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17 May 1998
Source: Hardcopy The New York Times, pp. A1, A18.

# HOW CHINESE WON RIGHTS TO LAUNCH SATELLITES FOR U.S.

## TIE TO DONATIONS DENIED

### Easing of Rules in 1996 Was a Shift of Balance Between Security and Commerce

By JEFF GERTH and DAVID E. SANGER

WASHINGTON, May 16--On Oct. 9, 1995, Secretary of State Warren Christopher ended a lengthy debate within the Clinton Administration by initialing a classified order that preserved the State Department's sharp limits on China's ability to launch American-made satellites aboard Chinese rockets.

Both American industry and state-owned Chinese companies had been lobbying for years to get the satellites off what is known as the "munitions list," the inventory of America's most sensitive military and intelligence-gathering technology. But Mr. Christopher sided with the Defense Department, the intelligence agencies and some of his own advisers, who noted that commercial satellites held technological secrets that could jeopardize "significant military and intelligence interests."

There was one more reason not to ease the controls, they wrote in a classified memorandum. Doing so would "raise suspicions that we are trying to evade China sanctions" imposed when the country was caught shipping weapons technology abroad--which is what happened in 1991 and 1993 for missile sales to Pakistan.

The Secretary of State's decision to keep satellites on the munitions list, making it harder for them to be exported, did not stand for long. Five months later, President Clinton took the unusual step of reversing it.

Control of export licensing for communications satellites was shifted to the Commerce Department, then run by Ronald H. Brown, who was deeply interested in promoting American businesses overseas and had been one of the Democratic Party's key fund-raising strategists. Several licenses have since been approved.

A reconstruction of Mr. Clinton's decision to change the export control rules, based on interviews and documents, shows that it followed a turf war between the State and Commerce DePartments, and a broader debate over how to balance America's security concerns and commercial competition in the hottest of all the emerging markets.

It also illustrates the intersection of the interests of both large American donors and surreptitious foreign donors to the 1996 campaign.

Both American satellite makers and the Chinese were delighted with the decision because the Commerce Department has dual responsibilities: licensing sensitive exports and promoting sales of American goods around the world.

One of the beneficiaries of that decision, it now turns out, was China Aerospace because its rockets could launch American satellites. An executive of the state-owned Chinese company, Liu Chaoying, is said to have provided tens of thousands of dollars from Chinese military intelligence to the Democratic Party in the summer of 1996.

Ms. Liu's involvement was described to Federal investigators recently by Johnny Chung, a Democratic fund-raiser who says he took $300,000 from Ms. Liu--who is also a lieutenant colonel in the Chinese military--and donated almost $100,000 of it to Democratic causes, apparently keeping the rest for his businesses.

President Clinton's decision was announced in March 1996, several months before the donations were made. But the actual change was delayed until the fall.

The White House said it did not know the source of Mr. Chung's donations and denies that the decision was influenced by campaign donations, domestic or foreign.

"This was motivated by competitiveness and streamlining bureaucracy concerns, and nothing else," Samuel R. Berger, Mr. Clinton's national security adviser, said in an interview two weeks ago.

On Friday, Mr. Berger's spokesman, Eric Rubin, said the decision was also part of the Administration's China policy, and specifically its effort to encourage China to clamp down on military exports.

"On many occasions, this was discussed with the Chinese Government because we believe that policy on satellite licenses is one of the tools we have to strengthen our nonproliferation policy," Mr. Rubin said.

Mr. Clinton's decision took place after months of tension with Beijing.

In January reports of China's export of nuclear technology to Pakistan and missiles to Iran caused considerable concern in Congress and the Pentagon. In early May, two months after Mr. Clinton reversed the Secretary of State, the Administration said China had agreed to curb its missile and nuclear exports. But that announcement was greeted with considerable skepticism by Republican critics, including Bob Dole, who was well on the way to getting the nomination for President.

During the campaign, the Republicans attacked Mr. Clinton for failing to curb China's sales of nuclear and missile technology to other countries.

The satellite decision in March was one element of the Administration's "carrot-and-stick-approach to working with China," said James Lilley, a former United States Ambassador to Beijing.

But in the way business and diplomacy mix in Washington's dealings with China, the decision also resonated in boardrooms on both sides of the Pacific. It satisfied the commercial interests of the American aerospace industry, which had long sought access to China's low-cost ability to launch satellites into space, aboard rockets called the Long March.

And it bolstered China's own commercial interests. Ms. Liu's parent company, China Aerospace, owns a large piece of a Hong Kong satellite operator. It also owns the China Great Wall Industry Corporation, the rocket company that launches both private satellites and tests and provides equipment for the missiles in China's nuclear arsenal. It was Great Wall that the State Department sanctioned in 1991 and 1993 for selling missiles to Pakistan.

