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HOOVER DIGEST
1999 No. 4

Bill Gertz

Missile Deception

U.S. intelligence learned as long ago as 1995 that China was selling nuclear technology to Pakistan—yet Washington did nothing. Bill Gertz explains how corporate interests waylaid the national interest.

Alarm bells went off at the headquarters of the supersecret National Security Agency on a cold December day in 1995. The NSA, located inside an army base at Fort Meade, Maryland, is the U.S. intelligence community’s ears around the world. It picks up millions of communications, from coded military radio transmissions to cellular-phone conversations by international weapons dealers.

This time, NSA listeners got the immediate attention of Vice Admiral J. Michael McConnell, who, as the agency’s director, was the nation’s premier electronic spymaster. The intercept that crossed his desk revealed that a year earlier, in December 1994, China completed a $70,000 deal to sell Pakistan five thousand custom-made “ring magnets” produced by an arm of the Chinese government’s China National Nuclear Corporation.

The intelligence report noted that the devices—ring-shaped, high-technology magnetic bearings—are key components in making fuel for nuclear weapons. The technology transfer remained secret until this reporter broke the story on the front page of the Washington Times in February 1996.

But the Clinton White House made sure that the State Department did not conclude China had violated the nuclear nonproliferation treaty or impose legally required economic sanctions. The administration’s policy was that sanctions against China should be avoided, that they would be bad for the international business that Commerce Secretary Ronald Brown was trying to drum up. “The lengths this administration went to to ignore great dangers to U.S. national security in the name of promoting business were unprecedented,” said a former military officer who worked in the White House and declined to be named.

On May 29, 1998—about two and a half years after U.S. intelligence flagged the China deal with Pakistan—the ground shook in a remote region of southwestern Pakistan as that nation conducted an underground nuclear test. It was the beginning of a new arms race in Southwest Asia.

Back in December 1995, NSA had sent a top-secret cable under Admiral McConnell’s title to the head of the CIA’s Non-Proliferation Center and to senior officials at the Pentagon, White House, and State Department, notifying them of China’s shipment of ring magnets to Pakistan. The intelligence report created a furor within the Clinton administration over whether China had helped Pakistan make fuel for its nuclear weapons arsenal, estimated at ten to fifteen unassembled nuclear devices. At the State Department, Robert Einhorn, deputy assistant secretary for political-military affairs, quickly recognized the problem. He had been assigned the task of looking into the application of complex laws enacted by Congress to put teeth into policies designed to halt the spread of weapons of mass destruction.

Made of a special alloy called samarium-cobalt, ring magnets must be precision manufactured to withstand the high speeds of gas centrifuges that are part of the process for making nuclear bomb fuel. China is the world leader in producing the components. The sale triggered a provision of a law on business loans that requires the secretary of state to notify the Export-Import Bank when any nation is caught helping another nation develop nuclear weapons. Mr. Einhorn called the bank and told officials the intelligence reports meant that, under the 1994 Nuclear Proliferation Prevention Act, the bank could be required to hold up all new loan guarantees for projects sought by U.S. businesses in China. But the Commerce Department, headed by Mr. Brown, former Democratic National Committee chairman, soon was leading the charge to block economic sanctions against Beijing and Islamabad. The Clinton administration ignored the violations.

The United States had imposed sanctions against China in 1993 for selling M-11 missile components but lifted them the next year at the urging of Mr. Brown and C. Michael Armstrong, chairman of Los Angeles–based satellite maker Hughes Electronics. Mr. Armstrong had written a terse letter to President Clinton on October 29, 1993, first highlighting how he had done what the president requested by supporting his economic and trade policies and calls for looser export controls. “I am respectfully requesting your involvement to resolve the China sanctions,” Mr. Armstrong wrote, noting that he had spoken to a Chinese official who informed him Beijing was “positive” about the idea.

China continues to be one of the most significant suppliers of weapons of mass destruction technologies to foreign countries.

But when then-secretary of state Warren Christopher told the Chinese that the United States needed to see “some sign of movement” by China on curbing weapons proliferation, a National Security Council memorandum reported that “the Chinese were not forthcoming.” The memo said Mr. Armstrong and Hughes Electronics “lobbied aggressively” to be allowed to sell satellites to China.

In 1995, the president named Mr. Armstrong to the influential Export Council, where he fought trade controls designed to protect national security. The council produced a lengthy paper arguing against imposing sanctions on foreign trading partners that engaged in illicit weapons sales. Bernard Schwartz, chairman of Loral Space & Communications, also lobbied hard to ease restrictions on satellite sales to China. Mr. Schwartz denied that his large donations to the Democratic National Committee (DNC) were meant to influence Mr. Clinton’s policies on satellite exports.

