OFFICE of the UNITED STATES TRADE REPRESENTATIVE EXECUTIVE OFFICE OF THE PRESIDENT UPDATE CONCERNING CHINA’S ACTS POLICIES AND PRACTICES RELATED TO TECHNOLOGY TRANSFER INTELLECTUAL PROPERTY AND INNOVATION November 20 2018 Abbreviations and Acronyms Acronym AEI AI AmCham APT AR ASPI BDI BfV BGP CCP CDB CFIUS CJV CNY DARPA DHS DIUx DNS DOC DOJ DPA DSB EJV FDI FF FIRRMA IC ICT INTA IP IPs JV MIIT MMT MOF MOFCOM MOST MSP NDRC NEV NSA NUAA NVCA OECD OFDI Definition American Enterprise Institute artificial intelligence American Chamber of Commerce Shanghai advanced persistent threat augmented reality Australian Strategic Policy Institute Federation of German Industries Germany’s Federal Office for the Protection of the Constitution Border Gateway Protocol Chinese Communist Party China Development Bank Committee on Foreign Investment in the United States contractual joint venture Chinese yuan Defense Advanced Research Projects Agency U S Department of Homeland Security Defense Innovation Unit Experimental Domain Name System U S Department of Commerce U S Department of Justice Defense Production Act of 1950 Dispute Settlement Body equity joint venture foreign direct investment Faraday Future Foreign Investment Risk Review Modernization Act of 2018 integrated circuit information and communications technology European Parliament Committee on International Trade intellectual property Internet Protocol joint venture Ministry of Industry and Information Technology Micron Memory Taiwan Co Ltd Ministry of Finance of the People’s Republic of China Ministry of Commerce of the People’s Republic of China Ministry of Science and Technology of the People’s Republic of China managed service provider National Development and Reform Commission new-energy vehicle National Security Agency Nanjing University of Aeronautics and Astronautics National Venture Capital Association Organization for Economic Cooperation and Development outbound foreign direct investment i OLED PEV PoP SASAC SDIC SEI TRIPS UMC USCBC USD VC VR WFOE WTO ZDG ZGC Organic Light-Emitting Diodes pure-electric vehicle Points of Presence State-owned Assets Supervision and Administration Commission State Development and Investment Corporation strategic and emerging industries Trade-Related Aspects of Intellectual Property Rights United Microelectronics Corporation U S -China Business Council U S dollars venture capital virtual reality wholly foreign-owned entity World Trade Organization Zhongguancun Development Group Zhongguancun ii CONTENTS I Overview 3 A B Background 3 China’s Technology Policies Persist 7 II China Continues Its Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information 10 A B Introduction 10 Rising Incidence of Chinese Cyber-Enabled Theft against the United States 11 1 2 3 The Increasing Frequency of Chinese Cyber-Enabled Theft 11 Continuing Threat to U S Companies from China’s APT10 12 The Increasing Sophistication of Chinese Cyber-Enabled Theft 13 C Major Criminal Indictments of Ongoing Chinese Government Economic Espionage against U S Aerospace and High-Technology Companies 13 1 2 China’s Campaign to Steal Commercial Aerospace Technology 14 China’s Campaign to Steal Semiconductor Technology from the United States 17 D China Conducts a Global Espionage Campaign to Obtain Intellectual Property and Sensitive Commercial Information 19 1 2 3 4 Australia 19 Japan 20 The European Union and Member States 21 South Korea 21 III China’s Unfair Technology Transfer Regime for U S Companies in China 22 A Introduction 22 B U S and Foreign Companies and Other U S Trading Partners Continue to Share U S Concerns 23 1 2 C Companies 23 Other Trading Partners 24 China Has Made Only Incremental Changes to Foreign Investment Restrictions 25 1 Changes to Foreign Ownership Restrictions 25 2 The Automotive Sector as an Illustrative Example of China’s Continued Use of Foreign Investment Restrictions 27 IV China’s Discriminatory Licensing Restrictions 29 V Outbound Investment 31 A Introduction 31 B Actions by the United States and Other Trading Partners to Enhance Investment Review Processes 33 1 2 Actions by the United States 33 Actions by Other Trading Partners 33 1 China’s Outbound Investment Regime 36 C 1 2 D Outbound Investment Approvals and Their Influence on Investment Decisions 36 Major Policies and State-Backed Actors 39 China Is Increasingly Focusing on Venture Capital Investment 40 1 Trends in Chinese Venture Capital Investment in the United States 40 2 The Significance of Venture Capital Investment for Technology and Intellectual Property Acquisition 43 3 Illustrative Examples of Chinese Venture Capital Investments 46 VI Conclusion 49 Appendix A – China’s Foreign Investment Catalogue Overview of Key Changes in 2018 Version 50 2 I Overview A Background On August 14 2017 the President instructed the U S Trade Representative to determine under Section 301 of the Trade Act of 19741 whether to investigate China’s laws policies practices or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights innovation or technology development 2 On August 18 2017 the Office of the U S Trade Representative USTR initiated a Section 301 investigation of China’s acts policies and practices related to technology transfer intellectual property and innovation 3 On the date of initiation USTR requested consultations with the Government of China concerning the issues under investigation 4 Instead of accepting the request China’s Ministry of Commerce expressed “strong dissatisfaction” with the United States and decried the investigation as “irresponsible” and “not objective ”5 On March 22 2018 USTR issued the Findings of the Investigation into China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation under Section 301 of the Trade Act of 1974 the “Section 301 Report” 6 Based on this report USTR determined the following Chinese actions are unreasonable or discriminatory and burden or restrict U S commerce 1 China uses foreign ownership restrictions such as joint venture JV requirements and foreign equity limitations and various administrative review and licensing processes to require or pressure technology transfer from U S companies 2 China’s regime of technology regulations forces U S companies seeking to license technologies to Chinese entities to do so on non-market based terms that favor Chinese recipients Unless otherwise specified “Section 301” refers generally to Chapter 1 of Title III of the Trade Act of 1974 codified as amended in 19 U S C §§ 2411-2417 2 See Addressing China’s Laws Policies Practices and Actions Related to Intellectual Property Innovation and Technology 82 Fed Reg 39 007 Aug 17 2017 3 See Initiation of Section 301 Investigation Hearing and Request for Public Comments China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation 82 Fed Reg 40 213-14 Aug 24 2017 4 See Initiation of Section 301 Investigation Hearing and Request for Public Comments China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation 82 Fed Reg 40 213-14 Aug 24 2017 5 Press Release Ministry of Commerce The People’s Republic of China MOFCOM Spokesman Comments on the 301 Investigation of the US against China Aug 23 2018 http english mofcom gov cn article newsrelease policyreleasing 201708 20170802631394 shtml 6 OFFICE OF THE U S TRADE REPRESENTATIVE FINDINGS OF THE INVESTIGATION INTO CHINA’S ACTS POLICIES AND PRACTICES RELATED TO TECHNOLOGY TRANSFER INTELLECTUAL PROPERTY AND INNOVATION UNDER SECTION 301 OF THE TRADE ACT OF 1974 Mar 22 2018 https ustr gov sites default files Section%20301%20FINAL PDF 1 3 3 China directs and unfairly facilitates the systematic investment in and acquisition of U S companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate the transfer of technology to Chinese companies 4 China conducts and supports unauthorized intrusions into and theft from the computer networks of U S companies to access their sensitive commercial information and trade secrets 7 After USTR issued the Section 301 Report the United States continued to engage China to resolve the unfair trade acts policies and practices included in the investigation A cabinet-level U S delegation traveled to Beijing on May 4 2018 to discuss a range of bilateral economic issues including China’s policies addressed in the Section 301 Report 8 This high-level engagement continued on May 17 2018 when senior administration officials hosted a trade delegation from China in Washington D C 9 Another high-level U S delegation met with its Chinese counterparts in Beijing on