THE SHANGRI LA CONSPIRACY AND THE DOUBLE-SILKWORM SCAM
THE STRANGE STORY OF
HOW THE CHINESE ALMOST BOUGHT AN AMERICAN AIRCRAFT CARRIER
HOW THE CIA BOUGHT TWO OF CHINA'S SILKWORM MISSILES
Admiral Beyarkov was nervous. He had arrived in Shanghai's airport on the previous afternoon on December 16, 1989, and had brought along ten colleagues with him from Moscow. The Shanghai airport was not simply not busy, as it had always been in the past. It seemed almost abandoned. The same was true of the central railroad station and of the hotels in Shanghai, which were usually crowded and bustling at this time of the year. Now, they were quiet and nearly deserted. Echoes of footsteps echoed through the cavernous train station where previously thousands of people were packed together in the massive waiting rooms waiting the arrival and departure of trains. In the post Tiananmen days, tourists had abandoned China, and so had many of her old friends. The Russians had not, however, and they were present as new friends and old comrades, to talk about business. Ironically, within a few weeks, the communist empire that they represented, would collapse and they would be part of a navy without a country. But at the moment, there was a glow and an anticipation of a major deal about to be struck between the two greatest communist powers in the world. Within weeks, there would be one.
[Soon after coming to power in the spring of 1985, Mikhail Gorbachev made normalization of relations with China a cardinal objective of his foreign policy. Bucking the advice of the China haters on the international department of the central committee of the Communist Party in the Soviet Union., Gorbachev made his historic visit to China in May, 1989, and was received warmly by the Chinese. Relations cooled as Gorbachev's reformist policies unfolded. And in August, 1991, the Chinese congratulated, prematurely, the leaders of the coup that temporarily replaced Gorbachev].
In addition to Beyarkov, deputy commander of the Soviet Navy, was Vice Admiral Shakov in charge of Soviet naval ship building, Deputy Minister of the Soviet Ship-building Ministry and the chairman of the All Soviet Ship-building Import/ Export Corporation. All members of the delegation, including Admiral Beyarkov, wore civilian clothes and no reference was made in private conversation to rank. Beyarkov was merely "Mr. Beyarkov" during the visit.
The pretest for the visit was to attend the Shanghai International Maritime Symposium held at the Shanghai Exhibition Hall. But there were also more important business at stake. The delgates met privately with Shanghai's mayor Zhu Rong-ji(who is today the Vice Premier of the PRC) and with Zhang Shou, General Manager of the China State Shipbuilding Corporation(CSSC) and with Qian Yung-chang, Minister of Transportation.
The Soviet delegation, accompanied by Chinese liaison officers, examined a Chinese missile destroyer(164) and a missile frigate(535) and a submarine(035). They were also shown the Jian Nan and Hu Dong shipyards, the two largest naval shipyards in Shanghai, and the CSSC 704 and 708 research institutes. They then held separate talks with PLA Navy Rear Admiral Chang Ming, who was in charge of naval equipment development, and Deputy Commander of the Shanghai Naval Base, Rear Admiral Huang Shao-ling.
The Soviet team was impressed, and Admiral Beyarkov expressed willingness to renew port-call courtesies between the two navies sometime in the next year. He specifically suggested that two Kresta-class cruisers from the Soviet Pacific Fleet visit Shanghai. After all, "Since American warships visit Qingdao and Shanghai, why shouldn't the Soviet Navy?" he asked. He also suggested that discussions be held for the possibility of having Soviet warships maintained, replenished and repaired in Chiense docks.
What the Chinese really wanted, however, in this warming relationship with the Soviet Union only a decade after the Soviet fleet threatened Chinese installations in the South China Sea Xisha Islands, was an aircraft carrier. The Soviets, it seemed, just might be able to provide such a ship for the Chinese navy.
