Why China’s resource paranoia won’t drive off foreign investment

Jon Huntsman, the U.S. Ambassador to Beijing, is the front line of a U.S. campaign to free a Chinese-born oil geologist named Xue Feng who was imprisoned this week for violating China’s state-secrets law. But should he be?

Here are the few facts that we know: In 2005, Xue (pronounced "Shwe") arranged for the $228,500 purchase of a database he acquired on some 32,115 oil wells, most of them belonging to PetroChina, the publicly listed arm of the China National Petroleum Co. The deal was for his employer at the time, IHS Energy, the parent company of Cambridge Energy Research Associates, the platform for global oil maestro Daniel Yergin. The database appears to have been publicly available previously, and already had been sold to at least one Chinese oil group, according to courtroom documents. On Monday, Huntsman sat in the courtroom as Xue was sentenced to eight years in prison.

This comes three months after Stern Hu, a Chinese-born Australian, was sentenced to 10 years in prison for another state-secrets violation, this one involving Rio Tinto’s possession of Chinese steel-industry data. In the courtroom, the prosecution presented evidence of Hu and other Rio Tinto employees accepting some $13.5 million in bribes from Chinese companies.

The list of those personally worried about the case isn’t short. It includes foreign companies working in the competitive Chinese market, expatriates using whatever means to clinch a deal while remaining within the bounds of the law, and Chinese-born employees of foreign firms helping their bosses to navigate the complex marketplace.

For a read, I called Charles Freeman, a lifelong China hand formerly with the U.S. government and now a private consultant and fellow at the Center for Strategic and International Studies.  As others have, Freeman notes that it’s fairly easy for a foreign company to violate China’s state secrets law. "It becomes a game of chicken to figure out what’s what," he said. Often, it’s simply a matter of whether the state wishes to prosecute you for something else, and decides to do so under this particular criminal code, he said. That is what happened in the Rio Tinto case, which started with state-secrets but ultimately turned on bribery. "So there is a question as to what [Xue] is really being charged with," Freeman said.

It’s also worth reading the comments on the Economist‘s Newsbook blog posting on the verdict. One gleans a disconnect in perceptions between the West, where collecting oilfield data abroad is a standard prelude to buying the rights to reserves, and China, which guards such information tightly, especially if it puts one of its state champions at a competitive disadvantage. China is particularly disapproving when that data is acquired by Chinese-born specialists brandishing foreign passports.

As for ordinary Chinese, there is much more concern about a U.S. case that’s attracted much local attention — that of Zhai Tiantian, a Chinese Ph.D. student at Stevens Institute of Technology in Hoboken, N.J., who faces deportation in a personal case involving a former girlfriend, a dispute with a college official, and his suspension from the school. If you read the Economist comments and the Chinese coverage, you see that the Chinese, rightfully or not, perceive hypocrisy in the name-calling against them.

Over at the Financial Times, Geoff Dyer argues that the Xue verdict will put a damper on Shanghai’s efforts to become a global financial center. I think Dyer may be premature. There simply is no recent record of which I am aware of Western capital fleeing a country in the wake of this kind of incident. Western oilmen don’t avoid Russia because of the loss of contracted assets nor the imprisonment of the country’s most important oilman, and they are unlikely to leave China because of the Xue case. Look at the Rio Tinto case for a signal: Immediately after the verdict, the company repudiated its employees, and sought to soothe the government. In the Xue case, barely a word has been heard from IHS.