A Sale to Red China We Will One Day Regret

PUBLISHED INSIGHT MAGAZINE - MAY 31, PAGE 28 AND 29

By Charles Smith

A flood of new details is surfacing about a controversial technology transfer between a U.S. company and front companies for the People's Liberation Army, or PLA, brokered by then secretary of defense William Perry and a high-ranking Pentagon official who himself had a stake in the deal.

The transfer in late 1994, known as the Hua Mei project, involved advanced telecommunications technology -- with a variety of battlefield and civilian applications -- from AT&T via SC&M Brooks in St. Louis to Galaxy New Technology in China. The fiber-optic technology sold to Galaxy New Technology is not a weapon itself, but it greatly enhances the command and control system linking the Chinese army, navy and air force.

The Chinese may have repackaged the same system and resold it to Iraq, where it would be able to threaten the lives of U.S. pilots flying reconnaissance missions. According to Aviation Week & Space Technology, Iraq's air-defense system -- code- named "Tiger-Song" by NATO commanders -- is an advanced internet for surface-to-air missile batteries using secure fiber-optic communications. One of the advantages of Tiger-Song is that it allows the Iraqi radar installations not associated with Iraqi missile batteries to lock in on U.S. aircraft and transfer the information to the missile operators through the secure fiber-optic network.

Perry faced a firestorm of criticism in early 1996 following reports that he overruled objections from the Pentagon's technology directorate, as well as from critics in the National Security Agency, who wanted to block the transfer in 1994.

Newly released documents from the Commerce Department reveal that Perry and other officials met with several leading generals of the PLA at an unannounced closed-door meeting at Commerce on Nov. 17, 1994. The documents show the level of contact between the Chinese army and the Clinton Commerce Department to be far deeper than previously admitted.

On the U.S. side, Perry was assisted by his friend and colleague at Stan ford University, John Lewis, who was a business partner of Galaxy New Technology and a member of the Defense Policy Board of the Pentagon, as well as a civilian consultant to the Secretary of Defense, according to Pentagon documents. In 1994 Lewis was executive director of Chicago-based SCM (which later became SC&M and merged with St. Louis-based Brooks Telecom.)

According to the Far Eastern Economic Review, Lewis was a member of the SCM board until January, 1995, although Lewis told the Review that he left SCM at the time he was appointed to the Defense Policy Board in August, 1994. SC&M Brooks was acting as a conduit for AT&T fiber-optic technology wanted by the Chinese generals.

SC&M/Brooks was financed on the U.S. side by Perry's investment-banking firm, Hambrecht and Quist, according to one of the bank's advertisements in 1995. Perry in 1985 helped found Hambrecht and Quist, which also is the financial backer of the liberal-leaning Salon magazine.

The Chinese delegation was led by PLA Gen. Ding Henggao -- the head of the Chinese Commission of Science, Technology and Industry for National Defense, or COSTIND -- who brought with him some of the highest-ranking PLA officers to travel outside of China. Dine brought his aide and second in Command at COSTIND, Lt. Gen. Huai Guomo, as well as Maj. Gen. Fu Jiaping and Maj. Gen. Chen Kaizeng. Ding even brought one of the spymasters of the Chinese army, Major Gen. Hou Gang, deputy director of the Intelligence Department of the PLA.

The military affiliation of the company officials meeting with Perry should have raised serious doubt as to the supposed civilian application of the fiber-optic system being traded, as required by Commerce Department licensing regulations. The cochairmen of the Hua Mei joint venture in 1994, according to Pentagon documents, were former senator Adlai E. Stevenson III and Madam Nie Li, wife of Ding. Lie holds her own military rank -- Madam General Nie of the People's Liberation Army. Lewis is listed in the same document as one of five directors under Stevenson's chairmanship.

As Lawrence DiRita, a scholar at the Heritage Foundation, reported three years ago, Galaxy officials approached several large U.S. telecommunications companies prior to 1994 in the hope of involving them in their partnership with SC&M Brooks. U.S. executives who spoke to the Galaxy representatives said that the Chinese side was counting on the influence SC&M brought to the partnership. Some of those U.S. executives, who declined to participate because of the obvious national security implications, asked out of curiosity how Galaxy intended to get U.S. government approval to transfer to China dual-use (civilian/military) technology. "In response, the Chinese spoke quite openly about the relationships they had already established with senior Democrats, mentioning Mr. Stevenson by name," DiRita explained.

