(Reuters) - It looked like a textbook win-win deal when Australian high-speed ferry designer AMD Marine Consulting formed a joint venture in 1993 with the engineering arm of a state-owned Chinese shipbuilder.
The joint venture partner, Guangzhou Marine Engineering Corporation, a subsidiary of the giant China State Shipbuilding Corporation, gained access to state-of-the-art technology in wave-piercing, aluminum-hull designs.
For AMD, a Sydney-based private company, the payoff was a foothold in China's maritime market during a period of rapid growth.
The joint venture, Seabus International Co, began designing high-speed aluminum catamaran ferries, rescue vessels and patrol boats for China's inland and coastal waters, according to the company's website.
That's when a third winner emerged.
Attracted to the performance of these fast, stable and relatively cheap vessels, the Chinese military adopted the technology as it began replacing its aging missile boats that had been derived from an obsolete Soviet design.
AMD did not respond to a request for comment.
China's naval buildup in the South China Sea, to back its claims to islets and reefs in waters rich in oil and gas and which half the world's ship tonnage passes through each year, has prompted the United States to make a strategic shift toward Asia.
U.S. Defense Secretary Leon Panetta, on his first visit to the region since announcing that shift in January, will brief allies about it this weekend, beginning with "The Shangri-La Dialogue". The event brings together senior civilian and military chiefs from nearly 30 Asia-Pacific states to foster security cooperation and takes its name from the host Singapore hotel.
Since 2004, the People's Liberation Army (PLA) navy has deployed a rapidly expanding fleet of heavily armed, Houbei class fast-attack missile boats based on AMD's advanced catamaran hull, according to reports on Chinese military websites and Western defense magazines.
In a clear demonstration of the value of foreign dual-use technology in China's rapid military buildup, the Houbei class or Type-022 as it is also known, appears to be adapted from the AMD 350 patrol boat design, Chinese and Western analysts say.
"I think it is the most impressive missile boat in the Asia Pacific region," said Andrei Chang, a Hong Kong-based analyst of the Chinese military and editor of Kanwa Asian Defense Magazine.
"It looks very high-tech and stealthy with plenty of firepower from eight anti-ship missiles."
In its annual report on the Chinese military, the Pentagon said earlier this month the Chinese navy had deployed about 60 of the Houbei class patrol craft.
"These boats have increased the PLA Navy's littoral warfare capabilities," the Pentagon said.
The United States is also beefing up its littoral warfare capabilities in the region. The USS Freedom, first in a new class of combat ships, will be sent to Singapore next year as part of the strategic "Asia pivot".
The smaller, shallow-draft ships are intended for operations close to shore and capable of deploying quickly in a crisis. Singapore has discussed hosting up to four such U.S. "Littoral Combat Ships" on a rotational basis at its naval facilities.
In the report, the Pentagon also said China's defense and civilian sectors worked in close cooperation as part of a long-standing effort to incorporate technology that could accelerate military modernization.
The report noted the cumulative effect of dual-use technology transfers, particularly from the United States, could make a substantial contribution to Chinese military firepower.
The mass production of the Type-022 suggests the Chinese navy believes these vessels will complement its so-called "anti-access" strategy aimed at keeping foreign forces away from waters surrounding Taiwan in time of conflict, said Sam Roggeveen, an analyst and commentator at the Sydney-based Lowy Institute for International Policy, an independent private foreign policy research group.
China considers self-ruled Taiwan a renegade province to be brought under mainland control eventually, and by force if necessary. The United States is Taiwan's biggest ally and arms supplier and is duty-bound by legislation to help the island defend itself.
"China's anti-access capabilities are now such that it would be very difficult for the U.S. Navy to intervene in a conflict over Taiwan at an acceptable cost," Roggeveen said. "The Type-22 has made a contribution to that capability."
Some analysts forecast the Chinese navy will take delivery of up to 100 of these vessels, which carry an estimated price tag of about $15 million each.
No one has suggested AMD Marine Consulting has done anything illegal. Under Australian law, exporters of military equipment must seek government approval for foreign sales but these restrictions do not apply to work done by Australian company subsidiaries operating offshore.
An Australian company is also providing aluminum hull design technology to the U.S. military. Western Australian shipbuilder Austal has won contracts to design and build a new class of littoral combat ship and high-speed transport catamarans for the U.S. Navy.
On its Chinese website, Seabus said it was engaged in research and development and design of wave-piercing and conventional, high-speed catamarans. It also advertises a range of AMD catamaran designs from 80 to 2,600 metric tons (88 to 2866 tons).
WESTERN WEAPONS SALES BAN
Despite bans on Western weapons sales to China that have remained in place since the 1989 Tiananmen crackdown, Beijing has mounted a rapid military build-up that has made the PLA increasingly capable of challenging the military dominance the United States has enjoyed in Asia since the end of the Cold War.
Average annual increases of almost 12 per cent in military spending over more than two decades have allowed China to deploy an expanding force of potent warships and submarines, long-range strike aircraft, missiles and modernized nuclear warheads.
Early in this period, China relied heavily on imports of Russian weapons but this has slowed as the domestic arms industry gears up to build more locally designed hardware.
As part of this shift, dual-use technology from abroad has been crucial to advances across a broad range of China's military technologies including satellites, communications networks, helicopters, radars, marine engines, signals processing and training simulators, military analysts say.
China's state-owned commercial shipbuilders, who also deliver warships for the navy, have been at the forefront of absorbing foreign technology.
TOP PLA PRIORITY
The link between AMD's designs and the Chinese navy was first reported in 2007 in SIGNAL Magazine, a Fairfax, Virginia-based specialist defense technology publication. Roggeveen also reported on the deal in a Lowy Institute blog.
At the time, AMD confirmed the Chinese navy had adopted its technology.
Since then, the expanding Houbei class fleet has become a top priority for China's military with mass production involving up to five shipyards, defense experts say.
With an estimated top speed of more than 36 knots, the 225-metric-ton boats were clearly designed for offensive missions where they would attack with their YJ-83 anti-ship missiles, which can strike targets at a distance of more than 200 km, experts say.
They also appear to be equipped with advanced data processing links so these missiles can be directed from sensors on other aircraft or ships.
The Type-22 also has a close-in weapon system for defense against incoming missiles and what appears to be a launcher for anti-aircraft missiles.
Naval strategists suggest that deployed in big numbers in wartime, these fast and stealthy craft could overwhelm bigger and much more expensive enemy warships with waves of missiles fired from different directions.
Combined with missiles from China's land-based launchers, surface warships, submarines and strike aircraft, these attacks could sharply raise the stakes for an enemy operating close to the mainland.
"This craft is a purebred ship killer, perhaps even a carrier killer," wrote John Patch, a retired U.S. Navy officer in an article for the United States Naval Institute.
In its report on China, the Pentagon said it would continue with efforts to block the transfer of important technology to China that would contribute to China's defense industry and military firepower.
However, for the United States and its allies, it could be difficult to evaluate which technologies or materials should be restricted, according to military analysts, particularly for countries that benefit from close trading relationships with China.
"If you were going to be terribly rigid about this, you'd argue that Australian iron-ore exports indirectly benefit the PLA and thus should be stopped," said Roggeveen.