One Belt, One Road, One Puzzle for Foreign Businesses in China

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Graham Norris, the communications director at AmCham China, takes the time to walk us through the new “One Belt, One Road” initiative. He looks at the past history as well as the current prospects. Bottom line: will take some time to find out if there is any there there.

So far, looks like there is potential for Chinese state-owned-enterprise to scoop up Chinese government money to clear their inventory and keep their engines humming. As for foreign business in China? Be careful about getting yourself too caught up in slogans.

As Graham writes:

It seems therefore that the biggest winners from this grandiose project will be state-owned enterprises, especially those with provincial backgrounds. According to the Economist, two-thirds of provinces have made One Belt, One Road a development priority this year, including Qinghai in the west and Guangdong on the coast. Cement maker Anhui Conch is building cement plants in several nearby countries, and steel exports from Shijiazhuang, the biggest steel-producing area in China, rose by half in the first seven months of the year, according to Reuters.

So is there anything for foreign companies to be excited about?

Anything that can arrest the slowdown in the economy, which in the third quarter expanded at its slowest rate since the global financial crisis, would be beneficial for all companies operating in China. But when it comes to specific opportunities, they could be harder to come by. 

Here is the link to the full article: AmCham China.

This post originally appeared on LinkedIn.

Is the Specter of a ‘Cyber Cold War’ Real?

(originally published in The Atlantic, April 27, 2013)

Why the best and brightest in China and the United States have the most to lose from a cyber-related conflict between the two countries.

A cleaner sweeps the logo of Google China outside its company headquarters in Beijing, January 19, 2010. (Alfred Jin/Reuters)

A cleaner sweeps the logo of Google China outside its company headquarters in Beijing, January 19, 2010. (Alfred Jin/Reuters)

“How do I screen when hiring Chinese employees?”

I was asked that question the other day by a senior executive at one of America’s most prominent tech companies who is worried about Chinese employees stealing the company’s trade secrets. The epidemic of cyber-burglary and trade secret theft coming out of China is leading many technology and industrial multinationals to not only ask this question but to discuss avoiding hiring Chinese scientists, engineers and executives for key positions — or at least determine ways to isolate them from core company systems. Some companies are already doing both of those things.

I was immediately and sadly reminded of the late-1990s Chinese spy mania in the U.S. ignited by then House Speaker Newt Gingrich’s attempt to connect a scandal involving Clinton campaign contributions with accusations that American companies with ties to Clinton were sharing sensitive U.S. space technology with China. In the end, as is usual with Newt’s political nonsense, the smoke led to barely a flicker of fire.

But Chinese American scientist Wen Ho Lee at the Department of Energy’s highly classified nuclear laboratory at Los Alamos, Mexico, ended up badly burned. And, for a while, so were the career prospects of Chinese immigrants with technology and science expertise studying and working in the U.S. After being charged with 59 criminal counts, shackled in leg irons, incarcerated in solitary confinement, and pilloried by press leaks, Lee pled guilty to one count that amounted to bringing classified materials home to work on. The judge who accepted Lee’s plea said that his prosecution had “embarrassed our entire nation.” During this time, I ran into more than a few Chinese scientists and technologists in China who had returned home because they saw their future in America limited.

***

A couple hours after the screening question, I received the CNN email alert about the death of Lu Lingzi, the 23-year-old Boston University student from Shenyang, China killed in the Boston marathon bombing. She was the same age as my daughter Sally, who was also born and raised in China and speaks Chinese. It is impossible for parents to fathom how a child’s life and dreams can be destroyed by senseless criminal violence. As her classmate Zheng Minhui said at Lingzi’s Boston University memorial service: “Her dream was very simple. She wanted a not necessarily rich life, but a peaceful life, with a stable job, a happy family, and a lovely dog.”

Lingzi was one of the 200,000 mainland Chinese currently studying in the U.S. — and nearly 1 million who came before her — whose big dreams and bright futures depend on mutual understanding, clear communications and real trust between the U.S. and China as nations and as people. I chair the advisory board of a student group called Global China Connection with branches on some 60 U.S. campuses and a membership that mixes students from China with American and international students interested in China. The group’s mission statement is clear: Global China Connection is a student-run organization dedicated to fostering deep and trusting personal relationships among Chinese and non-Chinese university students. I believe the future of the U.S.-China relationship depends on these young people to help us overcome the inevitable friction between a rising global power and a reigning global power. When I travel on business in the U.S., I stop by campuses and talk with these students. I have met many, many like Lu Lingzi over the years. Sincere, decent and diligent Chinese who love their homeland but have great curiosity about and affection for America — and dreams and ambitions that involve both countries.

The fantastic Internet cyber world that has brought the globe together in so many ways is now endangering those dreams. The fallout for Chinese in the U.S., and those working for American multinationals in China, during the Wen Ho Lee fiasco was serious but short lived. The accusations were aimed at an individual who had resided in the U.S. for some 35 years at the time of his arrest. But today’s accusations and a large body of detailed and credible evidence point at Chinese state-sponsored cyber hacking and trade secret theft involving a Who’s Who of American multinationals.

