Washington, April 22: A Federal criminal inquiry has uncovered new evidence, including American satellite photos, suggesting that a state-owned Chinese company had all along intended to divert American machine equipment to a military plant that builds missiles and fighter aircraft, intelligence officials say.
The equipment, bought in 1994 by one of China's most powerful state-owned corporations, Catic, was supposed to be used solely for civilian purposes.
Now, as a year-old inquiry accumulates more evidence of a diversion, the Clinton Administration is faced with the question of how to proceed if it is proved that Catic knowingly misled American officials. Administration officials say the next step could be filing charges against the company.
The new evidence also raises questions about the Administration's approval of the sale in the first place, officials said.
The Administration preliminarily approved Catic's purchase of machine equipment from the McDonnell Douglas Corporation in late August 1994; the equipment was supposed to be used in Beijing to make civilian jetliners. The approval came about the time Commerce Secretary Ronald H. Brown left for China, where he helped persuade Chinese officials to keep their commitment to spend $1 billion on jetliners from McDonnell Douglas.
But Pentagon critics of the sale had earlier said they believed that the Chinese wanted the sensitive equipment, which included giant machine tools to shape and bend large aircraft parts, to improve their military capability, Administration officials said. At the time, the Chinese press had reported a Chinese Government plan to cut jetliner production in half, which would have reduced the civilian need for the American equipment.
In the end, some equipment sent from the United States wound up 800 miles from Beijing, at a military complex of the Nanchang Aircraft Company. The satellite photos recently uncovered show that a plant was being built in Nanchang to house a giant stretch press, a major piece of American equipment, even as Catic was telling American officials that the equipment would go to a civilian machining center in Beijing, intelligence officials said.
American officials said other documents in the case suggested that Nanchang had been the intended destination from the start. Nanchang officials, for instance, inspected some of the equipment at a McDonnell Douglas plant in Ohio 1993, before the deal was signed, and then packed up the equipment in late 1994 as it was being shipped to China, the officials said. The plan to build the Beijing machining center, the supposed destination for the equipment, was abandoned before the license was issued.
All that raises some diplomatically sensitive questions.
`We ought to send the Chinese the message that they can't divert our technology with impunity, and an indictment of Catic might even get the Chinese to talk to us seriously about proliferation,' said Gary Milhollin, the director of the Wisconsin Project on Nuclear Arms Control, which has tracked the procurement activities of Catic in the United States.
Catic and its lawyers declined to answer any questions about the grand jury investigation, which, one witness said, is still in the early stages of taking testimony. Catic is based in Beijing, outside the reach of the grand jury, but records from its subsidiary in Southern California have been subpoenaed, Administration officials said.
A spokesman for McDonnell Douglas, Larry McCracken, said, `At this point, since these matters are being looked at by the United States Attorney's Office, we have no comment other than to say that McDonnell Douglas has not done anything illegal.'
McDonnell Douglas, an aerospace company based in St. Louis that has agreed to merge with its longtime competitor, the Boeing Company, discovered the diversion in Nanchang in early 1995 and reported it promptly to Commerce Department officials. Commerce Department officials say the unusual conditions they attached at the last minute to the approval for the license enabled them to have the diverted equipment placed under tighter supervision at a civilian location in China.
But that took almost a year. By then, the criminal inquiry by the United States Attorney's Office in Washington and the United States Customs Service had begun. In late spring of 1996, several weeks after
the grand jury had subpoenaed records from McDonnell Douglas, a company official tried to obtain the sensitive satellite photos of the Nanchang military site, intelligence officials said.
The request was eventually denied, but the question of why the company official sought the photos has become part of the investigation, intelligence officials said.
The decision to approve the export of the machine equipment pitted national security concerns against economic interests and, in the end, the latter prevailed.
`For the Administration, this has been a difficult decision, weighting jobs against counterproliferation,' said Adm. Bill Center, who represented the Joint Chiefs of Staff in 1994 in deliberations within the Government about the proposed sale.
Admiral Center said, `The Joint Chiefs of Staff initially opposed the sale on national security grounds.' But after considerable discussion, led by White House officials, `all of us concluded that if McDonnell Douglas didn't sell it, others would, and we wouldn't accomplish anything by saying no.'
Secretary Brown, who died in a plane crash in Croatia last year, intended to raise the issue of economic and security trade-offs when he visited China in 1994. A draft of one of his speeches said, `Sales of sensitive technologies have been made despite public and political opposition.'
Some sales to China may wind up being examined as part of the various inquiries into possible ties between the Chinese and the Clinton Administration.
The House Government Reform and Oversight Committee, the principal panel looking at campaign finances, has requested the use of Customs investigators who have specialized in export diversion cases, Congressional and Administration officials said.