Scrutinize SOEs, Cyber Gaps

A U.S. congressional commission recommends closer scrutiny of China's policies.
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A container ship is berthed at the Port of Qingdao in Shandong province, Oct. 30, 2012.
A container ship is berthed at the Port of Qingdao in Shandong province, Oct. 30, 2012.

Updated at 12:20 p.m. EST on 11-14-2012

Washington must more closely evaluate Chinese investment practices in the U.S. and vulnerabilities in U.S. computing systems to cyber attacks from China, a congressionally appointed commission tasked with monitoring the rising Asian power said in an annual report released Wednesday.

The U.S. China Economic and Security Review Commission (USCC) said that despite three decades of economic reform, state-owned enterprises (SOEs) still account for as much as half of the Chinese economy, and pose “numerous challenges to U.S. corporate competitors” within China, the U.S., and third-country markets.

It said that as SOEs are the preferred supplier for all levels of government in China, U.S. companies face a variety of discriminatory barriers to sales there. The same preferences enjoyed by the state sector in China when competing with foreign companies also make the SOEs stronger competitors in the U.S. market and third-country markets.

"China’s policies are expanding the power and international reach of state-owned and state-controlled enterprises, which already tend to be the largest and most politically influential companies in China," said USCC Vice Chairman William Reinsch.

All levels of the Chinese governments, even down to the villages, act in support of these government-owned companies and shower them with subsidies and other favors, including trade and investment restrictions designed to hobble their foreign competitors."

These advantages drove the commission to call for Congress to direct the U.S. Department of Commerce to report annually on Chinese investment in the U.S., “including, among other things, data on investment … by Chinese SOEs and other state-affiliated entities.”

“In undertaking any bilateral investment treaty negotiation with China, the U.S. administration should insist upon terms that ensure reciprocity and explicitly address the unfair challenges posed by China’s SOEs in all markets,” it said.

Congress should examine foreign direct investment from China and assess whether there is a need to require a mandatory review of all controlling transactions by Chinese state-owned and state-controlled companies investing in the United States," the report said.

The USCC also called for a review of whether Congress should add a new “economic benefit test” to the existing national security test the Committee on Foreign Investment in the United States (CFIUS) administers and prohibit investment in a U.S. industry by “a foreign company whose government prohibits foreign investment in that same industry.”

Cyber concerns

The commission also warned of significant upgrades in China’s development of its capabilities in the cyber arena, noting that U.S. industry and government and military targets “face repeated exploitation attempts by Chinese hackers.”

The USCC noted that figures about exploitations and attacks on U.S. Department of Defense information systems, many of them believed to originate in China, decreased in both 2010 and 2011, which the department attributed to greater leadership attention and the creation of the U.S. Cyber Command.

"Hackers in China have waged aggressive cyber espionage campaigns targeting a wide range of U.S. and international military, government, commercial, and other nongovernmental organizations," said USCC Chairman Dennis Shea.

"The sophistication of these activities varies markedly among different actors. Some demonstrate extremely advanced techniques, but even rudimentary tactics can be effective when applied on such a broad scale."

“However, if the threat activity from the first half of the year persists at its current rate throughout the second half, 2012 will bring levels of malicious activities comparable to 2011,” it said.

In particular, the USCC said that the integrity of the defense and telecommunications supply chains “poses a concern,” as the complexity of technical systems grows and increasing fragmentation of supply chains “allows numerous points for subversion.”

The report called on relevant congressional committees to “conduct an in-depth assessment of Chinese cyber espionage practices and their implication and report the findings in an unclassified format.”

It also recommended that Congress request that recently reelected President Barack Obama’s administration assess and report on possible vulnerabilities for U.S. government and private sector parties in data storage and the provision of web services in terms of national and economic security interests.

“Such assessment should focus on the provision of such services by Chinese companies and whether specific mitigation, abatement, or notice provisions are necessary,” it said.

Leadership change

The USCC also warned of China’s growing global influence as the country’s “continuing military modernization is strengthening its confidence and ability to advance Chinese government interests.”

It called on Congress to require the U.S. State Department to detail efforts to “integrate China into existing and future nuclear arms reduction, limitation, and control discussions and agreements” through periodic updates.

The commission also recommended that the Obama administration and Congress determine ways to meet U.S. demands for natural resources without reliance on China as a source for those materials.

It said Congress should direct the administration to establish an interagency task force to develop a government-wide definition and list of “critical minerals” and to develop a plan regarding those minerals to “reduce the vulnerability of the United States to pressure from China … for political or economic advantage.”

With a number of uncertainties involved in the ongoing leadership transition in Beijing, the USCC said it expects “the United States will continue to face a range of challenges when dealing with China.”

Washington should “demand reciprocity and seek mutual benefit in its relationship” with China, the report said, ahead of the once-in-a-decade leadership change of the ruling Chinese Communist Party that will be announced Thursday.

“Our nations would both be better off as partners rather than competitors; however, this will depend on whether China is willing to make the reforms necessary for it to transition into a responsible actor on the global stage,” it said.

Reported by Joshua Lipes.





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