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Investment security


It’s not just Rolls-Royce: China is stealing every technology that isn’t nailed down

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The Telegraph, 16 June, 2018

The arrest two days ago of a Rolls Royce engineer for allegedly spying on his employers on behalf of China did not shock many in aerospace. It’s no secret that China is attempting to develop an indigenous aerospace industry and will do everything it can to get its hand on modern Western-designed jet engines. Such is the complexity of these engines that they are virtually impossible to reverse-engineer.

But this story has become a bit of a motif of late. Nearly every week, we hear of another story of alleged hacking of corporate secrets by some Chinese entity – or, worse, resorting to outright robbery, as might have happened to Pelamis Wave Power, a Scottish alternative energy company that saw a Chinese start-up appear only months after its offices were burgled.

So what’s behind it all? What is driving these stories? Well, to some extent, China is a driver of its own success and a driver of its own reputation. Over the past two decades, China has been implementing policies that some say unfairly help its firms to acquire foreign technology, either at home in the Chinese market, or abroad, when they invest in overseas markets, including the British one.

Rather than developing indigenous technologies, they prefer to steal, beg or borrow those of others, leapfrogging up the technology ladder. And they don’t mind stooping to different means: China’s current domination of solar energy technologies is alleged to have come after Chinese hackers stole files on panel technology from Solar World America. The subsequent government support for Chinese firms to build solar panels at much cheaper prices than US and European firms put many Western solar power companies out of business.

Are these policies illegal according to the World Trade Organisation? Indeed, they are, but getting them to that stage takes political support from their own governments.

The Chinese government policy most associated with this issue is Made in China: 2025, which has been widely criticised by the US government, the German government, among many others. According to James Lewis, a technology expert at the Washington-based Center for Strategic and International Studies (CSIC), the policy seems to have three stages.

The first is to require foreign firms attempting to enter China’s market to hand over their intellectual property in critical sectors such as robotics, alternative energies, quantum, and new energy vehicles. The second is to provide government subsidies to Chinese firms to go out into the international market and sell these newly-acquired products for cheaper prices. The third is to dominate these sectors by driving out foreign competitors.

According to Peter Navarro, an economic advisor to Donald Trump, these sectors have a strategic implication for the future of Western security, as national governments look more and more to the high-tech sector for the next generation of military technologies.

The news this week that the European Council and European Parliament have passed investment screening mechanisms shows that Western governments are seeking to maintain a level playing field for their own firms and stopping buy-outs that either seem driven purely by the desire of China to gain intellectual property with military connotations. Germany passed legislation last year screening investment and the US has also tightened up its own Committee for Foreign Investment in the United States (CFIUS), making sure that Chinese firms cannot simply swoop in and buy high-tech firms and give their IP to Chinese competitors.

The May government is current considering a White Paper on investment-screening, having already tightened up the current Enterprise Act (2002) and broadened the remit of the Competition and Market Authority (CMA). Given China’s voracious appetite for British high-tech and the impact its theft has on British companies, this is a welcome and appropriate response. Britain is open for business, but in a fair way that gives all sides a level playing field.

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The Telegraph: Germany accuses China of setting up fake social media accounts to lure top officials

The Telegraph, Abby Young-Powell,  10 December, 2017

“In July, the Henry Jackson Society, a think tank, warned the personal data of thousands of British citizens could be trawled through by spies in Beijing as the UK sells off sensitive high-tech industry to Chinese investors.”

To read the full article, please click here.


Daily Mail: Chinese technology firm takeover ‘could put UK security at risk’

The Daily Mail, James Burton, 25 September, 2017

“John Hemmings, of The Henry Jackson Society think-tank, said the deal has ‘all sorts of implications in the military sphere’.

‘If the military suddenly has to start buying semiconductors from China, there are very serious concerns,’ he said. Chinese firms might build ‘back doors’ into their chips which allow devices to be hacked into by the state. Consumer electronics could also be at risk, he added.”

To read the full article, please click here.


Risky Business: Keeping an Eye on Chinese Investment

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Politico.eu, 26 July, 2017

If money talks, Chinese money is particularly loud these days. In the past five years, Chinese investment abroad — largely dominated by the country’s giant state-owned enterprises — has tripled. Today, China accounts for nearly 10 percent of global foreign direct investment outflow.

In an era of austerity, influxes of investment are often appreciated. But not all Chinese money receives a warm welcome — as evidenced by Germany’s recent decision to limit investment into its strategic infrastructure. This is especially true when it comes to granting China access to Western infrastructure and sensitive telecoms and high-tech companies.

Western countries are right to pay careful attention to what Chinese companies do with their money. The trouble, however, is there is no agreed-upon standard for determining when an investment poses a security risk — and no coordination even among the closest Western allies in deciding which investments should be blocked. As Chinese money continues to flow westward, the future of European and North American security could depend on governments in those regions coming up with a common policy on where that money can be spent.

To continue reading, click here.


The Interpreter, 26 July, 2017

The recent exposure of Chinese influence-peddling inside the Australian political system is just one example of China’s growing influence and willingness to act in Western states. In these days of austerity for many Western nations, money speaks loudly and in recent years Chinese investment into Western liberal democracies has surged.