June 2 and 3 2018 for additional discussions on trade and other issues 10 Each of these meetings gave China an opportunity to address U S concerns – but China failed to do so adequately The United States has also worked closely with the European Union EU and Japan who share many of the concerns expressed by the United States regarding China’s acts policies and practices related to technology transfer intellectual property and innovation  At the conclusion of trilateral meetings held in May 2018 the trade ministers of the United States Japan and the EU the “Ministers” “confirmed their shared view that no country should require or pressure technology transfer from foreign companies to domestic companies including for example through the use of JV requirements foreign equity limitations administrative review and licensing processes or other means ”11  At the conclusion of trilateral meetings held in September 2018 the Ministers “further recalled their shared view that no country should require or pressure technology transfer from foreign companies to domestic companies including for example through the use of JV requirements foreign equity limitations administrative review and licensing 7 See Notice of Determination and Request for Public Comment Concerning Proposed Determination of Action Pursuant to Section 301 China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation 83 Fed Reg 14 906-09 Apr 6 2018 8 Press Release The White House Statement of the United States Trade Delegation’s Visit to Beijing May 4 2018 https www whitehouse gov briefings-statements statement-united-states-trade-delegations-visit-beijing 9 Press Release The White House Trump Administration Officials to Host Trade Delegation from China May 16 2018 https www whitehouse gov briefings-statements trump-administration-officials-host-trade-delegationchina 10 Press Release U S Embassy and Consulates in China Readout of Discussions between Administration Officials and a Delegation from China Regarding the Trade Relationship between the United States and China June 5 2018 https china usembassy-china org cn readout-of-discussions-between-administration-officials-and-a-delegationfrom-china-regarding-the-trade-relationship 11 Press Release Office of the U S Trade Representative Joint Statement on Trilateral Meeting of the Trade Ministers of the United States Japan and the European Union May 31 2018 https ustr gov about-us policyoffices press-office press-releases 2018 may joint-statement-trilateral-meeting 4 processes or other means The Ministers found such practices to be deplorable ”12 The Ministers also “affirmed their commitment to effective means to stop harmful forced technology transfer policies and practices and to this end deepen discussions on enforcement and rule-making as tools to address these problems ”13 Despite repeated U S engagement efforts and international admonishments of its trade technology transfer policies China did not respond constructively and failed to take any substantive actions to address U S concerns As a result of China’s ongoing failure to respond constructively to U S concerns USTR imposed tariffs on July 6 2018 and August 23 2018 on approximately $50 billion of Chinese imports as part of the U S response to China’s unfair trade practices related to the forced transfer of American technology and intellectual property 14 The United States also requested dispute settlement consultations with China in the World Trade Organization WTO on March 23 2018 concerning certain measures pertaining to the licensing of intellectual property rights and the United States is now pursuing dispute settlement before the WTO on those issues 15 China however made clear – both in public statements and in government-to-government communications – that it would not change its policies in response to the initial Section 301 action 16 Indeed China largely denied there were problems with respect to its policies involving technology transfer and intellectual property 17 The Information Office of China’s State Council issued a 71-page “White Paper” in September 2018 that dismissed the Section 301 12 Press Release Office of the U S Trade Representative Joint Statement on Trilateral Meeting of the Trade Ministers of the United States Japan and the European Union Sep 25 2018 https ustr gov about-us policyoffices press-office press-releases 2018 september joint-statement-trilateral 13 Press Release Office of the U S Trade Representative Joint Statement on Trilateral Meeting of the Trade Ministers of the United States Japan and the European Union Sep 25 2018 14 See Notice of Action and Request for Public Comment Concerning Proposed Determination of Action Pursuant to Section 301 China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation 83 Fed Reg 28710 June 20 2018 Notice of Action Pursuant to Section 301 China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation 83 Fed Reg 40823 Aug 16 2018 15 Press Release Office of the U S Trade Representative Following President Trump’s Section 301 Decisions USTR Launches New WTO Challenge Against China Mar 23 2018 https ustr gov about-us policyoffices press-office press-releases 2018 march following-president-trump%E2%80%99s-section See also Request for Consultations by the United States China — Certain Measures Concerning the Protection of Intellectual Property Rights WTO Doc WT DS542 1 Mar 26 2018 https www wto org english tratop_e dispu_e cases_e ds542_e htm 16 See e g Press Release Ministry of Commerce The People’s Republic of China Statement by the Ministry of Commerce Regarding the Statement by the Office of the U S Trade Representative on Section 301 Action July 12 2018 http english mofcom gov cn article newsrelease significantnews 201807 20180702765653 shtml 17 See Press Release Ministry of Commerce The People’s Republic of China Statement by the Ministry of Commerce Regarding the Statement by the U S Trade Representative on Section 301 Action July 12 2018 Press Release Ministry of Commerce The People’s Republic of China The Office of the USTR Notes on 23rd That It Will Hold Hearings on Imposing Tariffs of $16 Billion on Chinese Imports on 24th and 25th What’s MOFCOM’s Comment July 27 2018 http english mofcom gov cn article pressconferencehomepage foreigntrade 201808 20180802772812 shtml 5 investigation’s findings and denounced U S actions as “trade bullyism ”18 Furthermore China responded to the U S action by attempting to cause further harm to the U S economy by increasing duties on certain U S exports to China 19 These actions demonstrated that USTR’s initial tariff action was no longer appropriate to obtain the elimination of China’s unfair trade acts policies and practices In addition the burden or restriction on United States commerce of these acts policies and practices continues to increase including following the one-year investigation period Accordingly under direction of the President USTR imposed additional tariffs on approximately $200 billion of imports from China on September 24 2018 20 USTR has undertaken this update as part of its ongoing monitoring and enforcement effort In preparing this update USTR has relied upon publicly available material and has consulted with other government agencies As detailed in this update China fundamentally has not altered its acts policies and practices related to technology transfer intellectual property and innovation and indeed appears to have taken further unreasonable actions in recent months  Section II describes how China continues its policy and practice of conducting and supporting cyber-enabled theft and intrusions into the commercial networks of U S companies and those of other countries as well as other means by which China attempts illegally to obtain information This conduct provides the Chinese government with unauthorized access to intellectual property including trade secrets or confidential business information as well as technical data negotiating positions and sensitive and proprietary internal business communications  Section III describes how despite the relaxation of some foreign ownership restrictions and certain other incremental changes in 2018 the Chinese government has persisted in using foreign investment restrictions to require or pressure the transfer of technology from U S companies to Chinese entities Numerous foreign companies and other trading partners share U S concerns regarding China’s technology transfer regime  Section IV describes China’s discriminatory licensing restrictions