China is rushing to modernize its nuclear weapons. It has developed a hypersonic missile that can travel at more than five times the speed of sound. Such a missile would be difficult to intercept with conventional missile defense systems, changing the fundamental premises of global security.

The Pentagon estimates that China could increase its holdings of nuclear warheads to 1,000 from the current above 500 by 2030. That would put it almost at par with the number of warheads deployed by the U.S. and Russia -- 1,770 and 1,674, respectively -- as of January, according to estimates by the Stockholm International Peace Research Institute.

“China’s nuclear capability is growing rapidly in both quality and quantity, aiming to enhance deterrence against the U.S. with a Taiwan contingency [invasion] in mind,” said Masafumi Iida, head of the China Division of the Regional Studies Department at the National Institute for Defense Studies in Japan.

China’s secretive nuclear institute

On March 13, Xi addressed the closing ceremony of the National People’s Congress.

“We should comprehensively promote the modernization of our national defense and our armed forces, and build the people's military into a great wall of steel that can effectively safeguard our nation's sovereignty, security and the interests of our development,”

said Xi, emphasizing the need for enhancing the capacity of the People’s Liberation Army.

He had the U.S. in mind. Taking the unusual step of singling out the U.S. for criticism in another speech, to China’s top political advisory body on March 6, Xi said, “Western countries led by the U.S. have implemented all-round containment, encirclement and suppression against us, bringing unprecedentedly severe challenges to our country’s development."

While tensions between Washington and Beijing since then have further sharpened over Taiwan, and the Group of Seven is also expanding its safety net around Taiwan, China will not give up its claim to the strategically important island.

Beijing’s determination on the matter can be seen in the government lineup of Xi’s unprecedented third term as leader. For example, a career soldier belonging to the "Taiwan Strait group," a former head of a state-owned weapons company and an expert on nuclear policy who had allegedly been engaged in the development of nuclear weapons were added to the Politburo of the Central Committee of the Chinese Communist Party, which consists of the top 24 party members.

Nuclear weapons are Beijing’s trump card in keeping Washington in check, and the nuclear lab where Chen works plays a major role.

The CAEP is at the core of China’s nuclear strategy

The CAEP introduces itself on its website as a unique entity, calling itself “China’s sole nuclear weapons development and production unit.”

The origin of the institution was founded in 1958 under the government of Mao Zedong, the founding father of the People’s Republic of China, as a national project responsible for research on nuclear weapons and the maintenance of related facilities. It has led China’s nuclear tests since the first one, in Xinjiang in 1964.

Currently it is a state organization at the subministerial level, with more than 20,000 employees based in the Sichuan province city of Mianyang, which is said to be easier to defend.

The CAEP actively collaborates with national military enterprises and Chinese universities. While much about the organization remains opaque, experts believe that the lab is still increasing the number of researchers and specialized engineers.

“The CAEP is under the State Council but is controlled directly by the Equipment Development Department of the Central Military Commission,” said Takehiko Kazama, the CEO of the Sansei Research Organization, a Japanese company that provides research and consulting on export controls and security. The Central Military Commission is the highest organ of decision-making for military issues and is headed by Xi.

The CAEP has possibly accelerated the pace of nuclear weapons development as Xi cemented power. Chen's research institute "is in particular a subordinate organization with deep ties to the military that needs to be careful about leaking technology and products that can be used for military purposes,” Kazama added.

The U.S. Department of Commerce revealed its first Entity List in 1997, putting restrictions on foreign organizations that are considered risks to U.S. national security. The CAEP was included in the very first list, indicating it is of major concern. In 2020, 10 affiliates of the CAEP were added to the list.

Playing catchup

China is aiming to be a leading global military power equivalent to the U.S. by the middle of this century. At a time when the use of nuclear weapons is seen by the international community as forbidden, why is China sticking with them and placing them at the center of its defense expansion?

There is a sense of frustration in China that it has fallen behind the U.S. and Russia.

