China-Australia Spy Case Fans Fears, Hits Aussie Dollar

China's detention of an Australian mining executive on spying allegations rattled currency markets on Thursday, with investors concerned that the affair could hurt trade ties between Australia and its biggest trade partner.

The Australian dollar slumped against the yen in offshore trade in its biggest one-day drop in 2-½  months, hit partly by concerns that the detention of global miner Rio Tinto's top iron ore salesman in China could damage relations.

Those fears were compounded by a Reuters report on Wednesday that a Chinese buyer had suddenly cancelled a coal shipment while it was sailing for China, though coal traders pointed to high Chinese coal stockpiles and slow demand as the reason.

"The market was already jittery over the whole Rio thing, the arrests and everything, and the coal headline just caught the Aussie at exactly the wrong time," said Sean Callow, a currency strategist at Westpac. "There was a rush of knee-jerk selling, which tripped stop-loss sales, and down she went." 

"Really the underlying story didn't justify such a move, but it shows how tense the market is."

Chinese authorities detained Stern Hu, Rio Tinto's top iron ore salesman in China, on Sunday on suspicion of stealing state secrets, Foreign Minister Stephen Smith said on Wednesday. Three Chinese members of Hu's Shanghai-based team were also detained.

Smith described the allegations as "very surprising" and said the government was seeking urgent access to Hu, an Australian citizen, and wanted to know more about the spying allegations.

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 paper 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.

More From CNBC.com

• Rio Exec Held in China on Spy Suspicions: Australia
• Rio Wraps Up Rights Issue, Australia Demand Strong
• China's Hu Skips G8 to Deal with Xinjiang Riots
• More Asia Pacific News

It was unclear if there was any tie between the two events, but the detention follows a period of tense relations between the two trading partners, with iron ore negotiations running past the June 30 deadline and Rio Tinto ditching a planned $19.5 billion investment by Chinalco last month.

"I see no basis in any of that speculation," Foreign Minister Smith said.

Rio said the Shanghai office where the detained staff worked 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.

Copyright 2009 Reuters. Click for restrictions.