It's not likely to be that simple. Sources in China tell TIME that while Beijing recognizes it overreached by originally alleging the theft of state secrets, this week's climbdown does not mean the government is looking for a face-saving way out of the situation. Far from it, in fact. The case just as many outsiders had assumed is rooted in what one Chinese steel-industry official called the "sense of outrage at the highest levels in Beijing" that Rio walked away in June from a $19.5 billion tie-up it had struck late last year with Chinalco, the Chinese state-owned aluminum company. To make matters worse, from Beijing's perspective, Rio then turned around and agreed to a joint venture in iron ore with global rival BHP Billiton. Together the two control about 75% of the world's iron ore, which China's steelmakers consume ravenously. "That deal is China's worst nightmare," says an investment-banking source with close ties to the global mining industry.
China's response is three-pronged. First, the case against Hu and his Rio colleagues, which Vice Commerce Minister Fu Ziying earlier this week insisted will show foreign investors that China is "ruled by law now," will proceed. And while the industry insiders interviewed by TIME do not have detailed knowledge of the specific charges likely to be brought against the Rio executives, they describe the steel and mining businesses in China as well as other developing countries as industries in which "side deals" involving key principles like executives and government officials are common. Despite Walsh's assertion that there is "no evidence" against the Rio execs, the widespread assumption among steel-industry insiders with experience operating in China is the opposite that the government will likely be able to produce evidence that is not, as a source put it, "made up out of whole cloth."
China's second tack is to prolong negotiations over the contract price of iron ore with the two main suppliers, hoping to wear them down while frantically moving to line up other potential sources beyond Rio and BHP Billiton for next year and beyond. China is the world's largest steel producer, and despite the global recession, its factories are running close to flat-out thanks to enormous infrastructure construction and brisk sales for new autos and apartments. That means it would appear to have little leverage in pursuit of the price cuts on iron ore that it seeks: a 45% reduction from last year's record levels. (Japan and South Korean steelmakers got cuts of 33% from 2008 levels.)
But there are different kinds of leverage. In June, when Rio and BHP Billiton announced their intention to form a joint venture, a Ministry of Commerce spokesman in Beijing said the proposal had "the obvious color of monopoly." China implemented a new antitrust law last year and has already used it once to block a high-profile foreign acquisition in China Coca-Cola's planned buyout of juicemaker Huiyuan. The fact that the proposed RioBHP Billiton deal doesn't involve a Chinese firm is irrelevant. China's antitrust regulators have the same right to review the plans of two global companies as the E.U. did to bring antitrust charges against Microsoft in 2000.
Earlier this summer, many mining-industry analysts were skeptical that China would actually act against the proposed Rio-BHP tie-up. They assumed the Ministry of Commerce was just venting after the Chinalco deal failed. But a banking source with close ties to the Australian mining industry says that perception is wrong. "The antitrust review is real, and right now if I had to bet, I'd bet that [the RioBHP Billiton iron-ore tie-up] doesn't happen. The Chinese are going to block it."
Contrary to constant press reports in China and abroad, which say the Chinese side of the iron-ore price negotiations are being conducted on Beijing's side by the Chinese Iron and Steel Association, they are, in fact, being run straight out of Premier Wen Jiabao's office. And Wen, says the banking source, has "not been a happy man" since the Chinalco deal fell apart earlier this summer. Don't misread, in other words, the absence of the state-secrets charge against the Rio Four as evidence that the extraordinary face-off between China and one of the world's most powerful global companies is now tapering off. Wen has other cards to play, and the confrontation may have only just begun.