Audio Transcript:

MARCO WERMAN: I'm Marco Werman and this is The World, a co-production of the BBC World Service, PRI, and WGBH Boston. Rio Tinto is a mining conglomerate with operations and customers everywhere in the world. China is a veracious customer of minerals from just about everywhere in the world. The two are tangled in a case involving industrial espionage and corruption. For more than a month four Rio Tinto employees had been detained in China under investigation for stealing state secrets. Today they were formally charged with lesser offenses, bribery, and stealing commercial secrets. As The World's Mary Kay Magistad reports from Beijing the case has worried foreign investors in China.

MARY KAY MAGISTAD: No one ever said it was easy to invest in China. The World Bank's Doing Business project ranks China 83rd out 181 economies in terms of its regulatory environment for business. But Arthur Kroeber, who heads the Dragonomics economic consulting firm in Beijing, says up until the Rio Tinto case foreign investors in China did feel they could take certain things for granted.

ARTHUR KROEBER: China has been quite effective in creating a predictable environment for businesses to operate in. In other words sometimes there are legal grey areas but you don't have capricious changes of the environment from one moment to the next. You don't tend to have expropriations and things like that. So even though there's problems in the legal environment predictability of the policy environment has been pretty much a given for a long time.

MAGISTAD: And then came the detention in early July of Rio Tinto's chief negotiator in Shanghai. Chinese-born Australian citizen Stern Hu and three of his Chinese coworkers. The detention came shortly after Rio Tinto pulled out of a deal that would have given a Chinese state-owned aluminum company a major stake in its operations.

KROEBER: And people were beginning to ask definitely, has China turned into Russia which is a place where there is no predictability and there's a much lower sense of security of your investments?

MAGISTAD: The immediate question for observers was had laws been broken or was this act of revenge because of a business deal gone sour? Only the Chinese prosecutor's office knows for sure and it's not talking. Nor have the detained Rio Tinto employees been able to see a lawyer because of the state secret charges against them up until today. The head of Rio Tinto's iron ore group, Sam Walsh, expressed some relief today to Australia's ABC television that at least the charges against his employees have been downgraded from one that potentially carries the death penalty.

SAM WALSH: I think that reflects what we've been saying all along � that we don't in fact believe that there's any evidence of wrongdoing. We believe that we have a code of conduct and that our employees have followed that.

MAGISTAD: Some members of the Chinese government seem to hope the downgraded charges, even though they still carry a maximum potential sentence of seven years in a Chinese prison, will help make tensions go away. Vice Minister of Commerce Fu Ziying spoke at a news conference today.

FU ZIYING: [SPEAKING CHINESE]
TRANSLATOR: The case showed the government's determination to create a competitive, open, and fair market environment in China. I think this isolated case should not hurt the healthy development of Sino-Australian trade ties.

MAGISTAD: But it may anyway. Australian Prime Minister Kevin Rudd made it clear last month that this case could indeed effect China's reputation as a trade partner in Australia and beyond.

KEVIN RUDD: A range of foreign governments and corporations will be watching this case with interest and be watching it very closely and they'll be drawing their own conclusions as to how it is conducted.

MAGISTAD: China's initial response was to say the Australian government should stop meddling in the case. But yesterday the US State Department spokesman said American businesses are watching closely too. While no big investors are pulling out of China just yet some say this case means new ones coming in will have to think a little harder about the risks of doing business here. For The World I'm Mary Kay Magistad in Beijing.