And within the next months, a delegation from the PLA Navy's Research and Evalutaion Center sent a survey team to the Black Sea Shipyard in the Ukraine to inspect the Soviet Union's first "true" aircraft carrier, the "Admiral of the Fleet of the Soviet Union Kuznetsov"[previously the Leonid Brezhnev and then the Tiblisi] and a sister-ship, the Varyag(formerly the Riga). On it's return to China, members of the team put together a report that circulated among the highest ranks of the Navy -- Aircraft Carrier Without a Catapult: A revolutionary Breakthrough for Carriers of the Next Generation(Bu Dai Tan She Qi De Hang Mu: Xia Yi Dai Hang Mu De Ge Ming Xin Tu Puo). The Chinese notion originally had been that the Soviet Union did not design the Kuznitsov with a catapult because they did not have the technology. But the trip to the Soviet Union convinced them otherwise. The report had a profound influence on Chinese plans for building their own aircraft carrier. Within a few months, however, the Chinese, who wtill experienced insurmountable technical problems in building the catapult system for a carrier, changed their minds. They reverted to a previous plan. They would not build a carrier. They would buy one. With the collapse of the Soviet Union, the Chinese opened negotiations for the purchase first of the Kuznetsov and then of the Varyag.
The acquisition of the carrier would dramatically change the military balance of forces in the South China Sea where China's claims to the Spratly(Nansha) and Paracel(Xisha) Islands worried military officials. During China's Vietnam War, in a secret deal, the carrier Coral Sea, followed a Soviet fleet that sailed through the Strait of Tsushima at a distance as it approached the Xisha Islands, eventually ninfluencing it to turn back. With its military budget 52 percent higher this year than in 1989, the PLA can now afford to pay hard currency to the the financially-pressed Ukraine, which now claims the Black-Sea vessel. The price for the vessel, it is estimated, will be more than $200 million.
China's earlier quest to acquire an aircraft carrier fell through in the summer of 1989 when it failed in a secret effort to purchase an American carrier, the Shangri-La, which was mothballed at the time in the Philadelphia Naval Yard. Earlier that year the Defense Logistics Agency had put the Shangri-La up for sale as scrap on a sealed bid basis. The Chinese immediately began planning to win the highest bid through espionage.
The Shangri-La episode, one Chinese military official told me, "was our greatest failure."
At that time, China had been trying to construct its own aircraft carrier. "We wanted to design our own carrier," a Navy officer told me. "But we had insurmountable technical difficulties. We needed to examine closely some of the launching, landing and maintenance mechanisms and techniques that the US used."
Then the Shangri-La was put up for sale and the Chinese saw their chance.
The ship had a long and colorful history. Named after the fictitious Himalayan kingdom described by James Hilton in his popular novel, Lost Horizon. In the early days of the Second World War, President Franklin Roosevelt was asked by reporters about the Doolittle raid on Tokyo in April, 1942. Roosevelt said that the Doolittle bombers took off from somewhere in Shangri-La. The Hornet, the actual ship that launched the planes, was lost in the battle of the Santa Cruz Islands in October of that same year.
The hull of this Essex-class carrier was laid down in the Norfolk Navy Yard in January, 1943, and she was launched 13 months later, she was commissioned in September, 1944. She became part of the force that attacked Okinawa. She became the flagship of the 2nd Carrier Task Force and was captained by Vice Admiral John McCain. For the remainder of the war she was engaged in airstrikes against the home islands of Japan. In 1946 the carrier participated in Operation Crossroads in the Central Pacific, the atomic bomb tests conducted at Bikini Atoll. In November, 1947, she was decommissioned and placed in the Rserve Fleet at San Francisco. Five years later she was underwent modernization at Puget Sound Naval SHipyard. She received an angled flight deck, twin steam catapults and her aircraft elevators and arresting gear were overhauled. She was recommissioned as a virtually new ship in 1955. In the 1960s she was part of the 6th fleet in the Mediterranean. In 1962 she was overhauled again in New York. This time she received a new air search and height-finding radar and a new arrester system. Her electrical and enginering equipment was renovated. She then returned to the second and the sixth fleet. In 1964 and 1965 she underwent another overhaul, this time in Philadelphia. She was then designated as an antisubmarine warfare aircraft carrier, CVS-38 and sailed to the Western Pacific. For seven months she launched her planes and her tours of duty on Yankee station. Following preinactivation overhaul at the Boston Naval Shipyard South Annex, she was decommissioned in July, 1971. She was placed in the Atlantic Reserve Fleet and berthed at Philadelphia. During her long career the Shangri-la earned two battle stars for World War II service and three battle stars for service in the Vietnam War.
The Essex-class carrier was exactly what the Chinese wanted. Informed of the pending sale by "close friends" in the U.S. Navy, they Chinese dispatched a team of trusted American friends to board the Shangri-la in order to see what would be sold with the ship. The group took photographs and sent them to Beijing. To the delight of the Chinese, the carrier's flight deck mechanisms were intact, and were to be part of the deal. This technology was modern on the carrier.
