The heads of MI5 and the FBI warned on Wednesday the 6th July about China’s commercial espionage thrust in the West, in a rare joint address at the British intelligence service’s London headquarters. Speaking to an audience of officials and business executives in Thames House, MI5 Director General Ken McCallum and FBI Director Chris Wray said the threat from Chinese spies is paramount in both countries and only continues to grow. McCallum said MI5, the British domestic intelligence service, had sharply expanded its China-focused operations. “By volume, most of what is at risk from Chinese Communist Party aggression is not, so to speak, my stuff. It’s yours – the world-leading expertise, technology, research and commercial advantage developed and held by people in this room, and others like you.” General Ken McCallum said. China is in a full espionage war with the West in order to be a global leader in the next generation of technologies and espionage is a key part of leapfrogging ahead of the West who have for long dominated new technologies.
China has made a number of impressive achievements on the technology front. It is considered to have leaped frogged the US in areas such as artificial intelligence (AI), life sciences, 5G and quantum computing. Whilst China is long known for creating cheap knockoffs and imitations it is now seen as a major threat in the 4th industrial revolution of technologies. For the Chinese they are returning to where they always were at the cutting edge of technology where for four millennia she was a global leader. After a hiatus of 180 years, today’s China sees technology as essential for her future prospects.
Civilisation and Tech
China’s view towards technology and its importance is rooted in her history. For millennia China was a great and powerful civilisation that had technology, wealth and prosperity. But then the industrial revolution took place and China stagnated and fell behind the West. The Europeans with their superior technology and violence descended upon China, beginning with the opium war in 1839 and forced their way into China. This was the beginning of China’s humiliation which would last for 100 years. The century of humiliation ended with the defeat of the Japanese at the end of World War Two. The rejuvenation of the Chinese nation, the slogan adopted by successive leaders, is by revitalising the economy which will be achieved by being at the forefront of new technologies and creating a strong military via civil-military cooperation. As far as the Chinese are concerned, they want to return to where they believe they always were. China’s vision is by 2049, 100 years since the founding of the People’s Republic of China, to take her position amongst the world’s nations, having borne all burdens, overcome all obstacles, defeated all enemies, and built her power anew so China’s place is at last restored.
For millennia China was a great and powerful civilisation that had technology, wealth and prosperity. But then the industrial revolution took place and China stagnated and fell behind the West. The Europeans with their superior technology and violence descended upon China, beginning with the opium war in 1839
During the Mao era technology was transferred from the Soviet Union to China, from nuclear reactors to military jets and engines. But little progress was made by the Chinese Communist Party (CCP) to develop indigenous technologies as Mao focused on consolidating China and her borders and firmly establishing the CCP as the sole political entity in the country. The disaster of the great leap forward from 1958-1962 set the country back and then the Sino-Soviet split as well as Mao’s cult personality all obstructed the conditions needed to excel in technological development. Chinese science and technology were in a perilous state due to years of isolation from the global mainstream, the systematic disparagement of intellectuals under Mao and the collapse of the formal education system during the Cultural Revolution.
Open and Reform
The opening up with the US and the passing of Mao led to the emergence of Deng Xiaoping and the beginning of China’s economic rise. Realising China’s industrial base was in a poor state, Deng established Special Economic Zones (SEZs) and focused on developing infrastructure such as ports, roads, railways and telecommunications in order to attract foreign companies. What China was offering the world’s manufacturers was an endless supply of labour, cheaper than anywhere in the world. This offer was based on foreign firms transferring skills and technology to China’s large labour force. Since 1979 many of the world’s premier brands shifted manufacturing facilities to China to take advantage of the cheap endless supply of labour. For many of the world’s largest manufacturers gaining access to China’s 1 billion plus population was too good an opportunity to miss. The CCP carefully managed this process ensuring tech, skills and foreign companies came to China, rather than their foreign ideas and values.
What China did was build a system in which Chinese companies and innovation satisfy the vast internal market, while exporting around the world. Foreign companies would help make this leap but would not be given broad access to China’s domestic market. China’s internal market was for Chinese champions to grow and then become global players. The 2018 Business Climate Survey Report from the American Chamber of Commerce in China said: “An astounding 75% of members still feel increasingly unwelcome, reflecting the persistence of perceptions among foreign-invested companies that they are not treated equally with their domestic competitors. When talking about context, it is also necessary to recognize that some sectors, such as consumer products, feel the heavy hand of government much less than those connected with the government’s most distorting industrial policies, like those listed in the Made in China 2025 initiative” Deng Xiaoping’s open and reform was designed to attract technology, skills and talent. This lure of China’s colossal market has seen companies, researchers, scholars and universities from around the world transfer, or otherwise hand over their knowledge and experience, and to help China build her technological capabilities.
