Rio Tinto spy scandal

China is accusing Australian mining executives of stealing state secrets damaging Beijing's economic security, following the arrest of four employees of mining giant Rio Tinto on suspicion of spying.The arrests came amid tense negotiations between Rio Tinto and Chinese steel mills over the contract price of iron ore.But questions are being asked about what impact the arrests will have on foreign investment in China, and the extent to which the state will intervene in deal making.

In the last two decades, China has been a new financial field for many, where the government has tried to build a reputation as a stable and lucrative investment destination. But now questions are being asked over just how business is being done in China, and how far the state will go, to ensure the price is right."The concern that foreign investors would have is the extent to which government plays a role in commercial negotiations - what one might describe as the hidden hand of government - and the extent to which the support of government might be enlisted to help resolve commercial issues," said Andrew Godwin from Melbourne University's Asia Law Centre.The arrest of four executives of the mining giant Rio Tinto in Shanghai, among them Australian Stern Hu, provoked immediate reaction.Australia's Foreign Minister, Stephen Smith, says officials were advised Mr Hu was being detained on suspicion of espionage and stealing state secrets."That was a surprise to our officials and the Australian Government, as it came as a surprise to Rio Tinto, the employer," he said.The Chinese foreign ministry says it can prove the allegations against the men."The relevant Chinese authorities have sufficient evidence to prove that they have stolen state secrets, which have greatly damaged China's economic security," foreign ministry spokesman Qin Gang said. "It is inappropriate to make this individual judicial case bigger, or even politicise it, because this will be no good for Australia."The arrests came at a time when China's steel mills, and miners like Rio Tinto, were in intense negotiations over the contract price of iron ore. The Chinese wanted a 40 per cent cut on the price, but a 33 per cent cut is now believed to have been agreed on. "In terms of meeting the market, they're not going to get the supply from anywhere else," Peter Arden from Ord Minnett said. "So I think they've got to be commercial about it, and I think they cannot expect Australia to agree to a bigger price cut in the way it's being demanded."Andrew Godwin says in China, the bigger the business, the more likely it is to be state owned. A veteran of ten years of law practice in China, he says there are always concerns about how much the state will intervene in the deal."Given the role of the state-owned sector in the Chinese economy, the extent to which state-owned enterprises are directly accountable to government, there are obvious concerns about the role of government, the extent to which commercial decision are being directed by government, and that is really behind the concerns that people have in this context," he said.When Rio allied itself with its arch-rival, BHP Billiton, last year, to thwart a bid by the Chinese Government-owned Chinalco, to take a $US19 billion stake in Rio, it was seen as a betrayal in a country where saving face is everything. There was talk about payback, but Andrew Godwin thinks that's unlikely, because the damage it would do to confidence in China would be too great."That, to me, would constitute a greater threat to confidence in China generally, and for that reason, I'd be surprised if they were motivated by those concerns," he said.At times, foreign business people have fallen foul of the law in China over disputed deals, usually in more remote regions. But Andrew Godwin says what should concern the international community is the fact these arrests were made in Shanghai."Shanghai really is the preeminent business and industrial centre in China, and it is a place in which foreign investors, I think, could expect to receive a fair hearing, and also, a place in which one would hope the principles of rule of law are observed," he said.China's economy has been the envy of many - continuing to grow during the global financial crisis, albeit at a slower pace than before. Foreign investment and expertise has played its own role in the success of the so-called tiger economies in the Asian region. Now it remains to be seen if the arrest of the Rio Tinto executives means the Chinese tiger is on a short leash.