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Special Update #15

IN THIS ISSUE: CHINA -

1. Loral Fined For Selling Secrets To China

2. Technology Transfers To China -- The Big Picture

3. China Sells Nuclear Technology To Others

4. China - A Huge Foreign Policy Disaster

5. Excerpts On China From Past Newsletters

INTRODUCTION

Last week, a major U.S. defense contractor agreed to pay the government a $14 million fine for selling sensitive weapons technology to China in the 1990s, but the story was buried by the media. Yet this is just the tip of the iceberg. This Special Update will focus on the massive transfer of nuclear weapons technology to China during the 1990s, and in particular the technology for long-range missile guidance systems.

I reported extensively on these asinine transfers of technology in my  FORECASTS & TRENDS newsletter in 1998 and 1999, as you will read below. I revisit this critical issue now in light of the new reports which have been released over the last two weeks, and those which I hope will be forthcoming in the weeks and months ahead.

The Chinese have made more advances in their long-range nuclear weapons program in the last 5-6 years than they have made in the last 20 years! In the mid-90s, China had only a few long-range missiles, and it was doubtful that they could reach the western U.S. However, based on the latest CIA reports (see below), that number climbed to at least 20 long-range missiles (ICBMs) pointed at the U.S. in 2001, and it is now believed that they have the capability of striking far beyond our western shores.

China's startling advancements are due in no small part to U.S. corporations selling and/or transferring sensitive technology to China in recent years, most of it with government approval, or at least a willingness to look the other way.

The Chinese have had nukes for many years -- that is no secret. Their problem has been that they lacked the technology to produce reliable long-range missile guidance systems to enable their ICBMs to reach beyond Alaska or the far western United States. Now they have it, thanks to revised government export policies on sensitive technology and a few U.S. corporations.

But first, the latest news.

LORAL GETS A SLAP ON THE WRIST FOR

GIVING CHINA SENSITIVE TECHNOLOGY

Late last week, we noticed an obscure announcement that on January 9, 2002 LORAL SPACE & COMMUNICATIONS, LTD (NYSE symbol: LOR) had agreed, in an out-of-court settlement, to pay the U.S. a $14 million fine for sharing sensitive, classified missile guidance systems technology with China in 1995 and/or 1996 and in the years following.

This is a HUGE story! Yet I doubt if a handful of you reading these Special Updates heard the announcement last week. In fact, if anyone reading this Update saw or heard the story, I would like to know about it (shoot me an e-mail at -- mail@profutures.com). If you were to catch this story at all, you would have to closely follow Reuters' securities news service (not their main news outlet). This service is targeted mainly at market makers in listed stocks and securities.

Even the limited reports that Reuters did put out gave next to no background on what it was that Loral was fined for. I will give you the complete background below, as I reported it to my clients and subscribers back in 1998 and 1999. This story was HUGE then, and it is HUGE now, but the American public has no idea.

DO NOT FORGET THE CHINESE OBTAINED

OUR TOP WEAPONS SECRETS WITH THEIR

INFILTRATION OF OUR NUCLEAR LABS

Let us also not forget the chilling revelations which first appeared in May 1999, when we learned that the Chinese had infiltrated our top secret nuclear labs during the 1980s and 1990s. If you will recall, the government admitted that the Chinese had almost certainly gained access to highly classified design information on all, or many, of our most sophisticated nuclear weapons.

This story of the espionage at our nuclear labs was a highly charged one at the time, both because of the seriousness of the alleged crimes (theft of our nuclear secrets), but also because of the stonewalling and attempted cover-up by the Clinton administration.

In case you didn't follow this story closely, here are just a few of the facts: 1) the Department of Energy (with oversight of the labs) discovered no later than SEPT 1995 that the Chinese had obtained many/most of our nuclear secrets from the labs, Los Alamos in particular; 2) National Security Advisor, Sandy Berger, was briefed on the theft by the head of Energy Department intelligence (Notra Trulock) in APRIL 1996; 3) Berger said he briefed President Clinton on the matter shortly thereafter; 4) yet the Clinton administration did not take action to tighten security at the labs until around mid-1997.