and how the United States has requested consultations and is pursuing dispute settlement under the WTO in Press Release Information Office of the State Council The People’s Republic of China The Facts and China’s Position on China-US Trade Friction Sep 2018 http english gov cn archive white_paper 2018 09 26 content_281476319220196 htm 19 State Council Customs Tariff Commission Public Notice on Additionally Imposing Tariffs on $50 Billion of Imported Products Originating from the United States State Council Customs Tariff Commission 2018 Public Notice No 5 issued June 16 2018 State Council Customs Tariff Commission Public Notice on Additionally Imposing Tariffs on Certain Imported Products Batch 2 Originating from the United States State Council Customs Tariff Commission 2018 Public Notice No 6 issued Aug 3 2018 State Council Customs Tariff Commission Public Notice on Additionally Imposing Tariffs on $16 Billion of Imported Products Originating from the United States State Council Customs Tariff Commission 2018 Public Notice No 7 issued Aug 8 2018 State Council Customs Tariff Commission Public Notice on the Implementation of Additionally Imposing Tariffs on Approximately $60 Billion of Imported Products Originating from the United States State Council Customs Tariff Commission 2018 Public Notice No 8 issued Sep 18 2018 effective Sep 24 2018 20 See Notice of Modification of Section 301 Action China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation 83 Fed Reg 47974 Sep 21 2018 18 6 China – Certain Measures Concerning the Protection of Intellectual Property Rights WT DS542 China continues to maintain these discriminatory licensing restrictions  Section V describes how despite an apparent aggregate decline in Chinese outbound investment in the United States in 2018 the Chinese government continues to direct and unfairly facilitate the systematic investment in and acquisition of U S companies and assets by Chinese entities to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by state industrial plans Chinese outbound investment is increasingly focused on venture capital VC investment in U S technology centers such as Silicon Valley with Chinese VC investment reaching record levels in 2018 B China’s Technology Policies Persist As detailed in the introduction to the Section 301 Report official publications of the Chinese government and the Chinese Communist Party CCP set out China’s ambitious technologyrelated industrial policies These policies are driven in large part by China’s goals of dominating its domestic market and becoming a global leader in a wide range of technologies especially advanced technologies The most prominent industrial policy is “Made in China 2025 ” initiated in 2015 21 Industrial sectors that contribute to or benefit from the “Made in China 2025” industrial policy include aerospace information and communications technology robotics industrial machinery new materials and automobiles 22 In the period following the publication of the Section 301 Report China has deliberately downplayed the importance of and reduced official media attention on the Made in China 2025 policy In late June China’s Internet Propaganda Ministry reportedly circulated a Propaganda Oral Notice directing media outlets to “not make further use of ‘Made in China 2025 ’ or there will be consequences ”23 Also in late June the Hong Kong paper South China Morning Post asked Wang Xinzhe chief economist at China’s Ministry of Industry and Information Notice on Issuing “Made in China 2025” State Council Guo Fa 2015 No 28 issued May 8 2015 These policies are also described in DEPARTMENT OF DEFENSE REPORT TO PRESIDENT DONALD J TRUMP BY THE INTERAGENCY TASK FORCE IN FULFILLMENT OF EXECUTIVE ORDER 13806 ASSESSING AND STRENGTHENING THE MANUFACTURING AND DEFENSE INDUSTRIAL BASE AND SUPPLY CHAIN RESILIENCY OF THE UNITED STATES 8-9 Sep 2018 https media defense gov 2018 Oct 05 2002048904 -1 -1 1 ASSESSING-AND-STRENGTHENINGTHE-MANUFACTURING-AND%20DEFENSE-INDUSTRIAL-BASE-AND-SUPPLY-CHAINRESILIENCY PDF 23 Minitrue On U S -China Trade Tensions CHINA DIGITAL TIMES https chinadigitaltimes net 2018 06 minitrueon-u-s-china-trade-tensions last visited Nov 15 2018 See also Raymond Zhong and Li Yuan As Trade Fight Looms China Turns Censors on Its Own Policies N Y TIMES June 26 2018 https www nytimes com 2018 06 26 business china-trade-censorship html stating that “As Washington and Beijing spar over trade news outlets here have been ordered not to mention Made in China 2025 an industrial master plan that aims to turn the country into a high-tech superpower according to two people at Chinese news organizations who spoke on the condition of anonymity to discuss the censorship authorities’ secretive workings ” See also Sidney Leng and Zheng Yangpeng Beijing Tries to Play Down “Made in China 2025” as Donald Trump Escalates Trade Hostilities SOUTH CHINA MORNING POST June 26 2018 https www scmp com news china policies-politics article 2152422 beijing-tries-play-down-made-china-2025donald-trump 21 22 7 Technology MIIT whether the Chinese government “would withhold or adjust” the Made in China 2025 policy 24 In his response Mr Wang made no mention at all of the policy stating only that “the ministry was following guidelines” set during the CCP’s 2017 national congress regarding “upgrading the manufacturing industry ”25 In addition the May 2018 project guide26 for China’s Industrial Transformation and Upgrading Fund – a government fund that provides financing to technology-related programs in sectors linked to Made in China 202527 – no longer references the industrial policy by name even though it still targets the same high-technology industries 28 Made in China 2025 featured prominently in the fund’s administrative measure issued in December 2016 and its 2017 project guide published in August 2017 29 Despite this transparent attempt to deemphasize Made in China 2025 in public China continues to implement this industrial policy on a large scale In February 2018 the National Strategic Advisory Committee on Building a Powerful Manufacturing Nation published the Made in China 2025 Key Area Technology and Innovation Greenbook – Technology Roadmap 2017 “2017 Roadmap” 30 which updates and replaces the 2015 Made in China 2025 Key Area Technology Roadmap “2015 Roadmap” 31 discussed in the Section 301 Report The updated document again sets explicit market share and other targets to be filled by Chinese producers Sidney Leng and Zheng Yangpeng Beijing Tries to Play Down “Made in China 2025” as Donald Trump Escalates Trade Hostilities SOUTH CHINA MORNING POST June 26 2018 See also a November 2018 opinion piece in the state-affiliated Global Times newspaper confirming that Made in China 2025 “gradually disappeared from Chinese official documents and media” following U S Section 301 actions and suggesting that this was an intentional action by China to avoid “inciting the behavior” of the United States Editorial Facing Up to the U S China Battle over High-Technology We’d Like to Say This Chinese GLOBAL TIMES Nov 9 2018 https m huanqiu com r MV8wXzEzNTAwODg0XzI4Ml8xNTQxNzU1MjYw 25 Sidney Leng and Zheng Yangpeng Beijing Tries to Play Down “Made in China 2025” as Donald Trump Escalates Trade Hostilities SOUTH CHINA MORNING POST June 26 2018 26 Ministry of Industry and Information Technology General Office and Ministry of Finance General Office Notice on Issuing the 2018 Industrial Transformation and Upgrading Fund Work Guidance MIIT and Ministry of Finance MOF Gong Xin Ting Lian Gui 2018 No 36 issued May 24 2018 27 See e g smart manufacturing programs administered pursuant to the Ministry of Finance Notice on Distributing the 2016 Industrial Transformation and Upgrading Made in China 2025 Fund Support for Smart Manufacturing Integrated Standardization and New Model Use Projects MOF Cai Jian 2016 No 351 issued June 16 2016 industrial strong base programs administered pursuant to the Ministry of Finance Notice on Distributing the 2016 Industrial Transformation and Upgrading Made in China 2025 Fund Support for Strong Industrial Base Projects MOF Cai Jian 2016 No 355 June 16 2016 and the first introduction of major technology equipment programs administered pursuant to the Ministry of Finance Notice on Distributing the 2016 Industrial Transformation and Upgrading Made in China 2025 Fund Support for Smart Manufacturing Integrated Standardization and New Model Use Projects MOF Cai Jian 2016 No 351 issued June 16 2016 28 The 2018 project