But corruption is a challenge and democratic and free market institutions have had only two decades to develop after its former patron, the Soviet Union, collapsed.

Its main sharemarket index has more than doubled in the past six weeks. The International Monetary Fund expects Mongolia's economy to grow 10 per cent this year. ''When you are a small country and they are a giant, even when they try to stroke you it can hurt,'' said one. Several senior Mongolian officials told the Herald of the public pressure they face to resist Chinese influence. ''We regard China as an important partner but equally importantly we'd like to have other countries represented in Mongolia in a more expansive way.'' ''We have a concept of a 'third neighbour' and we'd like to see a balance,'' he told the Herald in an interview in Ulan Bator. Mongolia's Prime Minister, Sukhbaataryn Batbold, formerly a successful businessman, will make new overtures to the Prime Minister, Julia Gillard, and Australian corporate leaders today. Mongolian sources said the announcement had led China's Minister for Railways, Liu Zhijun, to unofficially threaten to cut off all infrastructure co-operation, before Mr Liu was detained for corruption a week ago. Last year the parliament of the fledgling democracy legislated to approve construction of a Russian-gauge railway line that will haul coal nearly 7000 kilometres to Russia's Pacific coast, rather than a wider Chinese-gauge line less than 200 kilometres to the Chinese border. While many nations have revealed anxieties about China's political and economic power, few are as close and economically dependent as Mongolia and none has taken such drastic steps to hedge their interests. The China-driven resources boom is hoisting Mongolia's traditionally nomadic people from subsistence living towards what some say could be a material standard of living equivalent to oil-rich Arab states. THE Mongolian Prime Minister wants Australia to be a ''third neighbour'' that can help develop his country's massive resource deposits and balance its strategic and economic vulnerability to China.

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