New York – On-the-ground research in China just got more interesting, as China sentenced Feng Xue, a geologist who was working for industry consultant IHS Energy, to eight years in prison for purchasing data on Chinese oil wells. The case underscores the tricky nature of information-gathering in emerging markets, although China-oriented researchers we spoke to were unfazed by the development.
Xue, a naturalized US citizen, was arrested in November 2007 for arranging the sale of Chinese oil industry data to IHS, Inc., perhaps best known for its subsidiary Cambridge Energy Research Associates, founded by analyst Daniel Yergin. According to court documents, the database contained information on 32,115 oil wells and prospecting sites mostly owned by China’s state oil giant, PetroChina Co. Included in the database were decades’ worth of well locations, reserves and other coordinates.
In his defense, Xue claimed the database was commercially available, apparently having been offered for sale on the Internet in 2003 and later sold to at least one other Chinese oil group, although it is unclear whether PetroChina knew of the sale.
According to witness statements cited in the court verdict, Xue poured his energies into his work for IHS, trying to gather information on China’s oil industry, contacting former school mates from his university days in China. Two of the three other defendants sentenced along with Xue were school friends. Mengjin Chen and Dongxu Li, who worked for research institutes affiliated with PetroChina were each given two-and-a-half-year sentences and fined 50,000 yuan ($7,500).
The other defendant, Yongbo Li, received the same sentence as Xue: eight years and a fine of 200,000 yuan ($30,000). In 2005, in a deal the verdict said was coordinated by Xue, IHS paid Li $228,500 through a third party to obtain a copy of the well information.
What constitutes a state secret?
This past April China passed legal changes aimed at increasing liability for violating state secrets, according to amendments approved by legislators at the time. State secrets include information that may damage the nation in fields ranging from defense and diplomacy to “national, economic and development projects” and technology. The government also has the power to label anything else a state secret, according to the amendments passed in April.
During the closed door trial, Xue was said to have argued that the information he gathered is data that the oil sector in other countries would make public. University of Chicago’s Dr. David B. Rowley, Xue’s former professor, said, “These types of databases usually contain information related to the petroleum potential of a given area, and that might include what wells already have been drilled and information on the geology and geophysical or underlying structure of these areas. That’s pretty much it.”
While Rowley said he was not privy to the specific database mentioned in Xue’s indictment, the professor said the pieces of information commonly contained in such databases are not state secrets.
Rowly said that Xue thought he was viewed favorably by the Chinese because he was able to sell to Chinese officials similar data from countries in which the Chinese had drilling interests.
Reactions from China specialists
Does China’s action imply higher stakes for doing primary research in China? We spoke with firms that specialize in doing primary research in China, which believe that the boundary lines for sensitive information are clear.
Ted Lin, CEO of Business Connect China, a Beijing-based expert network, takes a more cautious approach than apparently was apparently the case with Xue, and stays away from sensitive areas. “We stay away from government-sponsored projects and also government projects in a couple sectors such as military and energy with national security implications,” he comments. This doesn’t mean that all government-related research is off the table, since the Chinese government is intimately involved with business in all sectors. It is a matter of knowing which segments are deemed vital to national security.
“Where experts and clients could get into trouble is when detailed, non-public resource data is requested/shared that is considered sensitive by employer or government,” says Ellen Tao Huang, Managing Principal for Westlake International, LLC, an expert network that specializes in sourcing Chinese experts. “Verbally sharing general industry trends (government sanctioned industry rationalization is/is not taking hold, provincial policies may counteract central government mandates, certain commodities in tighter/looser supply YoY, etc.) that are gleaned from an expert’s normal course of work seem fine.”
This corresponds with perspective from Access Pointe LLC, which specializes in conducting channel checks and gathering information on Chinese economic and market trends. Jiayi Li, President of Access Pointe, points out that the level of information involved in the Xue case was extremely detailed which combined with the subject matter raises red flags. A safer approach is to focus more on trends and developments.
At this point, none of the research firms we spoke with foresaw any significant changes in the process of doing primary research as a result of the case. “We haven’t seen any changes over time in the ability to recruit experts,” says Huang of Westlake. “There was a brief period after the Rio case started that it was difficult to find anyone who would speak about commodity trends, but that eased off.”
Primary research firms that work with US investors have compliance systems in place to protect against the transmission of material non-public information, as defined under US securities laws. The definitions are relatively clear. China has different definitions of what it considers sensitive information, and to some Western observers these can appear arbitrarily defined and enforced. However, to those who specialize in China, the signals are more straightforward. Nevertheless, the Xue case illustrates that compliance in the context of primary research is not just abiding by US securities laws, but also respecting requirements in local jurisdictions.