What Does China Want? How U.S. Technology Turned Beijing Into a Global Military Power

Newsweek published this story under the headline “Beijing's Secret Wish List” on April 31, 1997. In light of recent news involving China's growing military power, Newsweek is republishing the story.

IT WAS JUST ANOTHER WEST COAST FUND-RAISER, THE THIRD in a row that day for Bill Clinton. Guests nibbled on salmon and took turns saying hello to the president of the United States -- all for $ 10,000 a head. Liu Chao-ying's hand was just one among many extended, with a smile and a nod, to Clinton at the dinner in L.A. last July. The real question is, what exactly was she doing there? For, though she looked the part, Liu was not another smartly dressed Chinese-American dealmaker seeking a photo op with the president to parlay into business back in Asia. She is a Chinese "princeling," a daughter of a top Communist Party cadre, and cachet was the last thing she needed. An executive with China's state-run rocket manufacturer, Liu told NEWSWEEK that she was only interested in "a little bit of business" with Johnny Chung, the wheeler-dealer whose name has been linked to Asiagate -- the scandal involving allegations of Chinese money funneled to U.S. election campaigns (his lawyer denies Chung was a conduit for such funds). Liu couldn't legally contribute to the Democratic National Committee, so Chung donated 10 grand in his name, his lawyer says. Maybe that's all there was to it. But Liu has another life as well, which investigators are now examining. Her resume includes the rank of major in the People's Liberation Army (PLA), and U.S. intelligence sources believe she has taken an active role in acquiring technology for China's military. Her father, Gen. Liu Huaqing, 81, is the senior vice chairman of China's Central Military Commission. He is described by China experts as probably the driving force behind Beijing's long-term plan to modernize its armed forces, a stealth strategy that calls for acquiring U.S. "dual use" technology -- supercomputers, for instance, that can either track weather or help target a modern nuclear arsenal on an enemy. Perhaps most tellingly, Liu, 38, is a graduate of one of China's leading spy schools, an elite institute run by the PLA.

Welcome to the shadowy underside of U.S.-China relations, where no one is quite who he or she seems to be. Obscured by the FBI probe into Asiagate, a larger question remains unaddressed. What does China really want from Washington? Its diplomatic goals are vastly complex and for years have focused mainly on improving trade. China clearly values the huge, rich U.S. market -- and has a $ 40 billion trade surplus to prove it -- but it has an ulterior motive, too, for wanting to do business with Americans. And that may help to explain the presence of Liu Chao-ying on the West Coast.

The Chinese military is woefully backward. China already has many of the earmarks of a rising power: a roaring economy, the world's largest standing army and plenty of breathless headlines. What it doesn't have -- and the United States does in unmatched quality and quantity -- is state-of-the-art defense technology. Beijing's leaders -- especially General Liu, sources say -- have grown acutely aware of this in recent years as they have come to see their nation as America's potential rival in the 21st century. They realize they badly need this technology to move from their cold-war-era strategic posture. That was predicated on defending against a Soviet invasion, with antiquated weapons and its "human wave" army of 3 million men; now the Chinese have the more ambitious goal of becoming the dominant power in Asia.

It is a strategy that could someday bring China into conflict with the major power in the region, the United States. The irony is this: under a dramatic liberalization of high-tech exports begun during Clinton's first term, the Chinese are purchasing many of the technologies they need to accomplish this goal from U.S. companies. And very often they are doing it legally. U.S. defense firms are forbidden to sell weapons to China, thanks to an embargo in place since the 1989 Tiananmen Square massacre. But in an era when much of the best defense technology comes from the commercial market -- like computers, avionics software and other dual-use components -- there is a great deal the Chinese are permitted to buy. As a result, thousands of Chinese businesses have crowded into the U.S. market in recent years, quietly gobbling up everything from optical tubes (which can be used for night-vision scopes on tanks) to oscilloscopes (which can aid in nuclear-weapons simulation). Ostensibly for civilian consumption -- the purchase contracts, under U.S. export rules, usually must say so -- these dual-use items often end up in the hands of PLA-affiliated factories.

