• Chinese trader indicted in US accused of busting Iran missile embargo

    Reuters file

    An Iranian long-range shore-to-sea Qader (Capable) missile is launched during Velayat-90 war game on the Sea of Oman near the Strait of Hormuz in southern Iran on Jan. 2, 2012.

    By William Maclean and Ben Blanchard
    Reuters

    A Chinese businessman indicted in the United States over sales of missile parts to Iran is still making millions of dollars from the trade, say security officials who monitor compliance with Western and U.N. sanctions.

    These officials, speaking on condition of anonymity, said the businessman, Li Fangwei, has earned at least $10 million from illegal sales to Iran since his indictment by the New York County District Attorney in 2009.


    Trade sanctions are at the heart of international efforts to curb Iran's nuclear program for fear it is for military ends -- a suspicion Iran rejects. Li's alleged activities may point to Iran's resourcefulness in circumventing those sanctions and turn a spotlight on China's ability to police its own export restrictions.

    It is hard to quantify the contribution of foreign firms and individuals to Iran's nuclear and missile programs, but analysts believe some vital components are all but impossible for Tehran to produce at home.

    Contacted by Reuters on Feb 4, Li said he continued to get commercial inquiries from Iran but only for legitimate merchandise, such as steel products. Li said his company, LIMMT, had stopped selling to Iran once the United States began sanctioning it several years ago.

    He dismissed allegations by the security officials that he had used deception, including changes of company names, to supply Iran with Chinese and foreign-made parts such as high-grade alloys that can be used to enrich uranium and guidance devices suitable for missiles.

    "Sure, we did business with Iran, but we did not export the goods they said we did, missiles or whatever," Li said. "We still get inquiries from Iranian clients, but we don't respond to them."

    A Chinese Foreign Ministry spokeswoman said Beijing was adhering to trade restrictions, including a U.N. ban on helping Iran build missiles that can deliver nuclear warheads.

    Officials from Iran, including at firms the security officials said were clients of Li and at the embassy in Beijing, did not respond to requests for comment. A Chinese bank that the security officials said Li used for Iranian business denied it had breached U.N. sanctions.

    Targeted by feds, local prosecutor
    In 2006, the U.S. Treasury barred Li from the U.S. financial system for allegedly selling goods with potential military uses to Iran.

    Three years later, the New York County District Attorney unsealed a fraud indictment against Li and his metals company LIMMT on suspicion they had used false names to process further payments for sales to Iran through several U.S. banks.

    The U.S. banks employed by Li were innocent of any wrongdoing because Li and other suspects had concealed their identities, then-District Attorney Robert Morgenthau said.

    On Feb 4, Li said that at the time of the indictment he had felt there was no point in saying anything because U.S. courts and prosecutors "don't listen to reason. It's useless."

    Three weeks ago, on Feb. 11, the U.S. State Department issued fresh sanctions against Li, saying he had "engaged in missile technology proliferation activities that require the imposition of missile sanctions", and placing additional restrictions on any missile technology trade involving him.

    A State Department official said Li had been sanctioned because of his "proliferation to Iran" since his 2009 indictment. Li did not respond to calls seeking comment on the Feb 11 action.

    China reacted with irritation to the Feb. 11 measures. Foreign Ministry spokeswoman Hua Chunying said the U.S. step "seriously violates the norms of international relations and harms China's interests" and urged the United States to immediately revoke "these irrational sanctions."

    China has no extradition treaty with Washington.

    Alloys, gyroscopes
    The security officials allege that since the 2009 indictment Li, working in concert with the Iranian Embassy in Beijing, had supplied parts to firms that make Iranian missiles, in particular the U.N.-blacklisted Shahid Bakeri Industrial Group (SBIG). SBIG did not reply to faxes and emails sent by Reuters for comment.

    The goods allegedly supplied included 15 metric  tons of high-grade aluminum alloy, more than 20 metric  tons of ultra-high strength steel and 1,700 kg of graphite cylinders.

    Li agreed in 2011 to supply 1,500 gyroscopes and accelerometers to SBIG, the security officials alleged, referring to devices that can be used in missile guidance and control systems -- a quantity sufficient for about 500 missiles.

    Gyroscopes are "controlled items" under the Missile Technology Control Regime (MTCR), an informal and voluntary partnership between 34 mainly Western countries. China is not a party to the MTCR but has similar export controls of its own.

    Li also supplied more specialized devices known as fiber-optic gyroscopes, the officials allege; their main uses are in missiles, robots or remotely operated land or sea vehicles.

    The officials accuse Li of advising SBIG and other Iranian clients to change details of shipments, including the falsification of the end-user and supplier details in contracts.

    Li denies all the allegations.

    Between 2010 and 2012, Li took over $10 million in payments from SBIG alone and travelled often to Iran, the officials allege. He used deception within China to hide his activities, not only from the authorities but from Chinese companies as well, the officials added.

    In 2012, they said, Li listed a Chinese company as a false end user to obtain repair equipment he intended to send to SBIG in Iran.

    A diplomat in Iran's Beijing Embassy helped Li, who is about 40, arrange meetings with defense officials when he visited Tehran, the security officials allege. In the Iranian capital, the officials said, some contacts knew him only as "The Tailor" to conceal his identity.

    Critical components
    The officials alleged that some of his clients were not always satisfied with the quality of his goods but kept on using him, perhaps for lack of choice.

    Asked in Beijing whether China knew of Li's purported activities, Foreign Ministry spokeswoman Hua said China's position was "clear and steadfast" on non-proliferation: China had always upheld U.N. Security Council resolutions on non-proliferation. If a Chinese individual or company was doing anything illegal, it would be dealt with.

    An internal report for the U.S. Congress in December concluded that sanctions, respected by China, were making it increasingly tough for Tehran to obtain certain critical components and materials for its missiles.

    From 2004 to 2007, Chinese arms transfer agreements with Iran totaled about $300 million at today's prices; between 2008 and 2011 total arms transfer agreements dropped to less than $50 million, according to the report by the non-partisan Congressional Research Service (CRS) on Iranian missiles.

    Li said his company, LIMMT, had stopped selling to Iran once the United States began sanctioning it several years ago. He did not indicate a date, but the U.S. Treasury first sanctioned LIMMT in June 2006, citing its alleged support of and role in the proliferation of weapons of mass destruction to Iran.

    "We used to export steel, things like that. Nothing to do with missiles," he said.

    At two buildings in the northeastern city of Dalian which the security officials said had been used by Li, people either had never heard of him or said he had left some years ago.

    Additional reporting by William Maclean, Ben Blanchard and Michael Martina in Beijing and Dalian, Marcus George in Dubai, Dan Williams in Jerusalem, and Mark Hosenball, David Ingram and Anna Yukhananova in Washington.

