By: Our Correspondent

China's behavior towards Anglo-Australian mining giant Rio Tinto has
become so bizarre that it is likely to damage the nation's reputation
for fair commercial dealing. The latest allegations thrown at Rio are
so extreme that they have undermined any credibility of the original
allegations and given and the impression of wild-eyed xenophobia.

As
it is, arms of the central government look as though they are up to the
sort of tricks sometimes used at lower administrative levels to use
trumped up criminal charges as commercial leverage.

The
new claims are that commercial spying by Rio cost China some 700
billion yuan over six years (roughly $100 billion averaging the
exchange rate over the period)

Even a glimpse at the
trade figures would have shown it to be absurd. China's total iron
imports over the period were about $160 billion, of which Rio probably
supplied no more than 15 percent. Rio's total iron ore sales over the
period were $40 billion, of which much went to Japan and Korea as well
as China.

China's domestic producers of iron ore
mostly sell in the spot market rather than follow the contract prices.
For most of the time in recent years spot prices have actually been
above the fixed contract ones — which makes it even more difficult to
claim that Rio was ripping off China through inside information.

Nor
was Rio the key figure in iron ore contract negotiations which were
mostly done by BHP and Vale of Brazil on the one side and Japanese and
Korean companies on the other. China imports only about half its iron
ore needs while Japan, Korea and Europe import almost all of theirs.

Although
this allegation came from an article by an official of the Bureau to
Protect State Secrets who was not involved in the Rio investigations,
it was widely publicised by mainland media including Xinhua, the
official news agency. The article has now been removed from the
bureau's website but continues to be widely quoted in China.

The
allegations follow the arrest last month of Rio employees in China,
including the China-born but now Australian head of its operations
there, …They have been accused in general terms of acquisition of
state secrets through theft and bribery of employees of Chinese steel
companies.

However, though several weeks have passed
since the arrests, no details have emerged either of the supposedly
secret information or who bribed whom. Chinese media have alleged that
the head of Rio in China, the China-born but Australian
passport-holding Stern Hu owned expensive properties in China but that
is scarcely relevant if he is the one supposed to have been doing the
bribing of the locals. Being rich in China is anyway only a crime when
you fall out with powerful and quite probably corrupt Communist party
officials.

The real cause of the grief for Rio and its
employees has little to do with iron ore prices and contract
negotiations and a lot to do with loss of face by China in failing to
acquire a major stakes in Rio's operating companies earlier this year.
Rio was deeply in debt and desperate for cash at a time when ore
markets as well as stocks were depressed. Along came China's state
owned (if barely profitable) aluminum giant Chinalco with an offer,
accepted by the Rio board, to provide billions in equity and
convertible loans in return for stakes in its operating companies as
well as an enlarged stake in its holding company and board seats.

But
once ore and stock prices bounced back and taking account of opposition
to the deal from UK institutional shareholders and Australian resource
nationalists, the board changed its mind. It opted for a huge rights
issue to existing shareholders and a joint venture deal with BHP on
iron ore.

Chinalco, which is very close to the central
government, felt aggrieved and angry. Ironically it was the recovery in
Chinese ore demand which had made it easier for Rio to find a financing
option more acceptable both to existing shareholders and Australians
worried about a leading buyer of its ore having management influence on
a leading supplier.

Chinese frustration has been
further exacerbated by the appearance of Uighur leader Rebiya Kadeer on
platforms in Australia, with China withdrawing films from the Melbourne
International Film Festival and demanding the National Press Club in
Canberra withdraw a speaking invitation.

These
actions have added to the impression in Australia and elsewhere of
China as a bully. The Australian government in general and prime
minister Kevin Rudd in particular have already been criticised at home
for trying too hard to ingratiate with China. Now Australians will be
going out of their way to emphasize that the dependence on China as a
major buyer of its resources does not carry through to political
subservience.