economics

March 5, 2010

Trial of American puts spotlight on the business of ‘state secrets’ in China

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BEIJING — Officially, the trial of American geologist Xue Feng is about state secrets. He’s accused of exporting sensitive information abroad for helping his Colorado-based employer buy a database about China’s oil industry.

But Xue’s attorneys say Chinese authorities pursuing the case have another motivation: commercial competition.

When Xue bought the surveys and maps for use in his company’s research reports, the information was openly available. It was only after the fact that Chinese authorities classified it a “state secret.”

In the past, many foreign businesses said, they might have considered a case like Xue’s an isolated incident, perhaps brought forth by a single overzealous government official. But some, viewing it alongside a spate of new regulations and trade policies, believe it represents a fundamental shift in China’s attitude toward foreign businesses.

Company executives, trade groups and diplomats said Xue’s case, which is now in its seventh month, and two similar ones involving an American auto engineer and an Australian mining executive appear to be part of a broader effort by China over the past few years to use everything at its disposal — the courts, the regulatory system, trade law and even hacking — to promote its own “national champions.”

The boldness of the new policies, foreign companies said, speaks to a self-confidence that has emerged as a result of China’s strong and speedy recovery from a global economic crisis that developed countries are still struggling with.

“When the Chinese government’s economic growth objectives depended on money, jobs, best practices and technology transfers from foreign direct investment, they welcomed us,” said Robert Ness, a Beijing-based lobbyist representing U.S. technology firms.

But now that some of China’s domestic industries are mature, Ness said, “we are all waking up to the fact that in China the concept of ‘open markets’ is not a value like it is in the West. It is a means to an end.”

‘Certainly more assertive’

Joerg Wuttke, president of the European Union Chamber of Commerce in China, said the change is jarring: “There’s this cocktail of more national-driven, less positive spin on foreign businesses in the Chinese media. Many companies’ accessibility to Chinese leaders has decreased. And all of a sudden, this image comes up that the Chinese appear to be more arrogant. I’m not sure ‘arrogant’ is the right word — I would say they are certainly more assertive,” Wuttke said.

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In January, Google became the first major company to take a public stand against China when it threatened to pull out of the country, citing its outrage over hacking into its servers and the theft of some of its intellectual property.

Other companies are overhauling their internal business practices, getting out of sectors such as energy and telecommunications that could be considered sensitive to national security, and shifting responsibility for some deals abroad to protect China-based employees. A few are even making plans to leave the country altogether and put their money in places such as Vietnam, India and Brazil, according to foreign chambers of commerce.

“Hundreds of thousands of multinational businesses are being affected,” said Jerome Cohen, a New York University law professor who is advising Xue’s family and who has served as a consultant to foreign businesses in China for more than 20 years.

Chinese officials maintain that the country still welcomes foreign investment and that adjustments are only natural as its economy becomes more developed. They point out that in some areas, foreign companies enjoyed “super-national” treatment, better than that of domestic companies. They acknowledge that the end of those policies may affect the bottom lines of some ventures and leave some companies disgruntled.

“After the economic crisis happened, China had a hard time. If China had continued to allow abundant foreign investment in at that moment, it would have oppressed the living and developing space of the domestic businesses. . . . It’s normal for a government to support domestic companies under special circumstances,” said Li Chunding, a researcher at the Chinese Academy of Sciences, a government-affiliated think tank.

Many of the clashes in recent months have been in an area where the United States and Europe still excel and China is trying to catch up: research and development in science and technology.

Foreign businesses accuse China of unfairly trying to gather intelligence about research data, computer code, patents and other intellectual property.

Pharmaceutical ventures are being told to open the books on their clinical data to get regulatory approval to sell their products. Security companies are being asked to provide the source code — the blueprint for a program — if they want to sell encryption software.

Rule of law?

One of the key questions for companies trying to decide their future in China is whether there will ever be rule of law, and that is why the arrests of Xue and two other foreign businessmen are so troubling.

In the most publicized case, Australian mining executive Stern Hu was charged in February with soliciting and accepting bribes and stealing state secrets, shortly after a deal between his employer, Rio Tinto, and a Chinese state firm broke down.

American automotive engineer Hu Zhicheng is accused of misusing trade secrets. His wife, who first spoke out about the case in December, says the arrest in November 2008 was actually punishment over a business dispute. Hu had refused to give up rights to a U.S.-registered patent to a former business partner.

Xue’s case is the most advanced of the three. Both President Obama and Jon M. Huntsman, U.S. ambassador to China, have expressed concern about Xue’s situation and called for his immediate release.

In September 2005, Xue helped his company, IHS Energy, which provides research for multinational oil companies, buy the database that is at the center of the trial, but it wasn’t until April 2008 when he was formally arrested at his hotel.

A court official in Beijing, where Xue is being tried, declined to comment, but according to his indictment, Xue is accused of illegally acquiring state secrets and unlawfully providing state secrets to foreigners. The charges are tricky ones in China’s legal system — the definition of a state secret is so vague that it often invites meddling by competing companies and their political backers.

“You don’t know you’ve acquired a state secret until they lock you up and accuse you and they send the materials in,” NYU’s Cohen explained.

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