Australia mustn't "lose face" in Rio row with China

By Rob Taylor - Analysis

CANBERRA (Reuters) - The row over four Rio Tinto (RIO.AX)(RIO.L) staff detained in China accused of spying has exposed Australia to Chinese wrath just when a Mandarin-speaking leader in Canberra had appeared to have wooed the country over.

Australia has had few real differences with Beijing and at times has had ambitions to be a bridge between China and the West.

But tit-for-tat diplomatic warnings between Canberra and Beijing over the Rio detentions have cast a shadow. How Rudd acts will determine whether the Sinophile boosts his foreign policy credentials or sees his influence shrink in Beijing.

Rudd warned China that the world was watching its handling of the case, with Beijing in turn warning Australia against "deliberately whipping up this case or trying to interfere in China's judicial independence."

Kim Beazley, a former leader of Rudd's Labor Party, says the prime minister made a rare error in adopting an early strident tone with Beijing, against his own judgment that it would be better to keep the matter behind diplomatic doors.

"He absolutely must not get himself in the position where he is publicly raising this with the very senior Chinese leadership," Beazley told local television.

"The loss of face to Australia would be massive in circumstances where you go to the emperor as a supplicant and the emperor spurns you," he said. "That is a really daft thing to do."

The timing of the row, a year from new Australian elections amid a worsening economic outlook, could not be worse. China is Australia's biggest trade partner, worth $53 billion last year, and iron ore exports injected $14 billion of that, powered by Rio Tinto, Australia's BHP (BHP.AX) and others.

What seems certain is that detained Australian Stern Hu will be the biggest loser. Australia, China and global miner Rio all need each other too much.

China's importance to Australia's export bottom line, and Rudd's diminishing export tax intake, means the dispute will likely not be allowed to interfere with business, even if Hu and his colleagues remain in jail.

"At the end of the day, business goes on. China needs Australian ore and Rio and BHP need to sell their ore to the Chinese market," said Scotia Capital China strategist Na Liu.

Rio says allegations its employees were involved in bribing Chinese steel mills were without foundation and despite the detentions it plans to remain in China and continues to maintain "high levels of iron ore shipments from Australia."

AUSTRALIA-CHINA LOVEFEST

Australia and China have had a close relationship for decades. China was happy to buy minerals dug up in Australia's backyard and Australia was happy for the revenue. China's insatiable appetite for Australian resources helped Canberra stave off recession in 2009.

Australian prime ministers from Bob Hawke in the 1990s to Rudd have all successfully wooed Beijing, but none more spectacularly then Rudd.