Intellectual Pursuits

The People’s Republic of China uses buying power, theft, spying to gain technological edge

FORUM Staff

Operating outside the bounds of global norms to steal technological and corporate secrets, the People’s Republic of China (PRC) is pursuing policies of economic aggression that threaten the security of intellectual property and endanger the global economy, a White House report said.

In its analysis, “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World,” the White House Office of Trade and Manufacturing Policy said the PRC wants to capture emerging high-tech industries that will drive future economic growth, including advancements in the defense industry.

“The People’s Republic of China has experienced rapid economic growth to become the world’s second largest economy while modernizing its industrial base and moving up the global value chain,” the June 2018 report said. “However, much of this growth has been achieved in significant part through aggressive acts, policies and practices that fall outside of global norms and rules (collectively, economic aggression).”

The PRC’s strategic goals, according to the 2018 “Foreign Economic Espionage in Cyberspace” report by the National Counterintelligence and Security Center (NCSC), are to achieve comprehensive national power, an innovation-driven economic growth model and military modernization. To reach these goals, the PRC’s industrial policy aims to “introduce, digest, absorb and re-innovate” technologies and intellectual property (IP) from around the world, the White House report said.

 The PRC’s methods include state-sponsored IP theft, cyber espionage, evasion of export control laws, counterfeiting and piracy, the report said. “China appears to be conducting a campaign of commercial espionage against U.S. companies involving … human infiltration to systematically penetrate the information systems of U.S. companies to steal their intellectual property, devalue them, and acquire them at dramatically reduced prices,” according to the U.S.-China Economic and Security Review Commission.

The PRC’s efforts target innovations by private companies and governments. The independent Commission on the Theft of American Intellectual Property concluded the PRC was the chief culprit in the loss of between U.S. $225 billion and U.S. $600 billion annually from intellectual property theft. The PRC also targets other Indo-Pacific economies. SecureWorks, a U.S.-based firm that provides information security, said in an October 2017 report that a China-based group called Bronze Butler has been attempting to steal the intellectual property of technology companies in Japan since 2012.

An analysis by the Counter Threat Unit of SecureWorks found that Bronze Butler exploits unknown software flaws and security gaps in computer systems, creates strategic web compromises and also uses the technique called spearphishing, which is a method of acquiring sensitive information by masquerading as a trusted person or entity.

Sometimes, the PRC’s efforts to steal technological secrets have military applications. A Chinese businessman was sentenced to four years in a U.S. prison in July 2016 for conspiring to hack into the computer networks of major defense contractors. Su Bin, 51, was convicted of taking part in a scheme by Chinese military officers to obtain sensitive military information, including plans relating to the C-17 military transport plane and F-22 and F-35 fighter jets. He received a 46-month prison term and was ordered to pay a $10,000 fine.

“Su Bin’s sentence is a just punishment for his admitted role in a conspiracy with hackers from the People’s Liberation Army Air Force to illegally access and steal sensitive U.S. military information,” John Carlin, assistant attorney general for national security, said in a statement.

Just a few years earlier, officials at the credit-reporting company Equifax Inc. told the FBI and the Central Intelligence Agency that it was the victim of corporate espionage by the PRC, The Wall Street Journal newspaper reported. The company’s security officials in 2015 feared that former employees had removed thousands of pages of proprietary information before leaving the company and moving back to China.

The materials included code for planned products, personnel files and manuals. What added to the suspicion was the fact that the Chinese government at the time had asked eight companies to help it build a national credit-reporting system. The FBI case ultimately stalled even though the agency believed trade secrets were stolen, the newspaper reported. 

The PRC invests enormous resources in collecting intelligence. The White House report said the PRC’s Ministry of State Security deploys 40,000 intelligence officers abroad and maintains more than 50,000 more in mainland China. This investment enables the PRC to be responsible for 50 to 80 percent of cross-border intellectual property theft worldwide and more than 90 percent of all cyber-enabled economic espionage in the United States, according to a report from the Foundation for Defense of Democracies.

Cyber Threats

China engages in expansive efforts to acquire U.S. technology by uncovering sensitive trade secrets and proprietary information through cyber espionage, according to the NCSC report. Trade secret theft alone could account for losses of between U.S. $180 billion and U.S. $540 billion in the United States annually, according to the White House report.

Verizon worked with private companies and government agencies to produce a 2012 study of cyber intrusions. The study analyzed more than 47,000 security incidents that resulted in 621 confirmed data disclosures. At least 44 million records were compromised. Of the disclosures linked to economic espionage, 96 percent were attributed to “threat actors in China.”

