China's espionage becoming a major threat - SIR 21 December 2006

Intelligence community sources in both the US and Europe are warning that the recent spate of prosecutions of individuals on charges linked to Chinese espionage are likely to represent only a fraction of a much wider threat to the economic and security interests of Western nations. And they are also highlighting the increasing use of ‘non-traditional’ intelligence assets in Beijing’s battle to win economic advantage over foreign competitors.

Key pointers include:

- A marked rise in suspected cases of industrial and technological espionage during 2006

- The rising numbers of Chinese academics, students, and visiting delegations suspected of involvement in information gathering on behalf of the Chinese state

- Reports of pressure being placed on Chinese nationals resident abroad to assist Chinese intelligence agents gather material

- China’s continuing economic growth – an average of 10% per annum over the past four years, with projected growth for 2007 only down slightly to 9.5%

- Beijing’s ambitions to increase its export market share of high technology products and components

Although there has been increasing concern over Chinese economic espionage against the West for a number of years, some intelligence community specialists are now suggesting that the current focus of Western intelligence agencies on what are seen to be ‘more pressing’ issues – particularly counter-terrorism – means that counter-espionage has not been prioritised by domestic intelligence agencies, either in the US or in Europe. However, given the enormous economic threat posed by Chinese industrial espionage there are signs that the risk is now being taken far more seriously.

One recent case was the prosecution of two US-based engineers (one a US citizen of Chinese ancestry and the other a Chinese permanent resident of the US) who have entered guilty pleas on charges of economic espionage to benefit a foreign nation – the first time such prosecutions have been brought by US authorities. Both men were apprehended by US Federal Bureau of Investigation (FBI) agents shortly before they boarded a flight to China.

The case is particularly significant because the FBI actually found highly confidential – and commercially valuable – material stolen from four Silicon Valley companies. According to US prosecutors, the espionage was part of a plan to set up a Chinese government-backed microprocessor operation in China. The two men face maximum terms of 30 years in prison when they are sentenced in late April 2007. However, the actual sentences handed down are likely to depend on the extent of the intelligence they are willing to provide to US investigators.

Similar charges have also been brought in a separate case involving the alleged theft of military equipment data which was to be used to "benefit the foreign governments of China, Thailand, and Malaysia" according to the official US indictment. In this case, the individual concerned – a Canadian citizen of Chinese origin – has denied any wrong doing.

Another current case in the US involves the alleged sale of microprocessors with potential missile applications by a Chinese academic to the Chinese state. In all, US investigators are currently probing around 400 suspected cases of economic or technological espionage involving illegal transfers to China.

Of even greater concern, however, is that many of those suspected of involvement in these activities are not professional Chinese intelligence agents. Many are visiting academics, students enrolled in Western universities and colleges, or members of official trade delegations. In some cases, investigators have discovered evidence that fake companies are being created to facilitate illicit technology deals. Some estimates have put the number of suspect firms operating in the USA at over 2,600.

The recent upsurge in prosecutions and indictments in the US demonstrates that Washington is facing up to a threat that many within the international intelligence community have been warning is escalating. There are wider parallels with events in Australia in June 2005 when Chinese consular official Chen Yonglin defected amid claims that Bejing had "up to 1,000 spies" operating within Australia and was also using its network of agents to "kidnap" Chinese dissidents in order to return them to China.

Although Beijing condemned its former official’s claims as "fabricated" and "purely fictitious", the affair shed rare light on the extent of China’s alleged intelligence activities abroad. Chen’s assertions were backed shortly afterwards following confirmation of certain details by another defector, this time a former security officer named Hao Feng Jun.

Hao’s claims focused mainly on Beijing’s operations to spy on dissidents in Australia. However, whilst the Australian authorities were reluctant to grant either man political asylum – or give their claims any official credence – amid concerns that the controversy might damage Australian-Sino relations, the US appears to be willing to take a much tougher line in order to safeguard its economic interests.

Concern over Chinese espionage activities in Britain have been mounting since warnings were given by the country’s domestic Security Service MI5 in late 2005 that the level of intelligence gathering by Chinese agents was becoming a threat to national economic security. Likewise, a defection in Belgium in 2005 led to the exposure of various front organisations for Chinese espionage activities such as the "Chinese Students’ and Scholars’ Association". Similar concerns have been raised in Sweden, as well as by national intelligence services across the EU.

We predict that with increasing numbers of Chinese students enrolling for courses abroad – one leading UK university’s business school recruits over 60% of its postgraduate students from China, most of whom are sponsored by the Chinese state or firms with close links to the government – the threat posed by Chinese economic intelligence-gathering is likely to remain a key risk. At present, the US seems willing to prosecute individuals involved in economic espionage, but other countries have not yet demonstrated the same determination to launch their own crackdowns against Beijing and its networks of intelligence agents and assets. SIR.