Chinese Firms Diverted U.S. Machine Tools, Commerce Department Finds

Three Chinese companies “knowingly violated” U.S. export regulations by diverting sensitive American machine tools to a missile factory in Nanchang, according to a Commerce Department investigation completed in late 1995.

The companies, CATIC (China National Aero-Technology Import-Export Corporation), China National Aero-Technology and China National Supply and Marketing Corporation imported the machines under export licenses issued by the U.S. Commerce Department with the stated purpose of making civilian aircraft. The machines had been used previously to make parts for the B-1 strategic bomber. The machines were shipped to China between September 1994 and March 1995 by the McDonnell-Douglas Corporation and were destined for CATIC’s Beijing Machining Center. The Machining Center, however, did not exist at the time the licenses were granted and was never created. Instead, the tools were illegally sent to other locations, including the China Nanchang Aircraft Manufacturing Company which makes military attack aircraft and Silkworm anti-ship missiles.

Commerce Department investigators found that the three companies had committed “intentional and willful violations of U.S. export regulations” and that the diversion posed “an imminent threat to the security of the United States.” The investigators recommended that the three companies and their subsidiaries and affiliates be denied U.S. export privileges until they complied with the 1994 export licenses under which the machines were shipped.

Of the seventeen machines exported, eleven were sent to Tianjin where they were stored, and six were sent to the Nanchang plant where one was uncrated, installed and operated. McDonnell-Douglas first discovered the diversion in March 1995 and in August, a McDonnell-Douglas employee saw one of the diverted machines in operation. The Commerce investigators concluded that the Chinese companies “demonstrated neither technical errors nor negligence” and were guilty of “deliberate violations.” The machines consisted of a Wheelon hydraulic stretch press, a White Sunstrand numerical machining center, a Sheffield (Bendix) coordinate measuring machine and three Cincinnati Milacron vertical bed mills.

After discussions among McDonnell-Douglas and the U.S. and Chinese governments, the Commerce Department agreed to amend the export licenses in February 1996 to designate Shanghai, where McDonnell-Douglas maintains a joint venture facility. On April 19, 1996, Commerce Department spokesperson Rosemary Warren, in response to questions from the Risk Report, stated that the machines “will remain in Shanghai for use on the previously approved joint-venture with the Chinese.” Warren also said that the “future of these machines is under review as part of the overall investigation.” On February 23, 1996, Rep. Floyd Spence, chairman of the House National Security Committee, asked the General Accounting Office (GAO) to investigate the transaction.

Portions of an undated Commerce Department document summarizing the Commerce investigation are included here. It appears to have been written in late 1995.


Bureau of Export Administration (BXA)
Office of Export Enforcement
2601 Main Street, Suite 310
Irvine, CA 92714-8299

In reply refer to:
006153: MGR

Date of first Violation: March 1995

MEMORANDUM TO: Pamela P. Breed
Deputy Chief Counsel for Enforcement and Litigation

FROM: Mark D. Menefee
Acting Director
Office of Export Enforcement

SUBJECT: Recommendation for the Issuance of a Temporary Denial Order Naming as Respondents:

– CATIC, and all related affiliates and/or subsidiaries thereof in the People’s Republic of China
67 Jiao Nan Street
P. O. Box 1671
Beijing, China (PRC)

Beijing, China (PRC)

North China Branch
10 Shifang Yuan Desheng Men
Beijing, China (PRC)


Title 15, C.F.R. 787.4
Acting with Knowledge of a Violation

Title 15, C.F.R. 787.5
Misrepresentation and Concealment of Facts

Title 15, C.F.R. 787.6
Export, Diversion, Reexport, Transhipment


  • Wheelon Stretch Hydraulic Press – ECCN 2B44
  • White Sunstrand Numerical Machining Center – ECCN 2B01
  • Sheffield (Bendix) Coordinate Measuring Machine – ECCN 2B06
  • (3) Cincinnati Milacron Vertical Bed Mills – ECCN 2B01

The identified commodities are controlled for Nuclear Proliferation and National Security reasons and required an Individual Validated License (IVL) for export to the People’s Republic of China (PRC).