Whenever American business talks about China with the U.S. government these days, this is topic number one. Most Chinese officials and business people I meet are completely unaware of the scope of the problem. The news and evidence is blocked by Internet censors. The Chinese government’s response so far has been to deny and dissemble, calling the accusations of state-sponsored Chinese cyber-theft “groundless accusations” with “ulterior motives.” After Secretary of State John Kerry and Treasury Secretary Jack Lew visited China in April and raised the cyber-hacking issue repeatedly, Qian Xiaoqing, deputy director of the state Internet Information Office told Reuters: “Lately people have been cooking up a theory of a Chinese internet threat, which is just an extension of the old ‘China threat’ and just as groundless.”

***

Here is a quick overview of what has become public.

Google closed down its self-censored mainland China search engine in March 2010 due to cyber-hacking of Google source code and attempts to steal the passwords of hundreds of Gmail accounts, including U.S. officials, journalists and Chinese activists. At the time,Google was one of some three dozen multinationals hacked from China . Except for Google, the other companies clammed up, lest they anger China and damage their China business. The problem continued to get worse, but few would talk about it publicly. The U.S. government didn’t want to reveal what it knew and how it knew it. Companies built stronger defenses and kept quiet.

China cyber-hacking news hit the headlines this January when The New York Times and The Wall Street Journal revealed that they had been hacked from China. Bloomberg BusinessWeek, in mid-February cover story entitled “Yes, the Chinese Army is Spying on You,” exposed a network of hackers, digging all the way down to a vacation photo of a People’s Liberation Army professor from Zhengzhou who had exposed his real identity by launching a small telecom side business that allowed investigators to connect his real name with his cyber-identity. The magazine followed the trail of Joe Stewart, director of malware research at Dell SecureWorks, who said he tracks 24,000 Internet domains “that Chinese spies have rented or hacked for the purpose of espionage.”

Days later, Mandiant, an American private cyber security company, issued an explosive report on Chinese hacking. The company said it had traced “one of the most prolific cyber espionage groups in terms of the sheer quantity of information stolen” to the neighborhood of a PLA building in Shanghai that houses an intelligence organization known as Unit 61398. The individual hackers tracked by Mandiant at 61398 included those such online monikers as “UglyGorilla” and “SuperHard.”

Mandiant said the group was one of more than 20 Advanced Persistent Threat (APT) groups it had been tracking in China. Mandiant said that in a seven year period, the Shanghai group – which it dubbed APT1 — had “systematically stolen hundreds of terabytes of data from at least 141 organizations” by periodically revisiting “the victim’s network over several months or years” to “steal broad categories of intellectual property, including technology blueprints, proprietary manufacturing processes, test results, business plans, pricing documents, partnership agreements, and emails and contact lists from victim organizations’ leadership.” Mandiant added that the companies targeted by APT1 “match industries that China has identified as strategic to their growth, including four of the seven strategic emerging industries that China identified in its 12th Five Year Plan.”

The “2013 Data Breach Investigations Report,” issued in recent days by Verizon’s RISK Team in conjunction with 18 others including the U.S. and other governments, for the first time separated hackers with financial motives from state-sponsored cyber-theft of intellectual property. Of the 120 occurrences of state-connected IP cyber-theft discussed in the report, 96     percent came from China. “We don’t think there was a super spike in that kind of [cyber-espionage] activity,” Wade Baker of the RISK team told the Washington Post. “It’s more about our ability to find them.”

The “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets” published by the White House in February labels China a “persistent collector” and cites a long list of trade secret theft prosecutions involving Chinese employees of multinationals in the U.S. The cases include: Space shuttle secrets from Boeing; Trading platform source code from the CME Group; Light emitting diodes from DuPont; Hybrid technology from GM; Car designs from Ford; Food component information from Cargill; Military technology from L-3 Communications; and paint formulas from Valspar. “China’s intelligence services, as well as private companies and other entities, frequently seek to exploit Chinese citizens or persons with family ties to China who can use their insider access to corporate networks to steal trade secrets using removable media devices or e-mail,” the report states. “Of the seven cases that were adjudicated under the Economic Espionage Act — both Title 18 USC § 1831 and § 1832 — in Fiscal Year 2010, six involved a link to China.”

***

Congress is searching for ways to respond. Mike Rogers, a Michigan Republican and chairman of the House Permanent Select Committee on Intelligence, is focused on making China pay a price. “Right now there is no incentive for the Chinese to stop doing this,” Rogers told The New York Times in February. “If we don’t create a high price, it’s only going to keep accelerating.

Unfortunately, Congress failed to do an inventory of U.S.-China trade before setting its first price. Congress in March added sanctions to the continuing resolution that funds the federal government through September. The sanction provision bars NASA, Commerce, Justice and other federal departments from purchasing information technology systems “produced, manufactured or assembled” by entities “owned, directed, or subsidized by the People’s Republic of China” unless the purchase is determined to be “in the national interest of the United States.”

If Congress continues down this road Americans may soon revert to manual typewriters and talking into tin cans with strings stretched between them. Here is the state of U.S.-China trade today: China sells America laptops, servers, routers, phones and televisions. America sells China beans, bits, Boeings and garbage. It would do House leaders good to read their own November 2012 report: Patterns in U.S.-China Trade Since China’s Accession to the World Trade Organization by the U.S.-China Economic and Security Review Commission, a body mandated and appointed by Congress.

