How Beijing gets U.S. defense plants

Insiders and internal documents confirm that People’s Republic of China developed a long-range espionage plan to acquire U.S. rare-earth-magnet technology

Scott Wheeler’s Op-Ed in Insight on the News

Outraged U.S. technology experts and documents obtained by INSIGHT indicate that the acquisition and subsequent transfer of high-tech rare-earth-magnet equipment and technology to the People’s Republic of China (PRC) is the result of a long-range espionage plan by the late “Paramount Leader” Deng Xiaoping directly involving two of Deng’s sons-in-law.

The revelations come as Magnequench Inc., a company partially owned by the San Huan New Materials and HiTech Co.–itself at least partially owned by the PRC government–prepares to shut down a factory in Valparaiso, Ind., that produces critical parts for U.S. precision-guided weapons. The company then plans to ship the machine tools to China. INSIGHT has learned from technology experts, plant insiders, internal PRC documents and historical records that the PRC had targeted the U.S. technological advantage in exotic materials and manufacturing and developed a long-term plan to acquire it in the United States and export a crucial U.S. military advantage to the communist-controlled mainland.

In 1995, San Huan New Materials and China Nonferrous Metals Industrial Corp. partnered with a U.S. investment firm to buy Indiana-based Magnequench from General Motors Corp. INSIGHT has learned that the president of China Nonferrous Metals Industrial, Wu Jianchang, is married to Deng Lin, the eldest daughter of the late Deng Xiaoping. The chairman of San Huan New Materials, Zhang Hong, now chairman of Magnequench, is the husband of Deng Nan, second daughter of Deng Xiaoping. Deng Nan also is vice minister of state on science and technology for the PRC.

Though blocked by secrecy rules from going public, government officials expressed alarm about allowing the Chinese government access to strategic technology now being used to produce critical neodymium-iron-boron magnets for servos used in U.S. guided missiles and smart bombs. An even more critical technology, according to experts, was exported to the PRC in 1999 by Magnequench. That transfer included high-tech equipment used to enrich uranium for nuclear weapons, raising additional concern because of China’s record of proliferating nuclear technology to rogue nations.

As noted, the PRC acquisition of the rare-earth-magnet technology was part of a long-term campaign initiated by Deng Xiaoping, who ruled the PRC from 1978 until his death in 1997. In 1992, Deng acknowledged the value of the PRC rare-earth reserves in the Baotou region, saying, “There is oil in the Middle East; there is rare earth in China.” Documents from the Baotou National Rare Earth Hi-Tech Mine, obtained by INSIGHT, reveal the importance to the PRC of the exotic materials, noting: “The reason why rare earth, a small industry with annual consumption of only 75,000 tons REO [rare-earth oxides] and a market value below U.S. $100 million, has been given attention by Chinese leaders at all levels is due to its uses in modern hightech industries because of its special chemical and physical properties. As a matter of fact, rare earth has been listed in the category of strategic elements in many countries, such as the U.S.A. and Japan.”

A 1999 congressional report on PRC espionage directed at commercial and military technology from the United States says that the Chinese “State Science and Technology Commission,” the agency where Deng Nan, wife of Magnequench Chairman Zhang Hong, serves as vice minister, is responsible for “importing technologies for military use.” The report, known as the “Cox Committee Report” for the select committee’s chairman, Rep. Chris Cox (R-Calif.), states: “In 1986, `Paramount Leader’ Deng Xiaoping adopted a major initiative, the so-called 863 Program, to accelerate the acquisition and development of science and technology.” According to the congressional report, “The PRC claims that the 863 Program produced nearly 1,500 research achievements by 1996 and was supported by nearly 30,000 scientific and technical personnel who worked to advance the PRC’s economy and … national-defense construction.”

The report lists “exotic materials” such as “rare-earth metals” as technology being sought to enhance the PRC’s military capabilities. It says China was using “joint ventures” with U.S. businesses as a way of obtaining “dual-use technology” that has both industrial and military applications–such as that it obtained with Magnequench. “The PRC is also working to translate foreign technical data, analyze it and assimilate it for PLA [People’s Liberation Army] military programs,” says the report.

