The arrest ten days ago of four members of Rio’s Chinese iron ore marketing team because of alleged industrial espionage puts the recent China-driven commodities boom in a whole new light.

When stock and commodities markets were steadily rising, most of us were more than happy to ride on the dragon’s back.

China’s “insatiable appetite for commodities” was the stock phrase trotted out by more than one journalist (including MD).

China needed the raw materials for its economic miracle and quarry Australia was more than happy to pocket the cash.

It was a happy marriage of convenience.

There have also been several friendly corporate marriages on Australian soil – Gindalbie-Ansteel, Grange Resources-Shagang and OZ Minerals-Minmetals spring to mind.

But the Rio arrests, particularly that of Australian citizen Stern Hu, have soured the Australia-China honeymoon.

Imprisoned in Shanghai, Hu is yet to be charged but stands accused of bribery and espionage in the fraught iron ore price negotiations.

The crackdown by China’s security forces reminds us that business and government are two sides of the same Chinese coin – something most of us forgot about, or glossed over, during the bull market.

Whatever the ramifications of the Hu case – and they may take months or even years to play out – China’s reputation for risk has deteriorated.

The story has “gone global and put all company executives on guard when dealing with the Chinese”, notes Patersons Securities.

“Either way it can’t be good for Rio to have got the Chinese government offside, or for BHP who gazumped them,” the broker said.

“The line between what is ‘fair game’ commercially sensitive information and ‘espionage’ is clearly not defined and that definition puts a lot of company executives in danger.”

In last October’s 2008 World Risk Survey, published by RESOURCESTOCKS, China came in 37th out of 74 countries and Australian states surveyed.

Finland was voted as the least risky, just ahead of South Australia and Canada.

Middle-of-the-pack China came in slightly above Thailand, Vietnam and South Africa, but below Mozambique and Malaysia.

MD would be surprised if China’s rating does not slide appreciably towards cellar dwellers Zimbabwe and Somalia in the next survey, due out in a few months.

The increase in mistrust stemming from the Rio arrests saddens some miners who have dealt extensively with China in the past half-decade.

“I’m personally not happy about it as it doesn’t reflect well on either side,” said George Jones, an avowed China enthusiast who recently stepped down as chairman of iron ore hopeful Gindalbie Metals.

“It is very unfortunate, as it puts everything back a bit.”

In terms of China-Australia dealings, it will “make business tougher both ways”, Jones said.

It has also made it tougher for Australia’s government to keep up any pretence of having a “special” relationship with China.

During his press conference on Friday, Australia’s Foreign Minister, Stephen Smith, first informed journalists of the link between Hu’s detention and the protracted iron ore price dispute.

But, five days after Hu’s arrest, Smith was reduced to reading a statement from an official Chinese website in making that conclusion.

The website said that “during China's iron ore negotiations with foreign miners, in 2009, Stern Hu gathered and stole state secrets from China via illegal means, including bribing internal staff of Chinese steel companies”.

Rio's office in Shanghai was searched by officials from China's Ministry of State Security last Sunday, July 5, after search warrants were issued.

It hasn’t been spelt out how the Chinese security forces learned of the alleged offences.

MD has never travelled to mainland China, but has heard from several sources that electronic surveillance is a fact of life for foreigners there.

According to one informed source, many Australian business executives were taking precautions even before the current scandal erupted.

They limit time on the ground in Beijing or Shanghai and adopt the usual tradecraft precautions: assume everything is recorded, so no phone calls or meetings inside the hotel.

Serious negotiations are left until the next leg of the journey, usually a neutral venue such as Singapore.

There is talk that BHP and Rio will have to shift their iron ore price talks to similar “neutral” turf, possibly Hong Kong, which has a separate legal system to the mainland.

After all, while in China, no miner can be absolutely sure what constitutes state secrets.

Smith said as much during his press conference.

"Frankly it is difficult for a nation like Australia to see a relationship between espionage, or national security, and what appeared to be suggestions about commercial or economic negotiations," he said.

It is difficult, but MD suspects that the many Australian mining companies with Chinese links have just had their eyes opened.

*Metal Detective is a weekly column on ILN’s sister publication MiningNews.net.