guide goes so far as to delete the words “Made in China 2025” from the title of the Ministry of Finance and Ministry of Industry and Information Technology Notice on Issuing “Measures on the Administration of the Industrial Transformation and Upgrading Made in China 2025 Fund” the measure pursuant to which the fund operates 29 Notice on Issuing the 2017 Industrial Transformation and Upgrading Made in China 2025 Grant Department Budget Project Guidance MIIT Gong Xin Bu Gui Han 2017 No 351 issued Aug 21 2017 30 Made in China 2025 Key Area Technology and Innovation Greenbook – Technology Roadmap 2017 National Strategic Advisory Committee on Building a Strong Manufacturing Nation issued Feb 2018 31 Made in China 2025 Key Area Technology Roadmap National Strategic Advisory Committee on Building a Powerful Manufacturing Nation issued Oct 10 2015 24 8 both domestically and globally in dozens of high-technology industries For example the 2017 Roadmap calls for “indigenous new energy vehicle annual production” to have a “supplying capacity that can satisfy more than 80% of the market” by 2020 up from a 70% target set in the 2015 Roadmap References in a litany of national and subnational normative documents such as 13th five-year sectoral plans 2016-2020 as well as their implementing measures confirm the continuing importance of Made in China 2025 and China’s persistent pursuit of its goals 32 China also appears to have reinvigorated the “Strategic Emerging Industries” policy a hightechnology industrial policy started in 2010 33 This policy was also addressed in the Section 301 Report China issued a draft for comment in September 2018 of the latest version of the Strategic Emerging Industry Development Key Product and Service Catalogue “SEI Catalogue” 34 As shown in Table 1 sectors covered in the catalogue illustrate a high degree of overlap with Made in China 2025 Table 1 – Comparison of the Sectors Targeted by the 2018 SEI Catalogue and the Made in China 2025 2017 Roadmap Topic New Generation Information Technology Industry High End Equipment Manufacturing Industry New Materials Industry Biotech Industry New Energy Vehicle Industry New Energy Industry Creative Data Industry SEI Catalogue Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 8 2017 Roadmap Chapter 1 Chapter 2 Chapter 9 Chapter 10 Chapter 6 Chapter 7 Chapter 1 In March 2018 a new agreement was signed by the National Development and Reform Commission NDRC and the Export-Import Bank of China to provide financial products worth 32 Chapter 22 of the 13th Five-year National Economic and Social Development Plan Outline adopted by the National People’s Congress on Mar 16 2016 is dedicated to the Made in China 2025 policy See also e g Ministry of Industry and Information Technology General Office Notice on the MIC2025 Province and City Guide 2017 MIIT Gong Xin Ting Gui 2017 No 41 Apr 13 2017 and General Office of the National Building a Strong Manufacturing Nation Leading Small Group Notice on Issuing the MIC2025 National Level Demonstration Zone Evaluation Guidebook Interim General Office of the National Building a Strong Manufacturing Nation Leading Small Group Gong Xin Ting Gui 2018 No 14 issued Jan 24 2018 effective Feb 12 2018 33 Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries State Council Guo Fa 2010 No 32 issued Oct 10 2010 34 Announcement on Request for Opinions on Amending the Strategic Emerging Industry Development Key Product and Service Catalogue 2016 Edition Strategic Emerging Industries Development Interagency Committee Office issued Sep 21 2018 9 CNY 800 billion $122 billion 35 to companies in Strategic Emerging Industries 36 China has also enhanced fiscal supports specific to Strategic Emerging Industries for fiscal-year 2018 37 II China Continues Its Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information A Introduction China shows no sign of ceasing its policy and practice of conducting and supporting cyberenabled theft and intrusions into the commercial networks of U S companies This illicit conduct provides the Chinese government with unauthorized access to intellectual property trade secrets confidential business information technical data negotiating positions and sensitive and proprietary internal business communications The White House National Cyber Strategy published in September 2018 concluded that “China engaged in cyber-enabled economic espionage and trillions of dollars of intellectual property theft ”38 The White House Office of Trade and Manufacturing Policy also noted China’s prevalent use of cyber-enabled theft as well as physical theft in acquiring technologies and intellectual property in strategic sectors 39 As the next section demonstrates China’s cyberenabled theft against the United States has increased in frequency and sophistication since the March 2018 issuance of USTR’s findings Unless citing to a value given by source in footnote currency conversions are based on the U S Federal Reserve’s average annual exchange rate for the year in reference for 2015-2017 and based on the average of the daily exchange rates from Jan 1 2018 to Nov 2 2018 For 2015-2017 rates see U S FEDERAL RESERVE FOREIGN EXCHANGE RATES - G 5A Jan 11 2018 https www federalreserve gov releases g5a current default htm for 2018 daily average rates see U S FEDERAL RESERVE HISTORICAL RATES FOR THE CHINESE YUAN RENMINBI Nov 5 2018 https www federalreserve gov releases h10 Hist dat00_ch htm 36 Press Release National Development and Reform Commission The People’s Republic of China National Development and Reform Commission and Export-Import Bank of China Sign Cooperative Agreement to Support Strategic Emerging Industry Development Chinese Mar 23 2018 http www ndrc gov cn tpxw 201803 t20180323_880112 html 37 China’s official budget documents show that in fiscal years 2016 and 2017 fiscal funding for Strategic Emerging Industries was administered through the “Strategic Emerging Industry Special Fund ” In 2018 funding shifted to the “Strategic Emerging Industry Major Contracts” and “Strategic Emerging Industry Venture Investment Guiding Fund ” with allocations exceeding those under the previous “Strategic Emerging Industry Special Fund ” Official budget information is available on the MOF website http yss mof gov cn 2017zyys and http yss mof gov cn 2018zyys 38 THE WHITE HOUSE NATIONAL CYBER STRATEGY OF THE UNITED STATES OF AMERICA Sep 2018 https www whitehouse gov wp-content uploads 2018 09 National-Cyber-Strategy pdf 39 THE WHITE HOUSE OFFICE OF TRADE AND MANUFACTURING POLICY HOW CHINA’S ECONOMIC AGGRESSION THREATENS THE TECHNOLOGIES AND INTELLECTUAL PROPERTY OF THE UNITED STATES AND THE WORLD June 2018 at 2-4 https www whitehouse gov wp-content uploads 2018 06 FINAL-China-Technology-Report-6 18 18PDF pdf 35 10 B Rising Incidence of Chinese Cyber-Enabled Theft against the United States 1 The Increasing Frequency of Chinese Cyber-Enabled Theft According to a June 2018 report cybersecurity firms have observed in the period from mid2017 through mid-2018 what appear to be Chinese state-sponsored entities attacking firms in cloud computing Internet of Things artificial intelligence biomedicines civilian space alternative energy robotics rail agricultural machinery and high-end medical devices sectors 40 One cybersecurity firm CrowdStrike observed that Chinese state hacking is gaining in pace and volume while another FireEye Mandiant similarly stated that previously inactive Chinese hacking groups had now been reactivated 41 In November 2018 cybersecurity firm Carbon Black found a sharp rise in the third quarter of 2018 “in attacks against manufacturing companies—a type of attack that has been frequently tied to Chinese economic espionage ”42 It also found that 68% of incident response professionals surveyed during the preceding three months assessed that China was the source of the observable cyberattacks more than any other country 43 In August 2018 cybersecurity firm Recorded Future found a series of cyberattacks around late May 2018 originating from IP addresses linked to Tsinghua University 44 The attackers in question appeared to be conducting surveillance on organizations related to the governor of Alaska’s trade delegation trip to China and were focused on oil and gas industry information 45 40 China Backed Off from Hacking U S Companies Now It Is at It Again MCCLATCHY June 7 2018 https www mcclatchydc com news nation-world national national-security article212666139 html See also MTrends 2018 MANDIANT A