Yet as late as March 1999, Bill Clinton maintained publicly that he was not aware of any nuclear espionage at the labs during his presidency. He let Sandy Berger take the fall, despite the evidence that indicated Clinton had known about the problem since 1996. The media started to get on this bandwagon but quickly abandoned the story.

In the June 1999 issue of FORECASTS & TRENDS (see attachment below), I wrote in detail about the espionage at the labs, about who knew what and when (including the president) and predicted that a new Cold War with the Chinese would be the result of these, and the above-mentioned actions (or lack thereof) by the Clinton administration. You can read the details below in F&T - June 1999.

But first, let's take a look at the latest CIA report on the status of China's nuclear arsenal which now apparently has the capability to reach far beyond our western shores, thanks directly to prior government policies, as you shall see.

CHINA HAS AT LEAST 20 NUKES POINTED

AT US NOW & SHOULD HAVE 100+ BY 2015

As noted above, in the mid-1990s China had only a few ICBMs that were "capable" of reaching the U.S. Their missile guidance systems were highly inaccurate, and their rockets had a high incidence of blowing up shortly after takeoff. Given these inadequacies, including the chance that the rockets would blow up before they even got out of Chinese territories, the threat of a nuclear launch against the West was virtually NON-EXISTENT.

Yet the latest reports from the CIA (and really these are nothing new) indicate that China now has at least 20 nuclear-tipped ICBMs pointed at the U.S. with much more advanced missile guidance systems. I have heard this number -- 20 ICBMs -- quoted from numerous defense analysts for several years now.

The only thing new in the latest CIA reports (and this isn't really new either) is that they estimate China will have at least 100 long-range, nuclear-tipped ICBMs aimed at the U.S. by the year 2015. My sources expect it will be a LOT SOONER than 2015. Furthermore, the CIA reports that most of China's nuclear missiles will be mounted on MOBILE rocket launchers by the end of this decade, making them much harder to monitor or target with our own missiles.

You can read the Jan 10 Washington Post article on the latest CIA reports on the China nuclear threat in the link just below (or you can go to the CIA's website at www.cia.gov/cia/publications/pubs.html.)

http://www.washingtonpost.com/wp-dyn/articles/A24542-2002Jan10.html

NUCLEAR THREAT FROM OTHER

LESSER-DEVELOPED NATIONS

When President Bush announced that the U.S. was withdrawing from the ABM Treaty, he stated that the main reason for a missile defense system is the threat of nuclear attack by "rogue" nations. Nuclear weapons have proliferated over the last 20-25 years, but particularly in the last decade. If you were to discuss this issue with most Americans, the vast majority would believe it was the former Soviet Union that sold most of the nuclear technology to the lesser-developed nations that are now threats to the U.S. and the West.

Clearly, some sensitive nuclear technology has leaked out of (or been sold by) the former Soviet Union, especially since it crumbled. However, my sources believe it has been CHINA that has sold the bulk of sensitive nuclear technology to the lesser-developed, or rogue, nations over the past decade.

When President Bush made his remarks recently about building a missile defense system to protect against the threat of nuclear weapons from rogue nations, numerous analysts were quick to disagree on the basis that rogue nations cannot strike the U.S. with intercontinental missiles, since they don't have ICBMs. The nuclear threat from rogue nations, they contend, is largely restricted to nukes that could be smuggled in on ships or airplanes or carried in by individuals.

That may be true today, but now that China has the long-range missile guidance systems, thanks to the U.S., who is to say they will not sell that same technology to nations like Iraq, Iran and others? Unfortunately, there is a great deal of evidence that they ALREADY HAVE!

CHINA -- AMERICA'S BIGGEST FOREIGN

POLICY BLUNDER IN THE POST-WAR ERA

To begin to understand the headline just above, consider how we have engaged the People's Republic of China over the last 20-25 years as compared to how we dealt with the Soviet Union. The Soviet Union was our mortal enemy (except, of course, in the most liberal circles). They had their nukes pointed at us; we had ours pointed at them. We stood up to the Soviets, especially in the Reagan years, and finally their corrupt, inefficient, communist regime collapsed under its own weight.

