Rudd scrambles to limit Australia-China rift

Production and Markets

Australian Prime Minister Kevin Rudd’s government is battling to mend a diplomatic rift with China after the communist country detained a Rio Tinto executive for allegedly stealing state secrets.

Trade Minister Simon Crean, in China to discuss auto exports, will meet with officials about the detainee, Rio Tinto’s head of iron ore operations Stern Hu, the Department of Foreign Affairs and Trade said in a statement. Foreign Minister Stephen Smith "called in" China’s acting ambassador in Australia and officials plan to meet with Mr Hu for the first time since his July 5 arrest, Mr Rudd said in a radio interview.

"It is time for working calmly and methodically through this complex consular case," Mr Rudd, a former diplomat in China, told Australian Broadcasting Corp radio. "I am confident we can get through this."

Mr Rudd, who interrupted his meeting in Italy with world leaders to address the detention, has been forced to balance Australia’s dependence on the world’s fastest-growing economy with a second public backlash against China this year. Rio Tinto’s decision last month to scrap a US$19.5 billion investment by Aluminum Corp of China allowed Rudd to dodge a political bullet after opposition lawmakers objected to a communist government’s potential hold on natural resources.

China is Australia’s second-biggest trading partner and bought A$18 billion (US$14 billion) of iron ore from the country in 2008. Mr Hu’s detention has sparked headlines in Australia on the "China crisis" or "spy row" case.

Mr Hu was detained in Shanghai together with three other Rio Tinto employees, the company said this week. Chinese authorities "established the evidence before they took action against anyone," the foreign ministry’s spokesman, Qin Gang, said yesterday at a regular press briefing in Beijing.

Mr Hu "is suspected of stealing Chinese state secrets for foreign countries and was detained on criminal charges," Mr Qin said.

Mr Smith said he was disappointed that he learned details about the allegations against Mr Hu from media reports before being contacted by China’s government.

"I would have of course preferred to have received this information directly from Chinese officials," he said. It’s "in Australia’s national interest to have a positive and productive economic relationship with China," Mr Smith said.

Rio Tinto, the world’s second-biggest iron-ore exporter, is deadlocked in price talks with Chinese steelmakers. The detention of its staff may be part of a broader investigation into alleged kickbacks among traders and mills, the Australian Financial Review said yesterday.

"Kevin Rudd will be pretty calm about the whole situation, he’ll be hostile but calm," said Kim Beazley, a former deputy prime minister and Australian Labor Party leader. "He’s an old China hand, he cut his teeth in the 1980s in China when something like this wouldn’t surprise you."

Mr Hu may be charged with offences under Chinese criminal law, according to a Department of Foreign Affairs e-mailed statement.

The government was "surprised by the detention and the reason for the detention by Chinese authorities," the statement said.

"Chinese authorities take a much broader view of what state secrets or national security might be than say Australia or other nations might," Mr Smith told reporters in Perth today.
"Frankly it’s difficult for a nation like Australia to see a relationship between espionage or national security and what appear to be suggestions about commercial or economic negotiations."

Chinese mills and iron-ore producers are continuing the longest-running negotiations in the 40-year history of setting annual prices for the steelmaking material. China, the largest buyer, rejected Rio Tinto’s push for a 33% price cut, which was agreed to by companies in South Korea and Japan, and is seeking a steeper discount to counter losses as demand drops.

"We will proceed cautiously "We’ll make representations at all levels that are necessary."

Mr Hu’s detention and Australia’s handling of it will affect the business relationship between the two nations, analysts said.

"If this poisons any relationship it is likely to be on the level of individual companies involved but not for Australia as a whole," said Sydney-based Bruce McLaughlin, chief executive officer of advisory company Sinogie Consulting.

Australian Nationals Senator Barnaby Joyce used Mr Hu’s detention to raise questions about the risks of doing business with China. The detentions may be linked to the failure by Chinalc to gain the stake in Rio it had sought, Mr Joyce, who opposed the original investment, said.

"This should be a clear example to Australia, and other countries around the world, of the extent of the relationship between a 100% owned entity in the People’s Republic of China and the actions of the Chinese Government," Mr Joyce said in a statement yesterday. "This should be a sobering wake up call for all Australians."

(Bloomberg, July 10)