Among the technology already acquired is telecommunications equipment that can build up the PLA's command and control of forces, and advanced software for battle simulation and coordination. China has also obtained satellites and sophisticated jet engines for cruise missiles to provide "over the horizon" force capability, and supercomputers that can be used for miniaturizing and targeting nuclear warheads. Often U.S. exporters do not know who the ultimate end user is. In 1994, for instance, Allied Signal sold China jet engines that later turned up in Chinese and Pakistani military training aircraft; intelligence analysts suspect they were also intended for Beijing's aggressive cruise-missile-development program.

THE CHINESE STRATEGY GOES back at least to the late 1980s. That's when the FBI first identified China as "the most active foreign power engaged in the illegal acquisition of American technology." But Beijing has sharply stepped up its efforts in the last few years. "It was Desert Storm that really woke them up," says Bates Gill, a U.S. authority on Chinese arms acquisitions. Chinese leaders watched, aghast, as U.S. "smart" weapons fired from miles away found their way down stovepipes in Iraq. "They saw the kind of technologies the Americans were able to use with impunity against the fifth or sixth largest army in the world -- which was armed with Russian and Chinese technologies," says Gill. Today Silicon Valley has become Beijing's East Berlin, its gateway to the best Western technology. About half of the 900 tech-transfer cases investigated annually on the West Coast involve the Chinese, says Nicholas Eftimiades, a Defense Intelligence Agency analyst. "They have hundreds of front companies," says a Western military attache in Beijing. "They have hundreds of people in those companies."

But the era of largely open-ended tech transfer may be ending. Stung by a perception of vulnerability toward China in the wake of Asiagate, the Clinton administration is toughening up export restrictions -- and pushing for a new, more hardheaded brand of "constructive engagement" with Beijing. In coming weeks, NEWSWEEK has learned, several names of Chinese end users -- customers, in other words -- will be added to a Department of Commerce list of dubious purchasers of dual-use technology suspected of involvement in weapons proliferation. This means that any company seeking to sell to these customers will probably be forced to get a government export license first. Already U.S. companies are feeling the heat -- and Beijing is upset (story). Says William Reich, the U.S. under secretary for export controls, "Our denial rate [of licenses for China exports] probably has tripled in the last year, and is more than three times the denial rate of any other country." Last month the Commerce Department called in federal prosecutors to investigate one of America's showcase exporters, Silicon Graphics, for selling supercomputers to China's Academy of Sciences, a sometime military subcontractor, and to a Russian nuclear weapons lab.

Commerce has also begun a review of all computer sales abroad, with a particular focus on China and Russia, Reich says. At the same time the State Department is hurrying efforts to gain concessions from Beijing on an anti-weapons-proliferation pact in time for the first of two summits between Clinton and Chinese President Jiang Zemin planned for the fall. Such an accord would impose an export-control-and-monitoring regime on Chinese factories, and on controversial exports to countries like Iran and Pakistan.

The administration's tougher line represents a step back from a long period of trade liberalization with China. The problem the president faces is peculiar to the post-cold-war era, when free trade has become the norm and technology is far more ambiguous and universal. During the cold war, military-related trade was closely monitored, and usually it was just a matter of planes, missiles and other big-ticket items. The enemy was clear. The Western allies barred dual-use technologies to communist countries through Cocom, the Paris-based Coordinating Committee on Multilateral Export Controls. Cocom required export licenses for any sensitive tech transfers.

But the 1990s have seen much of this old consensus unravel. To a great extent, this was the doing of William Perry, Clinton's recently retired defense secretary. In 1994, Perry decided it was all but impossible to halt the flow of many dual-use technologies abroad. Cocom was dissolved that same year, and Perry threw open the door to sales of most computer and telecom equipment without export licenses. As a result, the number of licenses required for potentially dual-use technology abroad dropped from a high of 120,000 per year under the Reagan administration to fewer than 9,000 cases last year. U.S. companies are now, for the most part, working on an honor system; if they decide themselves that a customer isn't military-related, they can sell without notifying the government.