At that time the situation in the South China sea was sc critical. We had naval skirmishes with Taiwan and with Malaysia over the Spratley Islands sovereignty. At that time, China became to think, or was reminded of the seriousness of having long range protection force capability, an aircraft carrier was the ideal solution for the Chinese navy, since a lot of areas in the Spratley islands were simply out of the range of the shore based fighter bombers. And so China needed an aircraft carrier. Therefore, they wanted to buy one. Actually, in 1980, China purchased one carrier, the old World War II model, from Australia, the Melbourne, the city in the southern part of Australia, We bought that and disassembled it. Every part was taken off with extreme care, it was disassembled in a shipyard near Guangzhou. And it was studied and the contract originally was for scrapping purposes. But every part was evaluated. Then we found that it was not enough. We needed to buy one from the US and evaluate it. The US was more advanced. That one was from Britain, but we needed one from the US. Of course we could never buy something like the Kennedy or your modern carriers, but we needed to buy a medium sized not to old ship. For scrapping purposes. So there was an argument in China. Some wanted to keep the Shangri La and to use it as it was. But the Shangri La they had something else in mind. It was put up by sale in Philadelphia. So we immediately jumped into the bidding for the ship. And we almost got it.
The Shangri La I think is our greatest failure. Actually. A major disappointment. It was supposed to be for scrapping purposes. At that time, in 1986 and early 1987. We wanted to design our own aircraft carrier. We wanted to learn some of the landing and maintenance techniques that the Us had. This was a medium sized aircraft carrier from World War II, and this as a medium sized carrier and that is what we wanted. The technology was modern on the carrier. At that time the situation in the South China Sea was so critical. We had naval skirmishes with Taiwan and with Malaysia over the Spratley Islands sovereignty. At that time, China became to think, or was reminded of the seriousness of having long range protection force capability, an aircraft carrier was the ideal solution for the Chinese navy, since a lot of areas in the Spratley islands were simply out of the range of the shore based fighter bombers. And so China needed an aircraft carrier. Therefore, they wanted to buy one. Actually, in 1980, China purchased one carrier, the old World War II model, from Australia, the Melbourne, the city in the southern part of Australia, We bought that and disassembled it. Every part was taken off with extreme care, it was disassembled in a shipyard near Guangzhou. And it was studied and the contract originally was for scrapping purposes. But every part was evaluated. Then we found that it was not enough. We needed to buy one from the US and evaluate it. The US was more advanced. That one was from Britain, but we needed one from the US. Of course we could never buy something like the Kennedy or your modern carriers, but we needed to buy a medium sized not to old ship. For scrapping purposes. So there was an argument in China. Some wanted to keep the Shangri La and to use it as it was. But the Shangri La they had something else in mind. It was put up by sale in Philadelphia. So we immediately jumped into the bidding for the ship. And we almost got it.
They obtained assistance from Am friends who are extremely well connected here in Am. They had access to information having to do with the bidding from Taiwan. So they went through a lot of activity, and they carried on covert surveillance and observations, and they concluded that they knew what Taiwan would offer. So China didn't want to spend too much, so having information on the bidding was crucial. This was a scrapping company making the bid, a company in the North, situated on the Northern coast of China, this is still secret today. This was not an open bid, people had to know who the bidder was. The bidder was only from Taiwan, as far as I know. The bidder was a ship scrapping company on the North Coast. We know who it was. The only competitor was from Taiwan, they were willing to offer more money, and we knew exactly how much. The bidding procedures were extremely confidential. I know that China offered a slightly higher price. So theoretically, we should have had the deal. But, unfortunately, your CIA found out that we wanted to use this carrier for something. Due to influence from the government, without opening the bid from China, the ship was sold to Taiwan. Chinese personnel from the security ministry went on board and videotaped the ship. They identified themselves as from the salvage company and Poly people identified themselves as salvagers. Then a small handful of friends from the circle also came with us on the ship. Genuine blue-eyed, blonde haired Americans took us aboard the ship and helped us greatly. Not Chinese Americans
They were satisfied on the Shangri-La and found that the catapult was still intact and the large caliber cylinder was still intact, that drove the catapult, and this is what we wanted. Poly wanted that ship. We would get it from the salvage company and individuals involved in the intelligence services were involved in the deal also.