    More from Open Channel:

    Follow Open Channel from NBCNews.com on Twitter and Facebook 


  • Expert: US in cyberwar arms race with China, Russia

    Rick Wilking / Reuters file

    First Lt Michael Newman examines a server rack that is isolated from the Internet at the Air Force Space Command Network Operations & Security Center at Peterson Air Force Base in Colorado Springs, Colo., in July 2010.

    By Robert Windrem, Senior Investigative Producer, NBC News

    The United States is locked in a tight race with China and Russia to build destructive cyberweapons capable of seriously damaging other nations’ critical infrastructure, according to a leading expert on hostilities waged via the Internet.

    Scott Borg, CEO of the U.S. Cyber Consequences Unit, a nonprofit institute that advises the U.S. government and businesses on cybersecurity, said all three nations have built arsenals of sophisticated computer viruses, worms, Trojan horses and other tools that place them atop the rest of the world in the ability to inflict serious damage on one another, or lesser powers.

    Ranked just below the Big Three, he said, are four U.S. allies: Great Britain, Germany, Israel and perhaps Taiwan.

    But in testament to the uncertain risk/reward ratio in cyberwarfare, Iran has used attacks on its nuclear program to bolster its offensive capabilities and is now developing its own "cyberarmy," Borg said.

    Borg offered his assessment of the current state of cyberwar capabilities Tuesday in the wake of a report by the American computer security company Mandiant linking hacking attacks and cyber espionage against the U.S. to a sophisticated Chinese group known as “Peoples Liberation Army Unit 61398.

    According to a new White House report released today, cyber spying and other forms of economic espionage are a growing national security threat – especially from China, where hackers are able to quietly and discreetly acquire source code from U.S. companies. NBC's Andrea Mitchell reports.

    In today’s brave new interconnected world, hackers who can defeat security defenses are capable of disrupting an array of critical services, including delivery of water, electricity and heat, or bringing transportation to a grinding halt. U.S. senators last year received a closed-door briefing at which experts demonstrated how a power company employee could take down the New York City electrical grid by clicking on a single email attachment, the New York Times reported.

    U.S. officials rarely discuss offensive capability when discussing cyberwar, though several privately told NBC News recently that the U.S. could "shut down" the electrical grid of a smaller nation -- Iran, for example – if it chose to do so.

    Borg echoed that assessment, saying the U.S. cyberwarriors, who work within the National Security Agency, are “very good across the board. … There is a formidable capability.”

    “Stuxnet and Flame (malware used to disrupt and gather intelligence on Iran's nuclear program) are demonstrations of that,” he said. “… (The U.S.) could shut down most critical infrastructure in potential adversaries relatively quickly.”

    China, Russia have different priorities
    Borg said China and Russia have similar capacity to cause mayhem, but have different priorities and skill sets.

    usccu.us

    Scott Borg says the U.S. possesses a 'formidable capability' to wage cyberwar.

    “Russia is best at military espionage and operations,” he said. “That's what they have focused on for a long time. China is looking for crucial business information and technology. China's main focus is stealing technology. These things quite separate. You use different tools on critical infrastructure than you use for military espionage and different tools again on stealing technology."

    Borg said that each has its strong suit. "The Russians are technically advanced. The Chinese just have more people dedicated to the effort, by a wide margin,” he said. “They are not as innovative or creative as the U.S. and Russia. China has the greatest quantity, if not quality."

    Borg said the group featured in Mandiant’s report, the People’s Liberation Army Unit 61398, may be one of the most important groups working in China, but not necessarily the most important.

    "There are at least two dozen groups carrying out aggressive operations against the U.S.,” he said. “They get in each other’s way and trip over one another, but they are all operating with the tacit approval of the Chinese government.

    "They're not cooperating with each other because they don’t share capabilities," he added. "One group has good programming, but is bad at access or targeting." 

    The Chinese hacking efforts are so broad, Borg said, that the highest-ranking Chinese officials “almost certainly do not know what all the groups are doing,” or the consequences. As a result, he added, they have been embarrassed by reports like the one in Tuesday’s New York Times, which first reported on the Mandiant assessment.

    China is the most likely of the superpowers to leave a calling card, making their work the easiest to track. "China is very arrogant in its authorship of cyberweapons,” Borg said. “It does little to conceal its identity."


    That’s in sharp contrast to the Russians, who he noted are not above writing code in Chinese to throw off investigators.

    While the U.S. could respond to ongoing cyberattacks from China and Russia by shutting down the power grid of "any of its adversaries” and causing severe physical damage, Borg said it is encumbered by several factors.

    One is its vulnerability to cyberwarfare as the world’s most networked nation, he said.

    And from a geopolitical standpoint, Borg said, the U.S. would not want to badly damage the economy of either China or Russia. In fact, he said, the U.S. would almost certainly have to incorporate protections for critical systems like the power grid in any cyberattack.

    Also, detecting the source of hostilities is not always easy, Borg said, as cybertracks are not as easy to follow as missile tracks. That means “mutually assured destruction,” the main strategic tenet of the Cold War, is problematic at best when talking about cyberwar, he said.

    "It might be difficult to determine proportionate response,” he said. “It might not be simple to attack the attacker.”

    For example, policymakers may think an attack has been carried out by the Chinese, when it was actually the work of the Russians or a rising power in the cyber world, like Iran. That is why intelligence -- getting insight into these operations -- is more important in a crisis than cyberforensics, which can take longer and not be as certain.

    "There is no MAD in the Cold War sense," he said, "You can’t be 'assured' of attribution. The attack can be anonymous. It can be spoofed," or disguised as coming from another source. 

    Iran developing 'serious capability'
    The U.S. first began to develop its own offensive capabilities 20 years ago when several strategic thinkers, particularly at the Naval Post-Graduate School, began to see the possibilities. It was not so much a strategic priority, but more "people familiar with electronics and hackers exercising their imagination." (Borg says one of those thinkers, Winn Schwartau, used fiction to discuss the threat and the possibilities, in a 1991 book, "Terminal Compromise.")

    While the U.S. has the means to respond and to defend itself, Borg notes that some countries have no recourse. He cited the Russian invasion of the Republic of Georgia in August 2008, when the Georgian government and media infrastructure was quickly compromised.

    What was particularly interesting, Borg said, was that the Russian military and intelligence services weren’t directly involved.

    "The first wave was carried by organized crime," he noted. "The second wave was carried out by a (hacker) group organized though social media.” He said Russian hackers could download the attack software from a variety of popular sites, including dating and gun-collecting websites.

    In both cases, Borg concluded, the organizers apparently were tipped off early about the timing of Russian military operations, he said.

    The attack on Georgia also illustrated another aspect of cyberwarfare, Borg said, noting that Georgia, Estonia and Lithuania afterward formed a cyberalliance, leaving them in a better position to deal with future assaults.