FIREEYE COMPANY 2018 at 49 https www fireeye com content dam collateral en mtrends-2018 pdf In its April 2018 review of the prior year FireEye Mandiant observed increased theft of sensitive business information like pricing data contracts and acquisitions It also noted a concerted campaign to attack companies with businesses in cloud computing and telecommunications which could be used as a more surreptitious means of gaining information on their clients 41 China Backed Off from Hacking U S Companies Now It Is at It Again MCCLATCHY June 7 2018 See also China Is a Bigger Cyber Threat than Russia Fox News television broadcast Sep 18 2018 https video foxbusiness com v 5836552451001 #sp show-clips In a separate televised interview Crowdstrike’s Chief Technology Officer noted “in light of the trade conflict we are engaged with China right now … companies all over the United States are suffering major breaches from Chinese actors primarily enacted by their ministry of state security ” He also stated “We’re seeing a huge pickup in activity it’s really been continuing for the last year and a half but increasing over time and every major sector of the economy is being targeted ” 42 Sean Gallagher New Data Shows China Has “Taken the Gloves Off” in Hacking Attacks on US ARSTECHNICA Nov 1 2018 https arstechnica com information-technology 2018 11 new-data-shows-china-has-taken-the-glovesoff-in-hacking-attacks-on-us 43 Destructive Cyberattacks Increase Ahead of 2018 Midterm Elections Quarterly Incident Response Threat Report CARBON BLACK Nov 2018 at 4 https www carbonblack com quarterly-incident-response-threatreport november-2018 44 Sanil Chohan Winnona DeSombre and Justin Grosfelt Chinese Cyberespionage Originating from Tsinghua University Infrastructure CTA-2018-0816 RECORDED FUTURE BLOG Aug 16 2018 at 1 https www recordedfuture com chinese-cyberespionage-operations Tsinghua University is a major Chinese university with close ties to the government and Chinese Communist Party leadership See Chinese Communist Party Organization Department Appointment to Tsinghua University Dean Incites Controversy Chinese BBC Mar 26 2015 https www bbc com zhongwen simp china 2015 03 150326_tsinghua_uni_headmaster 45 Sanil Chohan Winnona DeSombre and Justin Grosfelt Chinese Cyberespionage Originating from Tsinghua University Infrastructure CTA-2018-0816 RECORDED FUTURE Aug 16 2018 at 7 11 In October 2018 experts affiliated with the U S Naval War College and Tel Aviv University published a study finding that China Telecom one of China’s three major state-owned telecoms enterprises may be using Points of Presence PoP servers to hijack internet traffic and direct it through Mainland Chinese servers for possible collection and analysis 46 According to these experts China Telecom maintains PoP control in ten locations in North America which it has used to hijack internet traffic in the United States and Canada and divert it through China where it could be copied 47 These acts by a Chinese entity suggest in these experts’ words “malicious intent precisely because of their unusual transit characteristics” of routing traffic through abnormally long paths that always go through China 48 Assessments in the U S law enforcement and intelligence community dovetail with industry views On November 1 2018 Department of Justice Attorney General Jeff Sessions announcing a new initiative to combat Chinese economic espionage stated “In 2015 China committed publicly that it would not target American companies for economic gain Obviously that commitment has not been kept ”49 In November 2018 Robert Joyce senior advisor for cybersecurity at the National Security Agency said that over the last year the U S government has seen a resurgence of hacking and intellectual property theft attempts by people based in China and sometimes even by the Beijing government 50 2 Continuing Threat to U S Companies from China’s APT10 Information obtained from the ongoing monitoring of APT10 by the U S Department of Homeland Security DHS has also indicated a rising incidence of Chinese cyber-enabled theft As noted in USTR’s original findings several cybersecurity firms believe APT10 is a Chinese cyber-espionage group that conducted a campaign of intrusions against several major IT managed service providers including some U S companies 51 APT10 targets industries that Chris C Demchak and Yuval Shavitt China’s Maxim – Leave No Access Point Unexploited The Hidden Story of China Telecom’s BGP Hijacking 3 1 MILITARY CYBER AFFAIRS 2018 https scholarcommons usf edu mca vol3 iss1 7 47 Chris C Demchak and Yuval Shavitt China’s Maxim – Leave No Access Point Unexploited The Hidden Story of China Telecom’s BGP Hijacking 3 1 MILITARY CYBER AFFAIRS 5-8 2018 48 Chris C Demchak and Yuval Shavitt China’s Maxim – Leave No Access Point Unexploited The Hidden Story of China Telecom’s BGP Hijacking 3 1 MILITARY CYBER AFFAIRS 5-8 2018 See also National Security Law of the People’s Republic of China adopted by the National People’s Congress on July 1 2015 effective July 1 2015 providing at Article 11 that “All citizens of the People’s Republic of China state authorities armed forces political parties people’s groups enterprises public institutions and other social organizations shall have the responsibility and obligation to maintain national security ” and at Article 77 that “ citizens and organizations shall provide necessary support and assistance to national security authorities public security authorities and the relevant military authorities ” 49 Press Release U S Department of Justice Attorney General Jeff Sessions Announces New Initiative to Combat Chinese Economic Espionage – Remarks as Prepared for Delivery Nov 1 2018 https www justice gov opa speech attorney-general-jeff-sessions-announces-new-initiative-combat-chineseeconomic-espionage 50 Alyza Sebenius and Nico Grant China Violating Cyber Agreement With U S NSA Official Says BLOOMBERG Nov 8 2018 https www bloomberg com news articles 2018-11-08 china-violating-cyber-agreement-with-u-s-nsaofficial-says 51 See Section V B 4 of the Section 301 Report 46 12 align with China’s technology policies for the 13th five-year planning period 2016-2020 to provide valuable information for advancing domestic innovation goals 52 Cybersecurity firm FireEye views APT10’s activities in many instances as supporting the theft of confidential commercial information to support Chinese firms 53 In October 2018 DHS issued a new alert concerning “ongoing APT actor activity attempting to infiltrate the networks of global managed service providers MSPs ” October 2018 Alert 54 The activity observed by DHS aligns with activity that cybersecurity firms have attributed to APT actors 55 This alert followed a prior one concerning APT10 issued in April 2017 56 3 The Increasing Sophistication of Chinese Cyber-Enabled Theft China’s cyber-enabled theft of intellectual property and sensitive commercial information exhibits increasing sophistication According to cybersecurity experts quoted in a June 2018 report China’s state-supported hackers have developed new ways of concealing their attacks 57 In particular hackers appear to be using generic “tools” that leave little if any unique traces making attribution more difficult 58 In its November 2018 assessment Carbon Black found that Chinese state actors had improved their methods of infiltration and concealment 59 C Major Criminal Indictments of Ongoing Chinese Government Economic Espionage against U S Aerospace and High-Technology Companies Since the publication of USTR’s Section 301 Report the Department of Justice DOJ has indicted a dozen individuals and corporate entities directed by the Chinese government to obtain commercial secrets from 15 companies predominantly in aerospace and high-technology sectors The facts alleged in these indictments reflect China’s ongoing determination to obtain trade secrets and other valuable commercial information in support of China’s industrial policy 52 See Section V B 4 of the Section 301 Report See Section V B 4 of the Section 301 Report 54 Press Release United States Computer Emergency Readiness Team Alert TA18-276B Advanced Persistent Threat Activity Exploiting Managed Service Providers Oct 3 2018 https www us-cert gov ncas alerts TA18276B 55 Ionus Arghire DHS Warns of Attacks on Managed Service Providers SECURITY WEEK Oct 4 2018 https www securityweek com dhs-warns-attacks-managed-service-providers Christopher Bing U S Warns of New Hacking Spree from Group