10 years ago, Chinese exports to the United States were dominated by toys and games, footwear, textiles and apparel. Today, atop the list are all types of electronic exports, which increased to $145 billion in 2011 from $25 billion in 2000. Many of the components come from America. U.S. chips now account for about 90 percent of advanced technology products exported to China. Since 2008 soybeans have been the single largest export to China. The export of American scrap metals, waste paper and industrial leftovers to China has increased to $11.5 billion in 2011 from $740 million in 2000. “Yes, that’s right,” Clyde Prestowitz of the Economic Strategy Institute wrote in 2010. “We’re swapping garbage for computers with China.”

To complicate matters further, the electronics arriving in the U.S. are nearly all manufactured by foreign invested enterprises in China. In testimony to the Commission, economists estimated that some 60 percent of all Chinese exports to the U.S., and more than 90 percent of advanced technology product exports, come from foreign invested firms in China.

***

While Congress stumbles, others are exploring a wide array of alternatives.

The Heritage Foundation suggests that Chinese State Owned Enterprises (SOEs) that benefit from state cyber-burglary be charged with “trafficking in stolen goods” and have their offshore assets seized. Dan Blumenthal of the American Enterprise Institute suggests that Congresscreate a cyber-attack exception to the Foreign Sovereign Immunities Act as was done with terrorism. That Act prevents foreign states from facing civil suits in U.S. courts. The terrorism exemption allows such suits and the collection of damages if the country has been designated as a state sponsor of terrorism by the State Department. Then there is George Mason University law professor Jeremy Rabkin and scholar Ariel Rabkin’s Hoover Institution study that proposes the U.S. “think about cyber conflict in more imaginative ways.” One of them is creating a cyber-militia by reaching back 200 years when the U.S. and others signed “letters of marque” to “privateers” who were commissioned to attack pirates ships and allowed to keep a percentage of what they seized.

A more mundane approach comes from defense consultant and author James Farwell. He wrote in the National Interest in March that Chinese hacking should be taken to the WTO. While espionage is not against international law, he says, the theft or infringement of intellectual property is. Farwell suggests that the U.S. should initiate a case under the Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement. “An internationally-recognized ruling, handed down in legal proceedings that found China guilty of intellectual-property theft or infringement, could render it liable for billions of dollars in compensation, expose it to multinational economic sanctions and cause it to be branded a ‘pirate state’,” Farwell wrote. “As a nation whose strategic thinking focuses on playing for psychological advantage, China would find that result uncomfortable.”

Real progress can only start with the separation of sleuthing and shoplifting. The U.S. and China should lead a global discussion of acceptable behaviors and protocols for cyber-spying and cyber-warfare. Those discussions could take years to become meaningful. But they at least open communications channels to avoid accidents, or a “Cyber Pearl Harbor” as Defense Secretary Leon Panetta put it as he headed into retirement. Even a cursory look at published studies makes it clear that both countries are cyber probing for ways to shut down each other’s financial markets, electric grids, telecom networks and transport systems in the event of conflict. China certainly took note in March when U.S. National Security Agency and Cyber Command chief Gen. Keith Alexander told Congress that 13 of the new 40 CYBERCOM teams being assembled would focus on offensive operations.

The Obama administration’s approach so far is to enlist allies and engage China in quiet talks about cyber-security, much like was done with some success when China was publicly denying mounting evidence of its nuclear proliferation. In the end, China realized that such proliferation was against its own interests. A cyber security working group between the U.S. and China is now being organized as a result of the recent visits to Beijing by Secs. Kerry and Lew and others. Public statements from Chinese officials appear to accommodate this. “Cyberspace needs rules and cooperation, not wars,” Foreign Ministry spokesman Hua Chunying said in mid-March. “China is willing, on the basis of the principles of mutual respect and mutual trust, to have constructive dialogue and cooperation on this issue with the international community including the United States to maintain the security, openness, and peace of the Internet.”

Even the Global Times, the Doberman of the Party propaganda press, suggested a good idea in a February editorial claiming the “insane U.S. accusations” reflected American intentions of “cyber hegemony.” The Global Times said that “China should confront the U.S. directly. China should gather, testify, and publish evidence of the U.S.’ Internet intrusions.”

That would be helpful as both countries could know who is doing what to whom. Many facts as the U.S. sees them are already on the table. If China has evidence showing that the U.S. government is stealing trade secrets from Chinese companies — or the companies of any country for that matter — that should be exposed and stopped. After all, the White House’s own February report on mitigating cyber hacking mentions a press report citing France’s Central Directorate for Domestic Intelligence calling China and the United States the leading hackers of French businesses.

As talks begin, both the U.S. and China need to step back and assess where this could be heading. Do the leaders of either nation really think a Cyber Cold War would benefit anybody? The longer this cyber-mess festers, the more distrust builds up, the more American companies question the trustworthiness of Chinese employees, the more China questions market access for American firms.

The victims I most worry about are our children, growing up in the age of globalization but in danger of being divided by distrust. Lu Lingzi’s father, Lu Jun, gave an eloquent and inspired eulogy to his precious daughter in front of 1,200 mourners at her Boston University memorial this week. He cited a Chinese proverb: “Every child is actually a little Buddha that helps their parents mature and grow up.”

The leaders of the U.S. and China may consider listening to Mr. Lu and manage this issue like mature grown ups who care about the world their kids will inherit.

China: Back to the Future

What the poet Lu Xun — and other voices of China’s past — can tell us about the country’s present challenges.

