The China Plan

Copyright ©1999, by Kenneth R. Timmerman

Paper presented at "Exposing Communist Chinese Government Influence in America" Conference, Orlando, Florida May 15, 1999

The latest information of our unfolding national security scandal started on Capitol Hill. Senator Richard Shelby, chairman of the Senate Select Intelligence Committee, made referrence last week to an "obscure U.S. bank" that was funnelling money from the Chinese Communist government to political campaigns in the United States.

Shelby said his investigators had turned over information about the bank, and its ties back to Beijing, to U.S. law enforcement officials and to main Justice in Washington, DC. But so far, nothing has come of it.

That should come as no surprise.

On May 13, the New York Times picked up on Shelby's hint, and gave a more complete glimpse of this latest episode in the scandal. Starting in 1996, the Comptroller of the Currency began to discover tens of millions of dollars being transferred from the Bank of China in Beijing to a series of banks in Los Angeles, among them an obscure local outfit run by a Chinese national, the Far East National Bank. In all, investigators traced $92 million in transfers back to the Bank of China, but they never got a straight answer from any of the bankers what the money was for. Some may have gone into personal accounts for China's Princelings. Some may have gone for legitimate business deals. But undoubtedly, a portion of this money was used to purchase U.S. politicians through campaign contributions, and to finance Chinese communist espionage operations in the United States.

Since 1993, we've seen an extraordinary campaign by the Chinese communist government to expand its influence in the United States. This has involved setting up hundreds, if not thousands, of commercial front companies, a large proportion of them in California. These companies form the network the Communist government uses for a variety of purposes, running from out and out spying and the procurement of so-called dual-use technologies, to all the concomitant operations needed to pull these off successfully, from financing, to shipping, and even customs clearance. Some are direct subsidiaries of the People's Liberation Army (PLA). Others are controled directly by the State Council, the central government of China.

Although the Chinese have long conducted aggressive intelligence gathering operations against America, their U.S.-based networks have mushroomed in recent years; in fact, since Bill Clinton took office in January 1993. China's sprawling defense establishment, unlike our Pentagon, contains a morass of military factories, trading companies, banks, and investment houses that over the past ten years have engaged in a vast expansion of worldwide dimensions, including massive investments here in the United States.

The United States is vulnerable to such infiltration for a number of reasons. Our technology controls are too weak to prevent Chinese entities from purchasing military secrets, our capital markets are so wide open that Chinese state investors can finance military modernization on Wall Street, and our statutes governing direct foreign investment are virtually non-existent, allowing Chinese companies to establish far-flung networks for both commercial and intelligence purposes in the United States.

While federal investigators are just beginning to untie the knots of Chinese government attempts to influence the White House and other elected officials through campaign contributions and other means, it is overwhelmingly clear that Peking has recognized that the United States is easy enough to infiltrate.

Chinese state-run companies are snatching up strategic real estate in places like Long Beach, California, where they had planned, with Clinton's warm approval, to turn a former U.S. Naval station into a container port to be be used by a company identified by U.S. counter-intelligence officials as a front for Chinese espionage efforts. The Chinese government's flagship conglomerate, China International Trust and Investment Corporation, CITIC, has been floating bond issues in the United States, tying the knot with major U.S. investment banks who are lobbying Congress against revoking China's Most Favored Nation trading status. People's Liberation Army (PLA) weapons firms have set up shop on our shores through a variety of front companies and obscure subsidiaries. Some of these companies have been targets of U.S. Customs of Commerce Department investigations for importing arms into the U.S. or exporting high technology, but they have never been punished - some believe, because of high-level U.S. government protection. Meanwhile, Chinese state-controlled trading houses are wheeling and dealing throughout the USA and Canada, raising capital on the stock market to modernize rust-belt factories back in China, and in the process establishing a nation-wide network of agents who are purchasing strategic technologies for the Chinese military. The Chinese "invasion" of the United States will require no warships, no bombers, no soldiers, and no missiles. In fact, it has already begun, through the creeping infiltration of the U.S. economy and a relentless intertwining of interests between American and Chinese business, much as mainland China is taking over Hong Kong. As the Chinese philosopher, Sun Tzu, put it in his classic treatise, The Art of War: "To fight and conquer is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting." China's military leaders still consider Sun Tzu's treatise to be a form of holy writ.