Evading Export Laws

Sometimes, PRC operatives physically take technological innovations to their homeland for study and duplication. In September 2016, a U.S. federal judge sentenced a Chinese woman to nearly two years in prison for illegally shipping parts for submersible vehicles to a Chinese university, including some that she tucked in her suitcase, the Orlando Sentinel newspaper reported.

Amin Yu, who was 55 at the time of her sentencing and a former employee at the University of Central Florida, was accused of failing to disclose that she worked on behalf of the Chinese government and of lying about what she was shipping to China. She pleaded guilty to exporting goods to a foreign country without registering as a foreign agent and conspiring to commit international money laundering. U.S. District Judge Roy B. Dalton Jr. sentenced her to 21 months in prison followed by two years of probation.

Yu, according to Assistant U.S. Attorney Daniel Irick, was part of a conspiracy that involved shell companies, offshore accounts and false documents, the Sentinel reported. She was involved in illegal transactions amounting to
U.S. $2.6 million.

In her plea bargain, she admitted to working for Harbin Engineering University, a state-owned entity of the PRC. Yu obtained systems and components for marine submersible vehicles from companies in the United States and exported them to China for the development of marine submersible vehicles, unmanned underwater vehicles, remotely operated vehicles and autonomous underwater vehicles, according to the White House report.

Her case illustrates a significant problem for countries trying to enforce export control laws — the growth in dual-use technologies that have military and civilian applications. “For example, aero-engine technologies have an obvious commercial application,” the White House report said. “When acquired by a strategic economic and military competitor like China, commercial items can be exploited for military purposes.”

PRC Infiltration of Social Media

Like actions taken by intelligence services of other countries, China has infiltrated social media sites in the U.S. to recruit human sources. William Evanina, director of the National Counterintelligence and Security Center, told Reuters in August 2018 that Beijing is liberally using LinkedIn, a popular business networking site, to recruit U.S. citizens with access to government and commercial secrets.

He said Chinese intelligence officials have contacted thousands of LinkedIn members. British and German authorities previously warned that the PRC was using the social media site to recruit potential spies. Evanina urged LinkedIn, which is owned by Microsoft Corp., to copy the responses of Twitter, Google and Facebook, which all purged fake accounts linked to Iranian and Russian intelligence agencies. 

“I recently saw that Twitter is canceling, I don’t know, millions of fake accounts, and our request would be maybe LinkedIn could go ahead and be part of that,” said Evanina, who heads the U.S. National Counterintelligence and Security Center. 

Although Iran, North Korea and Russia also use LinkedIn and other platforms to identify intelligence targets, U.S. intelligence officials said the PRC poses the biggest threat. About 70 percent of China’s overall espionage is aimed at the U.S. private sector, rather than the government, said Joshua Skule, the head of the FBI’s intelligence branch, Reuters reported. “They are conducting economic espionage at a rate that is unparalleled in our history,” he said.

Experts have been sounding a warning about China’s aggressive campaign for more than a year. In June 2017, experts told the U.S. Senate Committee on Foreign Relations that Chinese hackers were laser-focused on U.S. companies. After a brief lull in activity, it appeared that cyber espionage against U.S. companies returned to “business as usual, meaning the wholesale theft of [intellectual property] on the private sector side,” said Samantha Ravich, an advisor to the Foundation for Defense of Democracies, a Washington, D.C., think tank.

The slowdown in Chinese hacking of American companies occurred after a 2015 agreement in which then-U.S. President Barack Obama and Chinese President Xi Jinping agreed that neither the U.S. nor China “will conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information,” for commercial advantage. Although cyber intelligence firms reported an initial slowdown in cyber espionage by the PRC in 2016, they issued multiple reports in 2017 that it was back on the upswing. 

The PRC also targets Western European countries through social media. The German Federal Office for the Protection of the Constitution alleged in late 2017 that Chinese intelligence used LinkedIn to target at least 10,000 Germans, possibly to recruit them as informants. The German newspaper Süddeutsche Zeitung also reported in June 2018 that Chinese agents were using fake social media profiles to contact members of the German parliament and offer them money in exchange for expertise and insider knowledge. The agents would invite them to China to try to pressure them for information.

Germany’s domestic intelligence service in late 2017 published the details of social network profiles it said were fronts faked by Chinese intelligence to gather personal information about German officials and politicians. 

