We need a new primer on how to do business in China. Years ago, on a flight to Shanghai, you could spot an MBA graduate in every seat mouthing polite mantras — how to show “face”, how to behave at a banquet. Long on protocol, the books were short on useful information. What you really need to know is who’s in charge; which Communist Party official pulls the strings; what to do when a bureaucrat solicits a bribe or the IT staff sell secrets to a state competitor.

A manual for today’s China tyro would make grim reading. A former chairman of Sinopec, the country’s biggest oil refiner, was sentenced to death yesterday for taking bribes. And the harsh law of Chinese state capitalism does not just threaten locals: Rio Tinto, the mining giant, is trying to secure the release of four Chinese staff, including Stern Hu, an Australian of Chinese origin who is their chief iron ore negotiator. All are accused of paying bribes for “state secrets”. They were arrested during tense negotiations over iron ore pricing with China’s steel mills.

There has been no formal charge, just official accusations. The latest, in China Daily, an English language paper, accused Rio of bribing executives at all 16 Chinese mills involved in the negotiations to obtain sensitive information.

The row over “spies” and lumps of red rock has the Australian media in uproar and enraged its Prime Minister. Kevin Rudd, a former ambassador to China and fluent Mandarin speaker warned Beijing that “a range of foreign government and corporations will be watching this case”. Rio is silent and, rumour suggests, a deal was quickly cobbled together yesterday between the miner and the main Chinese steel mills, at Rio’s original price. Ore mined in Australia fuels China’s economic motor, and the annual negotiation is highly contentious.

There is also a problem with “face”. Chinalco, China’s aluminium giant, failed in its attempt to buy a large stake in Rio’s iron ore business this year, an experience that left Beijing bruised. Its strategy of pushing state-controlled companies to hoover up foreign resources was shown to be over-reaching and clumsy. But the four “spies” are still detained and we may never know what offence, if any, they committed. Was it dinner and a corporate golf weekend or brown envelopes stuffed with dollars?

For years pompous CEOs have praised China as a paradise for businessmen. I remember hearing one crass speech while driving on a motorway in Shanghai. The boss described with awed admiration how the road was built with bulldozers razing thousands of dwellings, their inhabitants fleeing by the back door as the front wall collapsed. Businessmen marvel at the speed and efficiency of construction projects. They may think again if bulldozers arrive in their boardrooms.

There are good grounds for expatriates in Beijing and Shanghai to be nervous these days. Proper statistical information is not widely available in China and analysts have to dig and delve — and that may be seen as treason. By contrast, Rio published its quarterly operating figures yesterday, a treasure trove of information about metal output and production capacity, broken down to each location. Such exhibitionism would be unthinkable for a Chinese enterprise linked by controlling shareholdings to Beijing commissars.

During negotiations in 1996 over a huge petrochemical facility at Nanhai, a Chinese employee of Shell, working in government relations, was arrested, found guilty of “spying”, detained for a year and released. She has since left China. This strategy of official bullying has disturbing parallels with Russia and the recent harassment of staff at the oil company TNK-BP, when BP’s Russian partners forcibly evicted the expatriate management.

China’s ruling bureaucracy is growing impatient with the market economy. It dislikes volatile prices and upsets. In the iron ore talks, China Iron and Steel Association (CISA) elbowed aside the big Chinese steel mills in an attempt by the State to control pricing. CISA is said to be worried about iron ore speculation by Chinese traders and wants to limit imports to state-controlled entities.

More worrying is evidence that mandarins are attempting to suborn the Chinese legal system to the will of the Communist Party. According to Trusted Sources, the emerging markets consultancy, the Party is now firmly in control of the judicial system after Xiao Yang, a reformer, was replaced as president of the Supreme People’s Court by Wang Shengjun, a former Communist Party official who rose through the police ranks with no legal training. According to Trusted Sources, this asserts the Maoist doctrine of “better Red than expert”.

This might be good news for Hong Kong, which retains its system of British-inspired commercial law, but China’s drift to authoritarian rule presents hazards to foreign businesses. There is mounting tension on the shop floor with the number of labour disputes doubling last year. Foreigners of Chinese origin may find that their passports offer little protection in a State that attributes political meaning and status to ethnicity — as the Uighur and Tibetan populations have found.

The Chinese don’t get it; Beijing would like to embrace capitalism, were it not for the free flow of markets. It would prefer instead the certainties of a command-and-control economy, but capitalism is all about markets, and a market is about free exchange of views, an argument between bears and bulls or conservatives and radicals. In the exchange between the weak and timid man and the rash fool, we hope to arrive at something like good sense. Between Rio Tinto and the commissars, you might wonder which one is which.

Carl Mortished is world business editor

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