WHAT DID CHINA WANT?

By Richard Lacayo

From the start, agents knew they were just peering at tea leaves. The two investigators from the FBI's supersecret "Division Five," as the national-security arm is called, reported to the White House on June 3, 1996. In their briefcases they carried classified information that even they didn't fully understand. A surveillance operation launched earlier that year by the satellite spymasters at the National Security Agency had alerted the FBI that the Chinese government might be planning an effort to funnel money into American politics.

The sketchy plan had been pieced together by analysts from various electronic communications in which the Chinese mentioned as many as 30 candidates for Congress by name. Officials told TIME that six were considered the most serious targets for possible laundered money because they were mentioned more than once in the intercepts. The FBI didn't have much more--no names of donors, no conduits for the money, no dates. It was just giving the White House a heads-up. Be careful with the information, said the two G-men. National Security Council aides Rand Beers and Ed Appel were too careful. They never sent word up the line to their boss, Anthony Lake, much less to the President, that potential donors with China connections should now merit far more scrutiny.

And so next day, when a Democratic fund raiser named John Huang requested White House clearance for a Thai industrialist to have coffee with the President, no alarms went off. No one made much of the fact that Dhanin Chearavanont, 57, chairman of the CP Group, is believed to be the largest single foreign investor in China and an economic adviser to Beijing. When an aide to campaign czar Harold Ickes asked "if it would be problematic if this individual met briefly W/ POTUS," the green light came quickly from the NSC: "O.K. by Asia Affairs." Among the 11 NSC officials informed of the meeting: Rand Beers.

It's small wonder that the NSC, the FBI and the White House got into a memorable shouting match last week over who had been told what and when about the alleged Chinese attempt to throw some money around. But on the eve of Vice President Al Gore's trip to Beijing, what really had the capital buzzing was whether the emerging picture of China's role represented a new obsession or just confirmed an old habit. Traditionally China has relied on commercial allies, like U.S. multinationals, to promote its interests. What investigators want to know now is whether it also tried to buy up the President's party, and for good measure some members of Congress.

If so, the effort didn't start yesterday. Five years ago, when candidate Clinton was first running for office, he used to flay President Bush for going easy on China and warn that "if other nations refuse to play by our trade rules, we'll play by theirs." China and its commercial partners wanted to be sure that Clinton would never make good on his word.

Despite China's decade-plus economic liberalization, its critics in the U.S. still see the country as a monolith obsessed with growing ever stronger through unfair trade practices. The view goes something like this: Beijing believes it can export whatever it wants while barring imports on any pretext it chooses. It can undercut other manufacturing nations by the use of cheap labor. It can steal ideas and ignore copyrights without much risk of retaliation. And it can essentially blackmail multinational companies into transferring jobs and technology as the price of cracking open a market of 1.2 billion people. Taken together, those practices help account for the tripling of the U.S. trade deficit with China since Clinton took office, to $40 billion a year. In 1995, Intel chief Andy Grove said he thought his biggest competition in 10 years would come from China. Asked last year if he stood by that forecast, Grove replied yes-- "but probably in eight years."

Given the growing trade imbalance, it especially irritates some American lawmakers that China is pressing for permanent most-favored-nation status, a guarantee of minimum tariffs. China is the only one of the 191 most favored nations whose status is renewed each year by a vote in Congress. That ensures a humiliating annual review on Capitol Hill of how Beijing punishes dissidents, suppresses Tibet and sells missiles to rogue states. Along with winning permanent MFN status, China wants to be admitted to the World Trade Organization, a goal the U.S. and other nations are obstructing until China lowers trade barriers.

Ironically, the world's last communist power largely relies on the FORTUNE 500 to advance its economic agenda. Whenever Congress considers China's MFN status, such companies as Lockheed Martin, Motorola, Intel, General Motors and IBM lobby on China's side. For Boeing, the stakes could not be higher: Beijing is expected to spend $124 billion on new planes over the next 20 years, making it the world's fastest-growing airline market. "When the U.S.-China relationship goes in the tank, so do our order books," says Boeing spokesman Thomas Tripp.

For years Beijing has envied the popularity that Taiwan enjoys in Congress. But it resisted advice to imitate Taiwan and hire pricey Washington lobbyists to make its case. That changed in May 1995, when Taiwan's President Lee Teng-hui was granted a visa to visit the U.S. to attend an alumni gathering at Cornell University. It was a step that followed a nearly unanimous vote in both houses of Congress. The Chinese were stunned by what appeared to be a departure from the U.S. policy of not having official contacts with Taiwan. "The Lee visit was a failure of their own guys to make an imprint [in Washington]," says James Lilley, who was U.S. Ambassador to China under George Bush. "So their bosses told them to get off their asses and start moving."