Now, they were so sure that they would get the ship, and they were extremely experienced people, and when they believe they will get something they will get it. But this time the US government intervened. So money was no longer the issue, but politics was. So they lost the deal.
And the State security people then had their friends buy cars in Philadelphia and Seattle. They knew it was going to China, and they wanted direct access to clearance in customs in China. Everyone would make a profit. Cars would be a solution to the problem. So they bought hundreds of cars in the US, new cars, ordered them. On both coasts. Not in concentrated areas. These were National Security people and their friends.
They had to resell the cars. They lost money. Some had agreements with car dealers, and returned them to friends at car dealers. But they had to eat the discount. That company generated a profit, but China lost money. The car dealers didn't have to be friends of China. The dealers arranged everything. They ordered the cars and told where to have them delivered for export, that was all legal. That was all legal, so long as you have the clearance documents, customs, and tariffs and so on. Who cares that this was going on. But once the deal was lost they had to resell the cars. The government agency would have owned the cars in China, and then resell them. That is extremely profitable. The government, of course, was not informed of the deal. The security ministry was informed of the deal, but it was a profitable venture and who cares, as long as you generate a huge profit. The security ministry was not going to buy this car, others, in the provincial governments, or in the agricultural ministry and so on. The Chinese would pay eventually, and then they could be sold to a third country, in the middle east or so on, in a third country and generate a profit there. Everyone was after a profit, of course. It could have been a collective profit, of course. A little bit of profit, of course, would have meant an awful lot of money.
National Security Service, called the State Security Ministry. There is no direct relationship between it and the PLA. They belong to the state. It is the state intelligence service, while the Army has an independent intelligence service.
The Poly, aside from being unique in the field, also looked after impost, and it is the only company in China authorized to purchase arms for the PLA. No other company can do that. There are many funny stories behind that.
Some other companies have very nice connections. With the overseas defense firms in Britain or in Germany. And through sources they found out what the PLA air force or the Navy needed and they privately or independently approached foreign defense firms, saying that they had a client looking for some product. Then, upon their return to China, they approached the PLAS without approaching Poly, saying that, "We know that you need this and we can get this for you. And due to arrangements we have made, a huge delegation from Germany arrived in Beijing. That company booked hotels and conference rooms for several weeks and they invited individuals from the PLA and from another company. And they introduced their technology and products to the PLA. And this process went on for several months.
So, and all these activities conducted at the expense of the company. They expect a lot out of this. They know that this business can be successful in China, because they knew this company owned something that the PLA really needs. So, there must be a deal later on. They were right. Later on there was a deal. The PLA later on filed a report saying yes, really, this is exactly what we need, and we need hard currency around so many millions and they read their expectations, and the PLA general staff ratified that, saying it was all right, that they would appropriate the money to buy, but the deal could only be made through Poly Technologies. And that meant that from that point on, that company had nothing to do with the deal. Leave it alone. And so they lost whatever time and money they had previously put into it. So Poly guys, and I was involved in this on a couple of occasions, personally, my boss threw some files on my desk, relating the technological specifications and the inquiries and the equipment, which I knew little about, specifications, inquiries, introductions about equipment. So from that point on I am the middle man. I am the man. Who is going to supervise the entire deal? I felt very strange and unique about this, when I stepped into the big conference room with all of the guys there, with the foreigners sitting on one side of the table and the Chinese on the other and they are all in uniform. But I was in a conspicuous position since I was representing Poly, the foreigners were totally boggled. They didn't know what was going on. They asked, "Where are our friends?" They wanted the representatives from the previous company. But they no longer showed up. All of a sudden it was turned over to poly by the General Staff, the individuals who have the money. They said no problem. You need the money. We'll give you the money. But only Poly could spend the money. So that company was left out, and that means seventh months of their activities were in vain. But that is the way it works. When the results are ready to be produced, then Poly steps in and takes over. Now they were extremely angry at this.
The point is that the General Staff, the reason why they did this, was not simply because they wanted Poly to profit, but the second and the most important consideration, was that they wanted to make sure that everyone obeyed the rules, that only Poly is entitled to arms imports and arms production for abroad for the PLA. And that means that only Poly can spend the money for the PLA and for the PLA, buying things from abroad. No other company can do that. There were other countries involved in the feud was that they knew that the PLA had money. Any business company, they tend to look after the rich client, whoever has the money and is a good customer for the company. A lot of people tried to get involved in the business, but they found that they could not.
