Chinese students suspects in espionage

Two Chinese students studying in the United States supplied China's military with American defense technology that allowed Beijing to produce a special metal used in sensors and weapons, according to a Pentagon report.

"This is a classic example of how the Chinese collect dual-use military technology," an FBI official said. "Students come here; they get jobs; they form companies."

The espionage, subject of an ongoing investigation, allowed China's military to develop a version of the substance known as Terfenol-D, which cost the Navy millions of dollars in research to create.

One of the Chinese students attended Iowa State University, where he worked closely with the Department of Energy's Ames Laboratory on the school's campus. The lab developed the material invented by the Navy in the 1970s.

The other student attended Pennsylvania State University.

The Terfenol-D data were stolen within the past three years in a computer hacking incident, the FBI official said.

In its annual report on Chinese military power made public last week, the Pentagon stated that "one of the Chinese students admitted sending this information [on Terfenol-D] to the [Peoples Liberation Army]."

The Pentagon noted that "usually the connections between [Chinese] academic, commercial, and military organizations are not so clear cut."

The FBI official said a Chinese company linked to the theft of the Terfenol-D data, Gansu Tianxing Rare Earth Functional Materials Co. Ltd., known as TXRE, is directly connected to the Chinese military. TXRE was set up by a Chinese official who studied with one of the two Chinese students.

TXRE's promotional literature states that it has developed a substance that U.S. officials say is Terfenol-D.

Terfenol-D is a high-tech material that changes shape in response to magnetic energy, and can be used in both sensors and mechanical devices. Because it has both commercial and military applications, any sale of the technology is strictly controlled and requires an export license.

The Navy uses Terfenol-D in an advanced sonar system designed to track enemy submarines. The material also has applications for advanced aircraft and spacecraft. U.S. officials said it could be used by the Chinese in a multiple warhead missile stage and in "smart" aircraft wings.

The sole U.S. manufacturer of Terfenol-D is Etrema Products Inc., a private company in Ames licensed to produce it. A company spokeswoman declined to comment on the Chinese acquisition of Terfenol-D.

Last week's report was the U.S. government's first public admission that the Chinese military had obtained the defense technology. Details of the Chinese acquisition of Terfenol-D were reported by Insight magazine in October.

"The close relationships between the personnel and organizations involved often makes it difficult to separate the research, funding and cooperation triangle among Chinese universities, government institutes and businesses," the report said.

The Pentagon report stated that China is using students and scientists to develop its military technologies. "Husband-wife teams" also are employed, the FBI official said.

According to the report, Beijing's China Defense Science and Technology Information Center is the key collector of foreign technology and is part of the military's General Equipment Department (GED).

The GED "oversees a complex web of factories, institutes and academies that are subordinate to China's nuclear, aeronautics, electronics, ordnance, shipbuilding and astronautics industries," the report said. "Each of these institutions has an import/export corporation to facilitate the import of technology and knowledge."

The FBI official said China's government uses people who study advanced technology in the United States to infiltrate U.S. companies to gain access to sensitive information. The collectors then return to China and set up their own companies or provide the information to the military, the official said.

In another case, two Chinese students in the United States were caught sending submarine-related technology to China to a relative working for the Chinese military.

About 50,000 Chinese students currently study in the United States. U.S. officials said a small percentage are involved in intelligence and technology-gathering work for the Chinese government.

"Our position is that the intelligence threat is asymmetrical, and it is all over the United States -- in Iowa, Mississippi, Maine or Alabama," the official said.

The FBI responded to the foreign threat by putting counterintelligence squads in all FBI field divisions.