Yet even though the "Red Chinese" hated us just as much as the Soviets did, we continually tried to engage them and nurture them into the modern world. We tolerated and even aided the Chinese in our zeal to topple Soviet Communism. They were a tool of U.S. foreign policy for many years.

But now we are faced with the potential for a new Cold War involving China. Unfortunately, it is a situation solely of our OWN creation. China is the single greatest foreign policy failure in the history of the US. Why? Because of our policy of "engagement" that we have followed for the past 25 years, rather than recognizing that China is another very dangerous enemy. I know that sounds harsh, but one cannot avoid the fact that they have 20+ nuclear warheads aimed at us (on their way to 100+).

What does the policy of "engagement" mean? It means many things, of course, but here are just a few. U.S. trade with China has been OBSCENELY UNBALANCED for years ("Made in China"). In a multi-year effort to appease the Chinese, we granted them permanent, normal trade relations ("most favored nation" status). We got them admitted to the World Trade Organization (WTO).

Simply put, the policy was that we would give them these much-sought-after trade relations in an effort to make them see the benefits of a free market economy. In the meantime, we would give them Cokes, Big Macs, color TV, the Olympics, cell phones, satellites, and super computers, so that they would want to embrace democracy. Well guess what? It has NOT happened, and is NOT likely to happen for many years, if ever.

Can you imagine the outrage if we had handled the Soviet Union in the same manner? Would they have collapsed as they did? NO! We would have created a monster. Yet that is exactly what we have done with China, and now we have a nuclear monster with full ICBM capability. Nevertheless, we continue to feed the monster instead of confronting it.

Over the years, we had many opportunities to cast China as the new Evil Empire they certainly are -- Tiananmen Square, numerous other human rights violations, threats against Taiwan and the Hainan Island incident last year - but again and again we have looked the other way. While it is easy to blame the massive technology transfers and theft from our nuclear labs on Bill Clinton, the policy of engagement and appeasement has continued throughout the last six administrations, including both Democrats and Republicans.

In the next 20 years, China should become a global super-power on par with the U.S., perhaps even greater. The U.S. has followed a policy that has assumed that the Chinese could be brought into the fold, that they could be influenced to accept our democratic way of life, and that they could be our friends. This was a massive macro-political MISCONCEPTION that Beijing's wants and desires mirror our own. Rest assured they do NOT! We can only wonder when our leaders will wake up and recognize this. Obviously, they haven't yet.

THE LORAL FINE IS NOTHING

The fact that the government fined Loral a measly $14 million is just the latest example. One report I read claimed the Loral fine was the largest ever levied by the government against a U.S. corporation. Maybe so, but the $14 million will be paid-out over SEVEN years, with no penalties or interest. Loral admitted this $14 million fine amounts to only FOUR CENTS per share on its outstanding stock. Compare this $14 million fine with the average cost of apprx. $200 million (today's price) to get just one of Loral's satellites launched into space on a U.S. rocket, or apprx. $100 million to launch one on a Chinese rocket. $14 million is chump-change to Loral!

There are other U.S. space and technology firms that sold or transferred sensitive technology to the Chinese in recent years. Hughes Electronics, mentioned earlier, is just one. But I have not heard of any ongoing litigation against these firms. Maybe there will be more actions taken against these firms, but I am not optimistic. In any event, Loral was the big one, and if the measly $14 million fine is all they get for enabling the Chinese to guide their ICBM's to US targets, that's hardly a deterrent to others!

BACKGROUND ON U.S./CHINA

TECHNOLOGY TRANSFERS:

For those of you who are not knowledgeable about (or have forgotten) the background on these technology transfers to China in the 1990s, I have included portions of my July 1998 and June 1999 FORECASTS & TRENDS (F&T) newsletters. These are two of the most important articles I have ever written.

FORECASTS & TRENDS -- July 1998:

"HAS BILL CLINTON SOLD

OUT TO THE CHINESE?"