Other powerful Chinese state enterprises also had multibillion-dollar stakes in getting access to American satellites. Among them was the China International Trade and Investment Corporation, whose chairman, Wang Jun, gained unwanted attention in the United States last year when it was revealed that he attended one of Mr. Clinton's campaign coffee meetings in the White House. The day of Mr. Wang's visit, Mr. Clinton, in what Mr. Rubin said was a coincidence, signed waivers allowing the Chinese to launch four American satellites--though they were unrelated to the business interests of China International Trade.

"Any suggestions that these decisions were influenced by Wang Jun's presence in the U.S. is completely unfounded," Mr. Rubin said.

It is not known what motivated Ms. Liu or the Chinese military to make the donations. Ms. Liu's father, Gen. Liu Huaqing, was not only China's highest military officer but a member of the leadership of the Communist Party.

The White House and the Democratic National Committee deny any knowledge of the source of Mr. Chung's $366,000 in donations, most predating his connection with Ms. Liu, and all of which was returned.

But there is no doubt that American companies--partners and suppliers of China International Trade and China Aerospace--put enormous pressure on the White House. They were also important campaign contributors. For example, the chief executive of Loral Space and Communications gave $275,000 between November 1995 and June 1996 to the Democrats.

The Precursor

### A Lobbying Effort To Persuade Bush

China's drive to obtain a steady stream of satellite technology from the United States preceded the Clinton Administration's arrival in Washington.

In 1990, just a year after the killings at Tiananmen Square, officials from China Aerospace and the Chinese Government approached Mr. Lilley, the American Ambassador, pressing for President Bush to waive restrictions enacted in the aftermath of Tiananmen that barred China from launching American satellites.

"They hit me very hard," Mr. Lilley recalled recently. "It was a prestige national program. It was putting China on the map as the big space country of the 21st century."

Mr. Bush, who became America's first permanent representative in Communist China in 1974, granted a waiver that allowed a launching on one of China's Long March rockets. In 1992, a number of Senators--including Al Gore, then still a Senator from Tennessee--wrote to the Bush Administration warning that China was using the launchings to "gain foreign aerospace technology that would be otherwise unavailable to it."

In the last days of the 1992 Presidential campaign, Mr. Gore made the waivers an issue, contending that President Bush "has permitted five additional American-built satellites to be launched by the Chinese."

"President Bush really is an incurable patsy for those dictators he sets out to coddle," Mr. Gore said in a speech at the Goddard Space Flight Center in Greenbelt, Md.

The Argument

### Business Leaders Pressure Clinton

Almost as soon as Mr. Clinton took office, business leaders began their campaign to drastically change his views about China.

Both Chinese and American companies were working to get satellites off the State Department's munitions list. The rules for exporting goods that are on the list are particularly tough. Congress must be notified 30 days in advance. Moreover, the State Department considers only nonproliferation issues and defers to the Pentagon's judgments.

In contrast, the Commerce Department's export-control administration solicits a host of views and must weigh the effects of its decisions on America's competitive position.

Mr. Christopher's aides also noted in their 1995 classified memorandum that "U.S. firms remain concerned there could be additional sanctions imposed on China precluding future munitions licenses," exactly the kind of sanctions that had been only recently lifted for China Aerospace's subsidiaries.

And there was a lot at stake: an estimated 14 commercial communications satellite launchings a year worldwide, costing several hundred million dollars apiece.

"The business community regarded the inclusion of civilian satellites on the munitions list as an insult," said William A. Reinsch, the Under Secretary of Commerce for export control, who fought Mr. Christopher's decision. "We're the only country that treats them that way."

The Chinese also understood that they had a huge stake in the outcome of the decision. Zuoyi Huang, president of the California subsidiary of China Great Wall, a part of the China Aerospace empire, said in an interview that his company was eager for any changes that would insure easier access to American technology.

"The license takes time," he said. "You have to get a waiver from the President. The customers can't wait. It's just pure commercial use. It's not a military threat to the United States."

The Review

### A Decision Against And a Quick Appeal

The arguments came to a head in 1995. C. Michael Armstrong, then the chief executive of Hughes Electronics and newly chosen as the head of President Clinton's export council, asked to meet Mr. Christopher. He urged that satellites, which his company produces, no longer be treated as military goods.

The Secretary of State promised that he would conduct a detailed review in consultation with the Department of Defense, the C.I.A. and the National Security Agency and the Department of Commerce.

But the majority of the interagency group quickly found itself at odds with the aerospace industry. A major issue was how to protect encryption equipment, which is built into a satellite and interprets instructions from ground controllers who manipulate the satellite once it is in orbit. Similar devices are used to communicate with American spy satellites, and the Pentagon and intelligence agencies worried that anyone who could crack the code could take control of the satellites themselves.

On Aug. 17, 1995, a memorandum prepared for the interagency group noted that the chief executive of a satellite company told Mr. Christopher that "once it is embedded in the satellite, the encryption device has no military significance." Thus, the industry argued, there was little risk that the Chinese would get their hands on the encryption devices-- especially because American military officials are supposed to watch the satellites with care when they are in Chinese hands.

