THE romance of mysterious star-crossed lovers Colleen and Robert remains strong. But they are growing increasingly anxious that the world is turning against them.

The 600-page report that enshrines Chinalco's bid to own 18 per cent of Rio Tinto and take stakes in several of its key mining operations contains more puzzles than usual, even in such complex legal documents.

Once the codes are cracked, however, the issues become clearer. And bigger -- for both Australia and China.

Who or what, for instance, is the "Colleen Holding Entity" that -- according to the structure chart of Hamersley Iron, Rio's iron ore producer -- will directly own 15 per cent? It is not contained in its 16 pages of definitions.

It is the code for China.

Who or what is meant in the report by "Robert's wholly owned Pilbara iron ore operations"?

Similarly, "Robert" is an undefined code name -- in this case for Rio itself.

These are not momentous revelations in themselves. But the use of such devices, even in the final "co-operation and implementation agreement" drafted by law firm Allens Arthur Robinson, does underline the haste, the pressure and the secrecy under which the $26 billion deal was cobbled together -- and thus its present vulnerability.

At stake is Australia's most important economic relationship, one that is hung up, to an extraordinary extent, on this single deal. It would be by far China's biggest-ever investment overseas, with its stake in the miner just under the 20 per cent mark the Corporations Act views as control. It would make Chinalco Rio Tinto's dominant shareholder and guarantee it two board seats.

Pressure on the deal is growing, for two reasons. One is concern that a British-based company has forged an arrangement with a Chinese state giant that does not adequately protect the value of strategic Australian resources, especially iron ore. The deal involves a wholesale reorganisation of Rio Tinto's core assets.

The other is that the premium provided by the Chinalco bid above the then-share price has been swallowed and left behind by the rising value of Rio Tinto stocks -- ironically, chiefly because of a gradual resurgence of commodity prices resulting from Chinese demand.

Shareholders may, as a result, eventually mount enough opposition to the deal to rescue the Rudd Government from having to make one of its most awkward decisions so far, following the referral of the bid to the Treasury's Foreign Investment Review Board.

But 78 per cent of these shareholders are based in London, and backers of the bid ask why not shift Rio Tinto's impetus from there to China, which is more clearly central to Australia's future.

Rio Tinto chief executive Tom Albanese said in announcing the deal that "Chinalco has a strong commercial focus and an outstanding track record of growth and value creating investments".

The company was cobbled together in 2001 from a group of government alumina and aluminium businesses, and grew rapidly under the leadership of Xiao Yaqing -- an alternate member of the central committee of the Communist Party, who recently left Chinalco to become deputy secretary-general of the State Council, China's cabinet. His predecessor became vice-governor of Guangxi province. China's leading business magazine, Caijing, describes Xiao as "a national hero for promoting overseas acquisitions". Although in the final quarter of last year, Chinalco's Hong Kong-listed business Chalco suffered a $500 million net loss, 10 times worse than expected.

Leading international mining analyst Michael Komesaroff, the principal of Urandaline Investments, worked for Rio Tinto for 20 years, including a period as the company's chief in Japan. He went on to work in Beijing for China National Nonferrous Metals Corporation, part of which became Chinalco.

He says that what is at play in the deal is the extraordinary contraction of the once-fragmented global mining industry, perhaps into as few as four global giants.

If his scenario works through, it would be dominated, he says -- like a growing number of crucial global industries including energy, airlines and now finance -- by state-owned, or at least state-controlled, corporations.

In mining, they would be Russia's Norilsk/Rusal, Brazil's Vale, Chinalco/Rio, and BHP Billiton, of which only BHP would be free of substantial government influence.

This shift is being accelerated by the train of events that led to the Chinalco-Rio Tinto tie-up. Originally, Rio Tinto sought contestability to the merger bid by BHP. When BHP withdrew its bid last November, as the global downturn was deepening, "Colleen" emerged as the best, or perhaps only, game left in town. Now, the agreement requires Rio Tinto to consult in advance with, and provide copies of all communications, to Chinalco, before it "enters into discussions, negotiations or communications with any authority in respect of the transaction". This includes the Australian Government.