    That also appears to be the case with Iran, which recently announced that it decided to establish cyber army and claimed to have 4,000 to 5,000 military personnel involved in defensive and offensive operations. That isn’t all bluster, Borg said, noting that when the U.S. leveled new sanctions on Iranian banks last year, U.S. banks suddenly came under attack.

    "Iran is developing a serious capability," said Borg. “It's exaggerating the present capabilities, but it’s working toward the future."

    That’s especially troubling because the risk of smaller nations waging cyberwar against one other may be higher than with the online superpowers, he said.

    He cited reports indicating that Iran may have been behind what he called one of the more serious cyberattacks to date -- an assault last August on the Saudi Aramco computer network that disabled more than 30,000 computers used to control the flow of Saudi oil. The Saudi Interior Ministry blamed "foreign countries" for the attack.

    Borg said he believes the attack was an "Iranian fundamentalist attack ... at some point loosely the under auspices of Iran, and blessed by Iran. The fundamentalist group made a claim of responsibility. ... “Based on technical analysis, the claim has credibility."

    For that reason, Borg says he is less worried about the possibility of China or Russia launching a catastrophic attack against the U.S. than he is about the emerging cyberpowers.

    “What I’m really concerned about isn’t Russia or China, but attacks from Iran or terrorist groups working with state actors,” he said.

    More from Open Channel:

     Lights, cameras, reaction: Resistance builds to red-light cameras

    Suburban Chicago cops allowed to work 'half drunk,' investigation shows

    GAO: Climate change poses big financial risk to federal government

    Follow Open Channel from NBCNews.com on Twitter and Facebook 

     

  • Law leaves unaddressed the problems of contaminated drywall made in China

    President Barack Obama signed a law Monday dealing with the issue of contaminated construction materials, the Drywall Safety Act of 2012. The investigative reporting group 100 Reporters has looked at the law, finding that it originally banned the use of contaminated drywall from China, but by the time the bill came out of committee it allowed regulators to defer to standards developed by the homebuilding industry.

    A 100Reporters review of the legislation shows that the law is unlikely to provide relief to current and potential victims of contaminated drywall. It does little to prevent the sale of tainted homes to unsuspecting buyers. Absent from the law are meaningful standards to insure that new drywall – both imported and domestically produced – does not release potentially hazardous levels of sulfur gases.

    In addition, after lobbying pressure from industry, the law hands off virtually all responsibility for writing a handful of new rules to drywall manufacturers themselves, rather than government regulators.

    As a result little may actually change for those whose finances and health have been severely impacted by the tainted drywall.

    Read reporter Aaron Kessler's full story at 100r.org.

    More from Open Channel:

    Follow Open Channel from NBCNews.com on Twitter and Facebook 

     

  • China has its own subprime investments: Meet 'Golden Elephant No. 38'

    By Kelvin Soh and Michael Flaherty
    Reuters

    Taihe, China — Absent from the product's prospectus is any indication of the asset underpinning Golden Elephant: a near-empty housing project in the rural town of Taihe, at the end of a dirt path amid rice fields in one of China's poorest provinces.

    "They haven't even built a proper road here," said Li Chun, a car repairman, who said he lives in the project. "The local government is holding onto the flats and only wants to sell them when prices go up."

    Golden Elephant No. 38 is one of thousands of "wealth-management products", instruments aimed at monied investors, which have shown phenomenal growth over the last five years. Sales of them soared 43 percent in the first half of 2012 to 12.14 trillion yuan ($1.90 trillion), according to a report by CN Benefit, a Chinese wealth-management consultancy.

    They are usually created in China's "shadow banking" system - non-banking institutions that are not subject to the same regulations as banks - which has grown to account for around a fifth of all new financing in China.

    Follow Open Channel from NBC News on Twitter and Facebook.

    Like the subprime-debt lending spree in the United States that helped spark the 2008 financial crisis, the products are often opaque, and usually dependent on high-risk underlying assets, such as the Taihe housing project.

    Warning bells
    Financial instability in the world's second-largest economy could have global ramifications, and warning bells have begun to sound about the way these products are marketed in China.

    It has become a mammoth industry, comprising an array of financial products. Analysts have different ways of measuring the size of the sector. Barclays estimates some 22 trillion yuan worth of wealth management products will be issued this year. Fitch Ratings says China's banks had about 10.4 trillion yuan in wealth management product liability at the end of June this year

    Reuters reviewed more than 50 wealth-management and trust loan products, available online and at bank branches in China, with the aim of tracking, for the first time in certain cases, where investors' money in these products ends up.

    All, except two, failed to explain or even display the underlying asset behind the product.

    The China Banking Regulatory Commission, which oversees banking products, said more than 20,000 wealth management products were now in circulation, from a few hundred just five years ago.

    In an email response to the questions raised in this story, the regulator told Reuters new banking regulations require more transparency about these products.

    "It is uncommon to find wealth management products that fail to clearly specify the underlying securitized assets," it said, adding that a regulation issued last year "clearly states that WMP prospectuses must indicate how the money is being used, and the percentage of money that is being put into each asset class."

    The commission is looking into further strengthening the regulatory framework over these products, and "will continue to encourage the wealth management industry's growth under the principles of transparency and sufficient risk control".

    'Ponzi Scheme'
    After a five-year bonanza in sales of these products, signs of trouble are building. China Credit Trust Co, one of the country's biggest trust companies, has disclosed that one of its wealth funds, Jinkai #1, is at risk of default because of money it lent to coal company Zhenfu energy Group. Zhenfu's boss has been arrested, amid reports he owed a total of 500 million yuan.

    "Zhenfu Group and related companies have already been sued three times in the second quarter, all because of off-the-balance-sheet fundraising from underground channels," China Credit Trust said on its website, adding that government teams were trying to sort out who was owed what.

    If the fund were to fail, it would be one of the first in China's fast-growing trust industry and open up a test case on who is ultimately liable when investment products go bad.

    It called to mind the massive losses and widespread bankruptcies in China's trust industry a decade or so ago, when the Guongdong International Trust and Investment Corporation, then one of China's largest state-owned companies, went bankrupt. Some analysts are warning of potential fraud in the industry.

    "Some banks have been using new (wealth-management product) proceeds to cover losses from previous products in the pool," said David Cui, a strategist at BofA Merrill Lynch. "In our view, this is not fundamentally different from a Ponzi scheme. The music may stop at a certain point if and when WMP asset size stops expanding."

    Managing troubled loans
    Wealth management products are investment tools with a short maturity that banks market as a low risk vehicle for returns higher than savings deposits. The products pool money to invest in a variety of different assets. Some of them, such as the Golden Elephant and Jinkai #1, are linked to high-risk trust loans, with the banks playing a middleman role between the trust company and investor.

    At first, products such as Golden Elephant were viewed as a beneficial way for China's banks to manage troubled loans and for its citizens to grow their money by investing beyond the government-set savings rate.