Part of China's offensive in the U.S. could be called classic influence peddling. I suppose I would put the campaign finance scandal in that category.

But the very individuals involved in that scandal also have deep ties back to the Chinese government; in some cases, to Chinese military intelligence.

Take Charlie Trie, the by now famous restauranteur of Little Rock, Arkansas. Charlie Trie played a significant personal role in convincing Bill Clinton of the virtues of doing business with Communist China, documents released by the White House to Senator Richard Shelby show. Well before the 1992 presidential elections, for instance, Trie used his friendship with then Governor Bill Clinton to promote a sister-city relationship between Little Rock and Changchun, the capital of Ji Lin Province in China - at a time when candidate Bill Clinton was fiercely criticizing President Bush for "coddling dictators" in Beijing. On November 10, 1992 - only days after his election as president - Clinton wrote Trie to congratulate him for establishing a branch of his company, Daihatsu International, in the People's Republic of China. "I know that you and your company can serve as a bridge of goodwill and exchange of mutual interest and benefits between China and the U.S." Clinton also noted that a delegation of Changchun City officials Trie brought to Little Rock "met with officials from A.I.D.C.(Arkansas Industrial Development Corporation)," the "I fully recognize the trade potential and contribution to Arkansas by such a venture," Clinton wrote. Trie clearly got the message, and became a major financial supporter of Clinton.

More recently, fellow campaign contributor Johnny Chung has testified in Congress of his own ties to Chinese military intelligence. Chung's contact was Liu Chao-ying, a Lt. Colonel in the PLA, Vice President of China Aerospace Holdings in Hong Kong, and daughter of General Liu Huaqing, who until recently held down the PLA's number two spot as well as being a member of the Politburo.

On a trip to Hong Kong in August 1996, Ms. Liu introduced Chung to General Ji Shengde, the head of Chinese military intelligence. As Chung testified last week, General Ji told him: "We really like your president. We hope he will be relected. I will give you $300,000. You can give it to your president and to the Democratic Party." In true entreprenurial style, Chung kept most of the money for his own expenses (and to pay college bills for General Ji's son at UCLA), contributing only around $35,000 of that money to the DNC.

But General Ji and Ms. Liu told Chung they had many other "agents" who were buying influence in the United States, including John Huang, the former DNC fund-raiser, Lippo Bank official, and Commerce Department appointee. Huang and his Lippo Bank partners have contributed millions of dollars to Bill Clinton and the DNC, and bailed Clinton out at a very delicate point in his career, during a financial scandal back in Arkansas in 1985.

The Economic Front

Much of Communist China's involvement in the United States is perfectly legal. But they did get caught once, in a 1990 attempt to buy up a Washington state aerospace subcontractor working for Boeing. The China National Aero-Technology Import-Export Corporation was blocked thanks to a little-known statute known as Exxon-Florio, passed in 1988, which requires a national security review when foreign firms seek to purchase key defense plants in the U.S. "Since then, they have simply changed tactics," said a Congressional aide who helped draft Exxon-Florio. "Once burned, twice smart," Today if a state-run Chinese company wishes to set up an American subsidiary, or even just a representative office, it can do so without restriction. Similarly, Chinese companies seeking to raise capital on Wall Street may list stocks freely, as long as they submit corporate and financial information as required by the Securities and Exchange Commission. "There are no statutes on our books preventing them," the Congressional aide said.

Since Bill Clinton came to office, in fact, the Chinese have been busily establishing companies that trade publicy in the U.S., with the dual purpose of attracting U.S. capital and purchasing sophisticated technologies for their operations back home. China Yuchai International is one such entity. Initially incorporated in Bermuda, the company went public on the New York Stock Exchange (NYSE) in December 1994 and used the $70 million in proceeds to modernize its diesel engine factories in China. Their engines power military trucks. The company is ultimately controlled by China's State Council through China Everbright International Ltd., a "red chip" which is run by Princeling Wang Guangying and is headquartered in the Lippo Tower in Hong Kong.

