Quite a few Chinese people saying they saw a UFO too, so it wasn't just us laowai's imagining some secret Chinese technology! Might have been an aircraft on afterburner going straight up realising they were in the flight path of commercial airlines, but likely we would have heard that... doesn't make sense if it was a rocket launch, straight above a city isn't very smart if it explodes or drops out of the sky...

China's space launch site is 360 km due north of kunming

Mike's got it right. Official word out of the National Space Science and Applied Research Center says it was a rocket launch. Payload was apparently scientific equipment for studying the ionosphere. Pictures and a brief explanation here:
news.sohu.com/20130514/n375886301.shtml
Message boards have gone haywire with comments on everything from UFOs to anti-missile technology tests.

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