    But as China's growth engine slows, concerns are rising that the mountain of products, many with a maturity of a mere four weeks, will struggle to keep the money flowing in. That would leave banks and investors on the hook for any bad lending stemming from these products and strain the financial system at a time when the country's economy looks fragile.

    "The concern is if some investors begin to experience losses in these products, this could create a panic among other investors," said Mike Werner, an analyst at Sanford Bernstein. "This could result in investors fleeing these products and result in a liquidity squeeze for this market."

    Especially worrisome is the quality and transparency of the products. Liu Shiyu, a vice-governor at the country's central bank, said in June many banks had failed to sufficiently disclose the risks involved in investing in these products, but he did not announce any measures to curb the sector's growth.

    Engine of wealth
    The 14-page prospectus for "Wealth Management Plan No. 350", sold by China Merchants Bank, says it aims to raise 200 million yuan ($35 million). Not until page 5 is it revealed that the product is linked to the Railway Ministry - whose 2.2 trillion yuan debt ($346 billion) exceeds the combined worth of all major U.S. banks.

    The railway operator is seeking to refinance 2.43 trillion yuan ($392 billion). The state-run Beijing Times said it lost 7 billion yuan in the first quarter of this year alone, hit by debt repayments of more than 28 billion yuan in January-March.

    The prospectus also says up to 70 percent of the product's proceeds can be used for investments in "other assets", without saying what these assets are. Bank officials said the money is usually put into a common pool for investments, but said they were unable to say exactly where the money was invested.

    In the American subprime-mortgage bubble, much of the credit-derivative obligations and other investment instruments underpinned by risky home loans were deemed AAA by ratings agencies. In China, domestic agencies give the railway ministry's bonds their highest ratings -- higher even than U.S. treasuries.

    A product called "Wealth Accumulator," sold by Bank of China, only states that the money is being put into high-quality assets that will yield guaranteed returns "significantly higher than term deposits of similar tenor." No other details are offered.

    "The problem is that not even high net-worth Chinese people may fully understand the risks involved," said Gigi Chan, who runs the China Opportunities Fund at Threadneedle Investments, which manages more than $123 billion in assets globally.

    "They're being told there are guaranteed returns, and people need to consider if these returns are really guaranteed."

    Subprime similarities
    The 5 trillion yuan trust industry, sometimes referred to as "shadow banks", emerged soon after China began opening up in 1979. It was meant to encourage innovation within the financial services sector by lending to higher risk companies that traditional banks would not lend to.

    Initially, the trust companies handed out loans by channeling money from institutional investors to companies that needed them, taking a cut in the process. That has changed in the past few years.

    Banks started working closely with trust companies by packaging trust loans into bite-sized wealth management products to cater to yield-chasing depositors, or by selling trust loan products directly to its depositor base at their retail branches.

    Banks also began transferring non-performing debts to roughly 60 trust companies, which in turn packaged the debt into investment products that were sold back to retail customers or marketed with a bank. These vehicles typically focused on property investments, because Beijing was cracking down on bank loans to developers.

    Around the same time, many Chinese banks began offering higher returns on securities they labeled "wealth management products" to people looking for a better return on their money.

    Cash pressures
    Deposit growth at Chinese banks, meanwhile, slowed to around 13 percent last year, its slowest pace in decades.

    Money flowing out of saving deposits and into wealth-management products poses a potential threat to banking stability, because it reduces the amount of money banks have on hand to lend and could lead to cash pressures, analysts warn.

    "Fitch has long emphasized that the greatest risk associated with Chinese banks' wealth management activity is the strain it places on funding and liquidity," Fitch analyst Charlene Chu said in a research note. "The risk was easily controllable when the amount of outstanding products remained small. But it is increasingly difficult for Chinese banks to manage."

    Chinese banks say they prefer straight deposits, but that the wealth tools are a response to the demands of a market that has shown explosive growth.

    "Customer expectations on financial services have been rising," China Construction Bank President Zhang Jianguo told Reuters. "To ensure our wholesome development, to keep customers and attract new ones, wealth management products have now become an essential part of any financial offering."

    All other banks mentioned in this report declined to comment.

    Short-term deals
    The banking regulator implemented rules last year to curb sales of some of the riskier products, including those with one-month or less maturity dates, and those linked to Chinese pawn shops.

    But most products still carry tenures of less than one year -- advisory firm KPMG says only 3 percent extend beyond two years. Information is opaque, rules are open to interpretation.

    "One of the key problems is that short-term financing is being used to pay for a long-term project," said May Yan, head of China bank research at Barclays in Hong Kong. "Infrastructure projects should be funded by long-term bonds. Unfortunately, China doesn't have that."

    The banking regulator has tried to protect the small investor with a rule issued last year requiring that only individuals with more than 1 million yuan in cash could invest directly into trust products.

    At bank branches in two Chinese cities visited as part of the Reuters review, that rule was easy to get around.

    Customers at banks in Nanchang and Shenzhen, unable to cough up the initial 1 million yuan investment, were offered the option of pooling their money together with others to meet the minimum sum required.

    'On paper...'
    The trusts, also called "shadow banks", create the wealth management products and then give them to banks to sell to their customers.

    The bank staff Reuters spoke to stressed the low-risk nature of the products, despite the higher-than-normal returns being promised. They often could not say where the proceeds of the product would be invested.

    "On paper, these are not principal guaranteed but you don't have to worry about that," said a wealth manager at a local branch of Bank of Communications, China's No. 5 lender. "All our clients who've previously bought these products got their principal plus interest back."

    It is not entirely clear who bears the risk if the products default.

    China's courts have in the past ordered banks to compensate investors who had lost money buying mutual funds and other financial products, prompting some to suggest a string of such defaults could weigh heavily on China's major lenders.

    But the fine print in most of the documentation for these products puts the onus squarely on the investor.

    "The question really is, at the end of the day, who is on the hook?" said Werner at Sanford Bernstein.

    Hao Xueqi, a homemaker who was at Shenzen branch of China Construction Bank, was unfazed.

    "I've bought these products and have always gotten my money back," she said. "I usually go with the bigger banks because they have a better reputation and won't close down with my money."

    'A model province'
    The proceeds from sales of the "Golden Elephant" product were channeled to Taihe City Construction Co., a local government financing vehicle. Taihe is an agricultural town in impoverished Jiangxi province, where annual incomes reached 4,500 yuan a year in 2010, barely a tenth of Beijing residents.

    Taihe City Construction Co. used the 50 million yuan raised to pay off part of the cost of constructing the subsidized housing units, according to the product's prospectus.

    "The central government wanted more subsidized housing, so they just removed all the farmers here and told them to leave," said Taihe resident Xiao Hongmei. "The farmers who used to live here were promised flats, but many of them haven't got anything so far."