Since 1979 many of the world’s premier brands shifted manufacturing facilities to China to take advantage of the cheap endless supply of labour. For many of the world’s largest manufacturers gaining access to China’s 1 billion plus population was too good an opportunity to miss
China’s State-Owned Enterprises (SOEs) flourished throughout the 1980s and helped form the foundation of China’s economic miracle. Beijing in the 1990s dismantled the larger state-owned enterprises, breaking them into various competing companies under the guidance of state-backed shareholders. By 2017, the assets of these enterprises reached 72 trillion yuan ($10.4 trillion), up more than tenfold from 2003 and almost equivalent to China’s total GDP for that year. Thanks to easy loans and unfettered access to government funding and assistance, these giants have been able to amass assets in areas where their private and foreign partners were either restricted or found it hard to compete. Since 2013, SOEs have received more than 60% of all new loans in China each year, peaking at 78% percent in 2016. China’s domestic market developed largely behind barriers that protected national firms from outside competition, while also letting foreign technology into the country as part of Beijing’s strategy to attract outside investment.
In 1999 the CCP launched the ‘Go Out Policy’ in order to promote Chinese investments abroad. The CCP with the China Council for the Promotion of International Trade (CCPIT), introduced several schemes to assist domestic companies in developing a global strategy to exploit opportunities in the expanding local and international markets. National champions such as the Alibaba Group, Baidu Inc., Tencent Holdings Ltd and Sino Corp have been the major beneficiaries of this policy. Three broad tactics have evolved ever since China’s national champions brought global technology into the country as part of Beijing’s strategy to attract outside investment.
Acquisitions – Mergers and acquisitions have been a major hallmark of China’s global companies. Chinese companies have been buying up tangible assets such as mineral deposits and oil reserves. By 2009 more than 70% of Chinese deals involved either energy or natural resources. Among these were Yanzhou Coal’s $2.8 billion takeover of Australia’s Felix Re and Sinopec’s $7.2 billion acquisition of the Swiss-registered oil and gas company Addax. China National Chemical Corporation (ChemChina), took over French Adisseo in 2006. By buying the French company for $480 million, ChemChina obtained methionine production technologies that were then non-existent in China. The Chinese also targeted companies that can deliver emerging and new technologies and possess offshore R&D facilities. Their value lies in their intellectual property, knowledge, and research and design processes. Patents and blueprints can be sent to China, where an engineer can easily interpret them.
Cybertheft – China is state-sponsoring hacking that focuses on stealing intellectual property and in 2021 it reached a record high. Cybertheft has ranged from theft of designs for advanced US fighter planes and gas distribution networks to personal information from healthcare providers. The process has lasted years, with almost daily raids on Silicon Valley firms, military contractors and other commercial targets. In 2020 Chinese hackers reportedly stole data from the credit rating firm Equifax. Data of over 145 million Americans was compromised. The huge cyber effort by China has seen a massive theft of intellectual property from companies around the world and is now referred to as “The greatest transfer of wealth in history.”
Espionage – China and her Ministry of State Security has been implicated in scores of espionage activities in the US and around the world. Between 1996 and 2019, China faced 66 (32%) of the 206 US federal cases involving charges related to economic espionage. Over a more recent timeframe, from 2016- 2019 China accounted for half of all charges related to economic espionage (18 of 36 cases). Researcher Nicholas Eftimiades estimated that Chinese economic espionage activities accounted for $320 billion in losses per year as of 2018, or 80% of the total cost of intellectual property theft to the US estimated at $400 billion per year by the director of national intelligence. China’s major scalp was Su Bin who established an aerospace firm in Canada who successfully targeted US defence companies and managed to get hold of over 630,000 files containing information on the C-17, F35 and F22. China’s J-20 and F-31 were manufactured by China’s defence industry with this information.
China’s innovation and technology strategy is built on forced technology transfer, cybertheft, massive state-led capital investment, and global strategic acquisitions done by state-run corporations. When the world’s largest companies come up against Chinese companies they are in effect competing with a 12 trillion-dollar state who is pouring billions into robotics, biotechnology, and quantum computing, or snapping up strategic acquisitions such as deep- sea mining corporations and leading-edge aerospace composites companies. The CCP has also brought China’s corporations and military together through the policy of “Civil Military Fusion.” Here, China’s private sector and military technology development combine, spanning a wide range of emerging technologies from artificial intelligence to robotics.
