MISSILE TECHNOLOGY CONTROL REGIME (MTCR): CHINA'S RECORD ON CONTROLLING MISSILE-RELATED EXPORTS

S E C R E T STATE 105132

SIPDIS
PARIS FOR EST: HELEN SMITH
LONDON FOR CHRIS PALMER
CANBERRA FOR CAROL HANLON

E.O. 12958: DECL: 10/01/2033
TAGS: MTCRE, ETTC, KSCA, MNUC, PARM, TSPA, FR, UK, AS, CH
SUBJECT: MISSILE TECHNOLOGY CONTROL REGIME (MTCR): CHINA'S
RECORD ON CONTROLLING MISSILE-RELATED EXPORTS

Classified By: ISN/MTR Director Pam Durham.
Reasons: 1.4 (B),(D),(H).

1. (U) This is an action request. Please see paragraph 2.

2. (S) ACTION REQUEST: Department requests Embassy Paris
provide the interagency cleared paper "China's Record on
Controlling Missile-Related Exports" in paragraph 3 below to
the French Missile Technology Control Regime (MTCR) Point of
Contact (POC) for distribution to all Partners. Department
also requests Embassy London provide paper to the MTCR
Information Exchange (IE) Co-Chair (John Andrews),and
Embassy Canberra provide paper to the Australian MTCR Plenary
Chair for 2008/2009 and/or appropriate staff. Info
addressees also may provide to host government officials as
appropriate. In delivering paper, posts should indicate that
the U.S. is sharing this paper as part of our preparation for
the Information Exchange that will be held in conjunction
with the MTCR Plenary in Canberra (November 3-7). NOTE:
Additional IE papers will be provided via septels. END NOTE.

3. (S) BEGIN TEXT OF PAPER:

(SECRET REL MTCR)

China's Record on Controlling Missile-Related Exports

China in recent years has taken some positive steps to
curb ballistic missile-related proliferation, and we have
seen some limited improvements continue over the past year,
particularly in regard to sales by some state-owned
enterprises to Iran. Despite indicators that Chinese
authorities are gradually adopting more responsible export
control policies, Chinese firms over the past year have sold
ballistic missile-related items - mostly metals and other raw
materials - to Iran, Pakistan, and to a lesser extent, North
Korea, and marketed sub-MTCR-class ballistic missile systems
and technology to a growing range of customers. Such
activities are indicative of China's uneven track record in
enforcing its missile-related export controls.

Increased Export Control Efforts by China

Over the past year, Beijing appears to have increased its
efforts to have China's defense trade firms move away from
WMD- and ballistic missile-related sales to Tehran. This
decision is most likely partially attributable to the
international scrutiny on Iran's nuclear program, including
the numerous UN Security Council Resolutions which also limit
missile-related trade, and China's calculation that such
sales had the potential to tarnish China's image in the
run-up to the August 2008 Olympics in Beijing. Whatever the
motivations of Chinese authorities, we assess that several of
China's state-owned enterprises - including entities such as
China North Industries Corporation (NORINCO),China Precision
Machinery Import/Export Corporation (CPMIEC),China Xinshidai
Company, and China Great Wall Industry Corporation (CGWIC),
have curtailed ballistic missile-related sales to Iran.
However, it is unclear how long China's commitment to curbing
some sales to Iran will last. Debate within China about
whether Chinese
firms should resume their earlier level of trade in sensitive
military and dual-use technologies with Iran most likely is
ongoing. It remains to be seen whether Chinese authorities'
resolve to curtail such transfers will weaken following the
conclusion of the Olympics.

Another positive indicator is that Beijing over the past year
has engaged in a bilateral nonproliferation dialogue with the
U.S. and Chinese enforcement authorities have worked with
U.S. officials to begin to close gaps in China's export
control system. China also has accepted U.S. offers of
export-control-related training. For example, Chinese export
control officials participated in a January 2008 U.S.-China
industry-government relations forum designed to encourage
industry to comply with national export control regulations.
Over 40 Chinese officials representing six ministries
attended the workshop. Additionally, in a new development
designed to complement our bilateral nonproliferation
dialogue, the United States proposed and China agreed in late
2007 to allow U.S. officials to engage in nonproliferation
discussions directly with some state-owned enterprises, such
as NORINCO and CGWIC.

Enforcement Efforts Incomplete

China's efforts to enforce its export controls, while
improving in some areas, remain incomplete. Several
entities, including both state-owned and private firms, have
continued to sell items to Iran's missile programs, in some
cases even after being the subject of investigations by
Chinese authorities. Such cases suggest that Beijing has not
imposed adequate measures to deter future sales that pose
missile proliferation concerns.