(Originally published in The Atlantic on March 28, 2013)

I just arrived back in Beijing after a month-long trip across the U.S. My trip started with discussions with mutual and hedge fund managers, corporate executives and Washington policymakers. It ended in Palo Alto where I talked to technology executives and then stumbled across the Chinese literary legend and social critic Lu Xun, who has been dead since 1936 but still dispenses great insights and wisdom.

I am writing this under winter camping conditions in my Beijing apartment, wearing long underwear and three layers of fleece. That is because the Beijing municipal government annually turns off the heat in all residential complexes on March 15th and then turns it back on November 15th, no matter what the weather. As I write this, the temperature is 34 degrees, and the air pollution level is 224, which is considered okay these days as it only qualifies for “health warnings of emergency conditions” and “protections recommended.” After readings of more than 1,000 on New Year’s Eve, today’s murky atmosphere is a relative oxygen bar, though I have my newly installed air filter whirring behind me.

I return to China asking myself if the country is poised to move forward or if China is heading back to the future. For much of the trip, I was watching the National People’s Congress and the Chinese leadership transition from afar. While doing so, I found that everybody I talked to — from those who have hundreds of millions invested in Chinese stocks to those who are advising Obama on how to interact with China during his second term — is simultaneously very negative about China and also very hopeful that the new leadership can turn the country around and revitalize reform and opening.

The new Communist Party chairman and China president Xi Jinping is in a similar situation to that of Obama after his first election. People at home and abroad are disenchanted and disappointed with Xi’s predecessors, and expectations are so high about Xi bringing positive change that even if he does a decent job he is likely to disappoint. We are seeing some early hopeful signs in Xi’s governing style, messaging and the people chosen by the Party and rubber-stamped by the NPC for important government posts. The new foreign minister, Wang Yi, is a fluent Japanese speaker, former ambassador to Japan and was China’s front man for the Six-Party talks with North Korea. He has the experience and relationships to help wind down the very dangerous and volatile China-Japan territorial dispute over the Diaoyu islands and help China rejigger its outdated “close-as-lips-and-teeth” relationship with an increasingly whacko North Korea.

The new finance minister, Zhu Rongji protege Lou Jiwei, has the experience and relationships to find a face-saving solution to China’s dispute with the U.S. Securities Exchange Commission and U.S. accounting regulators. Left unresolved, the dispute could lead to a wholesale delisting of Chinese companies from American exchanges if China doesn’t allow U.S. inspectors to examine the auditors in China who are certifying the books of U.S.-listed Chinese companies as well as American companies with significant business in China. Lou is coming from the China Investment Corporation sovereign wealth fund that needs free access to overseas investments.

One discouraging sign is that speculation that Pan Yue would become Minister of Environmental Protection did not pan out, no pun intended. He had been sidelined years ago when as deputy director of the then State Environmental Protection Agency he had criticized the “growth at any cost” development model and tried to enforce environmental laws against powerful, high-polluting state-enterprises.

American government officials who deal with China who I met with in Washington are increasingly frustrated that China doesn’t even bother to pretend to tell the truth when discussing contentious issues. Very solid evidence of state-directed cyber-hacking of just about any American multinational with valuable technology and industrial trade secrets is met with the admonishment that the U.S. must cease with these “groundless accusations” that result from “ulterior motives”. The hedge funds and mutual funds that have been big investors in the China growth story and strong proponents of patience with China’s reform process have run out of patience themselves. They figure that all Chinese companies are lying to their investors so they are now turning toward investing in American and European companies with significant China exposure or playing China stocks on pure speculation. In short, the American business community that has long been the stalwart supporter of China in the U.S. has basically lost trust in China as an entity while they still have great respect for the Chinese people and what they have accomplished.

All eyes are now on Xi Jinping and the new premier, Li Keqiang. So far there are many positive signs. Their atmospherics and rhetoric are mostly progressive and positive. In their speeches both leaders have emphasized that the Chinese government needs to loosen its grip and be more of a “service oriented” government. Xi has told Party cadres to “think a little more, learn a little more” and focus on fulfilling “the Chinese dream” of job stability, quality education, higher income, reliable social security and better medical care. Li Keqiang says that there needs to be a “division of power” between the government and enterprises, the government and investors and the government and civil society. As he exited his decade as premier, Wen Jiabao set the stage for Xi and Li by passionately calling for political and economic reforms — which it seems he didn’t have the power to carry out – while characterizing the economy as “unstable, unbalanced, uncoordinated and unsustainable.”

If you get right down to it, Xi and Li have inherited a huge pile of unsustainability. The OECD is projecting that China will overtake the U.S. economy in size in 2016 in terms of purchasing power parity. To keep that engine humming, however, the growth model has to shift from investment-led to driven by consumption.

As Economist Andy Xie put it in Caixin Magazine recently: “If China keeps pushing growth through fixed-asset investment and credit, a full-blown banking crisis is likely within five years. Kicking the can down the road is not a viable option for the new government. Reform is necessary for survival, not a choice.

During his “southern tour” in December, Xi paid homage to Deng  Xiaoping and his transformative market reforms. Xi said that the Party Congress that had just appointed him as Party chairman had issued “a new mobilization order” to deepen reform and opening up. An official speech from that tour is now circulating among Party officials. According to an analysis by independent Chinese journalist Gao Yu, Xi expands his vision for “the China Dream” to lay down firm lines against political reforms. He discusses the Soviet Union’s collapse and complains that the Soviet Communist Party fell because “nobody was man enough to stand up and resist” when the military was no longer under the firm grip of the Party.