"All the prior Clinton scandals combined, including the ongoing Monica Lewinsky fiasco, don't threaten the President as much as the exploding scandal over illegal campaign contributions by the Chinese, and the possibility that he may have personally authorized the sale of highly sensitive military technology to the ChiCom. Friends, this story is red hot and is getting bigger by the day! And this one came not from right-wingers but was broken by the New York Times.

While it may be months before the full truth is known, there is no question that the Chinese made large illegal campaign contributions in an attempt to influence US foreign policy. Only the Chinese are now saying otherwise. The worst case is that the President authorized the sale of previously restricted military technology, including long-range missile guidance systems, to the ChiCom and secondarily may have directly led to the proliferation of nuclear weapons in Pakistan and India and elsewhere.

Clinton's connections to the Chinese go back a long way. In the late 1970s, Mochtar and James Riady, Chinese nationals with a base of operations in Indonesia, came to Arkansas for reasons unknown and went into business with one Jack Stephens, a big Clinton supporter. The trio took control of Worthen Bank in Little Rock. Along with international banker John Huang, another a Chinese national in Arkansas for reasons unknown, they became friends with and supporters of young and promising state Attorney General Bill Clinton. When Worthen Bank got into trouble with regulators, the Riadys and Huang took over a bank in California and began the Lippo Group and many other ventures.

All of these companies had a common thread: they all lost money yet somehow managed to make huge political contributions to the Democratic National Committee. In fact, the Riadys were the single largest contributors to the DNC in 1992 when Bill Clinton ran for President.

The problem is that the Riadys are so closely connected to the Beijing regime that they have been characterized by some as "active intelligence agents" for the People's Liberation Army! Here is what the Senate Governmental Affairs Committee report said last year about the Riadys:

'The committee has learned from recently acquired information that James and Mochtar Riady have had a long-term relationship with a Chinese intelligence agency. The relationship is based on mutual benefit, with the Riadys receiving assistance in finding business opportunities in exchange for large sums of money and other help. Although the relationship appears based on business interests, the committee understands that the Chinese intelligence agency seeks to locate and develop relationships with information collectors, particularly persons with close connections to the U.S. government.'

After Clinton was elected, John Huang began to travel all across the country hosting Chinese officials and businessmen and, whenever possible, introducing them to members of the Clinton administration and the President himself. It is assumed that these people also made large contributions to the DNC. On Saturday, June 25, 1994, James Riady and Huang met privately with the President, when Clinton reportedly agreed to give Haung a high level, top security position at the Commerce Department. On the following Monday, Webster Hubbell was retained by the Lippo Group for $100,000, and Huang received a $900,000 severance check from Lippo. Immediately thereafter, Huang became the Commerce Department's deputy assistant secretary for international economic policy - with access to critical information including classified CIA briefings. Isn't that special?

Huang visited the White House at least 67 times (quite unusual) while at the Commerce Department. He also spent an inordinate amount of time across the street from Commerce at a private Washington office, receiving mysterious packages, making and taking phone calls, faxes, etc. He made at least 232 phone calls to the Lippo Group during the 18 months he was supposedly working full-time at the Commerce Department. Nice work if you can get it!

For reasons still unknown, a decision was made in 1995 at an Oval Office meeting attended by James Riady, Huang, Bruce Lindsey and President Clinton to move Huang from the Commerce Department to the Democratic National Committee. In that position, Huang raised over $3 million in campaign contributions - at least half of which was from illegal foreign sources. As noted above, the Riady-Huang-Clinton connection goes back a long way, and it has proven to be a perfect conduit for the transfer of huge sums of illegal Chinese money into the Clinton election campaigns. The question is, what did the Chinese get in return?

[Still quoting from FORECASTS & TRENDS -- July 1998]

Is Bill Clinton The Manchurian Candidate?

