US to hit China hackers before Xi’s Washington visit

Damir Sagolj | Reuters

Chinese President Xi Jinping waves at the beginning of the military parade marking the 70th anniversary of the end of World War Two, in Beijing, September 3, 2015.

The White House is preparing to slap sanctions as early as next week on Chinese companies connected to the cyber theft of US intellectual property.

The Obama administration has for months been preparing a raft of sanctions to respond to mounting commercial espionage from China. Three US officials said the sanctions would probably be unveiled next week, just weeks before Chinese President Xi Jinping makes his first state visit to America.

Officials have been divided over whether the administration should impose the sanctions before the Xi visit. Proponents argue that the US needs to show China that it is serious about tackling cyber espionage. But opponents worry that such timing would seriously damage the visit.

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The state department had been pushing for the sanctions to come after it, according to people familiar with the situation. But law enforcement officials argued against waiting because of the serious nature of the cyber attacks.

One official said the move would probably come next week, after the US Labour Day holiday. He said the White House wanted to avoid slapping China with sanctions immediately before the visit, to give China time to cool down before Mr Xi meets President Barack Obama in Washington.

Officials are participating in White House meetings this week to finalise plans for the sanctions, according to people familiar with the talks.

T​he sanctions are expected to focus on cases involving economic espionage and the theft of trade secrets, according to people familiar with the cases. They will also probably be used as additional punishment in cases where indictments have already been handed down.

When Mr Xi lands in the US, he will be caught between three uncomfortable stories: the visit of Pope Francis, attacks against China on the presidential campaign trail, and the White House move to impose sanctions on Chinese companies and individuals.

China wants to boost Mr Xi's status as a global leader, but his visit — which will include a 21-gun salute and a big banquet — will be overshadowed by the Pope's, which will attract huge media coverage, and also the move to impose sanctions.

Bonnie Glaser, a China expert at the Center for International & Strategic Studies, said sanctions would send a message that Washington was "really serious" about cracking down on commercial espionage. Some have argued that it would spark retaliation, but Ms Glaser said the US needed to accept the risk of retaliation to show the Chinese that it was serious.

​"If we are fearful of Chinese retaliation, then we are self-deterring," said Ms Glaser.

However, one former US official said: "The cyber sanctions could really throw a spanner in things. There is no reason to embarrass the president of China. It would crater the visit."

When the US unveiled a new sanctions regime in April, sceptics wondered if they would be used against entities in China given the country's deep economic ties with the US. But concern about cyber incidents emanating from China has been increasing — the FBI recently blamed China for a 53 per cent rise in economic espionage cases.

The US is betting that sanctions would have a tough effect on those targeted, since it would cut them off from the global financial system. Banks and companies that do business in US dollars would be required to freeze their assets and would not be able to conduct transactions with them.

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​The tough enforcement environment has already prompted banks such as JPMorgan Chase to get out of certain businesses, such as declining to house bank accounts for former and current foreign government officials because of money laundering and sanctions risks.

"There was a recognition that there needed to be more tools for deterrence and to raise the costs of these attacks," said Adam Golodner, a cyber expert at the Kaye Scholer law firm. "Sanctions are a powerful tool because it affects your ability to do business. There is a certain amount of symmetry in imposing economic sanctions on the actors that benefited economically."

There has been no reaction in China to the news about sanctions. Beijing has long argued that the revelations by former NSA contractor Edward Snowden prove it is a victim of US hacking, rather than the main aggressor. Documents released by Mr Snowden showed that the US planted backdoors in products from big US technology companies to spy on communications.

The sanctions will exacerbate a spat between the US and China over trade barriers in high-technology industries that has seen the US shut its domestic market to Chinese companies such as Huawei, while China has sought to institute controls on foreign IT purchases, particularly from US companies.

The tit-for-tat nature of the dispute was made clear last year when the US indicted five Chinese army officers over cyber-related economic espionage. China subsequently implemented measures such as a ban on Microsoft Windows 8, and attempted to put pressure on domestic banks to forgo purchases of foreign servers, particularly from IBM.

Goodwell Gong, founder of the Chown Group, a Chinese information security forum, and a founding member of China's hacking community, said China would probably take no action until the US provided a list of individuals and entities who fell under the sanctions.

"Once they publish a list . . . it means they have gathered enough evidence to point their fingers and China needs to make sure that their evidence is sufficient and solid," said Mr Gong. "Otherwise, hacking is just an excuse for the US to issue technology barriers on Chinese companies."