China's arrest of Rio Tinto staff for spying points to economic worries in Beijing, a security analyst said, and an Australian newspaper reported China's president endorsed the Rio investigation.

The arrest of Rio's top iron ore salesman in China helped push down shares on Monday in BHP Billiton and Rio Tinto, the world's two largest iron ore firms respectively. The arrests and protracted price talks between Rio and Chinese steel mills unsettled investors, traders said.

The arrests have cast a shadow over Australia-China ties, which have been key to Australia avoiding a recession in 2009, and placed pressure on Prime Minister Kevin Rudd, a former Beijing diplomat and fluent Mandarin speaker, to personally contact Chinese President Hu Jintao.

Anglo-Australian miner Rio was in intense price negotiations with China when Australian Stern Hu and the three others were detained in Shanghai, accused of stealing state secrets and bribing Chinese steelmakers for information.

The investigation into Rio appears to be part of a realignment of how China manages its economy in the wake of the global financial crisis, with spy and security agencies promoted to top strategy-making bodies, the Sydney Morning Herald newspaper said on Monday.

The nine-member standing committee of China's Communist Party, led by President Hu, had taken more control over economic decisions at the expense of the State Council, led by Premier Wen Jiabao, it said, quoting anonymous Chinese economic advisers.

The president endorsed the Rio investigation, it said.

International security analyst Clive Williams said every country, not only Australia, now faced difficulties dealing with China, because of the country's looming economic problems and leadership sensitivities about them.

It's a difficult time to be dealing with China, because in a state-owned economy there is a certain amount of blow-back from economic stagnancy to the leadership, Williams, from the Strategic and Defense Studies Center, told Reuters.

Chinese state-owned companies have been trying to portray themselves as independent, commercial entities as they roam the world buying up companies and sourcing raw materials, but may now face suspicions they are fronts for Beijing, analysts say.

Australia has urged Chinese authorities to handle the case expeditiously, and to consider the wider risks for international business confidence.

But Australia, which has relied on China's insatiable appetite for its minerals to protect its economy from the global financial crisis, is treading carefully.

When matters of this kind occur, not all of the processes between the governments (are) played out in public, Australian Finance Minister Lindsay Tanner told local radio.

It's very important that we focus on achieving the best possible out outcome ... and sometimes that involves things that go on behind closed doors, just ordinary diplomacy, rather than this just shouting at people in public.

Australian authorities are pressing for details of the allegations against Hu, as China had still not revealed to them any evidence supporting the detentions.

Chinese media reports say information from an internal meeting of the China Iron and Steel Association on the negotiations was leaked, and have reported the investigation has extended to several senior figures in the Chinese steel industry, including within the association itself. A senior executive at Shougang, China's eighth-largest mill, has also been detained.

Sources say some Rio Tinto computers were removed in the course of the investigation, which could potentially expose the company's negotiating strategy as well as contractual terms with the mills it supplies. Rio has not commented on the computers.

The inquiry into Rio began before it broke off its $19.5 billion investment deal with Chinese metals firm Chinalco and instead formed an iron ore joint venture with rival BHP Billiton on June 5, the Herald reported.

This is certainly not revenge for the Chinalco deal not going through, the Herald quoted one Chinese government source as saying.

But the collapse of the Chinalco deal was immediately followed by the establishment of a high-level group that would assess the political and economic risks of large overseas investment deals, the paper said.

Peking University international relations professor Zha Daojiong said he did not think President Hu intervened personally in the Rio case and does not believe the arrests will make it harder for foreign firms to operate in China.

The Stern Hu case is something for the courts to settle, but what I will say is the legal lines are rather blurry and international agencies have called for clarity on the issue (of state/commercial secrets), Zha told Reuters.

(Police intervention) is very normal. That should not really be magnified. Let's face it. Corruption is part of the game in this business and it is a matter of how you define it...

Foreign firms operating in China are already alert to the problem of Internet and phone communications being monitored for commercially sensitive information.

Zha said China had been attempting to streamline and rein in new capacity in its steelmaking sector since 2003.

There is too much disorder in the sector, and relentless adding of production capacity. This chaotic system in the trade is partly to blame for all this, he said.

Zha said foreign firms operating in China needed to better understand the culture of business in China and agree with Beijing on what is appropriate business activity.

China is a different culture, a different type of society. It is time for these international companies to collectively work together with the Chinese authorities on guidelines, he said.

(Additional reporting by David Stanway)

(Writing by Michael Perry; Editing by Bill Tarrant )

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