The information delineated below will outline the immediate need for the issuance of a Temporary Denial Order against the listed respondents to prevent continuing and imminent violations of the Export Regulations from occurring.

In 1993, CATIC successfully bid for, and purchased, various equipment, including the listed commodities, that were located at the Rockwell Corporation B-1 Bomber facility in Columbus, Ohio, which at the time was being leased by the McDonnell Douglas Corporation (MDC) from the U.S. Government. The original intention was that CATIC wanted to utilize the B-1 Bomber manufacturing equipment as part of a joint venture with MDC to build MD-80 and MD-90 commercial aircraft. Following the purchase, approximately 50 CATIC personnel were dispatched from Beijing, and with coordination from CATIC in El Monte, CA, dismantled, packed and prepared the equipment for shipment, pending approval of the appropriate IVL’s.

CATIC additionally retained the services of Monitor Aerospace Corporation (MAC), Amityville, NY, which agreed to assist CATIC in setting up the CATIC Machining Company (Beijing Machining Center) at No. 16 Hongda North Daxin, Beijing, where the commodities were to be shipped. In September 1994, based upon end user assurances from the respondents, the U.S. Department of Commerce (USDOC) issued 16 IVL’ s for 19 aircraft machine tool commodities from this B-1 Bomber plant, including those listed.

Numerous terms and conditions were mandated by the USG in the approved IVL’s, specifically with regard to location, end use and end user of the equipment. These terms and conditions were conveyed verbally and in writing by MDC to CATIC.

Between September 1994 and March 1995, all commodities were shipped to the PRC by CATlC and MDC, with the exception of two, which were leased back to MAC and shipped to Amityville, NY. During that time frame, an impasse was reached between CATIC and MAC concerning setting up the Beijing Machining Center. Ultimately, the Beijing Machining Center was never established, and 11 of the commodities were delivered to two unapproved locations in Tianjin, a port city two hours from Beijing, in violation of the IVL terms and conditions and CATIC’s end use assurances for the IVL’s; 6 of the commodities were delivered to the Nanchang Aircraft Manufacturing Company (Nanchang) factory in Nanchang, approximately 900 miles from Beijing, also in violation of the terms and conditions and CATIC’s end use assurances for the IVL’s. On March 24 and August 23, 1995, MDC Long Beach, CA and MDC Beijing officials personally inventoried all items in Tianjin and Nanchang, respectively, confirming that none were present at the location originally specified and approved in the IVL’s. During discussions between OEE/LAFO and MDC Long Beach on November 21, 1995, MDC disclosed their concern about the Nanchang factory being involved in the production of attack aircraft and coastal defense missiles, and provided documentary evidence to that fact. Despite protests by MDC to CATIC that same violated the terms and conditions of the IVL’s, according to MDC, CATIC has made no attempts to return the commodities to Beijing, adding to this problem. In July, 1995, CATIC assured MDC that the equipment in Nanchang would not be unpacked.

CATIC in fact requested MDC to ask USDOC to approve the sale of the 6 commodities in Nanchang to Nanchang. Despite CATIC’s assurances to MDC, to the contrary, CATIC has already permanently installed and made operational the Hydraulic Stretch Press at the Nanchang factory. Recent CATIC/MDC discussions have suggested an alternate storage location in Shanghai; however, based upon MDC’s observation there appears to be an unsuitable risk of continued and imminent diversion of the B-1 Bomber facility aircraft manufacturing machine tools, both controlled and general license, to unapproved end uses and EPCI (Enhanced Proliferation Control Initiative)-related destinations.

