After a Chinese court sentenced four executives of Australian mining company Rio Tinto to lengthy prison terms for bribery and stealing commercial secrets yesterday, Canberra was quick to respond. Foreign Minister Stephen Smith pointedly stated, “As China emerges into the global economy, the international business community needs to understand with certainty what the rules are in China.”

In the eight months since Australian citizen Stern Hu and his Chinese colleagues Wang Yong, Ge Minqiang and Liu Caikui were arrested, we've learned a great deal about the lack of certainty and rules not only in China, but also in the global commodities trade. Some of that is China's fault, but hardly all of it. The Australian government and Rio Tinto must share the blame for lack of transparency and failing to play by the rules.

Foreign media coverage of the arrests and trial has focused on whether the Chinese authorities pursued this case for political reasons. Remember that early last year, cash-starved Rio Tinto angered China by inviting Aluminum Corp. of China, or Chinalco, to take a $19.5 billion equity stake and then backing out of the deal under a combination of shareholder, government and public pressure. Rio was also driving a tough bargain in iron-ore price negotiations with Chinese buyers. Many observers speculated that the four executives were pawns in a high stakes game of tit-for-tat orchestrated from Beijing.

Certainly the timing of the case makes such suspicions inevitable. But the reality is probably more complicated. The Chinese justice system may be manifestly unfair, and once it gains momentum a guilty verdict is a foregone conclusion. Yet Rio itself put forces in motion that led to four men losing their freedom.

It all started with the boom in the global iron-ore market in the early 2000s. That’s when China’s steel industry embarked on a massive expansion of capacity, turning the trade in ore from a buyer’s market to a seller’s market. China’s large state-owned steelmakers bought at the benchmark price negotiated by Japanese and Korean mills, while smaller firms had to pay the higher spot price. This created an incentive for arbitrage and corruption, but unfortunately both the Chinese government and the mining companies were slow to take account of this in their internal controls.

via Hugo Restall: The Rules in China – WSJ.com.