China’s Vice-Premier Li Keqiang recent trip down under, accompanied by an “A-team” of vice-ministers and senior government officials, only serves as a salutary reminder of the increasingly sophisticated yet tough approach by the PRC in its dealings with weaker nation states such as Australia.

It is all charm at present but it’s now three months since Rio Tinto’s chief negotiator, Stern Hu, and some of his (ethnic Chinese) staff were arrested in Shanghai (abducted would be a better description) and have been held without charge or even legal or effective consular representation. Three months may not seem long — but if you call it “more than 100 days”, living on a bowl of rice and some fish-head soup each day, alone (effectively in solitary confinement) one starts to see how ruthless is China’s approach. And all for what? As I argued in Crikey in July, simply conducting normal market assessments — no more than what is standard business practice throughout the Western industrialised world.

If Rio Tinto had not rejected the takeover offer by Chinalco, thus pre-empting an embarrassing rejection by the FIRB and the Australian government, one could be certain that the unfortunate Hu would never have been arrested.

China has stated that it wants one price for all of its mills and it will set that price (not Rio Tinto and Stern Hu). As for Rio Tinto, it refused to buckle and has made China pay the spot price for iron ore, which is actually above the price being paid by other Asian steel mills. This has been a major embarrassment to the Chinese.

And the Australian government’s response to Hu’s arrest so far? Still a virtual silence. There is a difference between quiet diplomacy and supine acquiesence. The regret must be not so much what China has done, that is not surprising, but how pathetic is our national government’s response.

China selected its mark well — an Australian citizen of Chinese ethnicity. China has sent a signal to its diaspora, indeed some of its senior government members have since said as much — that their first loyalty must be to China.

How does this make the many ethnically Chinese-Australian citizens feel? Clearly if they are arrested on some trumped-up pretext when visiting China, the Australian government will apparently do nothing — “for fear of upsetting its major trading partner”. It thus implies that those Australian-Chinese when facing direct or indirect (family connections in China) will have a propensity to co-operate with China and this will lead to the wider conclusion, in Australia, that they cannot be trusted. They will be intimidated and cornered.

We do not have “half citizens” in Australia. When a person attests to their allegiance to Australia and is granted citizenship, they expect to be a full citizen of this country, with rights and obligations. “One flag, one nation, equal before the law“. And it follows that they expect the Australian government to protect their rights as citizens when abroad, regardless of their ethnicity.

So back to the Chinese government’s response to these initial developments on iron ore company investments. Here we see a classic example of “judo diplomacy” — the initial small attack, and then the sudden relaxation that encourages one’s opponent to step forward, only to find that a more sudden manoeuvre occurs, which provides an even greater advantage to the attacker.

Stern Hu is only a pawn in much, much larger game. China wishes to not only “secure” but control the prices of the materials it needs to import. While many of its companies are nominally publicly owned and listed, such independence in China is an ephemeral thing. In reality, they are operational units of that vast sovereign wealth fund, “China Inc”.

So just before the recent Vice-Premier’s visit, the Australian government approved the $A3.5 billion takeover by Yanzhou Coal of the Australian-based Felix Resources coal mining entity. Surprise, surprise. Nominally the Australian government imposed “tough conditions” — principally the requirement that Yanzhou must float at least 30% of the company and other assets on the ASX by end of 2012 and that Yanzhou’s interests in the company must be less than 50% by that date. Well, we will see. Do not hold your breath — even conditions laid down by the ACCC for domestic mergers that may limit competition have been flouted at will.

We need to ask: why would Yanzhou wish to invest such a huge sum in an existing enterprise — it does not really “secure” its supply any more than longer-term contracts. It is really buying its coal twice over. But, of course, such resource entities in Australia are extremely profitable and while the future marketing of the Felix coal must be at “arm’s length” basis, any person acquainted with resources marketing would be aware of the many different means by which Yanzhou/PRC will clip the price for its national benefit, and for Australia’s loss of tax revenue. That is where Yanzhou and the PRC will obtain their true rate of return on this investment.

Will the Australian Taxation Office audit this company and impose punitive penalties for assessed tax evasion? I leave you to answer.

Many other Chinese investments in Australia’s resource industries are currently working their way through the FIRB, and behind this the Treasury and the Treasurer’s office for that “political” decision. All shepherded along by those Labor lobbyists whose names you know well.

And in a follow-through flanking attack, the Vice-Premier has indicated that after years of prevarication by China, Australia may actually obtain a Free Trade Treaty with China — but, of course, many understandings (concessions?) must be made and Australia’s attitude to China must be “non-discriminatory”. Again with the judo diplomacy.

Well, so far China is well ahead in this initial phase of the first economic/resources shadow war of the 21st century. Which is not surprising. They regrouped after their Chinalco rejection, re-assessed their strategy and avoided the tougher opposition of Rio Tinto but rather tried again at a weaker point in our defences, viz: the Australian government and its desperate economic position. This time they have established a beach-head with Felix Resources (the tough rules will be easily brushed aside over time), the Australian government is positively grovelling to obtain further investments, and the cost to China? Some accommodation in a Shanghai prison for Stern Hu and his staff, and a quick trip by the Vice-Premier to Australia. Dirt cheap really.

Hu will be released soon — as a “gesture of good relations” between the two countries.

Kevin Rudd will give a little Cantonese speech in reply, and the shadow war will move to the next phase of both attempting to brow-beat Rio Tinto into accepting a “China price” for iron ore, and by applying back-door pressure on a whole range of issues to the Australian getovernment. Where it all end? It is quite alarming really.