The speech makes clear that Xi does not want to become China’s Gorbachev and undertake risky reforms that could unravel the system. Instead, Xi emphasizes that “Only socialism can save China. Only reform and opening-up can develop China, develop socialism, and develop Marxism.” An evolving early mantra employed by Xi is being called the “three confidences.” They are: “confidence in direction, confidence in theoretical foundation, and confidence in system.”

And this brings us to Lu Xun, who I ran into at Bell’s Books, a wonderful used book bookstore in Palo Alto on my last U.S. stop. I stumbled upon a copy of “A Brief History of Chinese Fiction” that grew out of notes Lu Xun drafted for his lectures at Peking University between 1920 and 1924. Paging through this English translation from 1959, I found several passages that offer some ageless insight and wisdom about China that can explain the obstacles facing Xi and Li and how their efforts could play out.

As Lu Xun told his students 90 years ago: “When we look at the evolution of China we are struck by two peculiarities. One is that the old makes a comeback long after the new has appeared — in other words, retrogression. The other is that the old remains long after the new has appeared — in other words, amalgamation. This does not mean there is no evolution, however. Only it is comparatively slow, so that hotheads like myself feel that ‘one day is like three autumns’.”

As for Xi and Li’s campaign to eradicate government corruption and extravagance with such efforts as limiting official banquets to “four dishes and a soup” and banishing traffic-choking official motorcades, Lu Xun cites the difficulties faced by reformers in the Qing, China’s final dynasty. “They carry on as usual, concealing the true state of affairs from above and below, while the worst of them employ bad men to get them off by bribery. Thus the evil, instead of being checked, goes from bad to worse.”

Xi and Li’s pursuit of plain talk and less formalism brings to mind this advice from a Qing Dynasty novel “Exposure of the Official World” cited by Lu Xun.”The son of the Minister of Justice sought advice for how to handle his first audience with the emperor from a senior adviser to the emperor who his family had provided with “ten thousand taels of curios.” He was told “Kowtow a lot and say little: that is the way to be promoted,” later adding, “Even kowtowing when it isn’t strictly necessary will do no harm.”

In Deng Xiaoping’s day, when nobody had nothing, nearly everybody in China supported reform and opening. Now that there are so many vested interests that profit handsomely from the current system, Xi and Li have their work cut out for them. The last leadership team in China seemed to be stuck in a reform pattern of taking one step forward and two steps back. Maybe the best Xi and Li can hope for is two steps forward and one step back.

Business 101 – Don’t Bring Your Cell Phone to Meetings in China, You Might Get Hacked

(Excerpt from No Ancient Wisdom, No Followers originally published on Quartz.com on September 28, 2012)

As part of their rush to meet the Party’s impatient expectations for technological progress, Chinese entities appear to have become the world leaders in cyber-hacking and theft of trade secrets. Combined with anxiety about losing their technology to Chinese partners, foreign executives in China sometimes behave as if they are operating behind enemy lines. 

The forced technology transfer features of Chinese industrial policies have generated deep distrust. But industrial cyber-espionage and cyber-hacking from China is prompting companies to act as if business in China constitutes a form of economic warfare.

In an October 2011 report to Congress, 14 US intelligence agencies identified China as the No. 1 threat to US firms through cyber-hacking and the theft of trade secrets. While the report detailed many Chinese government policies that appear to support and encourage these activities, the intelligence agencies stopped short of saying the Chinese government is directly involved. Some analysts believe that state-owned enterprise national champions—under tremendous pressure to innovate but incapable of doing so—are significant drivers of Chinese industrial cyber-espionage. “Chinese actors are the world’s most active and persistent perpetrators of economic espionage,” the US government report stated. “US private sector firms and cybersecurity specialists have reported an onslaught of computer network intrusions that have originated in China, but the IC (intelligence community) cannot confirm who was responsible.”

According to the October 2011 report to the US Congress, the areas most threatened are:

  • Information and communications technology, which forms the backbone of nearly every other technology.
  • Business information that pertains to supplies of scarce natural resources or that provides foreign actors an edge in negotiations with US businesses or the US government.
  • Military technologies, particularly marine systems, unmanned aerial vehicles and other aerospace/aeronautic technologies.
  • Civilian and dual-use technologies in sectors likely to experience fast growth, such as clean energy and health care/pharmaceuticals.
It should be no surprise that seriously schizophrenic behavior by multi-nationals in China is becoming the norm. CEOs continue to display big smiles and voice “win-win” rhetoric when visiting. But their in-country executives often behave as if they are working behind enemy lines. Corporate conference calls discussing anything remotely sensitive no longer take place on Chinese telecom networks. Some multinationals don’t even trust the Hong Kong phone system. They instead require executives to travel to South Korea to make important calls, or fly home for face-to-face meetings. Many technology multinationals and foreign governments forbid their people from bringing smart phones or laptops to China, and some US government officials are forbidden to connect to the government network (.gov) from within China’s borders.

