China Security Memo: July 22, 2010

13 MINS READJul 22, 2010 | 18:33 GMT

Rare Earth Metal Smuggling

On July 15, China's General Administration of Customs announced that its Nanning branch in Guangxi province had arrested a group of people on allegations of smuggling 4,196 metric tons of rare earth metals worth 109 million yuan (about $16.1 million) by making false declarations on customs forms. The seven suspects, all current or former employees of Aotian Commerce and Trading Company, falsely declared the minerals in 2009 and 2010 in order to avoid paying 13 million yuan (about $1.9 million) in taxes. Customs agents were tipped off to the operation in July 2009 and arrested the suspects in five cities (Fangchenggang, Wuzhou and Nanning in Guangxi province, Chengdu in Sichuan province and Kunming in Yunnan province) in March 2010. The destinations of and buyers for the minerals are unknown. Rare earth metals are a group of 17 elements that are used in high-tech industries worldwide to manufacture such things as automotive catalytic converters and missile guidance systems. They are not as "rare" as the name suggests; it is just that they are not commonly found in concentrations large enough to merit commercial extraction. China controls almost 97 percent of the world's production of rare earth metals but has set export quotas for 2010-2015 at about 35,000 tons per year and tariffs at 25-35 percent. The quotas are China's way of leveraging its advantage as the world's major producer of these minerals, and they have become a major point of contention with the United States, the European Union and the World Trade Organization. And while China produces a large amount of rare earth minerals, its reserves are predicted to run out in 30 years, so it is also trying to conserve. The value of the metals, along with the low quotas and high taxes, has only increased the incentive for smugglers to bypass these restrictions. The Chinese government has estimated that 20,000 metric tons of the minerals were smuggled out of China in 2008, about one-third of China's total rare earth metal exports. In the operation involving the Aotian employees, the rare earth metals were falsely declared as diatomite, aluminum sulfate and glass adhesive, which are products not subject to the same restrictions as rare earth metals. Aotian used two front companies to pay off an official in Guangxi customs to help clear the minerals for export, according to investigators. Those charged are considered industry experts in rare earth metals, and Aotian would likely be a major legal exporter without quotas. Workers in their employ are accused of trying to circumvent customs since 2007, when export limitations were first implemented. Given the locations of the arrests, the metals presumably were being shipped from mining areas in Sichuan, where there are many smaller mines that are easier targets for smuggling operations. But even the largest mining area in China — Inner Mongolia's Baiyun'obo operation — which controls 87 percent of China's rare earth metal production, is a target for smugglers. Lax security at Baiyun'obo may be intentional, since the operation alone can produce well beyond China's total export quota. Smugglers are known to dress in mining company uniforms and use convoys of 10 to 20 50-ton trucks each day to transport minerals to processing plants disguised as iron ore mills. Authorities in Baotou in Inner Mongolia began cracking down on these smuggling operations in May. To avoid the export quotas, smugglers usually cover the rare earth metals and other minerals in different substances to disguise them, such as plaster, marble or paraffin. In 2009, a 215 million yuan (about $32 million) mineral smuggling case was uncovered in Shenzhen, where rare earth metals were declared as cleaning powder, ferromanganese was declared as lime powder and magnesium ingots were declared as marble in order to avoid tariffs. Since 2008, only 23 companies have been given licenses by the Chinese Ministry of Commerce to export rare earth metals, but at least 169 companies are involved in exploration. Some of these unlicensed companies are involved in smuggling using the methods described above, many of which are involved with state-owned firms. Given the high-tech applications for rare earth metals, foreign demand is only increasing, and since Chinese mines can produce well above the quotas (estimates of the surplus vary from 16,000 to 30,000 tons), mining and trading companies will continue to find ways to export the material unless Beijing institutes a major crackdown. The arrests of the Aotian employees and the policing in Baotou may mean such a crackdown has begun.