The service warned public officials about the risk of leaking valuable personal information on social media sites. “Chinese intelligence services are active on networks like LinkedIn and have been trying for a while to extract information and find intelligence sources in this way,” the service said in a statement. 

Operators in Academia

PRC operatives actively recruit scholars, researchers, technology experts and scientists who are at the top of their fields, the White House report said. The efforts typically target top employees of a company a Chinese entity wants to buy, partner with or invest in. The PRC’s Thousand Talents Plan, a recruitment program run by the government, targets scholars with top-level research capabilities who may hold intellectual property rights, key technologies or patents in technological fields. They often are offered lucrative and prestigious positions at Chinese research institutes, laboratories or universities.

China also fills up U.S. universities, think tanks and laboratories with its scholars. More than 300,000 Chinese nationals annually attend U.S. universities or find employment at U.S. national labs, innovation centers, incubators and think tanks, the White House report said. About 25 percent of Chinese graduate students specialize in science, technology, engineering or math. The Chinese government, the report said, has put in place “programs aimed at encouraging Chinese science and engineering students to master technologies that may later become critical to key military systems.”

FBI Director Christopher Wray, speaking before the U.S. Senate Intelligence Committee in February 2018, warned about possible operatives at the nation’s learning centers who are professors, scientists and students. The FBI is monitoring academies within universities that are sponsored by the Chinese government. Some of the institutions, he said, seem unaware of who could be spying on their campuses. “I think the level of naiveté on the part of the academic sector about this creates its own issues,” Wray said.

The concern in academia is not confined to the U.S. In October 2017, Australian Security Intelligence Organization Director-General Duncan Lewis told politicians in Canberra that universities need to be “very conscious” of foreign influence on Australian campuses.

Lewis also said foreign powers were “clandestinely seeking to shape” the opinion of the Australian public, media organizations and government officials to advance their countries’ own political objectives, Reuters reported. 

An October 2018 report by the Australian Strategic Policy Institute explained that the risk of Chinese infiltration into public universities is greater than influence wielding. Military secrets are at stake. Since 2007, China’s People’s Liberation Army (PLA) sponsored more than 2,500 military scientists and engineers to study abroad, particularly in Five Eyes countries. Five Eyes is an intelligence-sharing alliance involving Australia, Canada, New Zealand, the United Kingdom and the U. S.

“Dozens of PLA scientists have obscured their military affiliations to travel to Five Eyes countries and the European Union, including at least 17 to Australia, where they work in areas such as hypersonic missiles and navigation technology,” the report said. “Those countries don’t count China as a security ally but rather treat it as one of their main intelligence adversaries.”

The PLA describes the process of gleaning military secrets in academic settings as “picking flowers in foreign lands to make honey in China,” the report said.

IP For Sale

One way the PRC gains a technological edge is through its checkbook. People working on behalf of the PRC government use vehicles that include mergers and acquisitions as well as seed and venture capital financing to strategically target high-tech industries all over the world.

In 2016, acquisitions accounted for 96 percent of Chinese investment in the United States, according to the U.S.-China Economic and Security Review Commission. In the first half of 2017, that trend continued with acquisitions accounting for 97.6 percent of Chinese investment in the U.S. 

A relatively newer phenomenon is China’s willingness to engage in venture funding deals that finance startup firms and early-stage technology companies. Since its founding in 2009, the China-based venture capital fund Sinovation has accumulated U.S. $1.2 billion in capital and has invested in almost 300 startups, including 25 that are working on projects dealing with artificial intelligence, according to a U.S. Department of Defense report titled, “China’s Technology Transfer Strategy: How Chinese Investments in Emerging Technology Enable A Strategic Competitor to Access the Crown Jewels of U.S. Innovation.” Sinovation was founded by the former leader of Google China, Kai-Fu Lee.

One way the PRC acquires this technology is by keeping an eye on U.S. bankruptcy courts. Chinese companies target small companies that make valuable technology, such as semiconductors, according to an October 2018 report by National Public Radio. Also, the PRC has learned that engaging in joint ventures with U.S. companies allows Chinese companies to escape scrutiny from the Committee on Foreign Investment in the United States. 

The White House report warned of the risks associated with Chinese venture funding. “The technologies China is investing in are the same ones that we expect will be foundational to future innovation in the U.S.: artificial intelligence, autonomous vehicles, augmented/virtual reality, robotics and block chain technology,” the White House report said. “Moreover, these are some of the same technologies of interest to the U.S. Defense Department to build on the technological superiority of the U.S. military today.”