A Senate investigation into illegal foreign political payments could not make a direct connection between them and Mr. Clinton’s conciliatory policies toward China. Both the White House and the Chinese government deny that Chinese cash influenced policies. But a Senate Governmental Affairs Committee report in 1998 concluded: “It is clear that illegal foreign contributions were made to the DNC and that these contributions were facilitated by individuals with extensive ties to the PRC [People’s Republic of China]. It is also clear that well before the 1996 elections, officials at the highest levels of the Chinese government approved of efforts to increase the PRC’s involvement in the U.S. political process.”

Two years before the ring magnets deal, in March 1992, China signed the nuclear nonproliferation treaty. The 1970 agreement recognized five nations—the United States, the Soviet Union, Britain, France, and China—as the only nuclear powers and sought to prevent others from becoming nuclear powers. The treaty was extended indefinitely in 1995 in what the Clinton administration hailed as a major arms-control victory. The treaty forbids signatories from providing components of nuclear weapons to nonnuclear states.

The State Department’s Bureau of Political-Military Affairs was in a quandary. China had failed its first test as a signatory. Selling ring magnets to Pakistan undermined years of work to keep such states from building nuclear bombs. In January 1996, the State Department quietly approached the China National Nuclear Corporation about the sale it learned of in December. The Chinese said there was “no information” about it. They lied. And the State Department and the White House’s National Security Council knew it. The intelligence was solid: NSA had the intercept detailing the transfer.

To this day, the Chinese and Pakistani governments deny the sale. But for $70,000, China gave a major boost to Pakistan’s nuclear weapons program. “The United States does have concerns about possible nuclear-related transfers between China and Pakistan,” State Department spokesman Glyn Davies said the day the Washington Times broke the story, refusing to comment directly on the transaction. He said the matter had been raised at senior levels of the Chinese and Pakistani governments. But the exact “concerns” and how they were raised did not become public. They were secret, and the Clinton administration was not pressured to explain, either by Congress or the news media.

Ten days later, Chinese Foreign Ministry spokesman Shen Guofang denied the sale took place. “China, a responsible state, has never transferred equipment or technology for producing nuclear weapons to any other country, nor will China do so in the future,” he told reporters in Beijing. He warned that U.S. economic sanctions against China would cause “serious harm” to relations. “China hopes the U.S. side will not use rumors as the basis for making decisions,” he said.

Rumors? The rumors were hard intelligence reports, most classified at the top-secret level and above. The CIA, however, did produce an unclassified report to Congress covering the period from July to December 1996. “During the last half of 1996, China was the most significant supplier of weapons of mass-destruction goods and technology to foreign countries,” the report said. “The Chinese provided a tremendous variety of assistance to both Iran’s and Pakistan’s ballistic-missile programs. China also was the primary source of nuclear-related equipment and technology to Pakistan and a key supplier to Iran during this reporting period.”

In a move aimed at keeping the ring magnets dispute quiet, Mr. Christopher wrote to the Export-Import Bank in February 1996, asking it to defer loan approvals for American businessmen operating in China. The cutoff would have been worth about $10 billion in new loans if it had been kept in place. But the measure lasted only thirty days and did not affect already approved loans. The bank began considering new loans after the thirty days lapsed, without waiting for an official go-ahead from State. The president considered waiving the thirty-day sanctions but backed off after Congress protested.

Several U.S. corporations, including Boeing and Honeywell, lobbied against sanctions. To many in the business community, nuclear weapons transfers should not be allowed to disrupt the flow of trade. National security interests, Mr. Brown asserted, should not be a higher priority than trade. “I happen to think the best chance for us to have an impact in those other areas is through being engaged with China,” he said. Mr. Christopher broached the ring magnets sale in his April 19 meeting with Chinese foreign minister Qian Qichen, a hard-line Communist and vehement critic of the United States. Mr. Qian lied: China had not violated the treaty and therefore had no reason to commit itself to refraining from such exports.

The Christopher-Qian meeting revealed the administration’s plan: If China would just pledge not to transfer more nuclear weapons technology, the United States would agree not to impose the sanctions required by law. After months of secret U.S.-Chinese talks, State Department spokesman Nicholas Burns issued a carefully worded statement May 10, 1996, saying the secretary of state had cleared China of any culpability. “Of particular significance, the Chinese assured us that China will not provide assistance to unsafeguarded nuclear facilities, and the Chinese will now confirm this in a public statement,” Mr. Burns said.

