July 10, 2009 / 12:41 PM / 11 years ago

Q+A - How will Rio case impact foreign business in China?

SYDNEY (Reuters) - China has shaken global commodities and currency markets and sent a tremor through its relations with Australia by detaining a senior Australian mining executive and three of his subordinates on spying allegations.

The detentions of the four employees of global miner Rio Tinto, including its top iron ore salesman in China, has raised some major questions about the implications of this affair for doing business in China and the iron ore trade.

DOES THE CASE REALLY THREATEN AUSTRALIA-CHINA RELATIONS?

It could. Relations were already strained before this week’s detentions, largely thanks to last month’s spectacular failure of a proposed $19.5 billion (12 billion pound) Chinese investment in Rio Tinto, which would have been Beijing’s largest offshore deal.

Australia’s foreign minister said on Friday that Canberra was still pursuing a free-trade deal with China, its biggest partner with about US$53 billion in two-way trade, but he conceded that the affair had further heightened bilateral tensions.

China buys about 15 percent of Australian exports and supplies about 16 percent of Australian imports, so Canberra’s diplomatic options in the face of such economic muscle appear limited. It is no wonder that Australia’s Mandarin-speaking prime minister, Kevin Rudd, is calling for cool heads to prevail.

Canberra wants the best price for its resource exports but it also has its eye on the bigger prize of a free-trade deal. In 2005, it estimated that such a deal would add as much as US$18 billion to gross domestic product over 10 years to 2015 — though the same calculation gave China a bigger gain of US$64 billion.

HOW DOES IT AFFECT THE IRON ORE TRADE?

Iron ore traders suspect that the case is linked to the Chinese steel industry’s pressure-cooker negotiations with Australian suppliers Rio Tinto and BHP Billiton. Australia sold US$14 billion in iron ore to China last year.

Chinese steel mills have little choice but to buy Australia’s ore, which is cheaper to ship to Chinese ports and is higher quality than China’s own ores, but Australian producers could come under pressure at home to compromise on contract pricing to ease wider bilateral tensions.

Reports surfaced early this week that China had done a face-losing deal with Rio Tinto to buy iron ore at the same 33 percent discount agreed with mills elsewhere in Asia.

Traders have questioned whether that and the timing of arrests was coincidental — a way for CISA to explain why it failed to win the 40 percent cut it had argued for.

Iron ore traders said the arrests would certainly slow signing of contracts. One Singapore-based merchant said he was putting off plans to visit China to talk about ore sales.

WHAT ARE THE OTHER CONSEQUENCES?

The perception that the detentions may be part of wider trade or diplomatic agenda has already hurt the Australian dollar, on investor fears of a wider deterioration in Australia-China trade.

The detentions have also rekindled awareness about the risk of doing business in China, which lacks an independent judiciary.

Chinese employees of foreign firms are particularly vulnerable, but Chinese-born citizens of other countries have also historically been targeted by state secret investigations.

With annual talks to settle prices and premiums for other commodities due to start in the next two to three months, other companies may also worry about sending delegations to China.

And the case could put a chill on the many industry information suppliers and researchers within China, who now fear that previously widely available data has now become toxic.

($1=1.279 Australian Dollar)

Reporting by Mark Bendeich and Bruce Hextall in Sydney; Editing by Lucy Hornby and Jeremy Laurence

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