Made in China 2025
The state driven “Made in China 2025” (MIC2025) plan unveiled in 2015 and aims to move the country’s industries up the value chain, replacing imports with local products and building global champions able to take on the Western technology giants in cutting-edge technologies. The strategic plan of China issued by Chinese Premier Li Keqiang and his cabinet in May 2015 aims to move China away from being the world’s factory floor for cheap goods and low quality and to move to higher value products and services. Made in China 2025 is the natural evolution of China’s strategy of being a technology giant and self-sufficiency in the next generation of technologies is the direction China is now heading towards.
When the world’s largest companies come up against Chinese companies they are in effect competing with a 12 trillion-dollar state who is pouring billions into robotics, biotechnology, and quantum computing, or snapping up strategic acquisitions such as deep- sea mining corporations and leading-edge aerospace composites companies
The goals of “Made in China 2025” include increasing the Chinese-domestic content of core materials to 40% by 2020 and 70% by 2025. The plan focuses on high-tech fields including the pharmaceutical industry, automotive industry, aerospace industry and semiconductors, IT and robotics etc, which are presently the purview of foreign companies. It is an initiative to comprehensively upgrade the Chinese industry. It is an attempt to move the country’s manufacturing up the value chain and become a major manufacturing power in direct competition with the US. The Chinese government is committed to investing $300 billion to achieve this plan and will be using all the aforementioned tactics to achieve this. It’s a highly ambitious plan which has already seen some success.
China’s strategic interest in conducting economic espionage has been made clear through initiatives such as Made in China 2025. This plan amongst others looks to achieve 70% self-sufficiency in high tech industries by 2025 and dominate global tech markets by 2049 — the 100th anniversary of the founding of the People’s Republic of China. Whilst China gets a lot of criticism for carrying out espionage, China is not the first nation to do this. From the 6th to the 17th centuries Europe carried out espionage to steal Chinese methods on silk, porcelain and tea. From the 18th century the US targeted British technology to grow its domestic industrial capacity. What China is doing today is the modern version of a centuries long battle to cut corners in developing new technologies.
Artificial Intelligence – In 2017 China’s State Council announced its “New Generation Artificial Intelligence Development Plan,” which set the goal of creating a $150 billion AI market and becoming a global leader by 2030. China’s approach to AI development combines market forces with strong state support, and this means that it can quickly mobilise resources to accelerate AI development and gain an advantage over Western players. China also has access to vast amounts of data, made possible by her large number of internet users.
5G – China plans to invest $411 billion in upgrading her telecommunications systems to 5G between 2020 and 2030. China already leads the way in 5G patents, and by 2025, it is expected that China will have the largest market with 430 million users. Huawei, China’s major telecommunication company, has been largely responsible for China’s success. Its state-sponsored programme offers cheap finance, which means that Huawei has been able to offer significant discounts on its base stations. As a result, the company has already shipped 200,000 units to 50 telecom operators in Europe and Asia, despite sanctions from the US.
Fintech – China is emerging as the world’s financial technology market leader. Nine of the 23 privately held fintech corporations are based in China. China’s influence in the global financial system is growing. The Chinese Central Bank has already announced the launch of a state-owned cryptocurrency which will be issued to seven different Chinese institutions, including tech companies Alibaba and Tencent. Facebook CEO Mark Zuckerberg has stated that US leadership in finance is being threatened by China.
Energy – China is now the world-leader in green technology. It holds 29% of the global total of renewable energy patents and has invested more in renewable energy than the US and EU combined. China’s commitment to a transition to renewables is evident through her technology roadmap, which outlines her ambition to reach a 90% share for new energy vehicles by 2025.
Semiconductors – China has included the establishment of an independent chip industry as essential for her “Made in China 2025” plan. But China has faced major challenges in these areas compared to others, even though it’s probably the most critical. Whilst most of the world’s chips are manufactured in China they are done mainly by foreign companies with subsidiaries in China. South Korea’s SK Hynix and Samsung are the two largest by revenue, then there is America’s Intel and Taiwan’s TSMC. The two Chinese companies in the top six, Huahong Group and SMIC, are generations behind the pack. Whilst Huawei has become a major player in designing certain chips, its most advanced chips are built by TSMC. China’s attempts to design, manufacture, test and assemble her own chips has seen the US turn against her and is now on a mission to counter China’s chip dreams.
Quantum Computing – China has invested very heavily in quantum technologies and has taken the lead and has done so relatively quickly. The number of patents filed by Chinese companies relating to quantum computing has shot up in the last few years. In 2014, there were a similar number of patents filed in the US and China, but by 2017 China filed almost twice as many. China firstly focuses on quantum communications, through projects such as Micius, as well as a ground-based quantum network in the northern province of Shandong. Currently China is focussing on building a multi-satellite quantum network and creating a quantum simulator to tackle scientific problems, while US big tech companies are focussed on pushing up the qubit-count and bringing down the error rate on quantum computers.