China said on Thursday detained staff from Australian miner Rio Tinto had harmed China's economic interests in a case that has rattled currency markets and raised questions about China-Australia relations.

Beijing confirmed on Thursday the detention of an Australian mining executive and three other Shanghai-based employees of global miner Rio Tinto.

Chinese authorities have a vast amount of irrefutable evidence which showed the four pried and stole Chinese state secrets for overseas, gravely harming China's economic interests and economic security, Foreign Ministry spokesman Qin Gang said.

He said it was an independent judicial case ... and should not be gradually enlarged or politicized. Doing the latter would also be detrimental to Australia, he added.

The head of the iron ore department with the foreign trade and investment unit of state-owned Chinese steel company Shougang Group has also been detained, newspaper reports and a Chinese steel industry executive said on Thursday.

Reports of the Rio Tinto detentions had already emerged from Australian sources in recent days, with investors concerned the affair could hurt Australia's ties with its biggest trade partner.

It could also increase concerns about doing business in China generally, as sources told Reuters that computers, likely containing sensitive commercial information relating to iron ore contracts, have also been removed from Rio's Shanghai offices.

This really does highlight, possibly more than any other case in recent years, the potential vulnerability to the law (in China) being interpreted very flexibly, and the huge grey area especially around information and what constitutes a state secret, said Andrew Gilholm, Control Risks' senior analyst for China and Northeast Asia.

Australia's Foreign Minister Stephen Smith said his officials were yet to talk to Stern Hu, Rio Tinto Ltd's top iron ore salesman in China, after his weekend detention. An Australian foreign ministry statement said China would give consular access to Hu on Friday.

WELFARE WORRIES

One of the reasons why we want access to him, is to satisfy ourselves as to his welfare, to satisfy ourselves as to his well-being, Smith told Australian state television. He described the spying accusations against Hu as very surprising.

The executive detained from China's Shougang Group -- Tan Yixin, assistant general manager of China Shougang International Trade & Engineering Corp -- was close to Hu, the official newspaper China Daily said on Thursday, citing unnamed sources.

The China Daily said steel firms were banned from signing long term iron ore contracts with foreign suppliers without permission.

Rio said its Shanghai office was mainly a sales and marketing operation for the company, the world's second-biggest iron ore producer, which is listed in London and Australia.

Fears the issue could damage trade ties saw the Australian dollar slump against the yen in offshore trade in its biggest one-day drop in 2- months. By late in the Australian trading day it had regained some ground to 72.60 yen from an overnight 70.94 but was still vulnerable to China worries.

China is Australia's second-largest export customer behind Japan, buying A$36 billion ($28 billion) of mostly commodities in the 11 months ended May 2009. In 2008, more than half of China's imports from Australia were of iron ore.

Details about the detentions emerged just as a Shanghai newspaper reported Chinese steel mills had given in on annual iron ore prices, agreeing the same 33 percent cut that other Asian steelmakers set earlier.

But the Chinese agreement was for six months instead of a year, the China Business News said on Wednesday.

DEAL DENIED

Both Rio and an executive from a top Chinese steelmaker denied the newspaper report that they had struck a deal on prices, adding negotiations were still going on.

The detentions came as China-Australia relations had already been going through a rough patch, with the iron ore negotiations running past a June 30 deadline and Rio Tinto ditching a planned $19.5 billion investment by state-owned Chinese metals firm Chinalco last month.

Smith said he saw no basis for speculation of business feud payback behind the detentions.

But Greg Hallahan, a regional director of risk consultancy Pacific Strategies and Assessments, said:

(My) colleagues and I are of the opinion that the arrests are probably payback for Rio's rejection of the Chinalco investment offer. I think it was particularly galling for the Chinese to see such public opposition ... to the extent that TV ads were taken out in Australia against it.

Hallahan said: There are numerous precedents for such tactics and one needs to look no further than the arrest of journalists on trumped up espionage charges.

Chinese and foreign business people have been detained or even kidnapped in China during the course of business disputes, for alleged customs or tax evasion, or as a pressure tactic by government bureaux or state-backed rivals.

The episode has put the steel industry, which relies on open market information for trading and pricing, in an ice box, said one Chinese iron ore industry analyst.

Right now everyone in the industry is afraid. No-one really knows if it's for commercial reasons, or something else, he said, declining to be identified.

(Additional reporting by Ben Blanchard, Tom Miles and Lucy Hornby in BEIJING and Wayne Cole and Mark Bendeich in SYDNEY; Writing by Jerry Norton; Editing by Sanjeev Miglani)

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