Floating-Casino Bid Turned Into China’s Biggest Aircraft Carrier Purchase

The Varyag was to be a 1,000-feet- long Admiral Kuznetsov-class warship, a platform for several dozen fighter jets as well as eight or 10 helicopters. Then the former Soviet Union fell apart in 1991, and Ukraine inherited the still-unfinished vessel with a ski-jump incline at one end to help launch aircraft.

In 1992, as the former Soviet republics stumbled out of communism, construction of the ship ceased altogether, Bloomberg Businessweek reports in its Jan. 30 issue. Ukraine couldn’t afford to complete the vessel, the Russian news agency ITAR-TASS reported.

In 1997 the National Agency of Ukraine for Reconstruction and Development organized a sale, with the opening bid set at $20 million. In 1998 a Chinese entrepreneur named Cheng Zhen Shu said his company in Hong Kong, the Chong Lot Travel Agency, would pay the minimum $20 million to tow the Varyag out of the Black Sea, through the Mediterranean and to Macau.

There, Cheng said, his company would refit the warship as a floating hotel and casino.

Devoted almost exclusively to coastal defense, the 500- vessel Chinese navy has long desired aircraft carriers. Chairman Mao Zedong proposed the construction of oceangoing fleets of merchant ships escorted by carriers himself in 1958, according to a 2010 article in the Naval War College Review.

Mao’s Idea

Mao’s idea died for lack of funding, as did a plan in the 1970s to acquire a late-model carrier from Britain. In the 1980s, General Liu Huaqing, then the commander of the People’s Liberation Army Navy, or PLAN, expressed his desire for a carrier. “Without an aircraft carrier,” Liu declared in 1987, according to the state news agency Xinhua, “I will die with my eyelids open,” meaning he would pass away with the wish unfulfilled.

Liu retired from the military in 1997 and the Varyag was acquired a year later.

The ex-Soviet ship was not the first used carrier China had purchased. In 1982 Beijing bought the 15,000 ton Majestic-class carrier Melbourne from Australia, which was dismantled for study and then scrapped. In 1998, the Russians sold China the much larger carrier Minsk, and, two years later, one called the Kiev. After undergoing similar scrutiny by Chinese ship designers, the Minsk and Kiev were turned into floating amusement parks.

‘Foreign Technology’

Beijing’s military planners do not have a made-in-China bias, according to Robert S. Wells, a former U.S. Navy commander who now advises the Pentagon as a private consultant based in northern Virginia. “They are eager to imitate foreign technology,” he says, “and they don’t have any concerns about intellectual property rights.”

In December 2006 the South China Morning Post reported that the Chinese military had completed a large-scale model of a U.S. Nimitz-class carrier, apparently for training purposes.

At the time, one hint that the Chong Lot Travel Agency might be part of a Chinese military reverse-engineering project was that Cheng, the head of the company, had spent 10 years as a People’s Liberation Army officer. “We always had great suspicion,” says Chong-Pin Lin, a Taiwanese national security scholar who has served as the island’s Deputy Defense Minister. Since 1949, mainland China has claimed Taiwan as its own.

Chong Lot’s Cheng insisted he had only tourism in mind. According to the South China Morning Post, he denied that he was planning to hand the ship over to China’s military. He told the Post in November 1998 that his company would spend $200 million to remake the Varyag into a water-borne resort “with 600 hotel rooms, a conference center and various attractions, including a nightclub and ‘children’s military playground.’”

‘Blue Water’

Word that a Chinese company with military ties had acquired the Varyag concerned Western intelligence agencies “that China is trying to convert its navy, now mainly a coastal defense force, into a ‘blue water’ navy capable of projecting military power abroad,” the Post reported.

Western governments pressured Turkey to deny Cheng permission to pull his unequipped warship through the Bosphorus Strait. Chinese officials promised to pay the Turks for any damage caused by the transit through the heavily trafficked strait, according to the China-owned Hong Kong Commercial Daily.

The ex-PLA officer Cheng complained that the delay would cost him the chance to compete for a casino license, the Commercial Daily reported. He said he hoped Macau, control of which had by then shifted to Beijing, would make a special allowance for him after his former Soviet ship was renovated.

Ship Adrift

In November 2001, Turkey let the Varyag pass. In the Mediterranean, the ship encountered a powerful autumn storm off Greece and it broke adrift. The Greek coast guard landed a helicopter on deck to help reattach the towlines.

In the process, a sailor fell overboard and died. Eventually the warship was secured, and it continued on its journey, dropping anchor in 2002 not in Macau but in Dalian, a northern China port that is home to the country’s largest shipyard.