The extent of the appetite of the Chinese Government -- the owner of Chinalco -- for the deal with Rio Tinto, and its difference from a conventional commercial transaction, is underlined by a compelling recent account in Caijing, of the way the deal is being financed.

The report begins: "A commercialisation push for China Development Bank may be crumbling in the face of second thoughts about its policy role."

This state-owned bank is the leader of the consortium funding the Rio Tinto bid.

Formerly purely a vehicle for "policy loans" -- politically directed capital transfers -- CDB was officially inaugurated five months ago as a commercial institution. But, Caijing says, "critics say the bank's success is tied to preferential policies and regulation waivers never offered to commercial banks. Banking regulators tip-toe around potential supervisory issues".

It says: "CBD has already veered from the commercial bank standards for corporate governance that it supposedly adopted a few months ago."

It stresses that recent major deals, including the Chinalco bid and energy contracts with Russia, Venezuela and Brazil, were not even included on the agenda of the bank's first board meeting this year, in February.

Chinalco announced, also in February, that it would spend $26.4 billion to raise its stake in Rio Tinto from 12 to 18 per cent, while its operating company Chalco was running at a loss, and before CDB, which has emerged as the chief source of the funding, had even formally considered the deal.

Chinalco vice-president Lu Youqing said, on a visit to Australia to promote the deal in February, that he did not know in detail how the immense investment would be funded. But he did not need to. The vehicle used by Chinalco to buy, with minor help from Alcoa, its original holding in Rio Tinto a year earlier was appropriately called Shining Prospect. And China's strategic planners were confident -- with good reason, it is now clear in hindsight -- that they had picked the bottom of the market to step up this stake substantially. That prospect was positively gleaming, and the income from China's manufactured exports held offshore, largely as US dollars, was amply available now that buying more US treasury bills was not looking such a good tactic.

Caijing says the CDB's two major government shareholders -- the Ministry of Finance and the People's Bank of China's Central Huijin Corporation, which holds China's foreign exchange -- said "they were not notified by the bank about these huge deals" involving Chinalco and China's oil champions. Such deals, says the magazine, "that related to the nation's energy strategy and foreign relations, were directly decided by the State Council, China's cabinet, without following corporate governance principles".

It quotes a bank staff member as saying: "From the perspective of national strategy, CDB has to carry out deals, whether profitable or not."

The aim of the initial foray of Chinalco into Rio, buying 12 per cent last year, was explained in Global Times, owned by party mouthpiece People's Daily, in an article by Professor Liu Jipeng and Liu Yan, a researcher at the National Development and Reform Commission, the core State Council body supervising China's economic development strategies.

They wrote: "Chinalco's purchase has successfully prevented the merger of Rio Tinto and BHP, broken the monopoly of multinational giants, and protected our nation's core interests.

"It has also explored a new path for the globalisation of state-owned enterprises, illustrating the capacities of government business."

While China's state firms still compete with each other at one level, they are being merged to reduce such rivalry, and when core interests are concerned, the Government is sufficiently well managed to ensure its priorities take precedence. Thus, while Chinalco is not itself a buyer of iron ore, China is Rio Tinto's biggest ore customer, and it is hard to conceive that Chinalco would be free, in its amplified role in Rio, to maximise the price.

Wang Xiaoqi, planning director at the State-owned Assets Supervision and Administration Commission of the State Council that owns Chinalco, told 21st Century Economic Report that "stabilising the prices of mineral resources should be the aim of this round of overseas acquisition for resources".

Komesaroff is less confident than supporters of the Chinalco deal in the Australian Tax Office's capacity to control transfer pricing -- one arm of a company exporting goods at a too-low price to another arm. He says that US home loan giants Fannie Mae and Freddie Mac engaged massively in uneconomic deals despite being subject to intense scrutiny by scores of regulators. Chinalco's success in its first move into Rio Tinto confirmed its choice by the NDRC as China's global diversified mining champion. Instead of taking the Japanese keiretsu or Korean chaebol route, as earlier mooted -- conglomerates running businesses ranging from banks to car-making -- China has chosen to back about 100 sectoral champions, with instructions to zou chu qu -- go global.