Ken Lieberthal, a former top Clinton administration China policy-maker who now heads a China center at the Brookings Institution, described his own protocol to the New York Times. Instead of his own electronics, he brings a “loaner” cellphone and laptop, and he wipes the laptop clean upon his return. In China, his phone never leaves his sight and during meetings he turns it off and removes its battery to avoid having the microphone turned on remotely. To bypass any key-logging software, he brings his Internet passwords on a flash drive to copy and paste them rather than typing them in.

As Jacob Olcott, a cybersecurity expert at Good Harbor Consulting, told the Times, “Everybody knows that if you are doing business in China, in the 21st century, you don’t bring anything with you. That’s ‘Business 101’—at least it should be.”

Based on available information regarding attacks from China, Russia, and other countries, a former FBI agent estimates that the total value of the information stolen from corporate networks in 2011 reached almost $500 billion. Respected analysts, including James Mulvenon, a cybersecurity expert at Defense Group Inc., believe there is ample evidence to show that China is responsible for the vast majority of this loss. Google Inc., DuPont, Johnson & Johnson, and General Electric represent just a few of the companies that have admitted losing proprietary data to hacker- thieves, and several (including Google) have publicly pointed to China as the source of the intrusions.

In December last year Bloomberg obtained intelligence data indicating “at least 760 companies, research universities, Internet service providers and government agencies were hit over the last decade by the same elite group of China-based cyber spies.” Bloomberg said that the companies “range from some of the largest corporations to niche innovators in sectors like aerospace, semiconductors, pharmaceuticals and biotechnology.”

“What has been happening over the course of the last five years is that China—let’s call it for what it is—has been hacking its way into every corporation it can find listed in Dun & Bradstreet,” Richard Clarke, former special adviser on cybersecurity to President George W. Bush, told an October 2011 conference on network security. “Every corporation in the US, every corporation in Asia, and every corporation in Germany—and using a vacuum cleaner to suck data out in terabytes and petabytes. I don’t think you can overstate the damage to this country that has already been done.”

The Chinese government steadfastly denies these accusations. Given the ability of hackers to mask their location and affiliations, it has been impossible to gather court-ready evidence implicating Chinese authorities in cyber-theft. Six of the seven cases adjudicated in the US in 2010 under the Economic Espionage Act involved Chinese nationals. Some of these cases were limited to corporate espionage aimed at business gains. But others clearly involve economic espionage in which the state is both the guiding hand and the final beneficiary of the criminal activity.

Excerpted from No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism. Published by Prospecta Press, 2012. 

Going Global with Bloated Ambitions

When US Treasury Secretary Tim Geithner and Qin Xiao, one of the most thoughtful Chinese state-sector businessmen, are saying the same things, it may be time for those in Beijing and Washington to start listening. At Davos last week, Geithner let loose on China’s regressive policies that emphasize state-owned-industry as the core of the economy. He rightly pointed out that China’s SOEs, and the array of industrial policies supporting them to become “national champions” and go global, are distorting international business practices and undermining the WTO system. It is nice to hear that Treasury is starting to move beyond its one-note harping about currency exchange rates and focus on the more significant and damaging industrial policies.

Qin Xiao, a longtime executive at CITIC who ended his career as chairman of state-owned China Merchants Bank, is concerned about the damage the SOEs are doing to the current Chinese economy and future growth. A recent report from Chinese think tank Unirule points out that when subsidies are removed from the equation the big central SOEs actually provide China with a negative return on equity. From his vantage point as an insider, Mr. Qin has seen how the big central SOEs have become extremely powerful in Party politics as an entrenched interest group. Meanwhile, the private enterprise companies that are key to China’s economic growth, and job creation, are mostly shut out of the Chinese financial system and pushed out of markets where the Party wants to preserve monopolies.

Having SOEs on the front lines of a “going global” strategy is like having a bunch of buffet-bloated, 300-pound slackers with bad knees leading your Olympic team.

Long march ahead to a truly capitalist China – FT.com

Even in an economy that has grown at 10 per cent annually in the past three decades, the debate remains: is this success due to government control or the effect of the free market? The answer to this critical question will define China’s future. Will it continue its unfinished free-market reforms or end our 30-year transition where we are now? Do China’s economic problems and social frictions result from market reforms themselves or from bottlenecks and backward steps in the reform process? Is China’s state-dominated economic model a transitional arrangement that has achieved its ends or an innovation that should be strengthened?….

Modern democracy and the market system need further improvement, but they remain viable, and mankind has not yet found an alternative….

Now, the mission of this state-dominated model is accomplished and it is time to overcome the constraints of special interest groups, transform government functions and further the process of market reform….

The spread of economic crisis across the capitalist world has cast the future of the free market into doubt. Yet China’s story does not support the case against free-market institutions. On the contrary, the past 30 years’ success was due to market reform. To keep progressing, it must now transform its government’s economic role and continue reform into a free-market system. This is its unfinished mission.

Geithner: China’s System ‘Damaging’ to Trade Partners – WSJ.com

“China does present a really unique challenge to the global trading system, because the structure of its economy, even though it has more of a market economy now, is overwhelmingly dominated by the state,” he said at a public forum in Davos, Switzerland, during the World Economic Forum.

Chinese policies, including subsidized prices for energy and land and preferential access to capital, have been “very damaging” to trade partners, he said. “That’s why it’s very important that we get China to move comprehensively not just on the exchange rate but on dialing back its subsidies and distortions.”