Chinese foreign direct investment is shifting from commodities in the developing world to high-tech acquisitions, equity stakes and mergers in advanced economies. In Europe alone, Chinese investment increased 44% between 2014 and 2015, when it reached €20 billion. For the most part, these funds have been welcomed by cash-strapped Western states seeking to reinvigorate their economies. However, there are also risks associated with Chinese investment in telecommunications and other mainstays of modern commerce.

Research carried out by the Henry Jackson Society suggests that Chinese investment in national infrastructure is taking on critical proportions, and Western states – particularly the five countries involved in the Five Eyes intelligence alliance – are responding in piecemeal fashion with each screening investments in different ways. A number of incidents in recent years have underlined the need for better co-ordination between nations, particularly those that share intelligence, and improved understanding of China’s investment strategy into the West.

In 2016, for example, a Chinese consortium that included a subsidiary of the Chinese defence industrial giant AVIC, bought a large stake in the UK’s largest data centre operator, Global Switch. Whitehall approved the deal, only to see the Australian Department of Defence pull out of future business with Global Switch, citing the AVIC buy-in. Then came the Canadian government’s approval of a Chinese takeover of the Canadian satellite communications company, Norsat.  After the Trudeau administration confirmed that change in ownership, the Pentagon announced it would have to re-examine its contracts with the Vancouver firm.

MERICS research suggests China’s state owned enterprises (SOEs) accounted for more than 60% of China FDI in Europe in 2015. While this is not as high as it has been, the trend is upward which adds to the argument that much of the investment surge is strategic in nature. Beijing has also recently announced its intention to become the global leader in artificial intelligence (AI), a cutting-edge technology upon which the defence of the West will depend. One can see China’s intentions in its Made in China: 2025 strategy that was announced in 2014. The strategy involves subsidising Chinese firms targeting acquisitions and mergers of Western AI, IT, and telecoms firms and using non-tariff barriers to provide a sanctuary for Chinese firms inside China so they can advance safely away from the harsh glare of competition. The goal is to give China strategic dominance in the technologies of future warfare.

Such goals are alarming, and it’s not just policy analysts who think so.The Trump administration, for example, demanded an investigation in Chinese investment into Silicon Valley start-ups and the resulting report indicates that many of the Chinese firms operating in this field have state support and direction.

The recent decision by Berlin to restrict Chinese investment into parts of its digital economy and infrastructure is another indicator of how critical this issue has become. As one of the West’s most open economies, this action demonstrates Berlin is taking the situation very seriously indeed. While London mulls over a body similar to the Committee for Foreign Investment in the United States or Australia’s Foreign Investment Review Board to supplement its current ad hoc system, it is imperative that the Five Eyes alliance members systemically overhaul the range of sectors open to Chinese investment. Some practices that could assist include:

  • Instituting a regular Five Eyes meeting between the heads of their investment review boards.
  • Use this process to build a ‘common operating picture’ of Chinese investment practices and targets.
  • Sharing more information on what Chinese firms are doing in each of the Five Eyes economies, their ownership structures, and any past instances of serving Chinese national security objectives.
  • Considering an overhaul of the Five Eyes working groups in telecoms and AI, giving them greater prominence than they now have, and creating stronger links between private sector actors and security agencies.
  • Developing better monitoring by Ministries of Economy; presently, governments capture statistics without giving much background. They can and should provide more information to regulatory bodies.

The surge of Chinese SOE-led interest into Western infrastructure and high-tech can help bridge the gap between supply and demand for investment dollars. However, we need to be realistic about Beijing’s own industrial goals and objectives and the nature of its investment strategy. A common assessment system for the Five Eyes allies would assist in safeguarding our interlinked telecommunications and high-tech sectors.


Pushback: Why the Five Eyes Intelligence Alliance Should Keep Chinese Investors at Bay

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The National Interest, 25 July, 2017

There has been a dramatic shift of investment into the West, which may have a deep impact on U.S. security and the country’s future way of life. According to a report recently published by the Henry Jackson Society, China is making massive investments into Western digital and critical national infrastructure, and Western states are not reacting in a coordinated or rational way. This article argues that those states can and should coordinate a collective reaction through the Five Eyes intelligence alliance. The Five Eyes—arguably one of the strongest and long-lasting intelligence coalitions in history—consists of five of the most robust liberal democracies in the West: the United Kingdom, Canada, Australia, New Zealand and the United States.

Bound by strong cultural links, these five states have seen off authoritarian communist dictatorships and global conspiracy theories from a range of directions. Following the collapse of the Soviet Empire and its satellites, the men and women who worked in the shadows to keep us safe during that time turned their attention toward failed and failing states. They also began defending us from corporate espionage and, now, the rise of domestic-based Islamist terrorism. While the members of this shadow group still work on those issues, a new one has presented itself, and from an unusual and unlikely direction—Chinese malicious investment.

To finish this article, click here.

Jeremy S. Maxie

Energy & Political Risk Consultant

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