So, because of that, the other companies were involved in exports, and not imports. And that explains why these companies have been active in the arms export business. Because this is the only channel for their profits. While Poly they could very comfortably spend the money for the PLA.
Competition in selling Arms? Since that was the case, a lot of companies want to proceed. And they said, OK, from now on only Poly will deal with this area. When Poly saw the possibilities of profits from arms sales to the Middle East or the third world, they want to have a hand in that, and take care of extremely sensitive items. Not the ordinary, conventional arms, like the AK47, that isn't a problem. Poly does not want to intervene in those areas. But when it comes to selling things from the PLA inventory or from the PLA equipment itself, in order the General Staff wanted to make a point for that.
So they misperceived, and Poly would only look after the imports, some felt, but Poly perceived potential profits out of arms sales, so they managed to get involved successfully in arms exports too. This resulted in strong competition among all the arms exports companies. Poly had strong backup of the general staff and so was able to win contracts and power. That means they were entitled to selling arms directly out of the PLA arms inventory will look after the selling of sensitive items, such as ballistic missiles to foreign countries. There is one indication, a detailed story, about this.
Catic, abbreviation that stands for Chinese Aviation Technologic Import Corporation(company). CATIC. In April, 1989, a certain company in the US was interested in obtaining certain models of the PLA silkworm launchers. Probably they purchased this sort of thing for the US army or navy, for study purposes. But we were never clear on who they were or who they represented. The company had permanent representatives in Hong Kong and an office. CATIC is also a very powerful arms exporting company that belongs to the Chinese Aviation and Aeronautics Ministry. It is actually the selling arm of that ministry. And they obtained information, and they learned that there was an American company asking how they could acquire two missile launchers. So they saw a profit. So where to get this missile Launcher. So they quietly approached the PLA Navy. Actually, the Navy had a testing site. The base was in Jing Xi, a port city in Bo Hai, on the Bo Sea. The Interior sea for China. Of course they have several other ones, but this is the primary one, and so they have the launchers for the missiles. And the testing base wanted some money too. But the problem was that the testing base, the missile launchers belonged to the PLA Naval Air Arm. And headquarters of Naval Air Arm was situated in Beijing, in a western suburb. So, through --the suburb is called Feng Pai -- located in the Western suburb, the headquarters of the PLA Air Arm. So the Catic representative, through family personnel connections, approached the Admiral working in the Naval Air Arm, and they obtained permission, the green light and the go ahead. And so they obtained even written permission granting the sale, which is really unusual. But the letter was never of course made open to anyone else. So the Catic representatives carried that letter, and they went to Jing Xi to the testing base, and they talked to the commanders and the general political commissar of that base. They were all admirals. They said we need to sell these missile launchers to the United States Company. And the company asked for a certain price, and they asked then for an accurate quotation for the price of sale of these items to the US. And several days later, the bosses of the testing base reached an agreement. They raised the price considerably. The concluded, "Well, this is the only place where there are launchers like this. And this is the only price, absolutely, that we are willing to sell these at. Anything lower than that and we will not sell." As far as I can recall it was $5 million each. That was a high price. So there were two plus the missiles. HY2 was the model of the silk worm that they wanted, the shore based launcher for coastal defense purposes. This is exactly what the PLA used. This is exactly what the PLA navy uses. Exactly. And once of course a foreign intelligence agency gets hold of these missile launchers they know, they know your national defense system, they know your setup on your whole coastal defense. So anything the PLA Navy uses is quite different from anything we sell to Iran and Iraq. Although they were both silkworms, HY2s, but the PLA navy uses the advanced version and that means many of the things on it are modified, and we also encrypt the electronic countermeasure system, ESM, it means we use electronic countermeasure systems for the missile, the system goes with the Missile, hand in hand, and this is what we did not sell to Iran and Iraq, but they were both silkworms. The ESM system manages to avoid electronic jamming from the target. That means the missile is capable of hitting the target despite electronic jamming performed by the enemy. So, the Catic representative, they were in Beijing talking. The ESM system is to counter electronic jamming by the system. If you do not have it the target can jam the frequency and the automatic homing system. You cannot acquire the target, and they can use a flare to deflect the missile.
It has a magnetic homing device, it only goes after Iron and Steel and nothing else. But on the other hand it is extremely vulnerable to electronic jamming. This is the system that we use. And we did not sell this in the Middle East, but we only sell the silk worms to Iran and Iraq. And this is regarded as a secret, and once the enemy = and we presume this is the USA -- once they know that you have an electronic countermeasure device, now we have electronic counter-counter measures. And that means, naturally, that you cannot avoid my jamming not matter what measures you take. But that is something much more advanced.