Linked to China REUTERS Oct 3 2018 https www reuters com article us-usa-cyberchina u-s-warns-of-new-hacking-spree-from-group-linked-to-china-idUSKCN1ME01L 56 Press Release United States Computer Emergency Readiness Team Alert TA17-117A – Intrusions Affecting Multiple Victims across Multiple Sectors original release date Apr 27 2017 last revised Oct 3 2018 https www us-cert gov ncas alerts TA17-117A last visited Nov 19 2018 57 China Backed Off from Hacking U S Companies Now It Is at It Again MCCLATCHY June 7 2018 58 China Backed Off from Hacking U S Companies Now It Is at It Again MCCLATCHY June 7 2018 59 Quarterly Incident Response Threat Report Destructive Cyberattacks Increase Ahead of 2018 Midterm Elections CARBON BLACK Nov 2018 at 13 https www carbonblack com quarterly-incident-response-threatreport november-2018 53 13 1 China’s Campaign to Steal Commercial Aerospace Technology a Cyberintrusion and Cybertheft On October 30 2018 the DOJ announced indictments against two Chinese intelligence officers six of their paid hackers and two Chinese intelligence agents placed in a French aerospace company 60 Over at least a five-year period the Chinese intelligence officers directed the hackers and agents to “facilitate intrusions into computers of companies based in the United States and abroad” for the purpose of stealing intellectual property and confidential business information in the aerospace and other high-technology industries 61 The indictment identifies 13 victim companies including aerospace companies in Massachusetts 62 Arizona 63 Oregon 64 Wisconsin 65 California 66 as well as companies from the United Kingdom 67 France 68 and Australia 69 The indictment states that Chinese intelligence targeted among other things data and information related to a turbofan engine used in commercial jetliners 70 At the time of the intrusions a Chinese state-owned aerospace company sought to develop its own engine for use in commercial aircraft manufactured in China and elsewhere 71 The turbofan engine targeted by members of the conspiracy was being developed through a partnership between a French aerospace company and an aerospace company based in the United States 72 According to the indictment Chinese intelligence and hackers operating at their direction used tactics such as spear phishing 73 malware 74 doppelganger domain names 75 dynamic domain name service DNS accounts to register multiple domain names and frequently change the associated Internet Protocol address 76 domain hijacking watering hole attacks 77 and co-opting 60 Press Release U S Department of Justice Chinese Intelligence Officers and Their Recruited Hackers and Insiders Conspired to Steal Sensitive Commercial Aviation and Technological Data for Years Oct 30 2018 https www justice gov opa pr chinese-intelligence-officers-and-their-recruited-hackers-and-insiders-conspiredsteal 61 Indictment United States v Zhang et al No 13CR3132-H S D Cal Oct 25 2018 hereinafter “United States v Zhang et al ” at 2 62 United States v Zhang et al at 5 63 United States v Zhang et al at 6 64 United States v Zhang et al at 6 65 United States v Zhang et al at 6 66 United States v Zhang et al at 6 67 United States v Zhang et al at 5 68 United States v Zhang et al at 6 69 United States v Zhang et al at 6 70 United States v Zhang et al at 6 71 United States v Zhang et al at 6 72 United States v Zhang et al at 6 73 United States v Zhang et al at 8 74 United States v Zhang et al at 8-9 75 United States v Zhang et al at 8-9 76 United States v Zhang et al at 8-9 77 United States v Zhang et al at 8-9 14 of targeted company employees 78 The actors launched multiple attacks on target companies 79 In one brazen attack on a French aerospace company Chinese intelligence officer “Chai Meng” reported to a colleague “We sent a fake email pretending to be from network management ”80 In another attack on the same company intelligence officers and their recruited agents inside the company conspired to plant a piece of “Trojan horse” malware on the company’s computer systems 81 One intelligence officer told another “I’ll bring the horse … to you tonight Can you take the Frenchmen out to dinner tonight I’ll pretend I bump into you at the restaurant to say hello This way we don’t need to meet in Shanghai ”82 Later on the company’s insider confirmed to a Chinese intelligence officer that “ t he horse was planted this morning ”83 In another instance described in the indictment one of the hackers that operated at the direction of Chinese intelligence officers created a “Google AppEngine” account and working with his associates placed malware on the network of an Oregon-based aerospace supplier 84 This company manufactured parts for a turbofan engine that was of interest to China 85 The hackers then used the Google AppEngine account to manage the implanted malware and steal commercial data over at least a seven-month period 86 In another instance malware was placed on the systems of a California-based company which the hackers used as a watering hole to launch further attacks on other victims 87 In short the indictment indicates that China conducted a systematic and thorough campaign to attack targets with the goal of stealing valuable intellectual property to further its industrial policies b Economic Espionage Campaign against the United States by Chinese Human Intelligence Programs China conducts cyberintrusion and cybertheft hand-in-hand with the physical theft of intellectual property many times with the use of insiders A common pattern—shown in an indictment made public in October 2018—appears to be the recruitment of employees in a target company who then take commercially sensitive information from their employer and transfer it to Chinese government agents A different criminal case from September 2018 also shows how Chinese intelligence seeks to gather information from co-optees in the United States regarding potential recruits According to the indictment made public in October 2018 a high-ranking Chinese intelligence officer “Yanjun Xu” “Xu” sought to steal trade secrets from U S and European aviation 78 United States v Zhang et al at 8-9 United States v Zhang et al at 5-6 80 United States v Zhang et al at 15 81 United States v Zhang et al at 14-15 82 United States v Zhang et al at 14-15 83 United States v Zhang et al at 16 84 United States v Zhang et al at 16 85 United States v Zhang et al at 17 86 United States v Zhang et al at 17 87 United States v Zhang et al at 13 79 15 companies 88 In particular he targeted technology from a U S aircraft engine supplier related to the “design and use of certain types of composite materials in fan blades and fan blade encasements that provide greater engine durability weight reduction and lower costs ”89 It is estimated that the company spent “billions of dollars of research and development investment” in developing these technologies over several decades 90 This aircraft engine technology gave the company “a significant competitive advantage over others in the industry ”91 The indictment relates that Xu worked together with an official at the government-affiliated Nanjing University of Aeronautics and Astronautics NUAA 92 NUAA is run by China’s MIIT which in the words of the indictment has “significant influence over China’s aerospace industry ”93 Xu developed a relationship with an employee at the company He lied to the employee about his true identity and instead posed as an official with a science and technology association 94 According to the indictment Xu worked with NUAA to invite the employee to give a presentation on the victim company’s “signature material design and manufacturing technology ”95 In return NUAA would cover all expenses and pay a stipend 96 The employee traveled to China and gave the presentation 97 According to the indictment these facts started a relationship in which Xu attempted to obtain the company’s trade secrets for Chinese intelligence Xu developed a list of intelligence collection requirements and specific technical information that he wanted the employee to provide 98 This list included documents related to an aircraft engine’s containment analysis for a fan blade encasement 99 The documents that the employee provided to Xu “contained a label warning that the presentation contained proprietary information ”100 Xu’s scheme was stopped only after he was arrested in Belgium 101 According to the indictment after receiving a computer file directory from the employee’s computer Xu arranged to