China drops spying charges against Rio Tinto employees

But executive faces prison for alleged bribery and violating commercial secrets

Chinese authorities formally arrested four Rio Tinto employees on suspicion of bribery and "illegally obtaining commercial secrets" yesterday, despite an increasing rift in Sino-Australian relations and the company reasserting its belief that the four have done nothing wrong.

However, in what could be an effort to diffuse the situation, there was no mention of the more serious accusation of stealing state secrets when the formal arrests were reported by Xinhua, the Chinese state news agency. The spectre of a spying charge has been raised in recent days.

The arrests, which come a month after the four were initially detained, nonetheless is a continued headache for the mining group, which has a significant stake in China, as well as Chinese shareholders.

Sam Walsh, the company's iron-ore chief executive said: "Rio Tinto will strongly support its employees in defending these allegations. From all the information available to us, we continue to believe that our employees have acted properly and ethically in their business dealings in China.

"The issue of the arrest warrant is of great concern. We respect the Chinese legal system and we hope to see a transparent process for our employees, including access to legal representation," he added.

The four men, including Australian Stern Hu, have been arrested under article 163 of the Chinese legal code. The crimes carry a maximum jail sentence of seven years in the most serious cases.

The accusations of suspected business crimes "indicate that the case has moved from the 'state secrets' area," Stephen Smith, the Australian foreign minister said yesterday. "The range of possible penalties under these articles is less severe than for state secrets," he said.

Mr Hu, as well as Liu Caikui, Ge Minqiang and Wang Yong, who are part of the group's marketing team based in Shanghai, were arrested on 5 July. They were accused of obtaining the Chinese steel industry's negotiating stance in iron-ore price talks, reports have said. Iron ore is used in the production of steel.

Rio Tinto yesterday stressed that the arrests would not hamper its iron-ore sales to China, which formed part of the $53bn of Australia-China trade in 2008. However, a source close to the company did confirm that a number of China-based employees had been relocated to Singapore.

China is deadlocked in negotiations with foreign iron-ore suppliers, including Rio Tinto, and is seeking a better price than agreed by other Asian steel mills. Australian exports accounted for 41 per cent of all China's imports in 2008.

The company is already embroiled in tense negotiations with the China Iron and Steel Association (Cisa) over the price of this year's iron-ore supplies. Chinese press reports have accused Rio Tinto of withholding iron ore from the spot market, as a way of pushing prices up and putting pressure on China's negotiators.

The row over iron-ore supplies started in May when Rio Tinto agreed to slash its prices by a third for Japan's steel mills, while its Chinese customers were fighting for a much larger discount. At that point, the annual price talks between the world's steelmakers and the three big iron-ore producers – Vale, BHP Billiton and Rio – had already dragged on beyond the April deadline.

Although the first deal usually sets prices across the board, Chinese groups, represented by Cisa, have still not backed down, despite the expiry of a number of contracts. Chinese customers have demanded price cuts of up to 50 per cent in the face of global recession and falling demand. Rio is also unpopular in China for its last-minute withdrawal from a $19.5bn tie-up with Chinalco. The deal floundered over shareholder anger.