So the American company in Hong Kong and its representatives in Beijing, they accept this price, without argument. And so the deal is made. What is so funny is that the Naval Testing Base did not know that the Catic guys who only had a letter of permission granting the Sale. They assumed, incorrectly, that these guys had full permission from the Communist parties committee of the PLA Naval Air Arm. Still, they wanted a low profile, and they wanted no one else to know that they had probably sold something to the US and probably to American intelligence, the NSA. On the other hand, we were still concerned that we could not sell the missiles to foreigners, even though we can sell them at a profit. And Catic said, "Don't worry, you can sell missiles to us. And you pretend that you don't know where they are going, actually. So the Naval guys said, All right, that sounds nice. So they sold the missiles.
Catic are well connected businessmen with a strong military family background. Not related, of course, to Poly, and that is why they were caught. The problem was that supposedly, the Navy testing base, if you want to sell something directly from your inventory arm, you need to make a report, and the report will have to be approved by the Navy headquarters, as well as the PLA general staff. And then the General Staff would notify Poly to sell the missiles, and this is official channels, and this is the only channel that both the PLA general staff and Poly have been struggling to maintain. This is what they want. But this is something that happened not in that way, of course. The testing base said, simply, we don't know and we don't care where the missiles goes, and the only thing we know is that we will sell the missiles to you guys for scientific research purposes. And then the PLA Navy, the transportation base provided transportation for the missiles and used one of their ships to transport the vessels the missiles directly, and they asked where do you want to see the missiles go, where are they to be delivered. They told them, "We prefer Dalian." That is the port for Beijing. And they said, All right, what time, what day." And they agree on the place and the time of delivery. So then Catic immediately informed the American businessmen and they hired a freighter that was registered in Hong Kong to proceed to Dalian. The ship then sailed on that day, at that moment, to Dalian, and they waited out at sea while the Catic guys waited at the port, then the PLA naval vessel carried the missiles and the launchers, and all of this was highly irregular and against the law, and they knew that -- the Admirals cautioned them, make this secret and tell know one what you are carrying. And so they carried the material to the port of Dalian and everything was signed and received and signed over. And then the Navy guys sailed away. The Catic men then signaled the Hong Kong ship to come into port and to transport these missiles to their ship.
Now all of this was carried out with extremely high efficiency. All this happened between April and June of 1989, when things were in turmoil in Beijing. The Americans aboard the ship, they knew the real significance of what was happening. They were utterly astonished at the efficiency of this maneuver because they knew that in dealing with China. That required a lot of patience and that is what American businessmen learned. But they had never experienced this sort of efficiency before. And besides that, they were buying something out of the national defense system of China. They were not idiots. They could hardly believe this was happening, could hardly believe their eyes. So these missiles were loaded on the Hong Kong registered ship and it immediately sailed to the USA. And those missiles are now in the US. We don't know where but we tracked that ship and we know it came here.
Now all of this was supposed to e done in secret. But it just so happened, that we had a man stationed at this port because this is the port that we use sometimes too, and some employees from our company, officers from our company were taking an afternoon walk on the beach. And they watched this naval ship come into port. And now these were guys who dealt with the navy and so they watched, this was the sort of thing that they did. So they stood there near the port and they saw what was unloaded. One of them was astonished, and he said, "Oh my God." It was an LST, an amphibious landing vessel. So it was mixed together, naval and commercial. They saw a naval vessel unloading but they sensed something. Two launchers and two missiles. They smelled something fish. They predicted, at that moment. That something was very wrong. They became more curious. It was over 10 meters long each.
So these two guys lingered. They watched what was happening. Then they saw this Hong Kong ship sail in and load the missiles. There was only a very short hiatus there, and the guy from Catic used a huge canvas to cover the missiles, but the Poly people saw all of this. They were stunned, really. Now the Naval testing base had enough missile launchers and they had so many that for a moment one could not tell if one was missing. They had dozens of them. They had a large depot where things were stored. And the Navy, the testing base, once these launchers were gone, the Navy office pulled two more from their depot and replaced them within half an hour so nobody could tell from a cursory look what happened. And in the afternoon, when people were taking a nap -- a xioxie -- these missiles were replaced. So it was everyone, when the story was disclosed, everyone was simply astonished, even the Chinese, at the secrecy and the efficiency under which this deal was conducted.