Unsafeguarded facilities are nuclear plants and support facilities that are not subject to inspection by the International Atomic Energy Agency, which monitors nuclear facilities around the world under the treaty. “In addition,” Mr. Burns declared, “senior Chinese officials have informed us that the government of China was unaware of any transfers of ring magnets by a Chinese entity, and they have confirmed our understanding that China’s policy of not assisting unsafeguarded nuclear programs will preclude future transfers of ring magnets to unsafeguarded facilities.” There was “not a sufficient basis” to impose sanctions as required by the Nuclear Proliferation Prevention Act of 1994.

China’s public announcement of the accord said only that “China will not provide assistance to unsafeguarded nuclear facilities.” The Clinton administration claimed this was a “significant public commitment.” The Chinese response was reported by the Xinhua News Agency, the communist government’s official organ. “As a state party to the treaty on the Non-Proliferation of Nuclear Weapons, China strictly observes its obligations under the treaty, and is against the proliferation of nuclear weapons,” Xinhua quoted an unnamed Foreign Ministry spokesman as saying. “China pursues the policy of not endorsing, encouraging, or engaging in the proliferation of nuclear weapons or assisting other countries in developing such weapons.” No mention was made of ring magnets, and no promises were offered on future sales. The Chinese “assurance” fell short of the written guarantee sought by U.S. officials.

The limitations of the U.S.-China understanding were highlighted by the fact that the U.S. statement was issued not in Warren Christopher’s name but in that of his spokesman. The failure to sanction Beijing undermined the nuclear nonproliferation treaty and encouraged China and other nations to disregard their obligations under it, said Representative Floyd Spence, South Carolina Republican and chairman of the House National Security Committee. “It is a further example of the administration looking the other way when the Chinese openly violated international law,” Representative Spence said. But it was a lawmaker from Mr. Clinton’s own party who had some of the strongest words. “It is outrageous that the administration has now freed the Export-Import Bank to use taxpayer funds for loans to assist the China National Nuclear Corporation—the very company that sold the ring magnets to Pakistan,” said Representative Nancy Pelosi, California Democrat. “When all is said and done,” she added, “the Chinese proliferated nuclear weapons technology and got away with it, and Pakistan received essential nuclear weapons technology and was rewarded.”

The Power of the PLA

China's military has used its formidable resources to threaten Taiwan, buy nuclear weaponry, and expand a commercial empire.

In July 1998, China became the world's tenth-largest trading nation, a meteoric rise from insignificance two decades before. Since 1996, the People's Republic of China (PRC) has supplanted Japan as the source of America's largest trade deficit; China also sells more to the European Union and most of its Asian neighbors, including Japan, than it buys.
Since 1989, this rising economic prosperity has been accompanied by double-digit increases in the size of the PRC's defense budget. What this means is a matter of debate. Beijing defends its military budgets by saying that they have barely kept pace with the country's inflation rate. This would be more plausible if the actual defense budget were the same as the official defense budget.

How large is the military budget

No foreign analysts of the People's Liberation Army (PI) believe this to be so; they differ only on the size of the discrepancy between actual and published budgets. Some estimate the variance as tenfold; most say the real figures are three to four times greater. In any case, this would not account for the 1998 defense budget, a 12.8 percent increase that was announced as the Chinese economy was in deflation. Even a massive stimulus package was not expected to yield an inflation rate above 3 percent.
An increasingly assertive international attitude became noticeable as well. In 1992, for example, the PRC's National People's Congress unilaterally declared China's sovereignty over

territories-including Taiwan and the islands of the Diaoyu/ Senkaku, Penghu, Dongsha, Xisha (Paracel), and Nansha (Spratly) groups-it disputed with at least a half dozen neighbors. The law furthermore claimed that the Chinese military (PLA) had the right to "take all necessary measures to prevent and stop the harmful passage of vessels through its territorial waters."
Since the waters surrounding these islands are busy shipping lanes, these actions aroused considerable international apprehension. After quiet pressure from one of its major investors, Japan, with whom the PRC disputes sovereignty over the Diaoyu/Senkaku Islands, Beijing softened its public stand. But the law has never been rescinded.
In the early 1990s, China began to procure advanced weaponry from the former Soviet Union. Its purchase of such high profile weapons as Sukhoi-27 fighter planes, Ilyushin 76 transport planes, Kilo-class submarines with advanced radar systems, and Sovremenny-class guided missile destroyers equipped with Sunburn SS-N-22 cruise missiles received press attention around the world. Less publicized but also important is the help China has received from Israel in its weapons development. According to statistics compiled by the Stockholm International Peace Research Institute, the PRC was the world's third largest arms importer in 1997.

