Chinese Government Engaged in ‘Holistic’ Cyber Effort to Infiltrate U.S. Industries

Experts call for review of policies to address uptick of Chinese investment in U.S.

Chinese President Xi Jinping / AP

BY: Morgan Chalfant 
January 27, 2017 4:59 am

The Chinese government is engaged in a systematic cyber-economic campaign across industries in the United States, according to expert testimony before a congressional commission.

Jeffrey Johnson, president and CEO of SquirrelWerkz, a company that analyzes these Chinese-affiliated campaigns, described them as a "holistic" attempt by the Chinese government to infiltrate information technology, finance, media, and the entertainment industry.

"These cyber-economic campaigns are persistent, intense, patiently executed and include the simultaneous execution of such a large and diverse set of legal and illegal methods, individuals and organizations, there's little chance the targeted U.S. competitors can effectively defend or compete in the future without significant support of the U.S. government," Johnson said in prepared testimony before the U.S.-China Economic and Security Review Commission on Thursday.

"If we begin with a mutual appreciation of this basic premise, we will be able to better understand how China's so-called private investment strategy, and related [cyber-economic] activities, fit within the broader context of China's strategic economic and military plans and activities while also addressing the one-sided, ‘in-the-trenches,' battles being fought every day and how to begin turning back the tide."

Lawmakers increasingly have raised concerns about the security and economic implications of investments in the United States by Chinese state-controlled, state-influenced, and private companies. The combined value of Chinese foreign direct investment in the United States has grown from an annual average of less than $500 million before 2008 to over $15 billion in 2015 and nearly $46 billion last year.

A coalition of lawmakers in September successfully pushed for a review of the Committee on Foreign Investment in the United States, or CFIUS, which assesses the national security implications of foreign acquisitions of U.S. businesses. The lawmakers, led by Rep. Robert Pittenger (R., N.C.), were concerned about the "rise in state-owned enterprises and state-controlled enterprises from China and Russia."

Lawmakers have attempted to block the sales of U.S. businesses to companies connected to or influenced by the Chinese government.

In December, a bipartisan group of lawmakers urged the government to block the planned sale of Lattice Semiconductor, an American company that produces military technology, to a venture capital firm supported by Chinese funding.

Thilo Hanemann, director and economist at the Rhodium Group, on Thursday acknowledged that both state-owned and private companies in China can be influenced by the ruling communist party. However, he rejected Johnson's assertion that the Chinese government is engaged in a "holistic" campaign to extend its influence overseas by acquiring U.S. companies.

"The notion of a private enterprise is a very different concept in China and … in a country like China, I do believe that we should assume that any company, whether it is state-owned or private, can be influenced and to some extent controlled by the Chinese government and ultimately by the communist party," Hanemann said.

Hanemann said Chinese acquisitions of U.S. companies have created American jobs in most instances, estimating that between 130,000 and 140,000 jobs are directly connected with Chinese companies in the United States.

The experts agreed that the government should review policies to address economic and security concerns stemming from the rapid increase of Chinese investment.

"The U.S. system for screening in-bound [foreign direct investment] has generally handled the inflow of Chinese investment well, permitting the benefits while at the same time managing concerns," Hanemann said.

"[Still,] Congress should ensure that the Committee on Foreign Investment in the United States, CFIUS, as well as regulators and law enforcement have sufficient resources to fulfill their mandates and to monitor new developments and patterns that could impact U.S. national security."

Johnson said Chinese investment in the United States is driven by a number of goals, including boosting economic growth, gaining diplomatic influence, asserting monopoly-like control of key industries and the global economy, infiltrating financial, corporate, research, and government entities, and gaining "enhanced insider access to sensitive intellectual property and technology otherwise considered off-limits or beyond their current capability."

He said that China has leveraged its cyber-economic capabilities to gain access to classified engineering documents from companies in other countries, including the United States, to improve its navy's undersea systems.

"I believe the solution to these cyber-economic campaigns is based upon two primary principles: 1) enhancing current laws and regulations to address nation-state cyber-economic threats vs. drafting new laws and regulations and 2) enhancing our government/industry command and control structure to address cyber-enabled economic warfare," he stated.

The commission was established by Congress in 2000 to monitor and investigate the national security implications of the United States's trade and economic relationship with China. It submits a report on the subject to Congress each year.

In its 2016 report, the commission wrote that Chinese spies repeatedly hacked into American national security agencies to glean details of Pentagon war plans. The commission also called on Congress to ban Chinese state-owned enterprises from controlling U.S. businesses.

Thursday's hearing, the first in the commission's 2017 report cycle, took place as policymakers and experts debate President Donald Trump's handling of China and the U.S. economic relationship with Beijing. Trump has indicated he will take a harder line on China when it comes to trade.