You see, it was both against regulations and against the law. So the two guys from Poly remained there long enough to see the missiles loaded on the ship from Hong Kong. Then they started to check. They had written down the ship number and wrote what they saw and filed a report. They thought something was amiss here. Then they informed the General Staff. The GS is really extremely powerful, they supervise everything. So they were asked to check on this and wanted to know what the General Staff was doing with missiles at the Dalian Port. But the Navy, unfortunately had not the slightest damn idea as to what was going on. Finally, after several telephone calls, the Admiral who actually signed the letter, Admiral, the director of the political department of the Naval Air Arm, Mr. Liu, Admiral Liu, he was the deputy director of the political department of the Naval Air Arm. So he finally, there was a house cleaning following this.
Poly found out that it was Catic guys who were at the port, and they immediately questioned them. They were afraid of Poly because they knew they had done wrong. After several efforts at explaining around what happened, they were left with no other choice but to tell the truth. And the truth was incredible. "We are very sorry, they said, we should have informed you. We thought someone had informed you, but due to a breakdown in communications, you were not duly informed and we are sorry for that. Really But it was just a kind of missile that we wanted for scientific evaluations and that is all that we needed it for.
And the Poly spokesmen said, wait a minute, damn it, we saw those missiles going on board a Hong Kong ship and sailing away.
And they said, "Oh, really. We didn't know that. We had no idea what was happening. Tell us what you saw."
The Poly questioners didn't know where the damn missiles had come from, of course. They just saw the naval vessel unloading the missiles, that was all. But once they saw the guys from Catic there, they suspected something was wrong with all of this.
So the whole story then came down to this. And they said they did have this business with the testing base and they did obtain the missile for research purposes and no more than that . And so the General Staff questioned the Navy to find out what happened to these two missiles. They were missing now. Where were they. They wanted to know why they had not been informed about the sale of the missiles. Here was PLA equipment going to a civilian company.
I mean this is the only instance that we know of where the Chinese company sold to American intelligence service our state of the art weapons for them to study. The Navy then contacted the testing base and requested a full report of what they had done.
So, they were caught. But they continued to pretend at the base that they didn't know what had gone on. Everyone pleased ignorance saying that Catic approached them and that they then sold the missiles to Catic, which may have been all right. But some guy working at the testing base, looking after the bank account transactions, they told us that the missiles were sold to Catic, for sure, but instead of getting the renmenbi or Chinese national currency for the missiles, he pointed out that they had been paid in American dollars. That means that the PLA testing base received hard currency from another country, which is against the law. They are not allowed to do that. And if they do that, they have to hide it somewhere. Military units are not supposed to keep foreign currency reserves.
Catic must have charged a ten percent commission, that is the usual commission for Catic, that is the standing rule in China for the sale. And so they charged that plus ten percent to the Americans.
So where did the money go? A lot of cash was involved. That is why there was a huge scandal. Once they carried out the transaction, they could deposit it into local banking account, where it is legal to have a foreign currency reserve account. In many banks in China you could deposit foreign currency, and this would be a provincial branch of the Bank of China. And this guy leaked the story and said that a lot of big transactions were carried out. And everyone in the bank knew that it had to be related to the sale. So the ;trail led then to foreigners. And they questioned Catic personnel.
Finally, Catic admitted it. We sold these, probably to the United States.
"What?" "The United States. My God.
Immediately there was trouble. As soon as this was revealed, the deputy director of the political department of the Naval Air Arm was severely questioned and at first he denied anything and said that he had signed no letters. But then the Catic guys revealed that they had the letter with the real signature, and we examined it and it was really his and his seal.
So finally the Central Military Commission had a disciplinary meeting, a disciplinary committee met, and immediately, the PLA General Staff made a report to this committee and they said, "We caught something here. It is bad." And after one month investigation and questioning. They questioned the PLA admirals and political commissars and many of them were very apprehensive, and afraid of losing their own jobs. They said they would accept whatever the penalties might be imposed on the navy, but not on them personally, they said. The testing base did something wrong, they said, but they had not. The agreement reached, then was that the Navy, the number one people would never get sacked, but those working under them would be disciplined. So this would be like an Oliver North. They had to find an Oliver North. The whole military saw the report, the army, air force and the navy leaders all saw this report, and this was to caution these guys from now on to sell no arms to foreigners without notification. They then fired the commander, deputy commander, the political commissar and the deputy political commissar of the testing base, together with the stupid guy who was the deputy director of the political department of the Naval Air Arm, and from that point on, Catic was in a very unfavorable position, because it had a very bad reputation.