THE PERRY STRATEGY MET WITH a willing audience at Commerce, which under Ron Brown, who was then secretary, began trumpeting export promotion. U.S. exporters, of course, relished this policy. Under intense corporate lobbying -- often by big Democratic donors and high-tech exporters like AT&T, Loral and United Technologies -- more and more sophisticated equipment was sold abroad. Much of it dovetailed nicely with Beijing's high-tech wish list.

Beijing, meanwhile, has done a masterful job of encouraging these openings. In trade and contract negotiations, China has blackmailed U.S. industry, in effect, into lobbying for export liberalization by threatening to withhold its 1.2 billion-consumer market. This played right into the Commerce Department's policy. For example, in 1994 Hughes Electronics chairman Michael Armstrong warned Clinton that sanctions against China could prompt Beijing to buy European satellites. Last October the administration finally moved exports of communications satellites, once highly restricted, to a fast-track approval process.

The same pressure has been applied to the Europeans, who are anxious about their ailing defense industries. Beijing today is lobbying the European Union hard -- and successfully, it seems -- to break its own tenuous post-Tiananmen weapons ban. The British, for instance, have made a deal to sell China a radar-and-communications system that could help give Beijing over-the-horizon capability. Last week French Defense Minister Charles Millon, on a visit to Beijing, also expressed impatience over the ban. Most strikingly, Russia has gotten into the game with a slew of direct arms sales to China. Moscow, its military-industrial complex in disarray, has been selling fighter jets, submarines, cruisers and possibly long-range-missile parts to Beijing in the last few years. It is a policy that Clinton has done little to stop, concentrating Russia policy instead on winning grudging acceptance for NATO expansion in Europe.

Today the real issue for U.S. national interests -- one that will long outlast the Clinton administration -- is whether Washington has been effectively played for a fool by Beijing. By opening the lanes of business so far and so fast, is America helping to transform what is still just a developing nation into a 21st-century superpower -- one that it will, ironically, someday have to contain? Far from being a well-considered policy, Clinton's critics say, "constructive engagement" has mainly become a free-for-all in which dealmaking is the ruling principle. And for that they blame a Clinton foreign policy that has put economics at the top of the agenda. "Our policy on China is pretty much being dictated by corporate America and its influence in the White House," says Gary Milhollin, director of the Wisconsin Project, a Washington, D.C.-based outfit that tracks arms flow around the world. "We deregulated too much too fast without thinking about the consequences." Some within the government agree. "It used to be that anything one step over a PC was licensable. Now they're letting supercomputers go without licenses," one chagrined U.S. Customs official told NEWSWEEK. "Commerce has shrunk the protected list down to practically nothing. Customs has turned into a trade-facilitation agency."

There is evidence that the administration has been at least somewhat naive about Beijing's designs. Perry, for example, not only opened up trade in high-tech goods; he also made a concerted effort to facilitate exports to China. In 1994 the Pentagon chief joined hands with Lt. Gen. Ding Henggao, then head of Costind (Committee of Science, Technology and Industry for National Defense), to form the hopefully named Defense Conversion Commission. The U.S. defense secretary thought this would be a vehicle for shifting China's militaryindustries into peaceful pursuits. "It was a stupid thing to do," says one U.S. official now, acknowledging that Perry's effort only helped China's military modernization. One U.S. intelligence official calls Costind "the central clearing-house that identifies what technologies are critical [for defense] and decides how to get them." Costind is also the guiding force behind China's effort to build a nuclear submarine and longer-range-missile program. Perry, in an interview, admitted that the conversion effort failed. "Their interest was primarily in defense-technology sharing. So we had different views, and we dropped it after a year."

ADMINISTRATION OFFICIALS, despite their new, tougher line, still argue that stemming technology flow is nearly impossible. "In the post-Cocom era there's no way to stop this from happening," says former assistant defense secretary Joseph Nye. "This technology is broadly shared, and the sense of threat [about China] isn't broadly shared." Perry says efforts to curb risky tech transfers fell flat in Clinton's first term. "There was a consistent effort during the whole time I was in government to reach agreement with Western countries on a unified approach," he says. "We did not have much success." Administration sources also point out that the government did replace Cocom with something called the Wassenaar Arrangement, a less stringent accord among Western countries affecting weapons and dual-use goods.

