we do not have ill intentions. We have our own interests. At the same time we need China to also meet international norms and international standards, not just China’s laws, China’s regulations. Sometimes we need a little bit of patience. Sometimes we should also look at it from China’s perspective. Chinese people at the moment think that they have achieved very successful economic development and they are very proud of themselves for the right reasons, but at the same time we hope that China’s development is not just economic development, but that it can also show itself as a responsible stakeholder.

SB: China’s got a few domestic issues, such as the one in Xinjiang and also a growing number of graduates from universities that are finding it hard to find work and similar issues. I was wondering which of these sorts of issues do you think has the potential to cause destabilising forces to China whether it be politically or economically?

CL: Well, all these issues that you’ve mentioned are quite serious. They have certainly given the Chinese leadership a surprise, not a complete surprise. They knew these could intensify, but they did not know that they’d reached that kind of scale with around 180 people killed and 1000 people injected. That explained why Hu Jintao shortened his trip to Italy.

Now, also the college graduates, you know, last year one million could not find jobs and this year probably two or three million, more than 30 per cent or 40 per cent of our college graduates could not find jobs. At the same time, 20 million migrant workers also lost their jobs.

All of these issues are real, but at the same time these kinds of social protest or grievance do not come together. They cannot unify, because their interests are not identical.

The Chinese students, those unemployment students, they are unhappy, but they are not also unhappy about separatism in Xinjiang or Tibet, so this kind of grievance is largely localised and the Chinese government type leadership actually are quite smart. They make people believe that they should think nationally, but blame locally, so only blame local leaders, whether it is a social group or local officials.

I do not see any of these kinds of forces will undermine the regime or as some say, that the regime will collapse. But we do not see the real kind of solution or reconciliation among these kinds of problems. These kinds of problems probably will remain for a long time, but at the moment will not be a real triggering factor to cause a serious, serious regime crisis.

I think in the near future we shall see China continue on the rise, not in decline, certainly not in collapse. We should get that picture right. But the challenges will be overwhelming and will not disappear overnight. That puts Chinese leadership always in crisis mode. They need to react. They need to react very quickly. They should be proactive. The worst thing is if they become overly confident with arrogance or some leaders appear in the older type leadership, but China is still not in that stage. When you look at the speeches by Premier Wen JiaBao he constantly talks about problems not talked about so much of China’s rise.

AK: Thank you for your time.

CL: Thank you.

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