The company's Cleveland, Ohio subsidiary, Yuchai America, exists solely to purchase sensitive dual-use technology in the United States. Yuchai representatives attended a Philadelphia auction at the premises of Heinz Corporation, which made jet engines for the Pentagon, and purchased 2 sophisticated five-axis milling machines. When they attempted to ship them to China on May 18, 1994, however, they were intercepted by U.S. Customs and impounded. The case was eventually handed over to the Commerce Department, which brushed aside concerns that the machines would enhance Chinese military manufacturing capabilities, and allowed the company to ship them to China in late 1995. Commerce announced on Oct. 2, 1996 that it was levying a $200,000 civil fine against the company for violations of the Export Administration Act.

EK Chor Motorcycle Corporation is another publicly-traded company on the NYSE. The company is a joint venture between the Hong Kong investment group, C.P. Pokphand Co. and China North Industries, more commonly known as Norinco. In papers filed with the SEC for the new company's Initial Public Offering, Bear Stearns described Norinco as "the PLA's weapons manufacturer." The head of the new company's Hong Kong partner, Dhanin Chearavanont, is an ethnic Chinese born in Fuijian province, who has built one of Asia's largest business empires.

In 1996 Dhanin was introduced to President Clinton by Pauline Kanchanalak, the head of the U.S.-Thai Business Council and a close friend of DNC fundraiser John Huang. The White House has acknowledged that the participants at that meeting discussed U.S. policy toward China, where the C.P. Group has major investments, including several joint ventures with Norinco. The next day, according to the Washington Times, Kanchanalak donated $85,000 to the DNC.

Another major state-controlled company that has attracted Wall Street capital is China Resources (Holding), notorious to U.S. counter-intelligence officials for the services it renders to COSTIND collectors. Through China Resources Development Inc., registered in Salt Lake City, Utah, the company raised funds from Wall Street in 1996. Ultimately controlled by China Everbright, it has used the money raised on Wall Street to expand state-owned enterprises back in China, SEC documents obtained by TAS show. Profits from the venture are distributed to directors through a holding company in the British Virgin Islands known as Billion Luck Company Ltd.

By far the largest public offering in the U.S. of a Chinese state-owned company was Huaneng Power International Inc., which raised $600 million on the NYSE in October 1994. The company operates five power plants in China, and pledged to use its U.S. money to finance new power plants in China. But a sizeable portion of the new funds ($51.5 million) was earmarked for paying off low interest loans that had been advanced previously by provincial governments, which were given 35 percent of the stock in the new company.

It was, if ever there was one, a sweetheart deal. U.S. investors paid $600 million to purchase 25 percent of the company, while the directors gave away 35 percent of the stock, worth $840 million, to their buddies in the local Chinese governments, sweetening the pot even further with a $51.5 million cash pay-off.

And there are many, many more new Chinese entries to the NASDAQ and the New York Stock Exchange.

PLA TOYS

The PLA has also established an extensive presence in the United States through private companies controlled by military trading groups such as Norinco (the PLA's "weapons manufacturer"), which has set up a whole family of trading companies that act as wholesalers for consumer goods, "sporting" rifles, and chemicals made in Chinese military factories. The lead company is Beta First, which operates out of Cerritos, California. Dun & Bradstreet lists it as a wholesaler of optical goods, at the head of a growing empire of subsidiaries and affiliated companies. These include Sunico Industries, of Sante Fe Springs (stone tiles and optical goods); Beta Chemicals, which acts as a wholesale importer of Chinese chemicals; and Larin, an importer of Chinese auto parts, based near Los Angeles in Ontario, Ca. Beta Unitex, based in Fontana, California, appears to be the largest of the Beta First companies, with 31 employees and annual sales in excess of $7 million. In addition to marketing Norinco-made ceiling fans, it is engaged in "import and export trade... specializing in scientific, technical, optical, electronic products, organic and inorganic chemicals to name just a few." The company told Dun & Bradstreet analysts that trade in machine-tools accounted for 27.5 percent of its annual turnover.

