The row over four Rio Tinto Ltd 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 Billiton Ltd 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 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.

Rudd wowed China's President Hu Jintao, and won a standing ovation, when he broke into fluent Mandarin during a 2007 regional leaders' conference in Sydney.

But Rudd now finds himself under fire at home for not using his diplomatic cachet to intervene on behalf of Stern Hu, now held for a fortnight in Shanghai.

Appearing to do too little plays badly at home, political editor Michelle Grattan wrote in the Age newspaper.

The longer Hu is held without being charged or having full details of the espionage and bribery allegations spelt out, the greater the pressure on Rudd.

Clouding the issue also for Hu is his nationality, security analyst Clive Williams told Reuters this week.

China saw Hu as its own citizen, he said, while his name would not likely resonate with Australia's nationalistic media beyond a few weeks, unlike an Australian beautician convicted in Indonesia on drug charges in 2005 and who remains a cause celebre at home.

The most likely outcome will be that Australia and China agree to quarantine their differences over Hu's case to protect the wider trade relationship.

Australia and its top export market Japan have already agreed to set aside differences over Japan's Southern Ocean scientific whaling program to ensure the issue does impact on growing security and business ties.

But Rudd's image among voters as a China expert and safe pair of hands steering vital exports threatened by recession in most of its biggest markets may not escape unscathed.

The row could erode Rudd's high standing in opinion surveys, which have already begun to show a narrowing between his Labor government and conservative opponents, although Rudd himself remains well ahead as the leader preferred by voters.

He's been caught between advice and probably his own assessment that a cautious approach would be most effective, and the demands of public opinion, fanned by a hectoring opposition, said Grattan.

(Editing by Michael Perry and Nick Macfie)