By Bill Gertz - - Wednesday, November 25, 2015

American companies doing business in China will face a continuing threat to their intellectual property under Chinese President Xi Jinping’s security policies, according to a State Department security report.
China’s large-scale information hacking is not limited to recent incidents like the theft of Office of Personnel Management records on 2.1 million federal workers, according to the report by department’s diplomatic security office produced for the Overseas Security Advisory Council.
Hacking is part of a much broader trend with an estimated 80 percent of all cyberattacks against Americans coming from China, the report says, noting that, despite the recent agreement by Mr. Xi to curb intellectual property theft, “threats to [intellectual property] are unlikely to disappear soon.”
The report adds, “Visitors to China should have no expectations of privacy. Taxis, hotel rooms, and meeting spaces are all subject to on-site and remote technical monitoring. Furthermore, the Chinese government’s access to infrastructure means that all forms of communication, including phone calls, faxes, emails and text messages, as well as Internet browsing history, are likely monitored.”
The threat is not limited to travelers and the information they are carrying, but could be used by Chinese hackers as an entry point into companies’ secured networks.
“Upon successful intrusion, threat actors may enjoy continued network access long after the traveler has departed, facilitating the theft not only of trade secrets (e.g., formulas, designs and chemical compounds), but of any information that would give an organization a competitive advantage (e.g., contacts, finances and business models).”
China also imposed a new regulation that threatens information held by foreign businesses. It contains a provision that “could require IT companies to transfer proprietary source code to authorities, create backdoors in existing platforms for third-party access, and house Chinese citizens’ personal data on Chinese servers.”
The measure may be a “subtle means of exacting concessions from foreign firms and forcing technology transfer.
“Ultimately, this may leave U.S. companies faced with a difficult choice: comply and receive access to Chinese markets on the one hand, or refuse to comply and miss a potentially lucrative opportunity on the other.”
Censorship and curbs on press freedom are increasing under Mr. Xi. Company employees who violate repressive Chinese media restrictions face fines, lawsuits and arrest. Major foreign news sites also are blocked in China. Social media also are being blocked to prevent political change in China, with some 2 million Communist Party censors working to scrub blog posts and shut down controversial unofficial websites.
On China’s maritime disputes, the State Department analysis warns that growing government-fueled nationalism could lead to a conflict and bellicose rhetoric and saber-rattling are likely to continue.
“Public sentiment could lead to anti-U.S. or anti-claimant demonstrations, as was the case with anti-Japanese protests in China in 2012, and this bears monitoring,” the report said, noting that authorities will probably limit any unrest that might undermine stability.
The report warns that Mr. Xi’s sweeping anti-corruption campaign that has netted tens of thousands of party officials is not aimed mainly at creating a more honest and open system. Instead, the campaign is based on fears the ruling Communist Party will be weakened or overthrown.
“Xi appears concerned about threats to the party and anxious to reassert control,” the report says.
The anti-corruption campaign is tightly controlled by Mr. Xi and his subordinate Wang Qishan who are carefully targeting certain corrupt officials while ignoring others. The controls are making it difficult for foreign companies to conduct due diligence on prospective Chinese business partners.