Importing and exporting arms

China is not only a major importer of arms but a major exporter as well. Many exports have been to "rogue states," countries that are either politically and culturally unstable or possess considerable potential to disrupt the stability of their regions. Chided by the United States, Beijing points out that America is the world's leading arms exporter and that, as a sovereign state, the PRC has the right to sell arms wherever it deems appropriate.
China has been reluctant to participate in arms forums, feeling that its voice will be overwhelmed by a clique of wealthy industrialized states that believe they can arrogantly dictate to developing areas. It has also objected to being asked to abide by rules, such as those governing the sale of missiles, which China had no part in formulating.
A leading cause of concern is the PRC's nuclear exports to Pakistan and Iran. The tension escalated in May 1998, when India detonated a series of nuclear j, explosions. In response to inter' national criticism, New Delhi explained that it has acted to counter China's help to Pakistan's nuclear development program. Pakistan, India's regional arch-enemy, then retaliated with its own series of detonations.
Hopes that the number of nuclear powers could be capped suffered a severe setback. According to U.S. intelligence agency reports, the PRC sold approximately 5,000 ring magnets to Pakistan between 1994 and 1996. The magnets were used to make enriched, weapons-grade uranium in a Pakistani installation, Kahuta, that is not subject to inspection or normal international safeguards.
The 1994 Nuclear Proliferation Prevention Act requires the United States to cut off all U.S. Export-Import Bank financing to any country that "has willfully abetted any non-nuclear-weapons state" to acquire unsafeguarded enriched uranium or plutonium. President Clinton, arguing that imposing the sanctions would hurt American businesses, declined to levy sanctions in return for a promise that Beijing would cease such shipments.

PLA helping Iran

The PRC continued, at least until 1997, to help Iran to construct a plant near Esfahan to produce uranium hexafluoride which is fed into gas centrifuges for enrichment. More recent reports indicate that Chinese technicians are aiding Iran in uranium mining and processing and, in fuel fabrication. These activities, however, seem to have been carried out in compliance with the Non-Proliferation Treaty
China's level of involvement with Iran's nuclear program has lessened, though apparently because of competition from Russia rather than international pressure to desist. In summer 1996, the PRC supplied Iran with 400 metric tons of chemicals, some of which can be used in producing nerve gas. There have also been reports that Chinese companies have sold Iran equipment that could be used to produce biological weapons. The PRC has supplied anti-ship cruise missiles including Silkworms, C-8Ols and C-802s, to Iran.
Beijing has helped Syria with its ballistic missile and sold Silkworms to Iraq. It is assisting Algeria in the construction of a nuclear research facility that is to be placed under international safeguards, but there are concerns about a "hot-cell" facility to which the reactor is connected.
China's attitude toward arms control leaves room for various interpretations. Optimists point out that Beijing did sign the Comprehensive Test Ban Treaty (CTBT) in 1996, after much international pressure. Pessimists argue that, since the treaty does not enter into force until signed by all powers, and since India strongly resisted signing, the PRC's decision to accede to the agreement was prompted by a desire to score points against an old antagonist rather than by real commitment to the goals of the treaty.

Test-ban treaty problems

Most recently, India has hinted that it would sign the CTBT if it were granted the status of a nuclear-weapons state and a permanent seat in the UN Security Council. Should India's demands be met, the PRC would be obliged to abide by the CTBT Primary remaining proliferation problems involving China include

The absence of a clear commitment to carefully monitor end-use assurances on its nuclear and nuclear-related exports.

No clear statement that it will eschew nuclear or nuclear related help or exports to states that, while they might meet formal international safeguard criteria, nonetheless have a suspect nonproliferation record.

Beijing's unwillingness to accept full-scope safeguards as an export requirement, as shown by its refusal to join the Nuclear Suppliers Group, which carries that obligation.

Skeptics also point out that, while Beijing has agreed to various regulations before, it is not always assiduous about enforcing them. If caught, the government can either deny that the level of proof it is presented with is sufficiently convincing, or explain that it had no knowledge that the actions were taking place.
The PLA's business empire has also aroused much interest in foreign countries. The Chinese military has been involved in production since its inception, though not to make profits. The idea was to avoid having the army become a burden on society; soldiers could weave their own sandals, build their own barracks, and raise their own food rather than tax an already impoverished peasantry. Some production was actually for the benefit of the peasantry: In the early days of the Communist Party, soldiers helped to build schools and dig irrigation ditches.