China’s state-led capitalist system emerged as a hot topic at the World Economic Forum this week, as participants pondered the country’s economic success in contrast to recent challenges faced by more free-market systems in the U.S. and Europe. Even within China, there has been rising debate over how fast to move ahead with liberalizing reforms and what kind of economic model the country ultimately aims for…

Xu Xiaonian, an economics professor at the China-Europe International Business School, was even more strident in his remarks, saying China’s state-capitalist model was in fact pioneered by Otto Von Bismarck, the 19th-century statesman credited with uniting Germany. “When Bismarck invented this idea in 1870 it gave Germany impressive performance over the main superpower of the time, Great Britain,” he said. But the state-capitalist system, he argued, ultimately played a role in precipitating two world wars and Nazism.

The Poison Pill of Taiwan’s Democracy

I was transfixed by the elections in Taiwan last weekend as KMT incumbent Ma Ying-jeou won by a 6 point margin over DPP candidate Tsai Ing-wen. It was gratifying to see how stable and mature  Taiwan’s democracy has become. Taiwan now has a genuine two-party system with campaigns that seriously debate ideas and compare ideologies in a sometimes raucous carnival atmosphere that allows everybody to let off steam. The island’s voters were split 52-46, as compared to about 58-42 the last time around. This is a huge advance from the beginnings of the Taiwan democracy that I observed as as a reporter based in Taipei in the late 1980s.

In those days, a very corrupt and arrogant KMT ruling party had control of the media, unlimited campaign funds and an increasingly unconvincing argument that since the KMT had brought prosperity, without the KMT prosperity would disappear and the island would dissolve into chaos. They faced a very clever band of former exiles and political prisoners who formed the Democratic Progressive  Party and employed satire and political theatre to expose KMT hypocrisy and begin cracking away at the ruling party edifice.

I have dredged up a column I wrote after the 1989 elections in which the DPP gained a toe-hold in the legislature and scored significant wins for county magistrate posts. Here we are 22 years later, the DPP has come and gone from power, elections forced the KMT to clean up its act, and Taiwan has the first functioning democracy in the history of the Chinese people. I feel privileged to have watched the beginnings of this process, and the Chinese people should be proud of what the people in Taiwan have accomplished.

Democracy Is Taiwan’s Best Defense Against China

By James McGregor

6 December 1989

The Wall Street Journal

(Copyright (c) 1989, Dow Jones & Co., Inc.)

TAIPEI — Where does Taiwan go from here?

The ruling Nationalist Party is still in shock over Saturday’s elections in which the opposition Democratic Progressive Party overcame a stacked deck and scored impressive victories. The DPP, a fractious group led by former political prisoners and fueled by public discontent, seems confused whether to celebrate its victory or scream about alleged election fraud in several races it lost.

Both sides now face the awesome task of putting aside decades of hate and fear to figure out a way to work together. And this must be done quickly: The elections have created a volatile brew. Taiwan’s Legislative Yuan, the country’s lawmaking body, is primed for an ugly explosion over whether Taiwan should declare itself independent of ties to China or seek a formula for peaceful coexistence.

When the next session opens in January, the 163 life-term Nationalist lawmakers who have been frozen in office since 1947 elections on the mainland will be joined by 130 lawmakers chosen by voting and appointments last weekend. Within this group of 130 are eight DPP lawmakers elected on a platform of Taiwan’s declaring independence, and 18 Nationalist lawmakers who are the sons and daughters of Chinese who fled to Taiwan from the mainland with Chiang Kai-shek in 1949. This group of second-generation mainlanders is determined to develop a way to reunify Taiwan and China.

In local government, the DPP has won six of Taiwan’s 16 county magistrate positions. So DPP politicians in these powerful posts now will have a big say in the lives of seven million of Taiwan’s 20 million citizens. The DPP says it plans to use these magistrate positions to harass the national government. Thus, Taiwan is set to have a legislature paralyzed with fighting about reunification or independence, and administrative branches of government more concerned with infighting than solving the island’s practical problems.

As is usual in Taiwan, the average citizens are way ahead of their government. Voters interviewed during the campaign and since the voting say they were seeking to establish a two-party system. Their foremost concerns are stability and furthering the island’s economic development while solving the problems of horrible pollution, a soaring crime rate, rampant financial speculation and an antiquated infrastructure that provides a quality of life that is far from commensurate with the citizenry’s $7,200 per-capita income.

Voters here seem to realize something else that has yet to dawn on this island’s politicians: A functioning democracy can provideTaiwan with an effective poison-pill defense against China. If Taiwan can develop full democracy in the next few years, China has good reason to keep the island at arm’s length. The last thing China’s rulers want is to absorb an island where people are accustomed to speaking their minds and electing their government representatives.

Democracy in Taiwan will give China’s leaders good reason to work out an accord that allows China to benefit from Taiwan’s technology, business acumen and abundant capital while providing Taiwan autonomy so its democratic ideals don’t infect China’s masses.

Businessmen, scholars, average citizens and the more-thoughtful government officials in Taiwan are optimistic that this can be accomplished. One reason is that in 10 years or so, the people on both sides of the Taiwan Strait who really hate each other will be dead. The Old Guard in Taiwan’s Parliament and China’s Old Guard that ordered the slaughter in Beijing in June are cut from the same cloth. These people grew up together but ended up on different sides of the Chinese civil war. To them, the division of Taiwan and China is a matter of face, and both believe that democracy is a chaotic form of government that goes against the Confucian ideal of citizens displaying blind fealty to enlightened rulers.