    A spokesman at the publicity department of the Taihe government office declined to comment, referring queries to the Jiangxi provincial government.

    Xu Weiguo, a deputy director at the province's economic planning department, said Jiangxi was a model province in keeping any economic risks to a minimum.

    "We always study the central government's instructions very closely and follow the rules," Xu said in a telephone interview. "There will not be any problems with our books."

  • Gruesome photos put spotlight on China's one-child policy

    Family photo

    Photos of Feng Jianmei on her hospital bed after a forced abortion have been circulating on the web. The photos were taken by her sister who in turn contacted the media about the story. The photos originally appeared in a local newspaper report online and then they were picked by netizens and distributed online.

    By Bo Gu
    NBC News

    Updated at 10:33 p.m. ET: China state media says city officials have apologized to Feng Jiamei and suspended three officials, the BBC reported.

    Xinhua news said the Ankang city government will urge the county government to review its family planning operations, according to the BBC report.

    BEIJING – Feng Jianmei  says she was manhandled by seven people, some of them local family planning officials, some of whom she didn’t know. 

    Feng, 22 years old and seven months pregnant, was dragged out of her relative’s home, carried and shoved into a van that headed straight to a hospital on June 2, she told NBC News in phone interview.

    She was blindfolded, thrown on a bed, and forced to sign a document that she couldn’t read with the blindfold still on her eyes. Then two shots were injected into her belly. Thirty hours later, on the morning June 4, she gave birth to a dead baby girl.

    Feng is one of the many Chinese women who have been forced to have abortions under China’s strict one-child-only policy started in late 1970s to contain the country’s fast growing population, which has now topped 1.3 billion people.

    One-child policy
    China’s long time Communist leader Chairman Mao Zedong originally encouraged women to have as many children as possible during the Cold War-era when human power was believed to be an important force if war broke out. But the country’s rulers soon found it too difficult to feed the huge population – so they adopted a harsh policy that allows urban citizens to have only one child, and rural couples to have two, if the first child is a girl.  

    The policy has been carried out for more than three decades despite public opposition, from human rights activists to ordinary people. Thousands of years of Chinese culture fostered the belief that “more children is more blessing,” especially in remote and rural areas where the elderly lack adequate social benefits and depend on children as they grow old.

    Government family planning officials are also under pressure to make sure their constituencies follow the quota of babies allowed. When there’s no clear law telling them what they can and cannot do, forced abortions, often on late-terms pregnancies, have become the norm, particularly for the poor who are unable to pay the hefty fines to have additional children.   

    Advocates on behalf of these women are usually ignored or face government repression. For example, Chen Guangcheng, the famous blind lawyer and human rights activist, represented victims of family planning abuse in Shandong Province. Chen was jailed for four years for his advocacy and put under house arrest until he recently escaped illegal detainment and fled to the U.S. last month.

    More on Chen Guangcheng

    There are no official figures of how many women in China unwillingly terminate pregnancies every year. “All Girls Allowed,” an organized founded by former 1989 student protest leader Chai Ling, claims there are 1.3 million forced abortions annually. 

    ‘How can I agree to do that, as a mother?’
    Feng Jianmei didn’t realize she wasn’t allowed to have a second child (her first daughter was born in 2007) since everyone else around her was permitted to have a second child. Both she and her husband Deng Jiyuan took for granted that they would have the same right.  But the family planning office in Zengjiazhen, a small town in Shaanxi province in the heart of China, thought differently.  

    Through a rigorous and rigid household registration system designed to control population movement, the central government classifies all its citizens as either city dwellers or rural peasants.  The registration, also known in Chinese as hukou, determines not only a citizen’s residence but also what kind of social services individuals are eligible for.

    It is very difficult to change one’s hukou although there are many ways, including marrying a person with a different registration status, applying for a new status through one’s job, or paying an enormous sum of money. 

    The local family planning office decided that Feng wasn’t allowed to have a second child because she didn’t have the necessary permit – apparently she had failed to relocate her hukou to Zengjiazhen when she moved from her original province of Inner Mongolia.

    But the couple says they had no idea their plan to have a second child was connected with Feng’s hukou.

    They were given another option that would solve the problem: pay a fine of $6,400. But that was an impossible amount for the couple to afford – Deng is a migrant worker and Feng is a farmer. 

    “I told you, $6,400, not even a penny less. I told your dad that and he said he has no money,” the family planning official wrote to Deng in a text message that has been made public. “You were too careless, you didn’t think this was a big deal.”

    Feng’s sister received the same warning;  if they couldn’t afford to help pay the fine, it was only a matter of time before her sister had to get rid of the baby, whether she wanted to or not.

    Things came to a head on June 2, but according to the local government, Feng agreed to the abortion.

    The Zhenping Population and Family Planning Bureau released on June 11 an official stamped document, which says  that “after government cadre’s repeated persuasion, Feng Jianmei agreed to have an abortion at 15:40 on June 2.” 

    “No, I didn’t agree to do it,” Feng told NBC News. “How can I agree to do that, as a mother?”

    She sobbed when asked what happened next, and said she was too upset to think about it. She said all those officials who kidnapped her disappeared after the abortion, and she’s still suffering from a constant headache.

    Two appalling photos of her were taken and posted online that show her lying in bed, looking weak and helpless, with a dead and bloody baby next to her. The photos were taken by her sister who in turn contacted the media about the story. The photos originally appeared in a local newspaper report online and then they were picked by netizens and distributed online.

    ‘If this evil policy is not stopped, this country will have no humanity’
    Forced abortions in China are not new, but Feng’s story spread rapidly via social media, and outrage was immediate and unanimous. On Weibo, China’s Twitter-like microblogging site, netizens left thousands of angry comments, although many of the posts were quickly deleted by government censors.   

    “The purpose of family planning was to control population, but now it has become murder population,” wrote Li Chengpeng, a well-known Chinese writer. “It was a method to contain population, but now it is a way to make money. When you can make money by killing, what else are you afraid to do? A seven-month baby can think already. I want to ask the murderer, how do you face your own mother when you go home? If this evil policy is not stopped, this country will have no humanity.”

    Zhao Chu, another writer, called it pure murder. “This is not about enforcing the policy, it is about depriving someone’s right to live. We avoid the nature of it by using a medical word ‘enforced abortion.’ For so long family planning seems like something completely irrelevant of human life. It’s like coal mining or digging mushrooms. Human life has become lifeless indexes, some cold, meaningless numbers.

    “Also, pushed by heavy fines, the controversial policy has become profit-oriented activities that everyone hates. The worst victims are those of low-class rural people who have no power to fight. Their tears and cries are not heard by so called mainstream society and the victims become worse than the untouchables,” said Zhao.

    Many called for the one-child policy to be outlawed. “We feel so sorry for the dead baby girl, we criticize those so-called law enforcers. But we should rethink the 30-year-long family planning policy. It’d be worth it if this could help to change the policy! We keep our eyes open!” commented user A-Kun on his Weibo page.