Until 1994, Norinco legally imported "sporting" rifles into the United States, including single-shot versions of the AK-47 assault rifle which were modified locally into fully-automatic rifles and have become a favorite of L.A. street gangs. Under the "China Sports" and other brands, Norinco sells ammunition at gun stores throughout the United States. It uses its own network of distributors known variously as China North Industries Corp. or NIC International Trade Corp. The AFL-CIO, which has tracked Chinese gun and ammunition imports into the United States, has uncovered three NIC outlets in New Jersey, operating in Secaucus, Fairfield, and Carlstadt. They have also identified a subsidiary known as China North Inc. Tan Fang, operating out of Baton Rouge.

Perhaps the most astonishing Norinco activity in the United States, however, is the weapons manufacturer's distribution of Chinese-made toys. Norinco subsidiary Beta Toys, of Cerritos, California, appears to be the main importer, and sells the toys to Wallmart and other chain stores. How will you recognize a Norinco-made toy (as opposed to toys made in non-military Chinese factories)? Look for the following trademarks: Nutco, Swan, The Pot Bellies, Pot Belly Bear Wear, Prestige, Sunshine Teddy, Soft Dreams, and NE-Animals. All have all been registered with the United States Patent and Trademark office by Norinco-affiliates.

Another major PLA arms exporter, Carrie Enterprises, has established an outlet in Kings County, New York, that imports bullet-proof vests and other PLA-made goods into the U.S. A third, China Xinxing Corporation, which depends directly from the PLA General Logistics Department, and operates from an office suite at 11111 Santa Monica Boulevard in Los Angeles under a variety of names (China National Medecines and Health Products, China Huaguang corporation, Perfect Treasure Industrial, Ltd., Begin Famous Enterprises Co., Ltd., etc.) China Xinxing also has a bonded warehouse near the Long Beach, California naval station. None of these companies appears to have attracted the attention of the U.S. authorities, although their ties to the PLA are unequivocal.

INVEST IN MILITARY MODERNIZATION: BUY CHINESE BONDS

Americans wanting to invest in the modernization of mainland China's military factories have another vehicle for placing their money effectively: now they can buy Chinese government bonds in U.S. dollars. And the man who opened the door to China's entry onto the U.S. bond market is Treasury Secretary Robert Rubin. As managing director of Goldman Sachs just prior to coming to Washington in 1993, Rubin paved the way for a $250 million bond offering by CITIC, the Chinese government's lead overseas investment arm that is chaired by arms dealer Wang Jun. In all, CITIC has floated four bond issues in U.S. dollars since the Clintons came to Washington, which attracted $800 million.

ITIC Chairman Wang Jun came to the United States in February 1996 originally to discuss further bond offerings with Clinton crony Ernest Green at Lehman Brothers in New York. His coffee with Clinton at the White House was set up by Green and Charlie Trie to coincide with the bond talks.

Roger W. Robinson, Jr., a Reagan adminstration National Security Council aide and an investment banker by trade, has been tracking China‚s penetration of the U.S. bond market. He has found 36 Chinese-government bond issues in the U.S. since 1989, which raised $6.725 billion for Chinese government?owned banks and trading comanies. All but four of the bonds, worth $420 million, have been issued since Bill Clinton became president. "There is a tremendous public consciousness on the part of large institutional bond-holders," Robinson says. "Groups like the California Teachers Retirement Fund or the ATT Pension Fund were instrumental in boycotting South African financial instruments during the apartheid regime. Do they want to be financing the delivery of AK-47 assault rifles to L.A. street gangs? Because that's what these CITIC bonds are financing."

Robinson warns that there is currently no screening of the U.S. bond market, to make sure that "undesirables" are excluded from raising cash in the U.S. "Without some kind of national security screening, we're going to have terrorists, drug smugglers, hi-tech thieves, and the Chinese military, borrowing on the U.S. bond market because it's simply the most accessible and liquid market in the world. The bond market is going to become the principal funding agency for the proliferation of weapons of mass destruction in the 21st century. This is a massive, global threat to the security of this country."

He also warns that in the event of a default by CITIC or one of the many local Chinese state-owned banks (that are somewhat equivalent to our Savings & Loans and engage in similarly risky investments), they will have to be bailed out-by the U.S. taxpayer. And the risk is real. A Wall Street Journal lead editorial recently revealed that 30 percent of China's Gross National Product is debt. "So it is simply not true that China is credit worthy," Robinson believes. "If they default, you and I default."

