LNG deal shows strength of Australia-China trade ties

BEIJING/CANBERRA (Reuters) - Political ties between Australia and China may be at a low, but news of a huge gas deal on Tuesday underlined that it would take a lot more than diplomatic tiffs to derail their increasingly inter-dependent trade relationship.

The Australian government said U.S. major ExxonMobil Corp (XOM.N) had inked a deal to sell liquefied natural gas from its share of an LNG project in Australia to PetroChina (0857.HK) in a deal worth about A$50 billion ($41.29 billion).

Analysts said while political relations had soured in the wake of the arrest of an Australian mining executive in China, commercial deals in the resources sector should be largely unaffected because both countries needed each other too much.

Canberra called the 20-year LNG agreement a reflection of the strength of Australia's investment relationship with its biggest trade partner.

The agreement is Australia's largest ever trade deal with China, the fastest-growing major economy in the world. Two-way trade last year was worth $53 billion.

"It's a statement about the nature of our two economies and the fact that Australia is important to China, just like China is important to Australia," Australia's Minister for Resources and Energy Martin Ferguson said of the contract.

"Australia is a resource- and energy-rich nation, and we have a capacity, if we develop our resources, to meet the economic needs of China," Ferguson told Reuters in Beijing.

In a sign that all is still not well on the diplomatic front, Australia earlier said Beijing had scrapped a visit by Vice-Minister for Foreign Affairs He Yafei because Canberra gave a visa to exiled Uighur leader Rebiya Kadeer.

China blames Kadeer for instigating last month's ethnic riots in Xinjiang province.

"Australia very much regrets that China has decided to effect that response," Australian Foreign Minister Stephen Smith said. "From time to time in any bilateral relationship there will be difficulties."

Political ties have come under strain since Chinese authorities in early July detained four staff of Anglo-Australian mining giant Rio Tinto (RIO.AX), including Australian Stern Hu.

They were formally arrested last week on suspicion of obtaining commercial secrets and bribery.

"Clearly Australia-China relations have gone downhill in a major way," Alison Broinowski, a former Australian ambassador and Australia-Asia expert at Wollongong University, said before news of the LNG deal was announced.

Australia's Mandarin-speaking Prime Minister Kevin Rudd had warned that the world was closely watching how China dealt with the Rio Tinto case.

The detentions coincided with wrangling between Australian miners and Chinese steel mills over iron ore prices and came after a failed $19 billion bid by China's state-owned aluminum group Chinalco for a strategic stake in Rio.

Beijing's unhappiness with Australia dates back to the release in May of a new defense strategy paper in which Canberra pointed to a stronger China as one of the main risks to continued stability in Asia, diplomatic analysts said.

"All of our defense and security and a great deal of our espionage is directed at China," said Broinowski.

OTHER DEALS IN PIPELINE

Nevertheless, business deals continue apace, with resource-rich Australia getting increased attention from China given Beijing's determination to secure mineral and energy imports for the world's third-largest economy.

Upstart Australian miner Fortescue Metals Group (FMG.AX) this week agreed a slightly cheaper iron ore price with Chinese steel mills than that sought by major miners in exchange for up to $6 billion in funding.

Meanwhile, China's state-owned Yanzhou Coal Mining Co (1171.HK) is seeking to buy Australian coal miner Felix Resources Ltd FLX.AX in a $2.9 billion deal requiring foreign investment approval from Australia's government.

Shen Shishun, a former Chinese diplomat and now senior research fellow at the China Institute of International Studies, said he did not expect the friction to do lasting damage. The two countries were too important to each other economically, he said.

"Chinese people feel very strongly about the July 5 incident in Xinjiang, and so there is public anger about her going to Australia. That must affect relations," Shen told Reuters.

"I think overall China-Australia relations will remain healthy."

Ron Huisken, a China and security expert at the Australian National University, said business interests would keep political differences at bay in the medium term, but tensions would remain as Rudd was apparently determined not to be steamrolled by China.

"It's these seminal cases where you set some ground rules, and if Australia does not protest, it will be done like a dinner. Precedent with China is everything," Huisken said.

(Additional reporting by Fayen Wong in Perth, Chris Buckley in Beijing and Michael Perry in Sydney; Writing by Dean Yates and Rob Taylor; Editing by Alex Richardson)