A Chinese state-security official arrested this year on allegations of spying for Washington is suspected to have compromised some of China's US agents in a major setback that angered President Hu Jintao, sources said.
Hu personally intervened this year, ordering an investigation into the case after the Ministry of State Security arrested one of its own officials for passing information to the Americans, two sources with direct knowledge of the matter said.
The official, an aide to a vice minister, was taken into custody sometime between January and March after the ministry became alarmed last year over repeated incidents of Chinese agents being compromised in the United States, they said.
The ministry's own investigations found the aide had been working for the Central Intelligence Agency (CIA) for years, divulging information about China's overseas spy network in the nation's worst espionage scandal for two decades, they added.
The sources' comments represent the first confirmation that overseas Chinese espionage was deemed to have been damaged by the security breach, which has been kept quiet by both Beijing and Washington. Reuters first reported it on June 1.
The aide's identity has still not been revealed but he worked for vice minister Lu Zhongwei, the sources said, speaking anonymously due to the sensitivity of the case.
They declined to elaborate on the information he is said to have passed to the Americans or how it compromised China's agents, but they have said it involved "political, economic and strategic intelligence".
Despite the breach, Lu has been spared formal punishment, the sources added, confirming for the first time that the vice minister had been cleared of working for the Americans after the wider investigation ordered by President Hu.
Instead, Beijing found that Lu had failed to properly screen the aide before hiring him. It stopped short of disciplining the vice minister, anxious to put the scandal to rest after several other political and diplomatic embarrassments this year.
"Lu Zhongwei's problem was he used a person without (adequately) investigating first," one source said, adding "The central government does not want to create trouble in a politically sensitive year."
China's ruling Communist Party plans a once-a-decade leadership transition late this year and is keen to wrap it up without further trouble. The normally well choreographed process has already been marred by a murder scandal which claimed the career of Bo Xilai, a contender for the new leadership team.
LU TO RETIRE
China's Foreign Ministry has declined to comment on the security breach. The Ministry of State Security is one of the most opaque government agencies in China and does not have a public web site or spokesperson. US Secretary of State Hillary Clinton has declined to comment on the case, saying only this month that the two countries continued to cooperate on many issues.
Lu turns 59 this year and is set to retire soon anyway, a second source said, noting the vice minister was not suspected of having worked for the Americans.
"He did not change colour," the source added.
Lu, a native of Shanghai, also has ties to a Beijing-based international think-tank which, according to two researchers familiar with the organisation, recently curtailed contacts with foreign researchers and also trips to conferences abroad.
In 1999, he was president of the think-tank, the China Institutes of Contemporary International Relations, which is backed by the Ministry of State Security.
Lu speaks fluent Japanese and sits on the board of the semi-official China-Japan Friendship Association, the sources said.
The spy scandal ranks as the most serious between China and the United States to be made public since 1985 when Yu Qiangsheng, an intelligence official, defected to the United States. The defection exposed a retired Chinese-American CIA analyst who killed himself in 1986 in a US prison cell, days before he was due to be sentenced to a lengthy jail term.
Lu's aide was arrested at around the same time that China's worst political scandal since the 1989 army crackdown on the Tiananmen pro-democracy protests was unfolding, though the sources said the two cases were unrelated.
The political scandal erupted in February when the police chief of Chongqing in southwest China took shelter for 24 hours in a US consulate. Chongqing's ambitious Communist Party boss, Bo Xilai, was later suspended after it emerged the police chief had been investigating Bo's wife for murder.
Bo's wife has been detained on suspicion she poisoned a British businessman, Neil Heywood, in a dispute over money.
In late April, relations came under even more pressure when blind Chinese dissident Chen Guangcheng escaped from house arrest and sought refuge in the US embassy in Beijing. He spent six days in the embassy, sparking a diplomatic crisis that was resolved only after he left China last month to take up an academic fellowship in New York.