China's latest boom industry: spying on British businesses

· Size of delegations to UK raises alarm at MI5 
· Espionage focused on technology and security

• Richard Norton-Taylor and Nils Pratley
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• The Guardian, Friday 11 November 2005

The following correction was printed in the Guardian's Corrections and clarifications column, Saturday November 12 2005

The president of China Hu Jintao did not fly back to Beijing on November 10 after his visit to Britain (China's latest boom industry etc, page 3, yesterday). He flew to Germany for a three-day state visit. He was meeting Angela Merkel and Gerhard Schröder before leaving to return to China late today. 

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The president enjoyed all the pomp and protocol that traditionally come with a state visit, reflecting the importance of the man, and the emerging superpower that he represents. But as China's Hu Jintao tucked into his filet de sole pompadour during the banquet at Buckingham Palace on Tuesday, and again as he flew back to Beijing yesterday after his three-day visit, Britain's security services were left pondering a more delicate issue: how many of the president's entourage had been left behind?

While on the diplomatic and commercial level relations between the two countries appear to be flourishing, with British ministers and businesses eager to cash in on China's booming economy, the security services are concerned about what is happening under the surface.

MI5 has become increasingly anxious about an increase in spying by the Chinese. Officials are unsure how widespread it is, and what impact it is having. The agency believes that "at least 20 foreign intelligence services are operating to some degree against UK interests", and say the Chinese and Russians concern them most.

The Chinese, security sources said yesterday, have become supreme opportunists, hoovering up information on the "grains of sand" principle: picking up the smallest pieces of information whether relating to business, industry or security and closely analysing them back home.

Justin King, managing director of C2i, a UK counter-espionage consultancy, said yesterday that businesses were all too aware of what is happening, particularly when they hire Chinese staff.

"The Chinese are desperate to find out everything about how western companies operate and how they are structured. It is old-fashioned human intelligence gathering - it's thousands of years old and it works. Employers should plan for the fact that there is a strong likelihood information, even if it is low-level stuff, will be fed back to China."

Whitehall officials cited examples:

· After the deaths last year of 21 Chinese cocklers at Morecambe Bay, the Chinese government sent over what was described as a "police delegation" to help identify the dead men and offer any other assistance to their British counterparts. However, the delegation was suspiciously big, leaving MI5 worried that it contained spies. "MI5 took certain measures to counter them," said a well-placed Whitehall source.

· After 58 Chinese stowaways were found dead in the back of a lorry in Dover, the Chinese government again sent a large delegation to help Kent police identify the men before the trial last year. A member of the team was later found logging on to the police national computer. It is unclear what he found out.

· One British company anxious to develop its business with China recently invited a delegation to visit its factory in the UK. The Chinese authorities sent a delegation, but only a few of them turned up. The rest were believed to have travelled around Britain inviting themselves to defence and research establishments.

Security sources say if a British company creates a fuss about visitors who fail to turn up, the Chinese threaten to cancel the company's licence to trade.

The Chinese are interested in particular in scientific and hi-tech developments. "The Chinese economy is booming but what they are short of is information technology and modern processing, manufacturing and design skills," said Mr King.

When Chinese nationals work in the west, he added, "our clients' experience is that they have mixed loyalties".

Mr King said: "We have come across cases where Chinese nationals are working at the heart of British companies' IT security departments with access to entire databases. To my mind, that is a business risk too far."

In Britain, China is said to be focusing on niche products, including security and surveillance systems, and especially dual use equipment - items that have a civil as well as military use.

But the FBI is also growing anxious about the impact of Chinese spies within the US. In February the bureau's assistant director of counter-intelligence, David Szady, urged US businesses to help the service stop the theft of business and technology secrets. He cited Russia, Iran, Cuba and North Korea but focused mainly on China, saying there were about 3,000 front Chinese companies in the US.

Security sources say the speed and effectiveness with which the US conducted the 1991 Gulf war was a "wake-up call" for the Chinese.

Mr Szardy said US companies should "partner up" with FBI agents to protect security. But some would always get through, he said. "Even as we increase our numbers of agents, we can't possibly totally stop it. If you have a little national asset, whatever it is ... they want that little thing that you produce. And they need it to make their missile fly straight or so they can compete in electronic warfare."