china: market research can mean espionage

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http://www.ft.com/cms/s/0/15beb70a-85c8-11de-98de-00144feabdc0.html

Alarm spreads over China spy allegations

By Kathrin Hille in Beijing

Published: August 10 2009 17:21

Alarm is spreading among foreign businesses as Beijing cranks up its accusations against Rio Tinto, the Australian miner, raising fears that multinationals could find themselves the targets of similar state secrets cases.

China’s vague legislation stipulates that any information concerning matters from defence, foreign policy, economic and social development, science and technology, criminal investigations or “other matters” can be classified as a state secret – even if it is already in the public domain.

Until now Chinese lawyers, rights activists and journalists have been the main victims of the legislation. But according to foreign executives and consultants, businesses are now worried they could fall foul of the law. “There is growing uncertainty right now as people realise what risks they could be facing when they are dealing with [Chinese] state companies,” said Jürgen Kracht, managing director of Fiducia, a Hong Kong-based consultancy.

The website of China’s state secrets watchdog crashed on Monday as thousands of users tried to access reports in which it accused Rio of large-scale commercial espionage and demanded a comprehensive overhaul of the way China deals with state secrets.

The official magazine of the National Administration for the Protection of State Secrets said past economic reforms had left state companies and industry associations vulnerable to spying and demanded action from the state.

Among the watchdog’s proposals for reforming the law is a recommendation to clarify the current fuzzy definition of state secrets. Apart from giving state enterprises better guidance on what to guard, it would provide everyone else with a secure legal basis. But the draft revisions to the law on guarding state secrets made public in June do not bode well. While they define more clearly the watchdog’s powers, they have left the definition of state secrets virtually untouched.

China has detained Stern Hu, Rio Tinto’s head of marketing and sales in China, and three other of its sales staff in the country after accusing them of bribing Chinese steel industry executives to gain access to state secrets about iron ore price negotiations.

Rio has said it is not aware of any evidence that supports China’s claims.

Foreign investors are worried the case could have wide-ranging implications.

“Normally, when we’re doing market research in China, we assume that we’re doing something entirely legitimate,” said an executive at the Asia headquarters of a European chemicals company who also works on China. “But in theory they might just define part of the information covered by such research as a state secret.”

A consultancy said clients had demanded guarantees that it would properly identify to potential interviewees in China all staff involved in custom market research and not extract any information under false pretences. “Even though that helps, there are certain things you should not have in the books in China at all – this is one reason why some foreign companies prefer to have their servers in Hong Kong and run some things through locations outside the mainland,” one consultant said.

Such precautions are likely to become more common following the state secret watchdog’s hawkish tone and suggestions such as installing Communist party undercover staff in all state enterprises to go after any leakage to foreigners.

The Financial Times