* Dropping state secrets charge is big improvement
* China seeks to depoliticise case
* International outrage likely contributed to change
By Emma Graham-Harrison
BEIJING, Aug 12 (Reuters) - The formal arrest of four employees of mining giant Rio Tinto may not sound like good news for foreign executives in China. The men are still in jail, any trial some way off and hopes for an impartial outcome low.
But analysts and lawyers say foreign companies should see a glimmer of hope in the fact that charges of violating national security, levelled when the men were detained last month, have been dropped from the list of accusations to be faced in court.
It has instead been downgraded to a charge of obtaining commercial secrets by improper means.
The change suggests Beijing has responded to an international outcry over the use of its catch-all state secrets law in a commercial situation and wants to defuse the politically-charged case as much as possible.
"At the end of the day, the people who didn't want to lose the public relations battle or go back to a more hardline approach appear to have won here," said Scott Harrison, managing director of Risk Consultancy Pacific Strategies and Assessments.
Rio Tinto's top China iron ore salesman, Australian Stern Hu, was detained with three Chinese colleagues in early July on suspicion of stealing state secrets.
The case prompted outrage in Australia, where Rio Tinto is headquartered, and rebukes from other trading partners and executives worried that Beijing was sending a warning to other overseas firms looking to cash in on China's growth.
"I think the message was to employees of foreign companies, that their activities in certain strategic areas are being watched very, very closely," said one China analyst who asked not to be identified.
Rio Tinto said on Wednesday that it believed its employees had acted ethnically in their China business.
SECRETS CONFUSION
The state secrets charge had especially sent shivers down the spines of China-based foreigners because Beijing has never been clear about what information is off-limits.
The state secrets law has been used in cases ranging from those with high economic stakes like Rio Tinto to the prosecution of rights activists who take on the government.
"You have to know the rules for operating here. There were many things I knew that I never passed on to my employers," one Chinese national, the retired representative of a foreign company operating in China, told Reuters.
With no clear guidelines, there is plenty of room to break the law unintentionally. Uighur activist Rebiya Kadeer was charged for sending newspaper clippings to her exiled husband.
Foreign companies are well aware of the risks, though the opportunities in China, the world's third largest economy, mean few can afford to pull out.
"When you are dealing with businesses in China, ultimately
you are dealing with state-owned enterprises, and this blurring
of lines between commercial espionage versus state espionage is
probably the most telling aspect," said Greg Boyce, Chief
Executive of Peabody Energy Corp.
"It doesn't change our view in terms of China as a country we want to continue to do business with."
BACK TO BUSINESS?
The dropping of the state secrets charge will soothe firms' worst fears about the politicisation of commerce in a country where government and business have long worked hand in hand.
"I think this is the first step in the easing of tension and to get back to business as usual," said Steve Vickers, head of Hong Kong based consultancy FTI-International Risk.
"The greatest fear and concern among the foreign business community that's been referred to us ... is whether ordinary market information can be classified as a state secret."
China's government regularly says that rule of law now governs a country once controlled by Communist Party diktat.
Vice Commerce Minister Fu Ziying said on Wednesday that the case was a purely judicial affair, should not affect ties between China and Australia, and the suspects could expect a fair trial.
In reality, a judicial system controlled by the party means justice can be elusive for those whose cases involve challenging the government or opposing its functionaries.
But though Rio's Hu, and his three colleagues, still face trial in a controlled court, and jail terms of several years, they, too, will benefit from the dropped charge.
The penalties may be smaller, there is a greater chance the trial will be open and defence lawyers should have more access.
"The lawyers for the men should now have a much stronger chance of seeing them and if it comes to an indictment, the trial could be open," said Jerome Cohen, an expert on Chinese law at New York University.
"But this all depends on how the authorities act in practice." (Additional reporting by James Grubel in Canberra, James Pomfret in Hong Kong and Ben Blanchard, Lucy Hornby and Chris Buckley in Beijing, editing by Ron Popeski)