Kevin Rudd and the new Labor Government have just received a big nudge from China about the BHP Billiton move for Rio Tinto. China doesn’t like it and the potential power it brings.

It’s also a direct challenge to the BHP board and CEO Marius Kloppers who has never been on the end of an anti-Australian campaign by major resource buyers, as Australian coal and iron ore companies have been several times in the past 20 years over corporate takeovers (Rio buying North Broken Hill) and concerns about prices and costs.

China is already worried by BHP’s moves to get rid of yearly pricing contracts and move to an index based pricing system (only a suggestion at the moment). China is being quietly supported by the big steel companies in South Korea and Japan who are also actively opposed to the BHP move.

It will be a question of where the Rudd Government sees our national interest, and where it sees China’s. After all, the buyers always want prices lower than the suppliers want, but iron ore prices have more than doubled in recent years.

However the Rudd Government has a test of transparency much more immediate in this story. ALP and Ruddites have made much of the closeness of Sir Rod Eddington to the party, with his chairing a sort of council of business advisers to the party.

Besides being on the board of News Corp and the Swire Group in Hong Kong (owners of his old gig, Cathay Pacific), Eddington is also a director of Rio Tinto. That was from his time in London running British Airways.

Eddington has now relocated back to Melbourne and the Rudd Government will have to be very careful on the controversial takeover proposal. This will be a decision for the Government alone, no talks to the business advisers or community on this one.

China understands the difference between a commercial deal and one where national interest is at stake: the country’s spokesman explained that this morning in a quote on AM on the ABC. In China’s view it is not a commercial deal, there are significant national interest issues here to be answered from its point of view.

So the Rudd Government can’t just wave a bid like this through. It has to be seen doing something to make it tougher, or extracting concessions for approval of the merger.

Rudd has boasted of his understanding of China and their needs and ambitions: this is an early chance to show he does, and can also look after Australia’s paramount interests at the same time. Those could include getting BHP to drop its legal action on giving rival Fortescue Metals access to its Port Headland Railway from the Pilbara.

It could also mean getting BHP and Rio to drop any objections to a second proposed attempt from Fortescue to access other railways of BHP and the Dampier line of Rio Tinto.

If the ACCC moves to enforce access and other pro-competition moves as precursors to any merger, before it is made to shareholders, that will go a long way to ensuring the opposition in China, Japan and other steel industries is mollified, and no deal done to look after a company on which a Labor mate is a director.