Nonetheless, criticism over the administration's engagement policy, once confined to the far right, is spreading in Washington. Last week, in a remarkably frank assessment, the Pentagon issued a report concluding that "China's long-term goal is to become one of the world's great powers," and it will "probably build its military power to the point where it can engage and defeat any potential enemy within the region" as well as deter any threat worldwide. Beijing's most urgent military focus is probably Taiwan, especially since a tense standoff last year, when Washington ordered aircraft carriers to the Taiwan Strait in response to threatening moves by China against Taipei. "A lot of the military technologies they are developing are directly linked to solving the problem of the U.S. Navy and an attack on Taiwan," says a policy analyst on the Committee on National Security in the U.S. House of Representatives, which ordered the report. "The administration's policy is premised upon its conclusion that we can have some sort of strategic partnership with the Chinese," he says. "But if that's so, then why do they characterize us to be the enemy, and why are they developing technologies not strictly required for defending their borders? How do you square that circle?"

ALL THIS FEAR AND SUSPICION has been compounded by Asiagate. It's unclear whether Beijing's technological ambitions are linked to the campaign-financing scandal. In all likelihood, China's eagerness to curry favor on Capitol Hill and in the White House was a response to Taiwan's diplomatic successes, especially President Lee Teng-hui's visit to America in 1995. Nonetheless, Beijing's longer-term desire for U.S. technology may help to explain why some names have popped up in the scandal's cast of characters. Often, like Liu Chao-ying, Chinese business people wear two hats, civilian and military, with interests in both worlds that are difficult to distinguish. Take Wang Jun, who's become notorious as the "arms dealer" introduced to Clinton at a White House coffee last year. Wang's far more important role is president of CITIC, the China International Trade and Investment Corp., Beijing's premier export vehicle. But Wang, another princeling, is also chairman of a weapons company affiliated with the PLA, China Poly Group. One of Poly's strategic objectives is "to buy whatever they can get their hands on from the open market. They hit on every company with technology they meet," says a U.S. intelligence official.

As for Liu, she's probably out to make a buck, too -- her presence at the L.A. fund-raiser was most likely Johnny Chung's doing, his attempt to impress a princeling contact. After Chung made the $ 10,000 donation to the DNC for Liu's invitation to the fund-raiser, she invested $ 300,000 in his fax business, and set up a company, Mars-well Investment, using his California business address. "Getting [American] parts and technology is part of her brief," says one U.S. official who is familiar with her family. The main company Liu works for, China Aerospace Corp., is part of the massive "collection network" for dual-use technology run by Costind, says a U.S. Defense Intelligence Agency source.

Any threat to U.S. security is, to be sure, a distant one. China's military will take decades to get its act together. For example, China has never successfully produced an indigenously designed military aircraft. And new software-driven defense technologies have made its task far more complex. Moreover, Beijing's technology strategy seems badly disorganized. Often it is subverted by its own putative agents -- even the PLA, whose hundreds of companies suffer the same capitalist fever as the rest of the economy. Many Costind factories want to make "refrigerators and motorcycles," says Gill. "They don't make any money in military research and production."

In the end, argues the U.S. administration, Washington is wedged between two irreconcilable interests. About half of the $ 12 billion in U.S. exports to China last year was in high-technology goods. America is now running a growing deficit with China, so the idea of restricting exports runs headlong into the administration's trade policy. And some suggest that the current demonization of China will do more damage to U.S. interests in the long run than tech flows. "Let's be blunt about it," says Commerce's Reich. "There are people in Congress, the media and academia who believe the president's policy of engagement is wrong and we should be pursuing a policy of containment. We don't agree . . . The president believes very much that exports are a vital part of our national health and, in a larger sense, our economic security."

Perhaps he will be proved right. Few critics dispute the need for some form of engagement with Beijing. The alternative is bleak: to cut off ties, possibly start Cold War II and make a lot of U.S. exporters very unhappy. And by the time China's military finally sees the fruits of its modernization program, the country may be more open, more democratic. For the U.S. administration, the best choice, in the end, may not be between engagement and containment. It may be a matter of doing the former more watchfully so as to avoid, someday, the latter.

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