Thus perhaps did 1996 become for China the year of living dangerously, at least in its dealings with the U.S. Beijing used some conventional means of cultivating favor, like inviting members of Congress for get-acquainted trips. Ma Yuzhen, China's personable former ambassador to Britain, was put in charge of improving his nation's image abroad. At the Chinese embassy in Washington, more staff members were assigned to handle Capitol Hill.

By early last year, however, the National Security Agency picked up intercepts of provocative communications among Chinese officials. They included discussions of a covert operation aimed at influencing the 1996 elections. Other intercepts indicated that front companies for the Chinese government might try to funnel cash. A few months later the NSA took its information to the FBI, which began a probe. Of the six U.S. lawmakers who emerged as major targets, four were from California, where the business community began courting the Chinese soon after Richard Nixon renewed ties in 1972. Democratic Senators Dianne Feinstein and Barbara Boxer are longtime supporters of China's MFN status. (Feinstein's husband has extensive business interests there.) Representative Nancy Pelosi, a Democrat, is a leading opponent. Representative Tom Campbell, a Republican, sits on the House International Relations Committee. Another target was New York Senator Daniel Patrick Moynihan, a Democrat critical of China's occupation of Tibet. (The sixth has still not been identified.)

When the agents came to alert the lawmakers, they didn't have many specifics to offer. "They just said, 'Be extra vigilant,'" says Campbell. "The intonation suggested that it might be something as stupid as a sack of cash. Like I might be invited to a dinner and told, 'There's some money for you in the other room.'"

One person who did not get the word was Bill Clinton. At a press conference last week he complained that he had not been informed about the warnings of Chinese influence delivered by FBI agents in June. "The President should know," he insisted. That led to a highly unusual public statement by the FBI contradicting the President and insisting that the agents had never demanded that the aides keep their own superiors in the dark. By midweek the issue appeared settled. Attorney General Janet Reno said it had all been a misunderstanding between the briefers and the briefed over just how closely the information was to be held.

And here the story of the China connection gets squiggly. Officials tell Time that NSA/FBI intelligence ultimately will not show that the Chinese government intended to organize payments directly to U.S. campaigns. They suspect the money would have come from businesses with operations in China, including subsidiaries in Taiwan or Hong Kong.

For now, the probes are examining several paths down which they believe Chinese money may have flowed. A prime focus is the Lippo Group, the Indonesia-based conglomerate with major development projects in six Chinese cities. Its most famous former employee is Huang, the Commerce Department official turned fund raiser for the D.N.C., who stayed in regular contact with Lippo no matter what his occupation. Also under scrutiny are the CP Group of Thailand, headed by Chearavanont and represented in Washington by former Democratic fund raiser Pauline Kanchanalak, and San Kin Yip Group of Macau, a business partner of fund-raiser Charlie Trie. Like Lippo, both companies are owned by ethnic Chinese and have ties to Beijing officials. Federal investigators are also looking into the business practices of Johnny Chung, the Chinese-American entrepreneur who gave the Democrats $366,000 during a period in which he helped raise about $1.5 million from foreign investors.

The blowup over the Chinese connection has already made it doubtful that Beijing will get Congress to grant it permanent MFN status this year. Even longtime supporters are worried about appearing to be in China's pocket. In Long Beach, California, residents are protesting a city plan to lease the abandoned Long Beach Naval Station to the China Ocean Shipping Company Americas, a firm controlled by the Chinese government. California Senators Feinstein and Boxer, who are ordinarily dependable China boosters, have asked the Pentagon to look into the security implications of the lease.

House Speaker Newt Gingrich is having second thoughts about visiting China this month as part of an Asian tour by members of Congress. Last week a group of prominent conservatives met with Gingrich to insist that he highlight human rights in his discussions with Chinese officials. Gore leaves next week on his long-scheduled China trip. At a press briefing in Beijing last week, Chinese Foreign Ministry spokesman Cui Tiankai had to spend much of his time fending off questions about the campaign-finance scandals. Said he: "There have been rumors in the American press that China did this or that, but eventually this will all prove to be untrue." Then Cui added, "We'd like to have a normal relationship with the U.S. Congress." When one considers how America's own special interests pour money into Washington, that's not entirely reassuring.

--Reported by James Carney, Elaine Shannon and Michael Weisskopf/Washington and Jaime A. FlorCruz/Beijing, with other bureaus

For more information, see our Web report at time.com/reports/chinafunds

With reporting by JAMES CARNEY, ELAINE SHANNON AND MICHAEL WEISSKOPF/WASHINGTON AND JAIME A. FLORCRUZ/ BEIJING, WITH OTHER BUREAUS