    Even Hu Xijin, chief editor of Global Times, one of China’s most pro-government newspapers, criticized the forced abortion on his Weibo account.

    “I strongly oppose the barbarous forced abortion to this 7-month-pregnant mother. Time has changed and the intensity of enforcing family planning has changed. We should promote civilized family planning,” Hu wrote.

    But he added that he didn’t think the whole policy should be abolished. “Don’t use Hong Kong and Japan as an argument to deny China’s population policy. Those places are small and developed early, fed by the whole world’s resources. But the world resources cannot afford to feed a China with billions of people.”

    ‘This has damaged the image of family planning work’
    NBC News tried to contact both town and city level family planning offices in Zengjiazhen and Ankang, but the calls went unanswered.  

    A report from Xinhua, China’s official government news agency, released on Thursday said that the Shaanxi Provincial Family Planning Committee has sent an investigation team to Zengjiazhen and requested local government to have the responsible parties held accountable.


    “This has damaged the image of family planning work, and had an adverse effect on the society. The committee will resolutely prevent such things from happening again,” the Xinhua news report said.

    Feng’s conversation with NBC News was interrupted three times by what she said were government cadres entering her hospital ward to talk.

    When asked what she would do next or whether they will seek legal help, she uttered an answer in a very low voice: “I have no idea.” 

    More world news from msnbc.com and NBC News:

    Follow us on Twitter: @msnbc_world

     

  • SF Bay Bridge may have been lost jobs opportunity

    Justin Sullivan / Getty Images

    The span of the San Francisco-Oakland Bay Bridge is an engineering marvel. Its construction has been a sore point for some American contractors.

    By Scott Cohn, CNBC.com

    It is designed to be an icon — and unlike any bridge in the country.

    After years of debate and delays, the dramatic new eastern span of the San Francisco-Oakland Bay Bridge is finally taking shape.

    At the heart of the project is a unique “self-anchored suspension span” — twin roadways linked to a soaring, 500-foot tower by a single, mile-long cable.

    A little over a year before the bridge’s scheduled opening, the bridge is already a conversation piece, though not for the reasons planners had hoped.

    Instead of marveling at the design, what many are talking about is the fact that the suspension portion of the bridge was made in China.

    Critics say the decision to outsource the span — the central tower and the two 1,500 foot steel road decks were fabricated in a specially-built factory in China and shipped to San Francisco Bay — was a missed opportunity to create thousands of American manufacturing jobs.

    California officials contend the U.S. does not have the manufacturing capacity or the workforce to build such a project on its own.

    A CNBC Investigations Inc. review of the process has found miscommunication, misconceptions and missteps that have, at the very least, tainted what planners had hoped would be an architectural and engineering triumph.

    “The Bay Bridge: 100% foreign steel,” proclaim billboards along the freeways approaching the bridge. To be accurate, the suspension span of the bridge is only about 80 percent foreign steel according to the California Department of Transportation (also known as CalTrans), and the entire eastern span, from Yerba Buena Island to Oakland, is about 20 percent foreign.

    The Alliance for American Manufacturing, which sponsored the billboard campaign, says whatever the actual content, the decision to use Chinese steel was scandalous.

    “I think every California taxpayer should be outraged by this,” says executive director Scott Paul.

    But the outrage extends beyond California.

    “What is it about American regulations, American taxation, American labor cost and attitudes that makes it cheaper to go to China,” asked former House Speaker Newt Gingrich when asked about the bridge at a CNBC Republican Presidential Debate in November.

    “It is good for America to have free trade,” said former Massachusetts Governor Mitt Romney — now the presumptive GOP nominee — at the debate. “But China is playing by different rules.”

    Slideshow: San Francisco: City by the Bay

    Justin Sullivan / Getty Images

    San Francisco's unique mix of physical characteristics, landmarks and attractions make it one of the most popular cities in the United States.

    Launch slideshow

    CalTrans Bay Bridge Program Manager Anthony Anziano told CNBC in an interview that the state had no choice but to go overseas.

    “The largest companies in this country just simply didn’t have the capacity to be able to do that work in the time that we required,” he said.

    That point remains a subject of bitter debate. And with the project now near completion, it is not clear the decision to outsource the span yielded anything close to the savings officials had hoped for.

    Now budgeted at more than $1.75 billion for the suspension span alone, the section has encountered nearly $300 million in overruns. And while officials recently moved up the projected opening of the bridge to Labor Day 2013, it is still as much as a year behind the schedule that was planned when the contract was awarded.

    In the end, the time and budget is nearly identical to the single bid the state received to build the bridge with American steel: a five-year, $1.8 billion proposal by a joint venture of American Bridge Company and Fluor Corporation that the state rejected in 2004.

    There is no way of knowing what overruns that proposal would have encountered, and it, too, contemplated buying some of the steel from overseas. But independent steel industry analyst Michelle Applebaum says American firms have a better track record than the Chinese when it comes to bringing in large projects without major overruns.

    “Just looking at dollars and sense, there was a much better argument for this to be done domestically,” says Applebaum, who describes herself as an ardent free-trader. 

    And she says any cost advantage the Chinese might have had would easily have been made up by the benefits to the U.S. economy. She believes officials in California fell victim to a mindset that says China is automatically cheaper.

    “We shot ourselves in the foot,” Applebaum said. “We never even took seriously the domestic bid.”

    Not so, says Anziano. But with only one domestic bid, which came in at more than double the CalTrans engineers’ estimate, the state had a duty to look elsewhere.

    “That’s telling you there’s something wrong. You’re not getting competitive bidding,” he said.

    Opening the project to foreign competition was not a simple matter. It required some fancy legislative footwork that still angers some U.S. manufacturers, who saw the Bay Bridge as a unique opportunity to revitalize American manufacturing just as the nation was heading into a recession.

    Early on, some in California saw the Bay Bridge project — necessitated when the existing bridge was damaged in the 1989 Loma Prieta earthquake — as a potential job creator.

    Flush with wealth from the dot-com bubble, the state and Bay Area leaders mandated the new bridge be “iconic” in its design. The costs — and potential benefits to the winning bidders —ballooned.

    After lobbying from labor and industry groups, then-governor Gray Davis won federal funding for the bridge. That meant the project was covered by a 1982 “Buy America” law requiring the state to give preference to American contractors.

    But then the 2004 bid came in, just months after the new governor, Arnold Schwarzenegger, took office. Hit by sticker shock, the Schwarzenegger administration decided to regroup.

    “One of the things that stuck out was the Buy America component,” Anziano said. “That was restricting, and we heard this loud and clear from the construction community.”