It is 20XX. Armed conflict between China and Taiwan has broken out. China has issued a warning to Japan and the U.S. to remain neutral and launched a Dongfeng 21 ballistic missile carrying a tactical nuclear warhead in the western Pacific Ocean. If the two countries still intervene in the Taiwan crisis, China will launch a nuclear attack on the Self-Defense Forces' surface vessels with the Dong Feng 26.

"It’s the most likely scenario, with 50% probability," said Narushige Michishita, a professor at the National Graduate Institute for Policy Studies. As an expert on East Asian security, he analyzed a scenario involving China using nuclear arms in an attack against Taiwan.

The small, low-yield nuclear weapons that might be used are believed to be on the order of a few kilotons, smaller than the atomic bombs used by the United States in Hiroshima and Nagasaki, which were 16 and 21 kilotons. Such weapons require a lot of testing and a high level of development.

Western countries and Russia repeatedly conducted nuclear tests

But “China doesn’t have sufficient experimental data on nuclear tests relative to the U.S. and Russia,” said Yuki Kobayashi, a research fellow for the Sasakawa Peace Foundation. “Because of that, China may not be able to simulate nuclear tests satisfactorily.”

According to the Arms Control Association, a U.S.-based think tank, China conducted 45 of the 2,056 nuclear tests worldwide from 1945 to 2017. In contrast, the U.S. tested 1,030 times and Russia 715 times.

Number of nuclear tests by country

• Atmospheric
• Underground

The U.S. and Russia have enough experimental data to enable them to upgrade weapons and develop new nuclear warheads by using only simulations and subcritical tests, which do not involve actual nuclear explosions. But this is difficult for China.

There is a clear gap between China and the U.S. and Russia in the accumulation of advanced technology and expertise in supporting the development of nuclear weapons. That has prompted China to rush to catch up with the two powers in terms of nuclear capability.

Among the options China and the CAEP could choose was the classic means of diverting Western technologies to its development of weapons.

High-tech procurements

Nikkei's research team used data available on China's internet and analyzed CAEP-related events and information with the advice of experts.

Information on public bids disclosed by the CAEP was used for the analysis. The research institute announces on its own platform the technologies or products it wants to procure.

Imports under tariff code 8457 (machining centers, machines capable of performing multiple types of processing in succession)
Source: U.N. Comtrade

Among the 140 cases of bidding suspected of being diverted to military use, 63 -- nearly half -- involved machine tools. Most of them were made in Japan, Germany or Taiwan.

Most of those machines appear to have a performance slightly below the standard that is subject to international export regulations. But industry observers who are familiar with export regulations warned about the procurements. “Not meeting the standards does not necessarily mean unusable for nuclear development. In export control, the application is more important than machine tools’ performance,” said one of the observers.

In the case of Japan, even if the product specifications are not subject to export restrictions, prior approval from the Minister of Economy, Trade and Industry is required if the cargo or technology to be exported may be used in the development of any weapons, nuclear or conventional.

Because they are mother machines that can make anything, the risk of diversion to fields unintended by manufacturers also increases.

Various parts -- such as motors, pumps, bearings and the metal turbines that Chen machined -- are required to develop nuclear armaments. “To make it easier to obtain, trying to procure a product that is subtly below the export control level is a well-known modus operandi of China,” said Tomonori Iwamoto, secretary-general of the Institute of Nuclear Materials Management in Japan.

According to the China Machine Tool and Tool Builders’ Association, an industry organization of manufacturing enterprises, China’s machine tool production value reached $25.5 billion in 2022. Despite being the largest market, China depends on imports for most advanced machines including five-axis products. Approximately 70% of these high-tech imports come from Japan and Germany.

The CAEP’s contract and bidding documents did not refer to the actual uses of Japanese and German machines.

CAEP’s ambition in writing

Bidding data alone could not indicate that the CAEP actually obtained these technologies or products. However, further analysis of product specifications recorded in documents clearly hints how Western companies have become included in the nuclear weapons lab’s procurement network.

Excerpt form the tender announcement titled '5-axis machining center'

The section labeled 采购需求 (Procurement requirements) announced in May 2022 shows how the CAEP wants very high-quality machine tools from Chinese companies that bid.