But when these people are gone, the next generation will have the opportunity to devise some sort of a commonwealth in which two separate Chinese nations can cooperate under an ethnic banner. To do so, however, Taiwan’s leaders have to determine how to avoid prematurely forcing a showdown. This won’t be easy.

At its core, the Taiwan independence movement is a call for fully representative government.

In March, Taiwan President Lee Teng-hui, a native Taiwanese who succeeded the Chiang dynasty in January 1988 upon the death of Chiang Ching-kuo, faces re-election. ButTaiwan’s citizens won’t have a say in the matter, even though his considerable popularity would make him a shoo-in. Instead, the National Assembly will vote on Mr. Lee’s fate. The National Assembly now has 797 members, of which 701 are life-term members from China.

This is the major reason there now is a strong movement for rewriting Taiwan’s Constitution. The current document was written in 1947 in China. It defines Parliament as a 4,725-seat, three-body institution elected by citizens living within national borders that include all of China, Tibet and Mongolia. Many scholars in Taiwan are calling on the government to rewrite the document with “creative ambiguity” to trim it down to Taiwan-size while leaving enough China connections to prevent provoking China’s communist rulers, who have threatened to invade Taiwan if the island declares independence. But only the National Assembly can change the constitution, and by doing so the Old-Guard assembly members would be writing themselves out of a job.

The more practical solution is for the DPP and the Nationalists to work together to sideline the issue of Taiwan’s international status. Many believe this can be done only by speeding up the retirement of the Nationalist Old Guard and replacing it through elections inTaiwan. The Nationalists already have a plan to do this over the next 10 years. But the DPP is unwilling to wait that long.

Unless the two parties can come to an agreement, Taiwan society is in real danger of splitting apart along ethnic lines. Second-generation mainlanders are very frightened about the new political power of ethnic Taiwanese politicians, both the DPP’s elected officials and President Lee. Ethnic Taiwanese are very angry about the continuing dominance in Parliament of the Old-Guard Chinese.

On Saturday, Taiwan’s voters sent a message to the Nationalists. They rejected the party’s plan to create a one-party democracy by slowly opening up seats to election and using state television and other ham-handed tactics to crush opponents.

The DPP on Saturday proved that it can compete and win, even in an election system designed to perpetuate the ruling party’s dominance. Now the opposition’s elected officials have to prove they can govern the counties they won and present fresh policy initiatives in the legislature.

But, most important, the DPP and the Nationalists have to prove they can cooperate.

If they need motivation to do so, politicians of both parties can simply look across the Taiwan Strait and realize that Taiwan’s best defense against China is a genuine functioning democracy at home.

Room Service Only for Democracy Tourists in Taiwan

I remember covering the early Taiwan elections in the 1980s as the Taiwan correspondent for The Wall Street Journal. In those days, Zhu Gaozheng, who had a Phd in philosophy from Germany and loved to get into punching matches with KMT opponents, got elected as one of the first 13 DPP legislators by promising to cause an “earthquake” in Taiwan politics. Twenty-plus years later, that earthquake now appears to be sending aftershocks across the Taiwan Straits. Taiwan’s democracy is emotional, messy and noisy. But it works. This article from The Globe and Mail’s Mark MacKinnon about Mainland tourists in Taiwan being told by their Mainland tour operators that they have to stay in their hotel on election day is just another example of how the traditional Chinese policy of “yuming zhengce“ (愚民政策) — keeping the masses ignorant so they will follow the rulers — is unworkable in the day and age of international business, global tourism, weibo, blogs and cell phone cameras.

Beijing limits democracy tourists to Taiwan – The Globe and Mail

“On Election Day we are not allowed to go out into the street. We have to stay in our rooms [on Saturday] until the results are announced. Then we can go out.”Asked who gave the order, Ms. Geng pointed up, indicating her superiors, and shrugged. Taiwanese tour operators say tens of thousands of other would-be mainland tourists were prevented from coming at all when Beijing halved the number of tour groups allowed to travel to Taiwan during the election period.“They’re afraid [the tourists] will see how elections are run and that they’re peaceful and the government doesn’t beat people up,” said Bruce Jacobs, an Australian academic who is part of an election-monitoring group known as the International Committee for Fair Elections in Taiwan…


Witnessing the campaign up close does seem to have had an impact on the Chinese tourists who have been allowed to come. Ms. Geng said her group has soaked up as much as they’re allowed to, building detours into their itinerary in order to watch the caravans of the three presidential candidates as they travel the country rallying supporters…


One Hong Kong tourist agency organized a special “Taiwan Election Carnival Inspection Tour,” charging about $350 for a three-day package that included stops at Friday night’s final pre-election rallies, as well as visits to voting stations on Saturday and the victory celebrations Saturday night.The election has also captivated Internet users in mainland China. “The democratic awareness of the Taiwanese people is admirable. Everyone takes part in the voting, everyone cherishes and guards their right to vote. They therefore have the feeling of being the owner,” one Beijing-based Internet user wrote on the popular Sina Weibo microblogging website. Others wondered if and when China’s Communist rulers would ever allow competitive politics on the mainland.

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