Chronology of events:

As background, during the time frame 1985 to 1993, MDC and CATIC were involved in a joint venture involving the production of MD-80 and MD-90 commercial aircraft. In 1993, further agreement was made between MDC and CATIC for the production of 40 additional “trunkline” aircraft to be completed by 1998. The Rockwell Corporation, having been involved in production of the B-1 Bomber, maintained a facility in Columbus, OH. Upon termination of the B-1 program, MDC took possession of the Rockwell facility, to include, all equipment at same, until apprised by the U.S. Air Force that MDC would no longer be allowed to lease the facility. In disposing of all the equipment, MDC offered same to bid; the eventual successful purchaser was CATIC, and it was agreed by MDC and CATIC that the equipment could be utilized to enhance productivity on the “trunkline” project. CATIC agreed to do all dismantling, packing and shipping of the equipment to the PRC, and through coordination with its El Monte, CA office, sent 50 individuals to accomplish the task. In May, 1994, MDC subsequently made application with the USDOC for IVL’ s to export the equipment to the PRC.

During the same time frame, CATIC entered into an agreement with MAC whereby MAC would assist in setting up the CATIC Machining Company’s Beijing Machining Center, where the commodities would be shipped and eventually utilized.

On September 14, 1994, the USDOC issued 16 IVL’s relative to 19 commodities from the B-1 Bomber facility destined for export to the PRC, following extensive inter-agency review. Exhibit (1) is a list of the IVL’s issued for export to the PRC, identified by the September 14, 1994 date. Exhibit (2) is one of the IVL’ s granted relative to one of the commodities, and is attached for the purpose of identifying the numerous terms and conditions stipulated on all of the IVL’s.

Between September 1994 and March 1995, all commodities were shipped to the PRC, with the exception of two items, which were leased by CATIC back to MAC, and thus shipped to Amityville, NY. Apparently, the IVL’s relating to this equipment have been suspended by USDOC.

Following the shipments, an impasse was reached between CATIC and MAC concerning establishment of the Beijing Machining Center, resulting in same never being effected. As the Beijing Machining Center did not exist at the time the commodities were ready for delivery, CATIC illegally, knowingly and willfully diverted 11 of the commodities to two locations in Tianjin (CBW Head Office and CBW Storage Yard), and the remaining 6 to Nanchang in Nanchang.

In adhering to the various terms and conditions, specifically that MDC provide a quarterly report to USDOC concerning the status of the commodities, on March 24, 1995, MDC officials from the Beijing office attempted to inventory the commodities in Beijing. The officials discovered that 11 of the commodities had instead been stored in Tianjin, two hours from Beijing, and were still in the original crates; it was additionally revealed that 6 of the commodities had been taken to Nanchang. Exhibit (3) is MDC’s first quarterly report detailing its discovery that the commodities had been diverted from Beijing, and specifically identifying the locations of the commodities.

On July 5, 1995, Exhibit (4) a letter from CATIC to MDC indicated the reasons behind the commodities being diverted from Beijing, as well as confirmed CATIC’s intention of selling the 6 commodities already in Nanchang to Nanchang. The letter provides assurances that none of the commodities have unpacked, and will not be until USDOC approval has been granted for the sale to Nanchang. The letter identified the end use of the commodities to be that of producing parts for the K-8 trainer and other commercial products.

On August 23, 1995, MDC Long Beach, MDC Beijing and CATIC officials sighted and inventoried the 6 commodities sent to Nanchang. Exhibit (5) are photographs taken by MDC during the inventory, which depict crates bearing 5 of the commodities as being stored outside of the restricted Nanchang factory, but also one of the commodities (Hydraulic Stretch Press) permanently installed inside the factory, at substantial effort and cost to the Nanchang factory, to design and fabricate the permanent foundation and building. [Text deleted]

[Text deleted] Exhibit (8) describes Nanchang as a military-civil production combination system” and being involved in the production of attack aircraft (Q-5, Q-5III, Q-5M, L-8) coastal defense missiles (FL-1, FJ-2, FL-3A) and motorcycles. Exhibit (9) is a memorandum forwarded from the Defense Technology Security Administration (DTSA) to OEE Headquarters, confirming also that Nanchang is involved in the production of attack aircraft and missiles, and expressing Department of Defense concerns regarding CATIC’s intentional misuse of the export license.