A Battle Over Mine Ownership

Residents of Fanjiahe village, which is not far from Yulin in Shaanxi province, clashed with employees of Shandong Coal Mine on July 17, the latest incident in a long-standing dispute over mine ownership. More than 100 villagers armed with household tools arrived at the mine at 8 a.m. July 17 and began smashing above-ground facilities in an attempt to shut down production. The mine's management then organized 70 workers to fight back and drive the villagers away. A Yulin government spokesman said 63 villagers and 24 mine workers were injured, only six of whom required hospitalization. The mine was founded in 1995 as a collective enterprise owned and operated by Fanjiahe villagers, and it is now producing 300,000 tons of coal each year. Not long after its founding, the mine required extra capital and an investor from Shandong province named Li Zhao became a partner in the operation. In 2000, villagers claimed he forged documents in order to register the mine as privately owned. The villagers sued the Shaanxi Province Land and Resources Bureau, which would have approved the change. City and provincial courts ruled in favor of the villagers in 2005 and 2007. But the provincial Land and Resources Bureau did not enforce the court rulings, and Li refused to give up the mine. The dispute is another example of local residents' frustration over a lack of law enforcement due to collusion between local officials and the business elite in privatization matters. Citizens also have major concerns about local mining operations, many of which Beijing has sold or shut down due to inefficiency, safety and pollution problems.

Concern About Mining Waste

Local concern about mining pollution came to a head in recent weeks over two toxic waste spills from copper mines in Fujian province owned by Zijin Mining Group. On July 3, 9,100 cubic meters of wastewater leaked into the Ting River from what investigators found to be an "illegally built passage" to the river. Another leak on July 16 was quickly stopped after 500 cubic meters seeped out. The company originally blamed high rainfall in the region, but the investigation revealed that Zijin had ignored government warnings about the need to repair a water quality monitoring system, as well as a breach in a tailings reservoir (such reservoirs are designed to hold the waste produced in the mining process). Reports in state-run news agencies indicate that local officials commonly owned shares in Zijin (which is illegal), and some went to work for the company after retiring from government service. Three Zijin managers and three government officials have resigned, been suspended or been arrested because of the waste spills. (click here to view interactive graphic)

July 15

  • A disgruntled employee of the Xuefeng Steel Co. in Wuxi, Jiangsu province, murdered 23 people and wounded 19 more July 4 after starting a fire on a shuttle bus for what the company said were "insignificant issues," Chinese media reported. The man also died in the blaze.
  • The Zaozhuang Municipal Intermediate People's Court in Zaozhuang, Shandong province, found the former party secretary for the Zhejiang Provincial Discipline Inspection Commission guilty of accepting bribes worth 7.71 million yuan (about $1.1 million) from 1998 to 2009 and holding property he did not buy valued at 9 million yuan (about $1.3 million). He will be sentenced at a later date.
  • Four suspects were detained after a factory that made fake military uniforms and badges was shut down in Shijiazhuang, Hebei province. The uniforms were sold on one of the major shopping streets in Shijiazhuang.
  • Sixty-one organized crime suspects thought to have been in operation since the 1990s were arrested after a nine-month investigation on charges of running a protection racket, social disturbance, fighting, possessing firearms, arson, prostitution, illegal gambling, sabotage and interfering in a local election in Bengbu, Anhui province. They also are accused of having 20 million yuan (about $3 million) worth of property acquired by illegal means.

July 16

  • For the first time in China's history, the Supreme People's Court approved the execution of a man convicted of trading illegal firearms and ammunition in Ningbo, Zhejiang province. He sold weapons that were later used in criminal activities, including an assault that injured four people. He had 40 firearms and about 150 rounds of ammunition in his possession when he was arrested.
  • Municipal police officers in Danzhou, Hainan province, arrested 17 suspects in a counterfeit-invoice and sales-receipts scam that produced fake documents valued at about 2 billion yuan (about $290 million). Six separate raids in Haikou and Wanning led to the arrests and seizure of the invoices and receipts.
  • Xinjiang police arrested 14 ethnic Uighurs in early July following violent clashes in Gulja, Xianjiang Autonomous Region, according to a report by Radio Free Asia. After police surrounded the Golden Apple restaurant, they entered and arrested the Uighurs on suspicion of drug dealing. Riot police were called in to control the situation after the Uighurs, who said they were attending a birthday party at the restaurant, resisted arrest. In the resulting skirmish the police fired shots in the air and used tear gas to break up the crowd while a police car was overturned. Municipal authorities and police are claiming the events did not take place.