It became increasingly unlikely the Varyag would ever be used for roulette and blackjack tables. Ian Storey and You Ji, a pair of scholars based in Australia, monitored what they called “persistent reports that the People’s Republic of China intends to acquire an aircraft carrier force as part of its ambition to achieve ‘blue water’ (high seas) naval capability.”

Firm Evidence

They sifted through Internet gossip, cryptic pronouncements from Chinese policymakers, and shipping industry intelligence. In a January 2004 article for the Naval War College Review, Storey and Ji concluded “no firm evidence exists that China really does intend to refurbish, build, or buy an aircraft carrier. Thus the prospect of a Chinese carrier remains subject to a great deal of rumor and speculation.”

Taiwan concluded otherwise. Not long after the boat docked in Dalian, workers began painting it a naval gray. “Then we saw the truth,” says Taiwan’s Professor Lin, the former defense official. “This was China’s first aircraft carrier.”

In 2006, China issued a defense white paper announcing that the PLAN would extend its mandate beyond coastal defense to include “offshore defensive operations.” Three years later, in 2009, when a Beijing-based reporter for Bloomberg News traveled to Dalian, he observed welding torches flaring at dusk on the flight deck of the still-unfinished aircraft carrier. The ship was in plain view in dry dock about 600 meters from an Ikea Group furniture store.

‘Short Takeoff’

The design of the ex-Soviet vessel is known as “short takeoff but arrested recovery,” or STOBAR. Ships of this variety are generally simpler to build and maintain than the catapult-assisted carriers in the American fleet, which can get heavier aircraft aloft.

In April 2011, Xinhua heralded the slope-decked vessel’s imminent debut, posting photographs on an official website. “Huge warship on the verge of setting out,” the state news agency declared, “fulfilling China’s 70-year aircraft carrier dreams.” Beijing rechristened the ship the Shi Lang, after a 17th century Chinese admiral who served the Ming and Qing dynasties. The symbolism could not have been lost on historically minded government officials in Taipei. In 1683, Admiral Shi led a force of 300 ships in the amphibious conquest of Taiwan.

Six months ago, in August, the Shi Lang took a maiden voyage under the Chinese flag. After nearly a decade of additional tinkering by Chinese engineers, it still lacks missiles, jets, and pilots, but it can cruise under its own power.

Larger Intentions

From Taipei to Tokyo to Seoul to Washington, diplomats and military analysts are scrutinizing every move the Shi Lang makes, searching for signs of China’s larger intentions. “It’s surprising to a lot of people that China has been the one member of the United Nations Security Council not to have an aircraft carrier,” says Wells, the former U.S. Navy commander who also served as a White House national security adviser during the George W. Bush Administration.

Among those in the carrier club are Russia, France, and Brazil. The U.S. alone has 11 carriers. Launching their own aircraft carrier, says Wells, signals that the Chinese expect to be respected as a great power.

The Shi Lang is only one element of a much broader overhaul of China’s military. The program includes construction of dozens of new Song-class submarines armed with cruise missiles and the development of a land-based antiship ballistic missile known as the DF-21D, specifically designed to destroy aircraft carriers and other warships.

Renewed Focus

In response, the U.S. has communicated it does not intend to allow China to bully American allies in the region. The Pentagon is scheduled to take delivery in 2015 of the first of a new breed of nuclear-powered aircraft carrier equipped with pilotless drones. During an Asian tour last November, President Barack Obama announced a renewed American focus on the Pacific, illustrated by the transfer of thousands of U.S. Marines to bases in Australia.

American shows of strength are in part a reaction to China’s challenges to Vietnamese and Philippine claims to oil and gas reserves beneath the South China Sea. Trade across that body of water has an annual value of $5.3 trillion, $1.2 trillion of it involving the U.S., according to the U.S. Defense Department. Since 2004, Chinese President Hu Jintao has spoken publicly of a more expansive naval policy that would help secure international shipping lanes, ensure access to energy sources, and protect Chinese nationals living overseas.

Taiwan Fears

The Taiwanese fear that Beijing harbors plans to emulate the invasion-inclined Admiral Shi Lang. Taiwan has 23 million citizens, compared with China’s 1.3 billion. According to the Pentagon, China has as many as 1,200 short-range ballistic missiles deployed opposite Taiwan.

Shunned by most of the world, Taiwan does not have an official representative at the United Nations and isn’t permitted to maintain a formal embassy in Washington. Under a 1979 U.S. law the U.S. has an obligation to ensure Taiwan’s self-defense by supplying the nation with weapons. As recently as last September, American officials approved upgrading the island’s fleet of Lockheed Martin Corp. (LMT) F-16 fighters.