On November 22, 1995, a review of ECASS disclosed extensive licensing history listing CATIC and its affiliates/subsidiaries, as well as China National Aero Technology, as previous/current consignees (15 total). Of the 15, application information was found for three, and of those, two have applications currently pending (D219031, D218462, D225413, D226271, D222230).

Additional information:

CATIC is a subsidiary of the Ministry of Aerospace Industry, according to “Jane’s Intelligence Review,” dated January 1992. The Federal Register, dated August 26, 1993, lists the Ministry of Aerospace Industry and all of its subsidiaries as Category 2 MTCR (Missile Technology Control Regime) sanctioned parties. Exhibit (10) also gleaned from the “Survey of Chinese Aviation Industry publication,” provides further identifying data for CATIC. No such facility as the Beijing Machining Center, identified in the IVL’s has ever existed; however, information provided by CATIC, and written into the terms and conditions of the IVL implied that the facility was in the final stages of preparation, thus constituting a misrepresentation of facts. Verbiage in the terms and conditions also specified that, until each facility was completed, all commodities were to be stored in one central location; instead, CATIC chose to ignore same, and knowingly violated the regulations by diverting the commodities to three separate locations in the PRC, one of which is an identified missile production site, and allowing one of the commodities to be installed and made operational at same without USG approval. Based upon the discovery of these diversions and violations of the Export Regulations, CATIC was advised by MDC that it should take immediate actions to rectify the violations of conditions originally agreed to. As such, MDC has submitted amendments for 11 IVL’s regarding the commodities identified herein, which would change the ultimate consignee to the Shanghai Aviation Industrial Corporation (SAIC). As of the date of this recommendation, the amendments are still pending approval, however, based upon CATIC’s prior performance in abiding with IVL terms and conditions, there are no guarantees that CATIC will comply, and the imminent risk of diversion remains.

CATIC has demonstrated a consistent pattern of deliberate actions which do not constitute either technical error or simple negligence, and are proactively contrary to the terms and conditions of the IVL; the likelihood of further movement and/or subsequent diversion of the commodities to unapproved or EPCI-related end uses poses an imminent threat to the national security of the U.S., especially considering that commodities have already ended up at a missile production facility. CATIC, by its actions, has manifested that it does not choose to abide by terms, conditions, regulations or contracts, and the likelihood that disposition of technology contrary to export control requirements will occur again, perhaps concerning pending licenses/exports, is substantial.

EPCI concerns are prevalent concerning these licensed commodities which have been diverted. Additionally, other commodities related to this transaction were exported under General License G-DEST, and concerns exist that same, as well as future G-DEST exports, might also be diverted/put to end uses in violation of EPCI regulations, and contrary to national security and foreign policy issues.


The violations enumerated herein demonstrate intentional and willful violations of U.S. Export Regulations and licences by the respondents. The recommendation identifies the likelihood that such violations will continue to occur, and that those violations are imminent in nature. There is no guarantee that the respondents will conform to USG mandates regarding the subject commodities, and there has been no effort on the respondents’ part to comply with the terms and conditions specified in the respective IVL’s identified in this recommendation. There are unused controlled commodities located in both Nanchang and Tianjin, which can, and may, be diverted to proscribed end uses at any time, as has already occurred in Nanchang. The respondents have demonstrated neither technical errors nor negligence issues in this matter, but rather deliberate violations, as evidenced by the fabrication of specialized building and cement foundation followed by permanent installation of a diverted, controlled CNC machine tool at Nanchang.

Related concerns regarding imminency should also extend to those general license commodities exported from the B-1 Bomber plant by CATIC to the PRC, and any current EPCI uses which were not disclosed to the USG as with the non-existent Beijing ultimate consignee.

It is recommended that a Temporary Denial Order denying all export privileges, including all General License exports, be issued against the respondents and their related subsidiaries/affiliates. It is further recommended that this order remain in full force until such time that USG is satisfied (via physical inspection) that the respondents are in full compliance with the terms and conditions of the IVL’s identified herein, as well as abiding by the assurance given by the respondents to the USG in the form of end user certificates.