“要求实现高效率、高精度、高可靠性。…采用成熟先进的技术及系统，保证系统具有良好的动态品质。”―High efficiency, high precision and high reliability are required.
… Adopt mature and advanced technologies and systems to ensure good dynamic quality of the system.

In the section on specific conditions in the procurement requirements, 型号規格 (Type spec) and 生产厂家 (Manufacturer) were whited out. Nikkei's analysis of those areas revealed the original text to be 德国 (Germany) and OPS.

Excerpt form the contract document labeled 'Procurement requirements'

OPS-Ingersoll Funkenerosion's five-axis machine tools are known for performance as high as DMG Mori’s. They could be easily diverted to process some equipment related to nuclear development, including turbines, motors, containers for centrifugal separators and missile wings. CAEP apparently tried to procure OPS products for developing something -- what, exactly, is not known.

OPS didn’t respond to Nikkei's requests for comment.

Excerpt from the document titled 'Technology agreement for 5-axis CNC machining center'

There were also a photo of a machine tool manufactured by Guangdong Jinke Machine Tool and an illustration of the machine's inner structure.

A spec table showed it consisted of CNC software by Heidenhain of Germany and parts by THK and NSK, both of Japan.

The machine can be used to produce complex products such as aircraft engines and auto parts. Applied in other ways, it could be used to upgrade nuclear weapons.

“Apart from the fact that we comply with all applicable export control rules, it is our company policy and our core principle that we do not sell our components to companies who deploy products in support of military or defense projects. We condemn vehemently any unauthorized use of our products in military applications.”―Heidenhain spokesperson

The company said it had added to its blacklist the 10 companies, including Guangdong Jinke Machine Tool, that appeared in the notification as bidders.

“Strict internal screening and contractual agreements are in place, but it’s difficult to capture all end-users.”―THK

“We are not aware of the fact that the CAEP has obtained our products, so we refrain from commenting.”―NSK

Excerpt from the same document

Excerpt from the document titled 'Technology agreement for small and medium parts turning automation units'

This document showed an illustration of an automated production line combining two machine tools made in U.S. and Taiwan and robots from Fanuc, Japan’s largest maker of industrial robots.

It said the line could work unmanned for more than four hours, improving the efficiency of machining components that are to be used for test and other equipment.

Another case of bidding (January 2022)

Excerpt from the document titled 'Technology agreement for CNC electric discharge machines'

There was another contract for machines from Makino Milling Machine, one of the largest manufacturers of CNC machines, based in Tokyo. The contract document had an illustration of a Chinese robot and two CNC electric discharge machines from Makino.

Electric discharge machines melt metal with sparks while finishing it into any shape. They are suitable for making dies because they can process hard materials such as cemented carbide.

It is difficult to confirm that such technology has actually gone to the CAEP, but the fact that “China’s sole nuclear weapons development and production unit” has moved to procure such equipment suggests many things.

Unchecked supply chain

There were 115 Chinese local manufacturers or sales agents contracting with the CAEP. Of these, 17 are owned indirectly by Chinese government or have capital relationships with state-run military enterprises or universities that have strong connections with the People’s Liberation Army, according to Orbis, a global database of corporate information.

Local secondary and tertiary distributors in China serving as covers for the CAEP make the true situation less visible for Western companies.

One example is Beijing Hademan Automation Equipment, a Chinese manufacturer that handles factory automation equipment.

According to bidding and contract documents, this company tried to supply the CAEP as a bidder with machine tools of U.S. and Taiwanese makers. The machines incorporated parts and systems from Western companies such as NSK, Fanuc and Renishaw of the U.K.

For Japan's NSK, one of the world’s leading manufacturers of bearings, Beijing Hademan is a secondary customer and the two have no direct business relationship. But each important technology and product from NSK can still be passed on to the CAEP via Beijing Hademan, demonstrating the complexity of the procurement chain.

“We have supplied annually several to 20 robots to the bidder (Beijing Hademan) in the period between 2018 and 2022. The company said that our robots will not be sold to the CAEP,"

a spokesperson for Fanuc told Nikkei.