meet the employee and obtain the employee’s company computer Xu confirmed that the contents of the 88 Indictment United States vs Xu No 1 18CR43 S D Ohio Apr 4 2018 hereinafter “United States v Xu” at 1 89 United States v Xu at 2 United States v Xu at 3 91 United States v Xu at 3 92 United States v Xu at 2 93 United States v Xu at 2 94 United States v Xu at 2 95 United States v Xu at 8 96 United States v Xu at 7-9 97 United States v Xu at 9 98 United States v Xu at 6 99 United States v Xu at 10 100 United States v Xu at 10 101 Press Release U S Department of Justice Chinese Intelligence Officer Charged with Economic Espionage Involving Theft of Trade Secrets from Leading U S Aviation Companies Oct 10 2018 https www justice gov opa pr chinese-intelligence-officer-charged-economic-espionage-involving-theft-tradesecrets-leading 90 16 employee’s company computer could be exported to a portable hard drive 102 Instead U S and Belgian law enforcement intervened and Xu was extradited to the United States 103 Chinese intelligence also sought to benefit from the resources available to co-optee “Ji Chaoqun” “Ji” who was arrested in Illinois in September 2018 104 According to the complaint filed by DOJ Ji was recruited by Chinese intelligence and tasked to provide background reports that could not be purchased from China on eight individuals whose names were provided to him 105 The “eight individuals … are naturalized U S citizens born in Taiwan or China now living in the United States” and who “either currently worked in or were recently retired from a career in the science and technology industry including several individuals specializing in aerospace fields ”106 Seven out of the eight individuals had been employed by U S defense contractors 107 Ji paid for background check reports on each of these eight individuals using services provided by Intelius Instant Checkmate and Spokeo 108 According to the criminal complaint he then transmitted these background check reports in email to his Chinese intelligence handler and disguised them as “Midterm test questions ”109 Ji facilitated the work of Chinese intelligence by providing them with unclassified information that could not be obtained easily in China 110 2 China’s Campaign to Steal Semiconductor Technology from the United States Another DOJ indictment made public in November 2018 discusses China’s efforts to steal U S computer technology In its 13th Five-Year Plan which covers the years 2016-2020 China prioritized the development of integrated circuit devices including dynamic random-access memory DRAM 111 DRAM is “used in leading-edge computing consumer networking automotive industrial embedded and mobile productions ”112 China is seeking to create its own DRAM production capability which would lessen its dependence on manufacturers in the United States China’s top government body the State Council views the building of a DRAM industry as “a national economic priority ”113 102 United States v Xu at 11 Press Release U S Department of Justice Chinese Intelligence Officer Charged with Economic Espionage Involving Theft of Trade Secrets from Leading U S Aviation Companies Oct 10 2018 104 Press Release U S Department of Justice Chinese National Arrested for Allegedly Acting Within the United States as an Illegal Agent of the People’s Republic of China Sep 25 2018 https www justice gov opa pr chinese-national-arrested-allegedly-acting-within-united-states-illegal-agent-peoples 105 Criminal Complaint United States v Ji Chaoqun No 18CR611 N D Ill Sept 21 2018 hereinafter “United States v Ji Chaoqun” at 11 106 United States v Ji Chaoqun at 10-11 107 United States v Ji Chaoqun at 10-11 108 United States v Ji Chaoqun at 9 109 United States v Ji Chaoqun at 11 110 United States v Ji Chaoqun at 13 111 Indictment U S v United Microelectronics Corporation et al No CR18465 N D Cal Sep 27 2018 hereinafter “United States v UMC et al ” at 8 112 United States v UMC et al at 2 113 United States v UMC et al at 2 103 17 According to the indictment the Chinese government established Fujian Jinhua Integrated Circuits Co Ltd “Jinhua” to help meet its DRAM production goals Jinhua’s “sole purpose” is to create and manufacture DRAM 114 The Chinese government started Jinhua with over $5 billion in capital 115 In or around 2016 Jinhua entered into a technology cooperation agreement with Taiwan-based United Microelectronics Corporation UMC to attempt to develop DRAM technology 116 Jinhua funded UMC and UMC promised to “develop DRAM technology transfer the technology to Jinhua and Jinhua would mass produce DRAM ”117 In this case the U S victim was Boise-based Micron Technology Inc “Micron” which is “the only United States-based company that manufactures DRAM ”118 It is a leader in the semiconductor industry and “provides approximately 20-25% of the world supply of DRAM ”119 According to the indictment Jinhua illegally obtained Micron’s trade secrets which included “detailed confidential information used to design and construct efficient manufacturing processes for advanced DRAM technology ”120 The indictment states that Jinhua recruited employees at Micron’s Taiwan subsidiary Micron Memory Taiwan Co Ltd MMT to steal critical DRAM technology trade secrets First UMC hired MMT’s former president “Chen Zhengkun” “Chen” 121 Chen in turn recruited “J T Ho ” who formerly worked at MMT 122 Prior to leaving MMT Ho took confidential information from Micron and used it to further UMC and Jinhua DRAM technology design 123 Ho also recruited former MMT employee “Wang Yungming ” who had taken “over 900 Micron files some containing Micron confidential and proprietary information for the design of the company’s DRAM technology in its current and future generations that were still in its research and development phase ”124 According to the indictment the stolen trade secrets are valued at up to $8 75 billion 125 UMC and Jinhua have filed for a number of patents that contain information that is “the same or very similar to technology described in Micron’s trade secrets ”126 UMC then used the Chinese legal system to block Micron from selling its DRAM products in China claiming that Micron had infringed on UMC’s patents 127 114 United States v UMC et al at 2 United States v UMC et al at 2 116 United States v UMC et al at 9 117 United States v UMC et al at 9 118 United States v UMC et al at 4 119 United States v UMC et al at 4 120 United States v UMC et al at 5 121 United States v UMC et al at 3 122 United States v UMC et al at 3 123 United States v UMC et al at 4 124 United States v UMC et al at 4 125 United States v UMC et al at 7 126 United States v UMC et al at 11 127 China Court Bans Micron Chip Sales in Patent Case Taiwan’s UMC REUTERS July 3 2018 https www reuters com article us-micron-tech-stocks china-court-bans-micron-chip-sales-in-patent-case-taiwansumc-idUSKBN1JT2DL 115 18 The United States responded strongly in this case of Chinese economic espionage Earlier this month DOJ unsealed an indictment against Jinhua UMC and the former MMT employees 128 The unsealing of these indictments come on the heels of recent action by the U S Department of Commerce DOC to restrict technology exports to Jinhua 129 Due to the importance of semiconductor technology the DOC determined that “Jinhua poses a significant risk of becoming involved in activities that are contrary to the national security interests of the United States ”130 D China Conducts a Global Espionage Campaign to Obtain Intellectual Property and Sensitive Commercial Information After USTR released the Section 301 Report in March 2018 reports of Chinese governmentsupported intrusions into commercial networks and cyber-theft emerged in Australia Japan the EU and South Korea 1 Australia A September 2018 report by the Australian Strategic Policy Institute131 “ASPI Report” found that China did not fulfill its commitments to Australia stemming from a 2017 joint statement 132 to refrain from commercial cyber espionage 133 The ASPI Report describes a July 2018 incident in which Chinese hackers attacked the Australian National University system which contained sensitive potentially commercially valuable information ”134 The breach was of a nature that the investigators found it “hard to definitively determine what was stolen and for what purpose ”135 The Weekend Australian has confirmed from a national security source that the intelligence highlighted Huawei’s role in cyber espionage 136 In August 2018 Australia had banned Huawei 128 Press