The Government has abandoned the old Marxist precept about controlling the means of production -- it has long opened manufacturing, now commodified, to foreigners and to the private sector.

Instead, it is focusing on what it views as the new core elements of a modern economy, revolving around logistics, finance and communications, including banking, telecommunications, transport, energy and resources, and media. The champions that are being slowly selected in each sphere -- following what are often bitter contests -- are guaranteed the funding they need to establish a big international presence.

Chinalco, which Komesaroff describes as "a fascinating hybrid of modern management and traditional communist command-economy structures", is an important piece of this jigsaw puzzle.

None of the other Chinese investment moves in Australia -- and there are 11 now awaiting FIRB approval -- have anything like the same weight in the eyes of the Chinese Government, which has pulled out all stops to support the Rio Tinto bid.

The case for approval is being pressed at almost every encounter between Chinese officials and Australians, in both countries, whatever the reason for the meeting.

China -- which is eager to advance its mining skills, which far lag its mineral processing capacity -- has failed in most of its attempts to gain major stakes in resource companies in the US and Canada, causing it to turn away from North America, doubling the significance of gaining a big share of the Australian market.

For Rio, as Komesaroff has pointed out in a report for GaveKal-Dragonomics, the aim is that "Chinese cash will rescue it from a precarious financial position created by management's incompetence and arrogance Chinalco's interest is strategic and long-term; Rio's is short-term and opportunistic".

The history of such joint ventures points to them being short-lived, especially when one partner -- in this case Chinalco -- essentially becomes the banker. "In the long run," says Komesaroff, "the most logical and likely denouement is a complete takeover of Rio Tinto by Chinalco, creating China's first truly global enterprise."

Rio's core problem was caused by its mis-reading of China's aluminium industry, which is dominated by Chinalco.

It bet, says Komesaroff, on the wrong metal, paying $49 billion almost two years ago -- on which a massive repayment is required by October -- to buy Canadian aluminium firm Alcan, on the expectation that Chinese capacity was high cost and would have to shut down, benefiting global producers like itself.

"But Rio Tinto failed to foresee that in order to preserve employment, China would support loss-making smelters through power subsidies and mass purchases for its national stockpile", keeping supply high and the price low, he says.

Now, says Komesaroff, "the informed public in Australia is livid that the high-handed Poms dominating Rio's board are flogging Australia's crown jewels to a Chinese firm because of a cock-up in Canada by a Yank boss and his highly paid mates.

"But most of this criticism is not xenophobic. It is legitimate to question why one should sell assets to Chinese firms that can sacrifice commercial efficiency in the service of state political and economic objectives."

And while Canberra is approving almost all Chinese investment proposals, Australian hopes for reciprocity via a free trade agreement are fast fading. Little progress has been made in four years and 13 rounds of talks, during which China has signed 11 FTAs with other countries, including a year ago with New Zealand.

Australian business and government had held high hopes that a comprehensive FTA might have delivered investment opportunities to companies locked out of the Chinese market -- or restricted to modest stakes, often as junior partners to local firms.

Trade in services accounts for just 10 per cent of the trade between Australia and China, yet services comprise 70 per cent of Australia's economy.

Wayne Swan told senior cadres at the Central Communist Party School in Beijing last year that Australia's mining output -- "important as it is" -- accounts for just 7 per cent of gross domestic product, about the same share as 20 years ago, while farm output comprises about 3 per cent.

The FTA was expected to open opportunities to the broader Australian economy, as well as opening doors to stakes in Chinese mining firms, from which, says Komesaroff, "Australian and other foreign investors are effectively barred".

Although Kevin Rudd proclaimed during his first visit to China as prime minister a year ago, that FTA negotiations had been "de-frozen" little progress has been made since then. Trade Minister Simon Crean said in Wuhan on a recent visit to China, that "in the end what it requires is the political will to conclude it".

The politics between Australia and China is becoming more difficult as the relationship becomes more complex. Rudd, despite his deep understanding of China, has said little in public since Chinalco launched its latest bid, stirring a public debate which is still growing.

State news agency Xinhua has described the move on Rio Tinto as "Chinalco's luxurious bet".

It's still in play, but the odds on success are growing longer.