China-Australia spy case fans trade fears

SYDNEY (Reuters) - China's detention of an Australian mining executive on spying allegations rattled currency markets on Thursday, with investors concerned the affair could hurt trade ties between Australia and its biggest trade partner.

Australia's Foreign Minister Stephen Smith said his officials were yet to talk to Stern Hu, global miner Rio Tinto Ltd's (RIO.AX)(RIO.L) top iron ore salesman in China, after his weekend detention by security forces, and were keen to ensure Hu had not been mistreated.

"One of the reasons why we want access to him, is to satisfy ourselves as to his welfare, to satisfy ourselves as to his well-being and to get some indication from him as to how we can be of assistance," Smith told Australian state television.

Chinese authorities detained Hu, Rio Tinto's top iron ore salesman in China, on Sunday on suspicion of stealing state secrets.

Three Chinese members of Hu's Shanghai-based team were also detained and were named in Australian newspapers on Thursday as Rio Tinto sales employees Wang Yong, Ke Ge and Jeff Liu.

Smith described the spying accusations as "very surprising" and said the government was seeking urgent access to Hu, an Australian, and wanted to know more ahead of a Saturday deadline for consular access to Hu by Australian diplomats in China.

Fears the issue could damage trade ties saw the Australian dollar slump against the yen in offshore trade in its biggest one-day drop in 2- months, hit partly by worries the detention could damage relations.

Those fears were compounded by a Reuters report on Wednesday that a Chinese buyer had suddenly canceled a coal shipment while it was sailing for China, though coal traders pointed to high Chinese coal stockpiles and slow demand as the reason.

"The market was already jittery over the whole Rio thing, the arrests and everything, and the coal headline just caught the Aussie at exactly the wrong time," said Sean Callow, a currency strategist at Westpac. "There was a rush of knee-jerk selling, which tripped stop-loss sales, and down she went."

"Really the underlying story didn't justify such a move, but it shows how tense the market is."

China is Australia's second-largest export customer behind Japan, buying A$36 billion ($28 billion) of mostly commodities in the 11 months ended May 2009. In 2008, more than half of China's imports from Australia were of iron ore.

Details about the detentions emerged just as a Shanghai paper reported Chinese steel mills had given in on annual iron ore prices, agreeing the same 33 percent cut that other Asian steelmakers set earlier.

But the Chinese agreement was for six months instead of a year, the China Business News said on Wednesday.

It was unclear if there was any tie between the two events, but the detention follows a period of tense relations between the two trading partners, with iron ore negotiations running past the June 30 deadline and Rio Tinto ditching a planned $19.5 billion investment by state-owned Chinese metals firm Chinalco last month.

Smith said he saw "no basis" for speculation of business feud payback behind the detentions, but an influential Australian conservative opposition lawmaker who opposed the Chinalco bid with a television campaign said he had no doubt of a link.

"Chinalco's failure to buy 18 percent ownership of Rio would appear to have inspired Mr Hu's arrest and that of three other Rio workers," National Party upper house Senate Leader Barnaby Joyce said.

Rio said the Shanghai office where the detained staff worked was mainly a sales and marketing operation for the company, the world's second-biggest iron ore producer, which is listed in London and Australia.

(Reporting by Rob Taylor, Wayne Cole and Mark Bendeich; writing by Mark Bendeich and Rob Taylor; Editing by Jerry Norton)