U.S. Probes Use of High-Tech Gear by China

A federal investigation is trying to determine whether China plotted to divert to its defense industry high-tech equipment obtained as part of a venture with McDonnell Douglas Corp. to build commercial airliners, U.S. officials said Wednesday.

They said a federal grand jury is looking into whether McDonnell Douglas’ work with a Chinese firm to produce advanced MD-90 commercial airliners was exploited by the Chinese to gain access to machine tools that could be transferred to China’s defense industry to build missiles and fighter aircraft.

The Chinese purchase of the tools had to be approved by the Clinton administration. After initial opposition from the Pentagon, U.S. export licenses were granted in 1994.

The investigation of the equipment transfer has been underway for at least a year.

It began after McDonnell Douglas officials reported to the administration that the tools had been moved.

They were shifted to an unapproved manufacturing facility in a different Chinese city than the one where they were supposed to be used to produce sub-assemblies for commercial aircraft, the officials said.

Intelligence gathered from U.S. spy satellites and other sources now appears to confirm that the Chinese planned all along to shift the equipment for use in their defense industry, officials said.

Satellite photographs apparently show that a defense factory in Nanchang was being prepared for the equipment before it was even shipped from the United States.

The Chinese had assured the administration that the equipment would be used in a commercial plant in Beijing. That plant in the capital was to be built by McDonnell Douglas’ Chinese partner and another Chinese firm.

Officials said federal investigators have subpoenaed documents from the U.S. offices of the Chinese state-owned company that is McDonnell Douglas’ joint-venture partner. They are investigating whether that company misled the United States about the equipment’s use.

U.S. officials said the alleged Chinese subterfuge was discovered before the tools could be used for military purposes.

The officials said the Chinese, under pressure from McDonnell Douglas, ultimately moved the equipment to a Shanghai plant that is producing components for the MD-90 project and other commercial ventures.

The roots of the controversy date to 1992, when McDonnell Douglas reached a co-production agreement with CATIC, the Chinese aviation firm.

As it is now structured, the deal calls for China to buy 40 advanced MD-90 passenger airliners, including 20 built in McDonnell Douglas’ Long Beach plant and 20 produced in Shanghai.

CATIC later bought $5.4 million in equipment, including machine tools and a giant stretch-metal press that McDonnell Douglas was liquidating from a plant it had closed in Columbus, Ohio.

Once McDonnell Douglas received Commerce Department approval for the export sales, it was responsible for monitoring the equipment’s use. When company officials went to China for a first inspection in March 1995, they found that some of the equipment had been moved to Nanchang.