“The mainland has shifted from traditional modes of strategic thinking, which concentrated on crossing the sea to do battle on land, to looking to encircle Taiwan by adroitly deploying forces off Taiwan’s east coast,” Deputy Minister of National Defense Andrew Yang said in an e-mail interview.

Not Hostile

In theory, a Chinese carrier-led naval task force could be used to deny the U.S. the ability to come to Taiwan’s rescue.

Beijing insists that it has no hostile intentions. When Chinese officials met with Obama during an international summit in Indonesia in November, the Beijing delegation said their country is prepared to negotiate a binding code of conduct for all nations whose vessels ply the South China Sea, Assistant Foreign Minister Liu Zhenmin told reporters. China aims to protect international shipping, Liu added. Beijing, he said, sees the U.S. as “an important player in Asia ever since the Second World War.”

Ten days later, on Nov. 29, the Shi Lang went for her second test cruise.

Despite the tension, economic relations between Taiwan and China have improved in recent years under the leadership of Taiwanese President Ma Ying-jeou, who was reelected in mid- January. Taiwan has relaxed trade, travel, and investment restrictions, and has ended a six-decade ban on visitors from the mainland. In 2010 the countries signed a trade accord, cutting tariffs and increasing access to cross-border banking.

‘Regional Security’

Noting these positive diplomatic developments, Chien-Min Chao, Taiwan’s Deputy Minister of Mainland Affairs, said in an e-mail interview that “the continued military buildup in mainland China threatens not only peace in the Taiwan Strait but also regional security.”

Last April, Admiral Robert Willard, the top U.S. military commander in the Asia-Pacific region, told the U.S. Senate Armed Services Committee that he didn’t consider the Chinese carrier an imminent menace. He acknowledged that its presence troubled American allies.

“Based on the feedback we received from our partners and allies in the Pacific,” he testified, “I think the change in perception by the region will be significant.” In addition to its commitment to Taiwan, the U.S. has defense treaties with Japan, South Korea, the Philippines, and Thailand. Willard, whose command is based in Hawaii, assured the senators that the Chinese would have to go through “a long period of training and development and eventual exercising preceding any operational [carrier] capability.”

Brazil Training

Landing jets on the deck of a rolling ship is among the most difficult of all military maneuvers. In 2009, Brazil announced it would provide naval aviation training to the PLAN, according to a Pentagon white paper published last year.

Optimists in the West see expanding Chinese naval activity as an opportunity for greater cooperation. Since 2008, the PLAN has helped support multinational humanitarian and antipiracy missions off the east coast of Africa. The U.S. has encouraged Beijing’s participation, and last summer, China deployed its ninth escort formation in that region. Chinese military leaders have even broached the once-taboo topic of building supply-and- repair bases overseas to support the antipiracy missions.

Warship Escort

“The Chinese are proud of having had their warships escort the merchant vessels of other nations, and that’s a good thing,” says Wells, the former U.S. naval commander. As a Pentagon consultant, he participated last year in a military conference in Bahrain where Chinese naval officers made a presentation about their activities in the Somali Basin and the Gulf of Aden. The Chinese, Wells says, openly lobbied for expanded antipirate responsibilities.

The U.S. State Dept. declined to comment on the record for this article. But government officials familiar with American diplomacy in the Pacific say the cooperative military-to- military interaction has helped improve overall relations between China and the U.S.

General Liu lived to see his navy take part in these joint operations far from home—something unimaginable earlier in his career. He may also have known about the initiation of another of his goals: the creation of an aircraft carrier designed and fabricated in China.

The Pentagon, in its 2011 Annual Report to Congress on Military and Security Developments Involving the People’s Republic of China, speculated that the building of Beijing’s first indigenous carrier may have begun last year. “If China commence[d] construction in 2011,” the report said, “the PLA Navy could have its first indigenous carrier achieving operational capacity as early as 2015.”

The Chinese have built enormous container ships, supertankers, and liquefied-natural-gas carriers. That experience would be helpful in constructing the hulls of more complex aircraft carriers, Li and Weuve write. China is also developing a carrier-capable fighter, called the J-15, or Flying Shark, which is based on a Russian Su-33 warplane obtained from Ukraine in 2004, according to the Pentagon.

For all of these advances, however, General Liu did not witness the first voyage of the Shi Lang under a Chinese flag. He died last January, his eyelids presumably open, at the age of 94.

To contact the reporter on this story: Paul Barrett in New York at pbarrett17@bloomberg.net

To contact the editor responsible for this story: Bryant Urstadt at burstadt@bloomberg.net

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