The detention by Chinese authorities of four employees from Rio Tinto PLC's (RTP) Shanghai-based operations shows that the relationship between the Chinese government and its state-owned entities is "anything but arms length", and has links to a failed alliance between the Anglo-Australian miner and Aluminum Corp. of China Ltd., Australian upper house lawmaker Barnaby Joyce said Wednesday.

Joyce, leader of the country-based Nationals party in the Senate and a vocal critic of a recent surge in Chinese investment in Australia's resources sector, said the detention of Rio employees appears to have been inspired by the failure by state-owned Aluminum Corp. of China, or Chinalco, to buy an 18% stake in Rio Tinto.

Rio last month walked away from a $19.5 billion alliance with Chinalco, in favor of a rights issue and iron ore joint venture with BHP Billiton Ltd. (BHP) to pay down debt. Some officials in China reacted bitterly to the spurning of Chinalco's investment.

"This should be a clear example to Australia, and other countries around the world, of the extent of the relationship between a 100%-owned entity in the Peoples Republic of China and the actions of the Chinese government," Joyce said in a statement.

"The two are one in the same in ownership, in action, in purpose. A check in the progress of one has ramifications far beyond a purely commercial arrangement with a corporate entity on the stock market," he said, adding: "This should be a sobering wake up call for all Australians."

Australia's center-left Labor government in a sense dodged a bullet over the failed Chinalco-Rio alliance in that Rio's decision to abandon the deal came just as Australia's Foreign Investment Review Board was poised to advise Australian Treasurer Wayne Swan whether or not to approve it.

But the news four members of Rio's Shanghai-based iron ore team have been detained since Sunday by Chinese authorities - for as yet unconfirmed reasons - reignited political debate on China's growing interest in Australia.

Tensions had been simmering below the surface for months between Canberra and Beijing over the Chinalco deal, which would have given the state-owned company an 18% stake in Rio, the world's third-largest miner, and two board seats.

It raised concerns among some Australian opposition lawmakers about the potential for Chinalco, also a major buyer of Australian commodities, to influence prices. Rio owns iron ore and copper mines in Australia and offshore. Some even argued that the proposed deal posed a threat to Australia's national security.

The detention of the Rio employees comes as Rio and Chinese steel makers are in the midst of drawn-out iron ore price talks. But people familiar with the situation said it would be surprising if the detentions were in any way related to the talks as it would hardly serve Chinese interests to use such an unsubtle negotiating tactic.

Joyce, with other opposition lawmakers, played a key role in spearheading an ongoing Senate inquiry into foreign investment by state-owned entities in Australia.

Australian government officials have made clear through the inquiry that they don't favor Chinese state-owned enterprises making large-scale takeovers of Australian miners but market participants say that China won't likely be deterred.

China's investment in Australia has surged in recent times to be now the third biggest behind the U.S and the U.K. after being sixth last year.

 
   -By Rachel Pannett, Dow Jones Newswires; 61-2-6208-0901; rachel.pannett@dowjones.com