Report’s Claim on China ‘Front’ Firms Disputed

The Cox committee’s assertion that the Chinese government established a network of as many as 3,000 “front companies” in the U.S. to acquire military technology reflects a fundamental misunderstanding of China’s business enterprises in the U.S., trade experts say.

The figure comes from the long-awaited report of the House investigative committee on Chinese espionage, which set off a wave of recrimination over lax safeguarding of U.S. nuclear and technological secrets when it was released Tuesday. The select committee is chaired by Rep. Christopher Cox (R-Newport Beach).

The committee suggested that many Chinese business entities are centrally controlled and their work coordinated by the mainland Chinese government. But that assertion was widely ridiculed by U.S. experts on the Chinese economy and its trade policies.

Many of them believe that tensions among the various Chinese military, defense and civilian companies operating in the U.S. actually “impede or prevent [their] cooperation,” as James Mulvenon, a Rand Corp. analyst who testified before the committee, wrote in a seminal report on the issue in 1997.

“The idea that most of these companies are set up by the [state security agency] is absolute nonsense,” said Nick Lardy, a senior fellow and expert on the Chinese economy at the Washington-based Brookings Institution.

Others said they fear that the Cox report could unleash an undeserved backlash against Chinese-owned businesses across the country, whether operated by ethnic Chinese from the mainland or from Taiwan. These include thousands in Southern California, the center of Chinese business activity in the United States.

“Put yourself in the shoes of a Chinese business from the mainland that imports and exports, said Llewellyn Chin, a Los Angeles attorney and Chinese community activist. “Automatically they are going to be suspect, and people are not going to want to trade with them.”

In its report, the Cox committee did not produce a list of the 3,000 “fronts” with its report or explain how it reached that figure.

The committee defined “front companies” as any affiliated with the Chinese government, its security service or the People’s Liberation Army, its military arm, that were set up to acquire Western technology, give cover to spies, launder or raise money, or influence the U.S. government.

Although previous testimony by State Department officials and outside experts placed the number of such companies operating in the U.S. at no more than 30, the committee “concluded that there are more than 3,000” such corporations operating in the country.

Experts in the Chinese economy say that the higher figure could only be reached by lumping together civilian, military and defense-industrial companies incorporated in the U.S.--and that there is little chance that all could be equally under the thumb of Chinese military or espionage agencies. Meanwhile, the companies are helping to handle Chinese exports to the U.S., which came to $71.2 billion last year.

In fact, Mulvenon said in testimony he submitted for a hearing in November 1997 before the Senate Foreign Relations Committee, any conclusion “that the activities of Chinese military and defense-industrial companies in the U.S. are highly coordinated . . . greatly oversimplifies the complexity of the relevant bureaucracies.”

He further stated that his research, “including conversations with knowledgeable law enforcement personnel, leads me to believe that the primary motivation of these companies is profit, not espionage.”

Mulvenon is traveling in Taiwan and could not be reached Wednesday for comment. Although he is considered one of the leading American experts on Chinese military commerce, his name does not appear on a partial list of witnesses released Tuesday by the Cox committee. His Senate testimony, however, was cited by the committee in a footnote.

The report did not explicitly say that all 3,000 companies were engaged in technological or commercial espionage. But it did argue that the Chinese government’s “blurring of ‘commercial’ and ‘intelligence’ operations presents challenges” to U.S. counterespionage efforts and strongly suggested the blurring was deliberate.

In conducting its investigation, the committee took testimony from more than a score of U.S. government officials and outside experts on the Chinese government’s direct commercial activities in the U.S.

Among the witnesses most vehemently opposed to allowing some Chinese government companies to operate domestically was Jeffrey L. Fiedler, president of the Food and Allied Trades Department of the AFL-CIO, a unit that has campaigned for years against allowing affiliates of the People’s Liberation Army to do business in the U.S. The department sponsors a Web site titled “Kick the PLA Out of the USA,” which bears links to testimony and reports about the PLA and to proposed legislation barring such enterprises from operating in the U.S.

In his 1997 testimony, Fiedler identified 12 companies incorporated in the U.S. that he said were owned by the PLA or the People’s Armed Police and another 11 whose status was “uncertain.” His opposition to allowing them to operate domestically, however, was based not on fears that they may be engaged in espionage but on the PLA’s and PAP’s record of oppressing trade unionists and other activists in China.

“My beef is purely political,” he said Wednesday. “As a matter of decency, the U.S. should not allow these people to walk the earth in this country.”

The Cox committee’s treatment of military, defense and civilian enterprises raised concerns in the Chinese business community that all Chinese enterprises would be viewed suspiciously. By far, most ethnic Chinese firms are owned by Taiwanese immigrants or their families.

Many if not most of the businesses established by mainland Chinese in such communities as the San Gabriel Valley in recent years are subsidiaries or affiliates of Chinese state-owned enterprises, said Li Pei Wu, a Taiwan native and chairman and CEO of General Bank, a Los Angeles institution founded by and catering to Taiwanese immigrants.

Wu said the systematic gathering of intelligence for the state “could happen” under such a system, and he believes there is “large-scale intelligence gathering in this country.” But the mere relationship of companies here to their home government is not evidence of a coordinated effort.

“They do have a lot of access to customers. They do establish business associations, but to what extent they could use this to access [sensitive] information is unclear,” he said.

The report also sent a chill through the Southland’s Taiwanese American computer industry, a thriving community of more than 500 technology companies concentrated predominantly in the San Gabriel Valley. The companies assemble finished parts and equipment imported from Asian manufacturers and repackage them for sale nationwide and around the world.

While the companies have little contact with mainland Chinese businesses, espionage allegations have nevertheless hurt their credibility and the job prospects of all Chinese American computer engineers, said Hank Tao, president of EKM Computer in Buena Park.

“Right now it’s a very bad situation for the Chinese companies and Chinese people looking for high-tech jobs,” he said. “I hope that time can pass and make everybody forget.”

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CAUTION URGED: Senate GOP Leader Trent Lott warned against partisan attacks based on the Cox report. A14