The sons and daughters of Chinese leaders are considered to be the next layer of leadership in the PRC. Sometimes referred to by the sarcastic term “princelings,” they frequently turn up in high-level positions of responsibility in the Beijing power structure. Professor June Teufel Dreyer, chairman of the political-science department at the University of Miami (Fla.) and a commissioner of the U.S.-China Security Review Commission, tells INSIGHT that the role of Zhang Hong is significant. “Someone in intelligence should investigate who are the princelings and what are the implications to national security,” she says. Zhang Hong did not return telephone calls requesting comment.

Critics say the Chinese plan is transparent. While the PRC was engaged in high-level technological acquisitions to obtain the related technology and machine tools that make permanent rare-earth magnets, a U.S. company mining the raw materials for the magnets was about to be closed. Until 1998 there were essentially two active mines in the world producing rare earths for the exotic magnets — the PRC’s Baotou mine and an American-owned mining operation in the Mojave Desert.

The tiny town of Mountain Pass, Calif., was home of the Molycorp mine from which experts say the highest-grade rare earths in the world came. In 1996, the vital Molycorp mine was accused by the Bureau of Land Management of running afoul of regulations to protect the desert-tortoise habitat. After paying a series of fines and spending a fortune to jigger its mining so as to accommodate protectors of the desert tortoise, the company that supplied almost all the U.S. rare earths laid off hundreds of workers and stopped production.

Prior to the 1998 shutdown of the Unocal-owned mine, Molycorp and its leading competitor, China’s Baotou mine, supplied more than 80 percent of the world’s rare earths. Afterward, according to Baotou company documents, “The U.S.A. has rare-earth resources, but has nearly stopped rare-earth production because of high production cost and environmental concerns, and instead has become one of the major rare-earth importers. … In 1999, the total world consumption of rare earth was about 75,000 tons REO, and China met 88 percent of this demand.”

Walter T. Benecki is a consultant to the Worldwide Magnetics Industry. He tells Insight that the PRC has ambitions beyond supplying the world with rare earths: “The Chinese, in my opinion, are going to dominate the worldwide production of sintered neodymium-iron-boron magnets in the next five years” — the kind of magnets necessary for making missiles and smart bombs and that soon no longer will be made in the United States.

U.S. government officials in charge of national security see importation from communist-controlled China of strategic components for U.S. weapons systems as a choke point in the event of hostility in the Pacific Rim. The lag time for the United States to reopen rare-earth mining and build an assembly line to produce the allied magnets could cripple crisis response, defense experts say.

This again raises questions about the sale of Magnequench and the export of its technology and machine tools to Beijing.

In short, the U.S. government had two opportunities to stop the leakage of this technology to the PRC. First, in 1995, when the two PRC companies attempted to acquire Magnequench, the sale required approval from the Committee on Foreign Investments in the U.S. (CFIUS). Concerns raised by American officials about what they considered a clear case of the PRC attempting to obtain control of vital U.S. weapons technology was shot down, and CFIUS permitted the buyout. The second opportunity came in 1999 when company officials say they sought U.S.-government approval to export equipment from the Magnequench plant in Anderson, Ind., that could enhance China’s ability to enrich uranium for a nuclear weapon. Stronger opposition to the transfer within government ranks again was stymied, and the high-tech computerized machine tools were moved to the company’s new plant in mainland China.

According to the U.S. government’s Military Critical Technology List, at that time China’s rare-earth-magnet capability was limited. By 2002, according to industry experts, China was able to produce a significantly more powerful rare-earth magnet that some experts say was a direct result of technology gained in the Magnequench buyout and subsequent technology transfer.

Some blame what they see as a failure of the U.S. government to safeguard weapons technology on the relaxing of export controls during the Clinton administration. Officials within the technology-export-control regime see the most recent development in the Magnequench case as an opportunity for the Bush administration to draw clear lines of distinction between itself and the export-control policy of the previous administration by interceding. It has only to order San Huan New Materials to divest its interest in Magnequench before the company carries out plans to export to China the equipment currently producing critical parts for U.S. precision-guided missiles and smart bombs.

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