Although Commerce Department national-security export rules were relaxed in April 1994, a Commerce cable to the CIA that same year nonetheless states, "There is a presumption of denial for the export of controlled products to military end-users or for military end-use in China."

Not only was the firm led by a Chinese general, the so-called "civilian company" was heavily packed with Chinese army officers and experts. One member of Galaxy New Technology management, according to the Defense document, was Director and President Deng Changru. Deng also was a lieutenant colonel in the PLA and head of the PLA communications corps. Another Chinese army officer on the Galaxy New Technology staff was Co-General Manager Xie Zhichao or Lt. Col. Xie Zhichao, director of the COSTIND Electronics Design Bureau.

Still another embarrassing aspect of the 1994 transfer deal is that a key figure in the founding of Galaxy New Technology in 1992 is Hua Di, a Stanford University faculty member who returned to China in 1997. Some congressional staffers and intelligence specialists alleged to this reporter their belief that Hua has been a Chinese agent since he "defected" from China in 1989.

Hua was born into a family of prominent Communist officials, studied missile engineering in Russia and worked inside China's missile program for 24 years. In 1989, Hua fled China after the Tiananmen Square crackdown on student democracy demonstrators.

In the United States, Hua went to work as a researcher at Stanford's Center for International Security and Arms Control. The Center's codirectors were Perry and Lewis.

In 1992, COSTIND's Lt. Gen. Huai -- the same Lt. Gen. Huai who attended the November 1994 meeting with PLA Gen. Ding -- contacted Hua to start a joint venture called Galaxy New Technology.

Hua in 1996 told the Far Eastern Economic Review: "Lewis and I were matchmakers," regarding Galaxy New Technology and SCM. "Huai is my good friend."

The Galaxy New Technology deal went public in 1996, drawing reams of press and a General Accounting Office, or GAO, report. According to the GAO, "Defense Department officials told us that broadband telecommunications equipment could be used to improve the Chinese military's command and control communications networks."

House Judiciary Committee Chairman Henry Hyde of Illinois tried to prompt an investigation in 1997 by writing Attorney General Janet Reno a letter outlining his concerns about Galaxy. According to Hyde's letter to Reno, "In 1994, sophisticated telecommunications technology was transferred to a U.S.-Chinese joint venture called HUA MEI, in which the Chinese partner is an entity controlled by the Chinese military. This particular transfer included fiber-optic communications equipment which is used for high-speed, secure communications over long distances." Despite the GAO report, Hyde's letter, a furious Congress and embarrassing press reports, Reno did nothing.

In late October 1998, it was reported in the New York Times that Hua had returned to China and had been arrested on spying charges. Hua met with Chinese security officials in late 1997 and was assured that he would not be prosecuted. But, on Jan. 6, 1998, Hua was arrested after all in Beijing and charged with passing state secrets to U.S. officials. The Times reported that Stanford officials and Hua's business partner, Lewis, have written to the Chinese government appealing for Hua's release, while the Clinton administration appears to be strangely silent about his case.

The likely reason for this silence, according to informed intelligence specialists, is that Hua could have passed false missile information to the West, obtained secure communications for the Chinese army and penetrated the Clinton White House through the secretary of defense. In this view, Hua served his partner and comrade Ding. In the end, Hua arranged for his two benefactors, Ding and Perry, to be part of negotiations on the deal to harden and secure Chinese military communications. It is being said on Capitol Hill that Hua in fact may have returned home to a hero's welcome and in all likelihood a fat bank account made on profits from the Galaxy New Technology deal. Hua was no fool -- nor was he a dissident. In the view of these sources Hua almost certainly was a spy -- one of many in a network of spies run by Ding.

In a single stroke, Perry and the Clinton administration sold Ding what Chinese army spies in a decade of espionage would have labored to steal. Ding, the master of spies, openly bragged of his ambition to make the PLA the most powerful military force on earth. Today, Ding can brag of his success. The Chinese general is a very rich man who has turned the PLA into a nuclear force poised to dominate the world. He likely will be remembered as the spymaster-buymaster, since he bought whatever his agents couldn't get by surveillance and theft. Needless to say, with business friends such as Perry and Lewis, who needs enemies?

Charles Smith is a Richmond-based journalist specializing in information'security issues.

May 31, 1999


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