"We’ve also never provided maintenance for the CAEP,” the spokesperson said. He also said that Beijing Hademan possibly included Fanuc's robots in the bidding document without permission, as the technical specifications required by the CAEP were close to those of the robots.

A spokesperson for Hardinge said in his reply to Nikkei that the company follows the law and internal policies “regarding export and import at any given time.” He added, “Hardinge does not divulge information about specific customers and products."

China and CAEP are a treasure trove of intricately intertwined supply chains.

Globalization and business specialization have separated makers and distributors even in the global machinery industry, making it more difficult for companies to see the entire picture. This potentially has paved the way for China to acquire cutting-edge technologies of Western companies.

“We were not aware of this until we received the inquiry (from Nikkei),” a manager at Makino said. “To be honest, I was surprised.”

As shown in the bidding data, he confirmed two Makino electric discharge machines made in China had been provided to the CAEP without the company's knowledge.

The supplier that sold Makino's machine to the CAEP was Shenzhen Moldbao Technology, a Chinese distributor of precision equipment in Guangdong. According to the manager, Makino made its first deal with Moldbao in 2021. But unbeknownst to Makino, the new customer took part in the CAEP’s bidding and supplied the machines to the institute.

Trail from Makino to the CAEP

Moldbao appears to be a typical military-civil fusion (MCF) company. On its website, Moldbao touts its cooperation with the National Supercomputing Center in Shenzhen.

The center has been on the U.S. Entity List since April 2021 due to concerns about its involvement in the development of hypersonic missiles and nuclear weapons, indicating that Moldbao potentially is involved in the development of nuclear weapons together with such entities as the center.

Makino emphasized that the two machine tools the CAEP obtained were not subject to export regulations because of their basic capabilities. “We’ll strengthen product management and screening of new customers to prevent a recurrence,” said the manager.

Moldbao did not respond to a request for comment.

These cases are just tips of a large iceberg.

Japanese procurements were highest

The largest number of CAEP procurements, including those other than machine tools, came from Japanese companies, followed by Taiwan, Germay, the U.S. and Switzerland. The companies involved are spread across Western countries, showing the breadth of the Chinese nuclear lab’s supply chain.

There were more than 80 companies in the machinery industry -- including global leaders such as Fanuc, Yaskawa Electric and Siemens -- whose technologies and products were possibly procured by the CAEP just during the period between January 2022 and July 2023.

Nikkei spoke with all of them. The common refrain was that they screened following the law and regulations up to the first distributor, but it was difficult to ascertain the secondary and tertiary distributors.

This is even harder to track when the products in question are generic parts of machinery, such as bearings and motors. Legal experts note that limiting Chinese customers' business relations with other companies without valid reasons would violate antitrust laws.

There are concerns about the Japanese Ministry of Economy, Trade and Industry's End User List, which warns of foreign importers involving in the development of weapons of mass destruction and other activities, as the list doesn’t include the CAEP. While the U.S. and some of its allies have raised their levels of caution, experts worry that Japan could form a loophole in export regulations.

“There are no legal issues [with our sales to the CAEP], as it is not in the list,” said an official of a Japanese semiconductor equipment manufacturer that this analysis has exposed as being feared to have supplied products to the CAEP.

The CAEP aims to circumvent countries’ scrutiny and target advanced technologies that can seep through gaps in the global supply chain. Companies that have been doing business with China for years, especially through local subsidiaries, are more likely to be targeted.

One target of such a gap was Takisawa Machine Tool, a Japanese machinery manufacturer based in Okayama prefecture.

Takisawa’s Taiwan subsidiary in July 2022 received an order for four CNC lathe machine tools from Shanghai Takisawa Technology, a local sales agent.

However, just one month after that, the agent company contracted with the CAEP to sell the four machines.

Product distribution to the CAEP was spared at the last minute

“After the inquiry from Nikkei, one of our board members visited the subsidiary and confirmed the fact,” a manager from Takisawa told Nikkei. “It has informed cancellation of the order to the Shanghai-based agent, and the CAEP has therefore not obtained our products.” He added that they have a business relationship with Shanghai Takisawa, but no capital relationship.