I mean everyone, later on people who dealt with the Navy and the Air Force, they questioned your credibility, because you were the company that was caught dealing illegally with the Americans, so you are not clear, you are not a clean guy and we cannot deal with you.
At that time this was the biggest military scandal in China. At the same time that Gorbachev was visiting Beijing, and that Tiananmen was happening, March to May was the scandal unfolding, and that is why a lot of things were unclear. They made use of the unclear situation, Catic did, to do some "real business" and make some "real profits," they thought that they might bypass the whole bureaucracy, and they could show to foreign companies that these this really an efficient company and they can do business. From negotiations to actually delivery, only took two months time. Payments were made, profits made and the whole thing was done. The payment was made in paper dollars. This was not in the official report.
Catic, the company, the head changed too. The head of Catic was sacked, too. Not the number one guy, but the people who worked under him at that time, because they had promised foreign firms that they could do some real business for the PLA. But only Polytechnologies was authorized to do business for the PLA and nobody else. The Chinese democracy movement provided them with a good chance to do business and they used it. That was the biggest scandal at the time for the PLA Navy. So we knew later on, don't do something like that again. From now on Poly handles the sales from the PLA inventory and absolutely nobody else, after that time.
I mean it was, speaking of the testing base, ever since it was founded it was the largest scale of housecleaning ever performed in the PLA. It had never happened before like this in the PLA Navy history have so many admirals fired at the same time. They were decommissioned, they were deprived of their titles, they were deprived of their party membership, they were deprived of their titles and they became basically nothing. And later on, a second order from the CMC was that these individuals were forced to retire, and they had to live in a quiet compound in a suburb of Beijing, contemplating what they had done to their country.
The Americans got everything they needed with this deal. The Chinese countermeasure system was not very well advanced, and the country that discussed countermeasures and needed the missile launchers was the USA Navy or the Army, for research, so they could do research on it. We never did learn what the Americans did with those missiles again. From that point on it was never our story. They just disappeared and to this day we don't know where they are. The manuals, everything, went along with the missiles. Except for technicians, they did not, Thank God, send along an army of technicians to help. The Catic guys even had everything of the missiles printed in English, parameters, firing range and so on.
The missiles had the warheads removed before they were sold. The normal procedure is to deactivate the warheads, but I don't know what happened in this case. But I believe they were equipped with the warheads, because without it there is no reason for individuals to purchase the e missiles. That is why these missiles were extremely effective in the Persian Gulf against the Kuwaiti tankers, basically they are one missile, one hit and one ship. They are extremely powerful. More powerful than any American conventional warhead. The warhead is tnt, standard explosives, but extremely large, and condensed. So once it explodes it is just deadly. This is why the Iranians liked the missiles during the initial stage of the war was because, they were extremely proud of the Chinese missiles, because they had inflicted enough damage to international shipping in the region, through the Persian gulf with our missiles. Everything that they hit was destroyed by the missiles.
The parameters on American weapons were available also. Like the direct manual for the US, specifications of the aircraft landing gears, the aircraft catapulting system, along with the large caliber cylinders under the deck. These were through the help of some of the very patriotic overseas Chinese, they were able to obtain these materials and ship them to China. They were immediately translated into Chinese for us. This happens by the way all the time. This never stops. How does it work
They have friends of family members serving on board US ships, basically. Of course, they then have access to these materials and they are willing to sell it for a profit. I do not know what the price was for the material, but it is extremely risky business and so I imagine that the price is high. In fact, nobody has ever been caught providing this information to us, but others were caught -- Pollard and the Walkers, for example -- but no Chinese or friends of Chinese thank God have ever been detected in their espionage activities.
The wire-guided torpedoes. The episode. These were wire-guided torpedoes, A184, Whitehead torpedoes. See, I have a wristwatch from whitehead, the name of the company that specialized in torpedo production. This is in Italy and that is why I went there.
The, I think we can talk about something else at the moment. This is sensitive material. If you publish this you are probably making a mistake. I mean, if you publish this story, involving this torpedo, the A184 torpedo, a lot of people will be extremely interested. And then you will be safe but I won't.