But, the memorandum went on, "the national security position" is that "the nature of the device itself," not its location, "should be used to determine whether it must be controlled as a military item."

The encryption issue was one of the main reasons the interagency group--over the objections of the Commerce Department--recommended that satellites remain on the munitions list. Mr. Christopher concurred. Soon after Mr. Christopher put his initials on the decision memorandum, Commerce Secretary Ronald H. Brown appealed the decision to the President.

The Turnaround

### The Commerce Dept. Wins a Turf Battle

The debate surrounding the appeal did not heat up for four months. The nature of the arguments that went to the White House is still unclear: many of the documents remain classified. But those that have been reviewed by The New York Times show that the White House and the Commerce Department began communicating again about the issue on Feb. 8, 1996, two days after President Clinton broke a backlog of applications for launchings by China, by approving four of them that day.

Mr. Clinton signed those waivers the same day that Wang Jun, the man who was often referred to during the campaign finance investigations as a "Chinese arms dealer," visited Washington. His company, the China International Trade and Investment Corporation, has a multibillion-dollar stake in one of Hong Kong's largest satellite companies.

That same day, Mr. Wang met with Mr. Brown, at his expansive office in the Commerce Department. And that evening, Mr. Wang attended a coffee at the White House, an event Mr. Clinton later called "clearly inappropriate." Others at the coffee said Mr. Wang never spoke during the session.

By mid-February, for reasons that are still murky, there seemed to be some urgency at the White House to decide whether to reverse Mr. Christopher's decision, shifting satellite export licensing to the Commerce Department.

A Feb. 15 State Department memorandum talks about speeding up the process because "the Administration wanted to wrap this up."

In the end, the State Department relented. Participants in the final debate said that the President concluded that the technology could be protected through the Commerce Department, just as the department protects supercomputers and other sensitive technologies.

The President's decision was announced on March 14. Commerce officials, who had just won one of Washington's nastiest turf wars were jubilant.

"Good news," officials were told by E-mail. The electronic message went on to recommend a "low key" spin on the news that would "not draw attention to the decision."

Internal Commerce Department documents show that officials were anticipating questions from reporters and Congress about whether the decision represented an effort to ease technology transfers to China and remove items from sanctions--some of the same concerns that figured in Mr. Christopher's decision.

In the days preceding the announcement, China had raised tensions with its Asian neighbors and the United States to new heights, firing M-9 ballistic missiles, which carried dummy warheads, into target zones 30 miles off the shore of Taiwan.

The March 14 announcement said that regulations putting into effect the President's decision would be issued within 30 days. But the bureaucratic infighting continued.

Finally, the State Department issued the regulations shifting most satellite licensing to the Commerce Department.

They were published on Nov. 5, 1996, the day President Clinton was re-elected.

[Sidebar]

### From Sanctions to Satellite Licenses

Between 1993 and 1996, the Clinton Administration dropped its sanctions on China Aerospace, a state-owned Chinese company, for selling missiles to Pakistan and gave the company permission to launch private United States communications satellites despite some lingering concerns in the Administration about security.

August 1993 State Department imposes economic sanctions against subsidiaries of Beijing-based China Aerospace for selling missiles to Pakistan. The sanctions bar American companies from doing business with the concerns.

Sept.-Oct. 1993 Michael Armstrong, the chief executive of Hughes Electronics Corp., tells the President the sanctions hurt his company because China Aerospace is a low-cost launcher of satellites.

Nov. 1993 The Administration signals it might ease satellite licensing procedures and Mr. Armstrong relays to the White House an encouraging reaction from his contacts in China.

April 1995 Secretary of State Warren Christopher begins an interagency review of restrictions on the export of communications satellites at Mr. Armstrong's urging. The companies want to see responsibility for the issue shifted to the Commerce Department.

Oct. 9, 1995 Following the recommendation of the Pentagon, intelligence agencies and his advisers, Mr. Christopher keeps satellites under the purview of the State Department. The Commerce Department appeals this decision to President Clinton .

Feb. 6, 1996 With the relations between the United States and China tense over Beijing's military operations and sales, President Clinton approves the launch of four American satellites by Chinese rockets.

Mid-February 1996 The White House revives the effort to ease restrictions on satellite exports, reviewing anew Mr. Christopher's decision

May 3, 1996 Three top satellite executives write to Mr. Clinton complaining about the delay in issuing the regulations.

March 8-15, 1996 China conducts missile tests near Taiwan, signalling its displeasure over talk of Taiwanese independence during Taiwan's elections.

March 14, 1996 In a low-key announcement, the Administration says that Mr. Clinton has shifted responsibility for communications satellites to the Commerce Department. Regulations, it says, are to be issued in 30 days.

Nov. 5, 1996 The State Department publishes the new regulations in the Federal Register. President Clinton is re-elected .

[End]

See also GAO report on US/EU arms sales to China since 1989 embargo:

http://jya.com/nsiad-98-171.txt