Attending to defense and production

Deng Xiaoping came to power in the late 1970s with an ambitious agenda to modernize China. Arguing that one could not graft a strong military onto a weak economy, he called upon the PLA to help the country's efforts at rapid industrialization. A few voices raised misgivings: Would this not dull the fighting edge of the military?
They were assured that it would not: The PLA could attend to defense and production at the same time. Soldiers took up the charge with alacrity, producing refrigerators, motorbikes, pharmaceuticals, and toys. They also run financial institutions, hotels, and karaoke parlors.
The PLA's General Logistics Department alone has at least 20,000 firms. No one, including the department's personnel, is sure of the exact number, because companies do not always provide notification when they change names or spin off affiliates. These involve an estimated 3 percent of the PRC's total GDP.
Some of these activities are legal, some not. Hotels and karaoke parlors can be thinly disguised brothels. Some of the financial institutions are engaged in dubious practices, to the detriment of customers. In July 1998, a scandal broke involving the army-backed J&A Securities firm. Several executives thereof had allegedly amassed huge personal fortunes through shady practices and then placed the money in personal accounts in Hong Kong banks.
Even where transactions are legal, civilian entrepreneurs complain that they cannot compete fairly with military-owned businesses, which are exempt from inspection. Military vehicles do not have to pay tolls on roads and the military can commandeer space on the PRC's overcrowded railway system when it wishes to ship goods to market. By 1993, the military's business activities were sufficiently worrisome that the PRC's defense minister warned that "the Steel Great Wall [a metaphor for the PLA) may self-destruct."

International concern

Internationally, the products of the PLA's business enterprise have caused some concern as well. Chinese-made assault rifles began turning up at American crime scenes in unusual numbers. In 1996, within days of President Clinton's decision not to apply sanctions despite the sale of ring magnets to Pakistan, an FBI sting operation seized $4 million of AK 47 automatic rifles that had been smuggled into California.
The rifles were supplied by two PLA-affiliated companies, Norinco and Poly, with ties to high-ranking Chinese officials. The head of Poly, Wang Jun, is the son of a retired military leader and hero of the revolution. He was later revealed to have been a visitor to the White House and a contributor to Clinton's reelection campaign.
Due to a mysterious leak, assumed to be from the U.S. side, agents had to move in on their suspects earlier than they would have preferred. They had been discussing the purchase of handheld antiaircraft missiles, explosives, and other agents of mass destruction and had believed they were on the verge of luring important Chinese officials who were involved to U.S. soil, where they could be arrested.
In July 1998, Chinese President Jiang Zemin, as part of a massive anticorruption campaign, made the startling announcement that the PLA was to abandon its business connections. What effect this will have is unclear: party and government have tried to rein in the problems in the military's commercial undertakings before, without noticeable effect.
Given the size of the military enterprises, it is unthinkable that they could be closed down. This would put hundreds of thousands out of work and stop production of needed goods and services.
Possibly the military will be told to sell the enterprises, but this raises questions of who would buy them-certainly not the state, given its lack of financial resources and the spotty profit record of state-owned enterprises. A "shell game" may take place, in which enterprises change names but ultimate control is maintained by military institutions. The consensus is that too many important people would be hurt were this directive to succeed. . . and that therefore it will not succeed.
This leaves the task of defining the relationships between China's civilian leadership and the PLA. Jiang Zemin is the first PRC leader never to have had military experience, a fact that seemed to concern the high command when Jiang assumed office. Jiang moved slowly, replacing people who reached retirement age with persons who owed their loyalty to him. It is believed that he would not have dared order the PLA to divest itself of its business empire had he not been confident that the army is loyal to him.
Ensuring that the army is firmly under the control of the Communist Party with Jiang as its head has been a major focus of propaganda for the past several years; in general these efforts seem to have succeeded. Previous reforms have concentrated on separating the army from the party and government-for example, there is now no serving member of the military on the Standing Committee of the Politburo.
This separation makes it possible for the military to develop corporate interests of its own that may not coincide with those of party and government. It cannot be assumed that the army's loyalty is eternal or unconditional. What will the military ask in return for giving up its lucrative commercial empire? There is some feeling that the high command has been urging a harder international line on Jiang as he deals with such contentious issues as relations with the United States, Japan, and Taiwan. The next few months will be interesting for China watchers.·

June Teufel Dreyer, a specialist in the Chinese military, teaches in the School of Business at the University of Miami.