Australia said on Wednesday that charges against four staff from Anglo-Australian miner Rio Tinto appeared to have been downgraded after China formally arrested the men but left aside accusations they stole state secrets.

By arresting Australian Stern Hu and three Chinese staff of Rio only on suspicion of illegally obtaining commercial secrets and of bribery, China may have opened the way to easing some tension with Australia during fraught negotiations with Rio and other multinationals over iron ore prices.

The accusations of suspected business crimes indicate that the case has moved from the 'state secrets' area, Australian Foreign Minister Stephen Smith said in an emailed statement.

He added that the range of possible penalties under these articles is less severe than for state secrets.

In reporting the formal arrests, China's official Xinhua news agency did not raise accusations of stealing state secrets, a sweeping charge raised in earlier reports.

The commercial secrets charge can bring jail terms of up to 3 years, or 7 years in especially serious cases.

Now that he has been formally arrested we encourage China to provide Mr Hu all the protections available under Chinese law including access to legal representation, said Smith.

Rio Tinto's chief executive for iron ore, Sam Walsh, said the company also rejected the accusations of business misdeeds.

Rio Tinto will strongly support its employees in defending these allegations, Walsh said in a written statement.

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.

Walsh also urged China to let the accused men see lawyers.

Experts said China's sidelining, for now at least, of the graver espionage claims may signal an effort to reduce political friction with Australia over the matter.

That lowers the temperature, said Jerome Cohen, an expert on Chinese law at New York University. That puts this as a white collar crime, a commercial crime, and not espionage involving state secrets.

BIG STAKES, BAD PR

Hu and the three other members of Rio Tinto's Shanghai-based iron ore marketing team -- Liu Caikui, Ge Minqiang and Wang Yong -- were detained on July 5. Hu, a Chinese-born Australian citizen and head of the team, was accused of obtaining the Chinese steel industry's negotiating stance in iron ore price talks, sources have said. Iron ore is used to make steel.

The Rio case has cast a shadow over Australia-China trade, worth $53 billion in two-way terms in 2008. China is also deadlocked in negotiations with foreign iron ore suppliers, including Rio , and is seeking a better price than agreed by other Asian steel mills.

Australia exported $15 billion worth of iron ore to China in 2008, accounting for 41 percent of China's iron ore imports in that period.

I think they wanted to get the bad PR behind them as much as they could, but at the same time get a message out to corporations operating in China, said Scott Harrison of Pacific Strategies and Assessments, an Asia-focused risk consultancy, referring to the arrests without state secrets accusations.

Many observers see little chance the four men will avoid a trial. Fu Ziying, China's vice minister of commerce, hinted as much when he told a news conference in Beijing they would receive a fair verdict.

I believe this case will not, and should not, affect the healthy and stable development of Chinese-Australian bilateral trade and economic relations, Fu said.

Under Chinese law the arrests do not amount to a formal decision to go to trial. They allow authorities to continue investigating, with a formal decision coming later on whether to try, said Mo Shaoping, a prominent criminal lawyer in Beijing.

Shares in Rio Tinto, the world's second-biggest producer of iron ore, closed up 0.17 percent at A$58.00 on Wednesday, but have fallen 4.2 percent since Friday after a report from China that said the company had been spying for six years.

Rival BHP Billiton has been steady over the same period while the benchmark Australian S&P/ASX 200 index has risen about 1 percent.

Walsh, the Rio executive, said the case had not upset the company's iron ore supplies to China.

Rio Tinto is working to resolve this matter and continues its business operations in China, including the maintenance of high levels of iron ore shipments from Australia, he said.

Australian Prime Minister Kevin Rudd, a former diplomat who speaks Chinese, has warned Beijing it had significant interests at stake in detaining Hu, and said the world was watching how it handled a case that has highlighted risks of doing deals in the world's third-largest economy.

On Tuesday, the United States echoed that warning.

China and how it reacts to cases like this will have a bearing on the international business climate and the willingness of individual businesses to invest in China, a U.S. State Department spokesman, Philip Crowley, said in Washington.

(Additional reporting by Emma Graham-Harrison and Lucy Hornby in Beijing, Joseph Chaney and James Thornhill in Sydney and Rob Taylor in Canberra; Editing by John Chalmers)

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