“While local subsidiaries are doing business based on Chinese laws, the sense of urgency at the headquarters about how their products will ultimately be used is diminishing,” said Heigo Sato, a professor at Takushoku University in Japan who is a specialist on economic security.

Shanghai Takisawa Technology did not respond to a request for comment.

Loopholes in control frameworks

It was only with a five-axis machine like DMG Mori's that CAEP’s Chen was able to carve out 144-bladed turbines. Again this poked a small hole in supply chain management.

“After obtaining an export license from the German government, the product was exported for civil-industry use to a company different from the CAEP,” a spokesperson for DMG Mori told Nikkei. “The subsequent circumstances are unknown, but no action was taken in violation of European export control laws.”

The company has been asking its global customers to install a remote management system that automatically turns off the power if a third party intentionally removes or dismantles the machine. The idea is to use the Internet of Things, in which devices are connected to the internet, to prevent misappropriation.

There are global export control frameworks to manage sensitive civil technology.

A typical example is the Wassenaar Arrangement, a voluntary regime formed after the end of the Cold War by mainly Western governments.

The member countries discuss and decide on which products should be regulated to prevent the unauthorized diversion of machines to military use. Restrictions on dual-use goods apply to exports to all countries and regions, including China. Based on agreed-upon lists of items, member countries regulate exports through their domestic laws.

But the framework involves 42 countries, so decision-making takes longer. Russia, which has invaded Ukraine, is also a member. The agreement itself is nothing more than a gentlemanly arrangement and is not legally binding.

Actual implementations also differ among member countries, including the export regulations on CNC software that affect the performance of machine tools. In the case of reviewing incorporated CNC software, Japan examines the performances of the software and the machines separately. On the other hand, in Germany the authority does not check them separately in principle.

That means low-spec machines incorporating high-spec CNC software that normally is regulated would be overlooked by German regulators.

All of the CNC software for five-axis machine tools found in the Nikkei analysis was made by German companies.

“The federal government is pursuing a restrictive export control policy,” a spokesperson for Germany's Federal Office for Economic Affairs and Export Control (BAFA) told Nikkei. “Each individual case is decided based on the intended specific use of the exported goods by the end user in the recipient country.”

Most of the Japanese products that topped the CAEP's bidding were general-purpose machine tools and related parts. Semiconductors that could be used to simulate missiles and nuclear experiments were mostly made in the U.S., while CNC equipment, the brains of machine tools, was mostly made in Germany.

There is no doubt that China is a huge market. But the differences in export control responses reflect the different attitudes in each country toward business opportunities in China.

The "cleverest" of any country is the United States.

The U.S. is ostensibly engaged in a bitter spat with China. But the reality is not that simple. “U.S. companies are tough, and they often sell while Japanese companies shy away,” said Shigehiko Ishimoto, a lawyer at Mori Hamada & Matsumoto who is familiar with trade sanctions. Cases are frequently seen of companies that intentionally downgrade their products to avoid regulations.

For example, Nvidia, whose state-of-the-art semiconductors were found in Nikkei's investigation to have been potentially exported to China, developed a downgraded graphics processing unit following sanctions restricting its sales to China. But the U.S. government announced the new regulation to crack down on these downgraded products as well this October.

The conflict between the U.S. and China has reached a point of no return. The cost of the U.S. sanctions on business with China is considerable.

But companies need to survive. Even as Western governments unite to contain China, within their own borders, governments and businesses are not monolithic.

“We began seriously considering whether deals with China would really disappear in the future,”

a CEO at a Taiwanese supplier in the machinery industry told Nikkei on condition of anonymity.

It is the West -- led by the U.S. -- that integrated China into the supply chains of all industries.

He continued, “We understand the importance of export controls, but also want to look at the Chinese market.” This confession speaks for many companies struggling with the dilemma of whether to prioritize their business or to comply with security measures by governments.

The CAEP, its affiliated institutes and Chen Xingxing did not respond to requests for comment.