    So the administration reconfigured the funding formula for the 16 separate contracts that made up the Bay Bridge project. While most of the contracts would continue to receive federal funds and be subject to the Buy America requirement, the self-anchored suspension span — the signature segment of the project and by far the most lucrative — would be paid for with state and local funds, exempting it from the requirement.

    Last month, the U.S. House of Representatives passed a bill that would ban such a maneuver in the future. It faces an uncertain future in the Senate. Regardless, it comes years too late for some who had hoped to win the Bay Bridge project, until the state changed the rules.

    “We thought it was gamesmanship, that it was a way of getting around the system,” says Thomas Hickman, a vice president at Oregon Iron Works outside Portland.

    CNBC.com: Jobs employers can't fill

    His firm was part of a consortium, Bay Bridge Fabricators, that had been preparing a bid for the project. The proposal included a new, state-of-the-art fabrication plant to be built at the port of Vancouver, Washington. Hickman says the factory would have been a huge boost to U.S. manufacturing capacity, allowing American firms to compete for even bigger projects around the world.

    “The impact on the economy throughout this country would have been tremendous,” he said.

    But when state officials announced in 2005 that the suspension span would no longer be subject to the Buy America requirement, the plan died.

    “At that point, we all looked at each other and said it's really time to go home,” said Hickman, “Because they're determined to go to China, or Korea, or somewhere other than the U.S. for this bridge.”

    “That was not part of the thinking — let’s just send it overseas,” said Anziano. “It was the reality of the market.”

    Nonetheless, Schwarzenegger and his administration began actively courting foreign bidders. In 2005, Schwarzenegger traveled to China on a trade mission. During the visit, state transportation secretary Sunne Wright McPeak ceremonially presented officials with a set of CDs including bidding specifications for the Bay Bridge project.

    From the state’s standpoint, the strategy worked as planned — increasing competition. When the project was rebid in 2006, the American Bridge-Fluor joint venture won out. Unencumbered by the Buy America law this time, the group bid $1.43 billion, nearly $400 million below its 2004 bid. After winning the contract, the group promptly subcontracted the steel fabrication to ZPMC, a Shanghai-based firm whose primary expertise is building cranes.

    “I don't believe they ever really took a fair look at what was available here in the United States before they made the decision to effectively abandon the U.S. as a supplier of the structural steel for the bridge,” Hickman said. “I don't mean that to sound harsh, but at the same time, that's really exactly what they did.”

    CNBC.com: Worst jobs for 2012

    His firm did win a contract to build some components of the Bay Bridge, but he says it is nothing compared to the contract for the suspension span.

    State officials say the bidding results proved the U.S. did not have the capacity to build the bridge on time and at a reasonable cost, and they could not rely on a hypothetical U.S. factory to build such a vital span. But it is not clear China had the capacity either.

    Soon after winning the contract, ZPMC built its own new factory in China, just as Hickman’s consortium had planned to do in the U.S. And more than 200 American experts and engineers traveled to China to help supervise the project.

    “Building a new facility, which they had to do, training their people, which they had to do, all of those were an investment in China that in my mind should've been done here,” Hickman said.

    “It's not quite that simple,” said Anziano, who says it is unfair to blame CalTrans for the work going to China. “You have to keep in mind, first of all, that the capacity situation that we have in this country is something that has evolved over decades. You can't fix it overnight. You really can't fix it on the back of one single project.”

    Besides, the Chinese managed tobuild their plant in just eleven months, American Bridge’s then-CEO Robert Luffy told a Congressional committee in 2007.

    CNBC.com: Ultra wealthy shunning stocks

    “Believe me, they have the capacity,” Luffy testified. “It is beyond your comprehension if you haven’t been there.”

    But he acknowledged that had the state approved the venture’s initial bid in 2004, it would have added the capacity in the U.S.

    “A lot of additional capacity,” he said.

    Today, one more major Bay Bridge contract has yet to be awarded: a five-year, quarter billion dollar project to tear down the existing bridge. Among the rumored bidders: a firm from China. 

    This story originally appeared on CNBC.com.

     

    CNBC's Scott Cohn looks at the controversy surrounding how some of the parts of the spectacular structure were built overseas and why those decisions were made.

     

  • 3 big brands may be tied to chicken jerky illness in dogs, FDA records show

    waggintrainbrand.com

    Waggin' Train Wholesome Chicken Jerky Tenders were among 13 Nestle Purina brand treats listed among 22 complaints being investigated by the Food and Drug Administration. The treats, made in China, have been tied to reports of illnesses and deaths in dogs.

    By JoNel Aleccia, Senior Writer, NBC News

    Stumped by mysterious illnesses in at least 600 dogs in the U.S., federal health officials have turned to consumers for help investigating problems possibly tied to chicken jerky pet treats made in China.

    A log of complaints collected from pet owners and veterinarians contains references to at least three popular brands of jerky treats that may be associated with kidney failure and other serious ailments, according to internal Food and Drug Administration documents obtained by msnbc.com.

    Of 22 “Priority 1” cases listed by the FDA late last year, 13 cited Waggin’ Train or Canyon Creek Ranch jerky treats or tenders, both produced by Nestle Purina PetCare Co., the records show. 

    Another three listed Milo’s Kitchen Home-style Dog Treats, produced by the Del Monte Corp. The rest listed single brands or no brand.

    Priority 1 cases are those in which the animal is aged 11 or younger and medical records that document illness are available, an FDA spokeswoman said. In many cases, samples of the suspect treats also are collected.

    The report, obtained through a public records request, is the first agency indication of any brands linked to illnesses that have climbed since the FDA warned pet owners about jerky treats in November. That was the FDA's third caution about the pet products since 2007.

    Nestle Purina and Del Monte officials said their treats are safe and FDA regulators said repeated tests have shown no absolute tie to any brand or manufacturer.

    “No specific products have been recalled because a definitive cause has not been determined,” FDA officials said in a statement.

    The internal report, overseen by the FDA’s Coordinated Outbreak and Response Evaluation, or CORE, group, is one of several ongoing assignments in which FDA regulators are seeking jerky treat samples and medical records of dogs that may have developed kidney failure, liver disease or Fanconi syndrome, which can lead to serious illness and death.

    The recent complaints were filed from October through December by people in cities from California to New York, but the agency will continue to accept them.

    “We still invite owners and veterinarians to submit complaints and samples,” said Siobhan DeLancey, an FDA spokeswoman. “The more information we have, the more likely we can find a link.”

    The move comes as the FDA is under growing pressure from consumers and lawmakers to address rising numbers of illnesses blamed on the China-made treats. Before the warning was issued in November, the agency had logged 70 reports of illnesses tied to the treats last year. Since then, more than 530 additional complaints of illnesses and some deaths have been filed, officials said.

    Courtesy Robin Pierre

    Bella, a 2-year-old pug, died last fall after her owner, Robin Pierre, said she ate Waggin' Train chicken jerky treats.