One such example involves the Chinese firm LIMMT. The U.S.
has discussed this firm's missile-related exports to Iran
extensively with Chinese authorities over the last several
years. In response to these approaches, China has stopped
several proliferation-related transfers by LIMMT to Iran.
However, in 2007 and 2008, LIMMT, operating under the name
Dalian Sunny Industry, supplied a range of raw materials to
Iran's solid-propellant missile organization Shahid Bakeri
Industries Group (SBIG). China has indicated its enforcement
agencies are working to find a legal basis to curtail this
firm's cooperation with Iran's missile program and last year
China's Ministry of Commerce reportedly decided to take
punitive action against the company. However, the company
appealed the measures and its proliferant activities have
continued. Our information indicates that LIMMT's main
representative is a former government official who has been
using his government connections to conduct business and
possibly protect himsel
f from Beijing's enforcement actions. More broadly, China's
ability to successfully resolve this case may be further
complicated by China's national-level officials' tendency to
relinquish some control of investigations to the provincial
level. Leads on impending proliferation-related transactions
reportedly are passed to relevant regional offices for
investigation. Although these offices have the freedom to
act independently to stop a shipment once being referred a
case, a lack of national-level oversight probably allows
local level officials to continue to shield firms in their
economic zones.

In another example, the U.S. has obtained information in
recent years that Chinese firms have made several shipments
of sodium perchlorate to Iran's Parchin Chemical Industries.
Sodium perchlorate can be used to manufacture the
MTCR-controlled oxidizer ammonium perchlorate (AP),which
Iran uses in its solid propellant ballistic missiles. In one
case involving sodium perchlorate, a Chinese firm likely used
what we assess to be a cover company to ship sodium
perchlorate to Iran. Additionally, we assess other Chinese
firms over the past year have supplied Iranian ballistic
missile organizations with graphite, metals, and the
solid-propellant fuel aluminum powder. In many cases, they
have used front company names.

China has continued to act as a key supplier of technical
assistance, raw materials, and other items to missile
programs in Pakistan, although Islamabad's reliance on
Chinese ballistic missile-related assistance has decreased as
its ballistic missile programs have matured. Over the past
year China has supplied truck chassis to Pakistan that we
assess are for conversion into missile
transporter-erector-launchers and ground support equipment
for Pakistan's ballistic missile force. Additionally,
Pakistan's Space and Upper Atmosphere Research Commission
(SUPARCO),which historically has been responsible for the
Abdali solid-propellant SRBM program as well as Pakistan's
space program, procured MTCR-controlled unsymmetrical
dimethylhydrazine (UDMH) from China Xinshidai Company in late
2007. This material can be used as a fuel in
liquid-propellant ballistic missiles and space launch
vehicles.

While not reaching the levels of support provided to Iran and
Pakistan, Chinese firms continue to provide North Korea with
sporadic shipments of military and dual-use items with
potential ballistic missile applications. These are
typically sent by ground, often through Dandong. For
example, over the past year, a Chinese firm sold Pyongyang
types of steel that can be used in the production of
SCUD-type ballistic missiles, including steel that we assess
is controlled under the MTCR.

China also continues to market the new P12 SRBM to a growing
range of customers in the Middle East, Africa, and South
Asia. The P12 SRBM is advertised as a 150-km-range,
solid-propellant system carrying a 450 kg warhead, using a
dual launcher, with an accuracy of 30-50 meters. Although
the system falls below MTCR Category I range and payload
thresholds, we remain concerned that a P12 sale might also
include access to related production technology that could
help advance the buyer's domestic ballistic missile
production capabilities.

Shortfalls Limit Progress

We have identified several practices and conditions that
hinder the effectiveness of China's export control
enforcement. These include a reluctance to invoke catch-all
controls to prevent proliferation-related sales, and lax
expectations regarding a firm's responsibility to know the
bona fides of the end-users for their products.

In many cases involving the transfer of proliferation
sensitive cargo to programs of concern, Beijing has shown a
reluctance to prohibit the export of an item unless it is
specifically listed on China's missile-related export control
list or the MTCR Annex. Beijing has also demonstrated an
unwillingness to hold Chinese firms accountable for fully
evaluating end users of a Chinese-origin item. Ensuring that
firms are performing due diligence with respect to their
customers is particularly critical in deals with Iran, where
front companies are often used to mask the ultimate
end-users.

We have also raised with the Chinese government our concerns
that Chinese seaport facilities and international airports
are transit and transshipment points for governments and
entities that wish to ship sensitive materials to programs of
proliferation concern.


Conclusion

China has made export control progress in recent years.
In addition to taking some steps to limit sales of military
and dual-use items by Chinese entities that pose
proliferation risks, China has engaged in a productive
dialogue with the U.S. on export control and nonproliferation
issues, including allowing the U.S. to participate in
outreach activities to select Chinese companies. However,
these positive steps have been offset by some Chinese firms'
continued support to missile programs in Iran, North Korea,
and Pakistan and by China's unwillingness to actively utilize
its catch-all controls authorities. China's lack of
consistency in its regulation of exports of missile-related
goods and technology will continue to be an impediment to the
overall effectiveness of its export controls.

END TEXT OF PAPER.

4. (U) Please slug any reporting on this or other MTCR
issues for ISN/MTR. A word version of this document will be
posted at www.state.sgov.gov/demarche.
RICE