Trawling for high-tech

China's thirst for U.S. high-technology goods is legendary in the law enforcement and counter-espionage community. But many U.S. Customs and Commerce Department agents are expressing increasing frustration at their inability to bring these cases to successful prosecution. Unlike the 1980's, when the Reagan administration had a policy of denying the Soviet Union access to American high-technology and vigorously prosecuted Soviet agents caught in the act, the Clinton administration has progressively stripped away layer after layer of national security export controls and failed to prosecute offenders.

"Sure, it's demoralizing," one senior U.S. Customs agent said. "You break your neck on a case, and then the Justice Department says they don't want to prosecute, or else the judge throws it out on a technicality."

This lack of enforcement has been noticed by the Chinese. "The Chinese are now buying up entire factories, lock-stock-and barrel," says one agent. Of particular interest to the Chinese recently have been microprocessor plants that have been retooled or closed down as production is moved off shore. Since the Clinton administration has decontrolled the export of microprocessor production equipment, even for military-grade gallium arsenide chips, there is little enforcement agents can do except watch the show.

To support these purchases, Chinese nationals are using small, defunct U.S. companies that have no obvious ties to the PRC. "They are buying trading companies, manufacturing companies, shipping companies, and banks," one law enforcement official says. "This allows them to buy the equipment, arrange the financing, and ship the products without ever interacting with an American. It makes it extremely difficult to penetrate their operations. We often don't get a clue they are PRC-run until they sponsor somebody needing a visa to enter the U.S.

Among the most active Chinese government-run companies scooping up U.S. technology is CATIC, the China National Aero-Technology Import-Export Corporation. CATIC's purchase of 31 sophisticated machine-tools from a former B-1 bomber plant in Columbus, Ohio in 1994 led to a grand jury investigation that continues to this day. The U.S. seller of the machines, McDonnell Douglas, was fined because CATIC diverted the machines from a civilian airliner plant to a new factory where they intended to assemble the Su-27 fighter-bomber. Despite feeble protests by the Commerce Department (which has never punished CATIC), the machines are still in China. A Washington grand jury is still empaneled and is considering further action-against McDonnell Douglas, which cooperated with U.S. officials by pressing the Chinese to move the machines back to a civilian plant.

CATIC continues to scour U.S. defense plants that have been closed because of defense downsizing in search of used production equipment, and even entire factories, which it can then ship to China. In 1995, CATIC officials based in Stamford, Connecticut, started negotiations with Northrup Grumman, to purchase a Glen Arm, Maryland manufacturing facility which only a few years earlier had been producing parts for the F-14 Tomcat and the B-1 bomber. In the end, CATIC's bid was too low and the plant was auctioned off piece by piece to the highest bidder. But the Chinese did purchase some $190,075 worth of equipment, which Northrup officials described as "bits, holders, holder bearings, and tools."

California Dreaming Many of my investigations took me to California, which I called in one American Spectator article China's 22nd Province, because of the massive penetration of California's economic, political, and banking establishment by Chinese communist enterprises and agents.

One of the more shocking details I uncovered in my investigation of China's California networks was that a front company owned by NORINCO, the PLA's largest weapons manufacturer, had set up shop directly above the CIA office responsible for contacts with U.S. aerospace manufacturers in the Los Angeles area, where some of the Agency's most secret projects have been developed. The Chinese operated there for more than two years without the CIA ever knowing, U.S. law enforcement officers in the LA area told me. The company, Beta First, is registered in California as a seller of optical instruments. The CIA is supposed to be America's premier intelligence organization.

THE MALOOF MEMO

When the Clinton administration took power in 1993, the Chinese had two ICBMs capable of targeting the United States. Today, says Deputy National Security Advisor Gary Samore, that has grown modestly to "less than two dozen." But thanks to the theft of the W-88 warhead design, and the transfer by U.S. satellite manufacturers of technology used to boost multiple satellites to different orbits, the Chinese may already have the capability to put up to five Multiple Independent Reentry Vehicle (MIRV) warheads on each existing missile. And, according to reports for the Office of Naval Intelligence, they will soon begin building and deploying two new generation missile systems, the DF-31 and DF-41, also equipped with multiple warheads, which could expand their nuclear forces exponentially over the next five to ten years. From the bottom rank among the five declared nuclear weapons states (not including India and Pakistan, which demonstrated their nuclear weapons capabilities last year), China will soon slip into third place, just behind the United States and Russia. All this has happened as a direct result of the Clinton administration's policy of engagement.