    Consumers who say their dogs were sickened or killed have launched at least three petitions demanding recalls of jerky pet treats made in China, including one begun in December that has more than 3,400 signatures from the U.S. and around the world.

    “At the slightest doubt, these products should have been recalled, especially knowing there was a link or at the very least a caution/warning label put on the packaging warning the consumers,” said Robin Pierre, a co-founder of “Animal Parents Against Pet Treats Made in China.”

    Pierre, 49, of Pine Bush, N.Y., believes Waggin’ Train chicken jerky treats were responsible for the sudden death last fall of her previously healthy 2-year-old pug, Bella, who developed kidney failure. 

    “The last week of her life was nothing but misery and pain, separated from her family, she died all alone, in a cage, despite the fact that she had a family who loved her,” Pierre wrote in an email to msnbc.com. “She meant the world to me and my family.”

    Courtesy Susan Rhodes

    Ginger, a 14-year-old family dog, sparked one of three petitions after she developed kidney failure possibly tied to chicken jerky pet treats. Her owner, Susan Rhodes, 51, of Port St. Lucie, Fla., wants the treats pulled from the market.

    More than 375 people have signed a petition launched last week by Susan Rhodes, 51, of Port St. Lucie, Fla. She believes her 14-year-old dog, Ginger, may have developed life-threatening kidney failure after eating chicken jerky treats. She was stunned to hear that consumer complaints alone can’t force the FDA -- or a company -- to recall potentially tainted products.

    “That is just unreal. I am not happy with that,” Rhodes said.

    For their part, FDA officials said the companies are free to enact a voluntary recall at any time.

    Lawmakers call for action
    Lawmakers, however, are demanding stronger FDA action. Ohio Democrats Sen. Sherrod Brown and Rep. Dennis Kucinich in February called on the FDA to step up investigation of tainted pet treats.

    In a response sent late last week, an FDA official told Brown the agency “continues to actively investigate” the reports and to pursue testing for chemical and microbiological contaminants.

    On Monday, Brown called the agency’s response “inadequate” and urged prompt release of results of 153 pending tests on the Chinese-made treats.

    “I will continue to press the FDA on this issue because Ohio consumers shouldn’t have to worry about the safety of their pet’s food,” he said in a statement.

    Since 2007, FDA scientists have analyzed jerky treats for evidence of dangerous toxins, including heavy metals, melamine, melamine analogs and diethylene glycol, chemicals used in plastics and resins.

    So far, they’ve found nothing convincing, a point emphasized by Keith Schopp, director of communications for Nestle Purina.  He noted that FDA officials also suggest that illnesses may be a result of causes other than eating jerky treats.

    “Our chicken jerky treats are safe to feed as directed,” said Schopp. “The safety of our products -- and the pets who consume them -- are our top priorities.”

    The company has a comprehensive food safety program in place, he said, including at manufacturing plants in China.

    Pierre, who lost her dog, has little faith in pet food manufacturers -- or in the FDA.

    “Actions speak louder than words and there has been no action from them up until now,” Pierre said. “Waggin’ Train has hid behind the technicality that the FDA cannot find the link and the FDA has let them.” 

    Consumers can report illnesses to the FDA's pet food complaint site.

    Related stories:

    Chicken jerky treats linked to mysterious illness, deaths in dogs

    More dogs sick as FDA steps up scrutiny of chicken jerky pet treats

     

  • Satellite spots China's first aircraft carrier at sea

    DigitalGlobe / AP

    This satellite image provided by the the DigitalGlobe Analysis Center shows the Chinese aircraft carrier Shi Lang (Varyag) sailing in the Yellow Sea. The picture was acquired Dec. 8 by DigitalGlobe's QuickBird satellite.

    By Alan Boyle, Science Editor, NBC News

    A commercial satellite operator says it has captured a rare image of China's first aircraft carrier as it sailed through the Yellow Sea, after going through an exercise that's the 21st-century equivalent of finding a needle in a haystack.

    DigitalGlobe said the aircraft carrier showed up on a cloud-filled picture snapped on Dec. 8 by its polar-orbiting QuickBird satellite from a height of 280 miles (450 kilometers). An analyst spotted the ship while checking the image on Tuesday, said Stephen Wood, the director of the company's analysis center.

    "There is something that is always indispensable about having people involved," Wood told me. The ship was identified "using a combination of the satellite imagery plus open-source material on the Internet, and geography," he said, but "at the end of the day, it still comes down to a person."

    Experts have been hoping for months to get a glimpse of the aircraft carrier at sea. The former Soviet Union started building the ship, originally known as the Varyag, but never finished it. After the Soviet breakup, the Varyag ended up in the hands of the Ukrainian government. The ship was auctioned off to the Chinese in 1998. Since then, the Varyag, which has reportedly been rechristened the Shi Lang, has been under refurbishment for sea service.

    "This is a ship and a story that has had legs for many years," Wood said.

    DigitalGlobe

    Don't feel bad if you can't spot the aircraft carrier in this wide-field version of the satellite image from QuickBird. It's in the very center of the picture.

    NBC's Brian Williams reports on the DigitalGlobe satellite picture.

    DigitalGlobe said this picture was taken during the carrier's second sea trial, approximately 62 miles (100 kilometers) south-southeast of the port of Dalian. Wood said the picture indicates that the ship is "moving at a decent rate of speed, which would be expected in the middle of the ocean." The U.S. military could no doubt glean more information about the Shi Lang's status, from QuickBird's pictures as well as from classified, higher-resolution imagery.

    China says the Shi Lang will be used for research and training, and the project is thought to be part of the country's strategy to expand its presence as a naval power. The Chinese military is expected to build more copies of the ship in coming years. In fact, sources told Reuters in July that a second aircraft carrier was under construction.

    "China's next moves have to be watched carefully, or there eventually could be a negative impact on maritime safety in Asia," Yoshihiko Yamada, a professor at Japan's Tokai University, told Reuters at the time.

    QuickBird's view of the Shi Lang serves as today's offering from the Cosmic Log Space Advent Calendar, which features an image of Earth from space every day from now until Christmas. Here are the past offerings in the series:

    Update for 10:45 p.m. ET: The Associated Press' Dan Elliott got in touch with a Pentagon spokeswoman, Cmdr. Leslie Hull-Ryde, who said the progress made by the Chinese on the aircraft carrier was in line with the U.S. military's expectations. A Defense Department report to Congress said the carrier could become operationally available to China's navy by the end of next year, but without aircraft. "From that point, it will take several additional years before the carrier has an operationally viable air group," Hull-Ryde told Elliott in an email.

    Connect with the Cosmic Log community by "liking" the log's Facebook page, following @b0yle on Twitter and adding the Cosmic Log page to your Google+ presence. You can also check out "The Case for Pluto," my book about the controversial dwarf planet and the search for new worlds.