July 17

  • Almost 90 percent of the 205 employees of the Atsumitec auto parts factory, a Honda subsidiary in Foshan, Guangdong province, went on strike July 12 and demanded a 500 yuan raise (about $70), according to Chinese media. Instead of submitting to worker demands, as it had done in previous situations, the Japanese company threatened to fire all the workers without pay. When this failed to end the strike, the company hired replacement workers. Fifty of the protesters returned to the factory but refused to work.

July 19

  • Public Security Bureau (PSB) officers arrested a man July 7 for having 17,125 grams of amphetamine chloride in Pu'er, Yunnan province, according to Chinese media. Police checked his luggage during a routine safety stop of the bus he was riding.
  • Almost 2,000 former bankers who were laid off by the Industrial and Commercial Bank of China, the Bank of Construction, the Bank of China and the Agricultural Bank of China protested in front of the People's Bank of China in Beijing's Xicheng district. The protesters accused the banks of illegally forcing them to take buyouts and not honoring agreements to pay for pensions and health care. Some 500 protesters were detained in the incident, which lasted less than half an hour. Some of the detainees said they had been picked up by police at their homes or at hotels in which they were staying. Nearly 7,000 former bank employees had come to Beijing for the protest but most did not make it to the site.

July 20

  • Two hundred ex-military personnel claiming that government pension and welfare programs for retired soldiers were unfair protested in front of the Guangzhou government offices in Guangzhou, Guangdong province.
  • Longyan municipal PSB officers arrested 12 suspects in connection with an online gambling organization in Longyan, Fujian province. The website had more than 300 members who had placed 320 million yuan (about $46 million) in bets over an unknown period of time.

July 21

  • Protesters numbering in the thousands attacked government buildings, held a township party chief hostage and clashed with riot police in Suzhou, Jiangsu province, after residents became convinced that government officials had stolen most of the proceeds from a plot of land that sold for 1.3 billion yuan (about $190 million). The land is to be used for a new industrial zone being built in the city.
  • Beijing police arrested 10 protesters outside of Ministry of Health offices in Beijing who were blaming low quality vaccines for their children's health issues. The parents had been camped outside the ministry since June 25. Some of the parents were injured when police tried to take a camera away from one of the mothers who was trying to take photographs.
  • Shanghai railway police found 700 grams of amphetamine chloride and a small amount of heroin in the backpack of a man leaving the subway. According to police, they questioned the man because he was acting suspicious. He said he was a drug addict who was paid 5,000 yuan (about $730) to transport the drugs.
  • On July 14, a 23-year-old man called in a bomb threat that turned out to be a hoax for China Southern Airlines Flight CZ3912 from Urumqi, Xinjiang Autonomous Region, to Guangzhou, Guangdong province, just to "enjoy the thrill," Chinese media reported. The man made the call to police in Guangzhou, stating he was a terrorist who had planted a bomb on the plane. The flight was diverted to Lanzhou in Gansu province, where 93 passengers were made to wait while bomb-sniffing dogs looked for the device. After nothing was found, the flight continued and the police traced the call to Shenmu county in Shaanxi province, where they arrested the man.
  • A coal mine accident that killed 28 workers in Weinan, Shaanxi province, led to the firing of the vice mayor of Weinan for dereliction of duty while another government official was forced to resign. After the accident, 33 coal mines were closed in order to address safety concerns.

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