Q&A: China holds Rio Tinto executives in secrets case

BEIJING (Reuters) - Four Shanghai-based employees of global mining firm Rio Tinto were detained last week on accusations of stealing state secrets.

The case highlights the risks for foreigners doing business in China, a country run by a single party with no independent judiciary.

WHAT HAPPENED?

Stern Hu, Rio's head of iron ore marketing in China, and three other members of the iron ore team were detained in early July for "stealing state secrets." Sources said Hu, an Australian of Chinese descent, was accused of obtaining and passing on the Chinese industry's negotiating position.

An iron ore executive from China's eighth-largest mill, Shougang, was also taken into custody, Chinese media reported. Executives from other big Chinese mills have also been questioned.

The arrests came as local media reported Chinese steel mills had given in on annual iron ore prices, agreeing to the same 33 percent cut other Asian steelmakers set earlier.

That capitulation would be a loss of face for the state-backed Chinese Iron and Steel Association, which had vowed to the central government it could achieve a deeper discount. Chinese and Rio Tinto officials have denied any agreement was reached.

WHAT ROLE DOES RIO'S CHINA TEAM PLAY?

Rio Tinto's annual iron ore price negotiations with all Asian steelmakers, including those in China, are headed up by a team based in Singapore.

Traditionally, all steel mills accept whatever deal is first settled between any mill and any of the big three miners, Rio, BHP Billiton and Brazil's Vale. This year, the Japanese and Korean mills have already settled.

The China team is responsible for carrying out the operational details of term contracts. They might also negotiate new term contacts and the desired volume with term clients.

The miners rely on their China-based team for predictions of China's future iron ore demand and steel capacity, as well as for information about the current market.

WHAT IS A STATE SECRET?

Chinese law is vague on what constitutes a secret, and the charge has been variously applied to academics, executives, journalists and dissidents.

Economic data, particularly involving gold holdings, currency movements, and key economic indicators, have at different times been deemed state secrets as have more traditional matters involving the military or movements by China's top leaders.

Under Chinese law, detainees may be held for some time without being charged, and interrogated without access to legal counsel. Once charged and formally arrested, the judicial process can begin.

WHAT ARE THE RISKS FOR CHINA IN PRESSING THIS CASE?

Executives and analysts in the steel industry, which relies on open market information for trading and pricing, now fear the investigation could spread.

Many view it as an attempt by the China Iron and Steel Association, which has lost the trust of many of its members by the way it handled the negotiations, to reassert control. If it turns into a purge, the Chinese industry could lose or hobble many of its most market-savvy executives.

China could also alienate foreign investors.

The developments also highlight the risks to foreign companies, who increasingly rely on mainland-born Chinese with foreign citizenship to run their China operations. "Returned Chinese" struggle with expectations over their dual loyalties, and are far more vulnerable than foreigners to Chinese charges of spying.

WHAT'S AT STAKE FOR AUSTRALIA?

Australian officials may have to weigh the interests of their important mining industry with their hopes of achieving a broader Free Trade Agreement with China, their second-biggest export market.

While China needs Australia's high quality, reliable iron ore supply, the Australians also need China's steel mills, restraining their ability to maneuver. "Who else can they sell to?" asked one Chinese steel analyst.

(Editing by Dean Yates)