Similarly, prior to January 1996, when computer export controls virtually lifted after intensive lobbying from Silicon Graphics and other top DNC contributors, the Chinese had obtained only three U.S. High Performance Computers (HPCs), all of which were subject to stringent Defense Department monitoring. In April 1997 - just 14 months after the decontrol - Undersecretary of Commerce William Reinsch told Congress that U.S. companies had sold 46 supercomputers to Chinese end-users, and that the Chinese were not allowing the U.S. government to verify how they were being used. By June 1997, concern in Congress grew that we were creating a significant new capability in China that allowed the PLA to dramatically improve weapons design, missile targeting, and nuclear simulation. This lead to a measure, adopted by the House but ultimately defeated under intense industry and administration pressure, to restore licensing requirements on HPCs.

In January 1999, Reinsch's Bureau of Export administration delivered its first Congressionally-mandated report detailing supercomputer exports over the preceding 12 months. Out of a total of 390 HPCs exported by the United States during that period, 191 of them had gone to China. [Note: a high-powered computer, or HPC, is now defined as a machine capable of performing more than 2,000 million theoretical operations per second [MTOPS]. A desktop machine running a Pentium II processor can perform between 300 to 400 MTOPS] Despite U.S. efforts, the Chinese only allowed government officials to inspect three of them once they had reached China. Congressional said they had been told by administration officials that as many as 600 HPCs had been sold to the Chinese since the 1996 decontrols - more raw computing power than can be found in the Pentagon and the Department of Energy's nuclear weapons labs, combined.

But supercomputers are only one element in a deadly mix of high technologies released for sale to the Chinese by the Clinton administration since 1993. An internal memorandum written by Michael Maloof of the Pentagon's Defense Technology Security Administration, DTSA, subpoenaed by the Cox committee, paints an astonishing picture of the cumulative impact of U.S. technology transfer to the Chinese military over the past five years. The combination of supercomputers, satellite sales, and advanced telecommunications switching technology since 1994 "have provided the Chinese military with a nationwide encrypted command, control, communications, computers and intelligence (C4I) network that will serve it will into the next century," Maloof warned his superiors. "Together, they provide the PLA with a communications infrastructure that it could not have developed on its own."

Extensive manufacturing technologies were decontrolled along with the actual products U.S. companies were allowed to ship to China. Since 1993, the PLA has been importing massive amounts of equipment to manufacture fiber optics cable, which allow for secure communications links impervious to electronics eavesdropping. And companies tied to former colleagues of then Deputy Defense Secretary William Perry led the way in transferring encrypted Asynchronous Transfer Mode (ATM) telephone switching equipment, now used by the PLA for its military communications network. "The decision to allow... ATM switching technology in 1994 occurred over the objection of DoD technical experts," Maloof wrote. "Despite initial NSA concerns, it was silent when the decision finally occurred." As I wrote in "Peking Pentagon" in April 1996, it appeared that Bill Perry personally intervened to get NSA to drop their objections to the sale of this technology, despite the fact that the Chinese buyer was a PLA-owned company.

The Bottom Line

While federal investigators are just beginning to untie the knots of Chinese government attempts to influence the White House and other elected officials through campaign contributions and other means, it is overwhelmingly clear that Peking has identified the United States as a soft target. Our technology controls are too weak to prevent Chinese entities from purchasing military secrets, our capital markets are so wide open that Chinese state investors can finance military modernization on Wall Street, and our statutes governing direct foreign investment are virtually non-existent, allowing Chinese companies to establish far-flung networks for both commercial and intelligence purposes in the United States. If, as authors Ross Munro and Richard Bernstein argue in their book, The Coming Conflict with China, the U.S. and China are headed on a collision course, then that collision is likely to take place right here on our shores.

Ken Timmerman can be reached by email at: medp@erols.com

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