David Prosser: China cannot afford to be vengeful

Outlook China must be careful as the fall-out from the collapse of the deal between Rio Tinto and Chinalco continues to rain down, not least on those still trying to negotiate on a market price for iron ore.

We do not yet have the facts about the continued detention in China of several Rio employees. China said yesterday it had evidence that they had stolen state secrets; Rio denies this. China, like any country, is within its rights to investigate cases of suspected industrial espionage. However, there is suspicion in Australia, where one of the suspects is from, that the arrests are an act of revenge from a country furious that the mining giant agreed a funding deal with its state-owned aluminium producer, only to walk away in favour of an alliance with another Australian company, BHP Billiton.

Australian politicians have not explicitly accused China of having ulterior motives for the arrests, but there is no shortage of analysts in the region making those claims. Reuters quoted one such expert yesterday as saying: "There are numerous precedents for such tactics."

There was a certain amount of nonsense talked when the Rio deal with Chinalco collapsed, mostly about how being gazumped by BHP would teach China a thing or two about how capitalism works. That was naïve: the blocks subsequently put up by Chinese competition authorities to the BHP tie-up showed that China has a pretty good grasp of how to play the game too.

It also seems to be playing hardball in those all-important iron ore negotiations, with Chinese officials denying that a deal has been struck under which China would pay the same price for iron ore as the Japanese – it wants bigger reductions than those.

All perfectly fair, but locking up your trading partners when they don't play ball – if this turns out to be what has happened in the Rio cases – is pushing it a bit as a negotiating tactic. If China wants to take its rightful place at the top table of international economics and trade, it can't be seen to be playing those sort of games.

Western companies don't have much choice about dealing with China, now on the verge of becoming the world's second largest economy. But they will think very hard about how those dealings are conducted if fear of this sort of behaviour becomes a factor when doing business in the country.

When Western companies became nervous about the behaviour of the Russian state towards them, many scaled back their activities in the country.

China is not so powerful that it can do what it wants when international businesses come calling. With a faltering economy and civil unrest issues – some of which are exacerbated by economic factors – it needs the West as much as the West needs it.