In November 1993, Bill Clinton officially loosened the export policies of the Bush administration by allowing a U.S. satellite to be launched in China while economic sanctions were still in place on Beijing for exporting missile technology to Pakistan, Iran, Libya and others. China charges about $50 million to launch satellites on its rockets (versus about $100 million to launch on a U.S. rocket). That's a nice chunk of change but there was a lot more in this deal than money for the Chinese. Clinton approved the launch on the basis that it was a Commerce Department-controlled satellite and was therefore not covered by the existing missile sanctions. What a stretch! Read on.

U.S. laws have restricted the sale or transfer of military technology, including satellites, to the Chinese for years. These restrictions do, however, allow for exceptions but only if granted by the President. Both George Bush and Clinton granted such exceptions. However, there are two huge differences. First, President Bush granted exceptions ONLY AFTER the Defense Department certified that the technology was NO THREAT to US security or our national interests. President Clinton changed that policy and transferred the security certification from the Pentagon to the Commerce Department (a la the now deceased Ron Brown, Clinton's former campaign manager). The Commerce Department is infinitely less qualified than the Pentagon to make such decisions, not to mention the fact that its primary mission is to increase trade.

The second difference is that under President Bush no sales or transfers of 'coded' or 'encrypted' satellite control systems were made outside the U.S. In fact, as late as 1994, even President Clinton denied the export of this highly classified technology. Since that time, however, Clinton has approved at least two such exceptions and allowed the sale of this missile control technology to the Chinese - overriding the objections of the Pentagon, the State Dept. and the Justice Dept.

The Chinese have been making missiles since the early 1970s. The biggest problem with the ChiCom missiles has been lack of accuracy and explosions shortly after takeoff. Thanks to technology transfers under Bill Clinton, both of these problems may now be vastly improved. This includes an estimated 13-18 nuclear missiles aimed at US cities!

If True, This Is A Travesty

I don't know if you have read this story elsewhere. It is only now beginning to make it into the mainstream press. You can find a lot more information on this mushrooming story on the Web at www.WorldNetDaily.com and other sites. If you read it, I suspect you will come to the same conclusion I have:

The Clinton administration is conducting a foreign policy which intentionally aids the military machine of America's largest and most dangerous adversary for the foreseeable future. It may be the most shocking scandal in the history of American politics. Yet the White House maintains that no laws have been broken. It makes no apologies for these practices and refuses to stop them.

If the information on this massive technology transfer to China is true, and it is looking more so by the day, it is a travesty. This is not some under-the-table $100,000 payback in the cattle futures market. This is not the illegal taking of hundreds of classified FBI background files in an effort to dig up dirt on Clinton's political opponents. This is not about having sex, or not having sex, with a young White House intern and then asking her to lie about it.

If true, this is about compromising the national security of the United States. This is about money changing hands for vital U.S. secrets. These actions should be investigated to the fullest and stopped!' [END QUOTE]

That, dear readers, is what I reported in 1998 as the news unfolded that the Clinton administration had allowed sensitive missile guidance to be sold to the Chinese. Unfortunately, then Attorney General Janet Reno quashed the investigation into the sensitive technology sales to China, and the media quickly buried the story. What else is new?

In the June 1999 issue of FORECAST & TRENDS, I again revisited this issue, only at that time the issue was the theft of highly classified weapons technology from our nuclear labs. As noted above, the Clinton administration stonewalled and tried to cover-up the espionage at the labs, but we brought our clients the facts at the time.

Due to space considerations, I have included the relevant excerpts from the June 1999 newsletter. Again, this is one of the most important articles I have ever written, not only due to the seriousness of the espionage, but also as it pertains to a new Cold War with China.

THAT'S ALL FOR NOW

Sorry for such a long Update, but this is information you need to have at your disposal. Next time, we'll try to focus on the economy and the markets.

All the best,

Gary Halbert

LINKS TO LORAL STORY

* There ain't much, folks -- they buried this story really deep!

Loral settles with U.S. in China satellite case - Reuters Securities

Loral agrees to pay fine on Chinese rocket - Reuters Securities

Loral and U.S. Government Settle 1996 Chinese Launch Matter - Business Wire

U.S. lawmakers applaud Loral's $14 million fine - Reuters Securities


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Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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