Release U S Department of Justice PRC State-Owned Company Taiwan Company and Three Individuals Charged with Economic Espionage Nov 1 2018 https www justice gov opa pr prc-state-ownedcompany-taiwan-company-and-three-individuals-charged-economic-espionage 129 Press Release U S Department of Justice Addition of Fujian Jinhua Integrated Circuit Company Ltd Jinhua to the Entity List Oct 29 2018 https www commerce gov news press-releases 2018 10 addition-fujian-jinhuaintegrated-circuit-company-ltd-jinhua-entity-list 130 Press Release U S Department of Justice Addition of Fujian Jinhua Integrated Circuit Company Ltd Jinhua to the Entity List Oct 29 2018 131 See also About Us ASPI ORG AU https www aspi org au about-aspi last visited Nov 19 2018 According to its website the Australian Strategic Policy Institute “is an independent non-partisan think tank that produces expert and timely advice for Australia’s strategic and defence leaders ” 132 Dr Adam Segal Dr Samantha Hoffman Fergus Hanson and Tom Uren Hacking for Cash AUSTRALIAN STRATEGY POLICY INSTITUTE Sep 25 2018 at 8 https www aspi org au report hacking-cash See also Press Release Australian Government Department of Foreign Affairs and Trade High-Level Security Dialogue with China Joint Statement Apr 24 2017 https dfat gov au news media Pages high-level-security-dialogue-withchina-joint-statement aspx 133 Dr Adam Segal Dr Samantha Hoffman Fergus Hanson and Tom Uren Hacking for Cash AUSTRALIAN STRATEGY POLICY INSTITUTE Sep 25 2018 at 11 134 Dr Adam Segal Dr Samantha Hoffman Fergus Hanson and Tom Uren Hacking for Cash AUSTRALIAN STRATEGY POLICY INSTITUTE Sep 25 2018 at 11 135 Dr Adam Segal Dr Samantha Hoffman Fergus Hanson and Tom Uren Hacking for Cash AUSTRALIAN STRATEGY POLICY INSTITUTE Sep 25 2018 at 11 136 China Used Huawei for Hack Attack WEEKEND AUSTRALIAN Nov 3 2018 at 2 19 as well as China’s other major telecoms equipment supplier ZTE from participating in the construction of Australia’s 5G network 137 The ASPI Report echoes the conclusion of cybersecurity experts in the United States that China has improved its cyber capabilities and is better able conceal its activities 138 As the ASPI Report notes Chinese activity targeting Australia spans the range of security and non-security related sectors including mining 139 2 Japan FireEye reported in September 2018 on a new campaign detected in July 2018 of phishing attacks on Japanese corporations in the media sector by APT10 which was discussed earlier in this report According to FireEye APT10 has “a history of targeting Japanese entities ”140 The report noted that APT10 has upgraded its malware such that it has become more difficult to detect 141 In addition FireEye noted in April 2018 that since November 2017 APT10 has conducted attacks on Japanese health care companies 142 Moreover according to an August 2018 report Japan is considering excluding Chinese telecommunications firms Huawei and ZTE from bidding on public contracts for building information systems Japanese newspaper Sankei Shimbun reported on August 26 that the Japanese government is considering the ban in a bid to prevent cyber-attacks and leaks of confidential information and to align with the United States and Australia’s recent restrictions regarding the two Chinese tech companies The report published by the newspaper said the government had already begun discussing concrete measures which would include a set of strict standards that companies need to satisfy to qualify for participating in public procurement for information systems 143 137 China Used Huawei for Hack Attack WEEKEND AUSTRALIAN Nov 3 2018 at 2 Dr Adam Segal Dr Samantha Hoffman Fergus Hanson and Tom Uren Hacking for Cash AUSTRALIAN STRATEGY POLICY INSTITUTE Sep 25 2018 at 11 139 Dr Adam Segal Dr Samantha Hoffman Fergus Hanson and Tom Uren Hacking for Cash AUSTRALIAN STRATEGY POLICY INSTITUTE Sep 25 2018 at 12 See also Justina Lee Suspected China Cyberhack on Singapore Is a Wake-Up Call for Asia NIKKEI ASIAN REVIEW Aug 21 2018 https asia nikkei com Spotlight Asia-Insight Suspected-China-cyberhack-on-Singapore-is-a-wake-up-call-for-Asia noting that in August 2018 the Singaporean government reportedly learned of a cyber-theft incident in which information regarding “1 5 million patients was stolen from the city-state's largest public health care provider ” According to Fergus Hanson head of the Cyber Policy Center at the Australian Strategic Policy Institute the incident “‘certainly fits with a pattern of Chinese Communist Party cyber-activity ’” Hanson also noted that Beijing “has been accused of other major health care hacks in the United States ” 140 Ayako Matsuda Irshad Muhammad APT10 Targeting Japanese Corporations Using Updated TTPs FIREEYE BLOGS THREAT RESEARCH Sep 13 2018 https www fireeye com blog threat-research 2018 09 apt10-targetingjapanese-corporations-using-updated-ttps html 141 Ayako Matsuda Irshad Muhammad APT10 Targeting Japanese Corporations Using Updated TTPs FIREEYE BLOGS THREAT RESEARCH Sep 13 2018 142 China Hackers Accused of Attacking Japanese Defence Firms BLOOMBERG via SOUTH CHINA MORNING POST Apr 23 2018 https www scmp com news china diplomacy-defence article 2142863 china-hackers-accusedattacking-japanese-defence-firms 143 Exclusion of Two Chinese Telecommunications Equipment Companies from Government Procurement Would Align Japan with the United States and Australia on National Security Policy Japanese THE SANKEI NEWS Aug 138 20 3 The European Union and Member States Earlier this month Germany’s public broadcaster Deutsche Welle144 published an article entitled “Chinese Spies Suspected of Pilfering German Industrial Pillars ” 145 The article noted that in recent years enterprises in the German state of Baden-Württemberg “have become the target of China's economic espionage more and more frequently and the automobile industry as the local pillar is the hardest hit 146 The Baden-Württemberg Ministry of the Interior confirmed this news in response to a question from the state legislature ”147 In addition the Recorded Future report noted above also indicated that German automotive multinational Daimler AG was targeted by IPs traced to Tsinghua University 148 4 South Korea In June 2018 the Suwon District Prosecutor’s Office in South Korea indicted one Chinese national for illegally attempting to use an external hard drive to transfer 5 130 trade secrets related to foldable OLED technology 149 the latest in electronic display technology which is 26 2018 https www sankei com politics news 180826 plt1808260002-n2 html See also Cybersecurity Law of the People’s Republic of China adopted by the National People’s Congress on Nov 7 2016 effective June 1 2017 providing at Article 28 that “Network operators shall provide technical support and assistance to public security authorities and state security authorities in legally safeguarding state security and investigating crimes ” 144 See Who We Are DEUTSCHE WELLE https www dw com en about-dw profile s-30688 last visited Nov 19 2018 145 See article posted by Deutsche Welle on its Chinese-language news service Chinese Spies Suspected of Infiltrating German Pillar Industries Chinese DEUTSCHE WELLE Nov 4 2018 https www dw com zh 中国间 谍疑染指德国支柱产业 a-46150266 See also Deutschland im Visier chinesischer Internet-Spione German DEUTSCHE WELLE Dec 11 2017 https www dw com de deutschland-im-visier-chinesischer-internet-spione a41739291 reporting on an investigation by Germany’s Federal Office for the Protection of the Constitution BfV which reportedly found that “China is increasing the focus of Chinese espionage activity on the Internet ” 146 See article posted by Deutsche Welle on its Chinese-language news service Chinese Spies Suspected of Infiltrating German Pillar Industries Chinese DEUTSCHE WELLE Nov 4 2018 https www dw com zh 中国间 谍疑染指德国支柱产业 a-46150266 See also Deutschland im Visier chinesischer Internet-Spione German DEUTSCHE WELLE Dec 11 2017 https www dw com de deutschland-im-visier-chinesischer-internet-spione a41739291 reporting on an investigation by Germany’s Federal Office for the Protection of the Constitution BfV which reportedly found that “China is increasing the focus of Chinese espionage activity on the Internet ” 147 See article posted by Deutsche Welle on its Chinese-language news service Chinese Spies Suspected of Infiltrating German Pillar Industries Chinese DEUTSCHE WELLE Nov 4 2018 https www dw com zh 中国间 谍疑染指德国支柱产业 a-46150266 See also Deutschland im Visier chinesischer Internet-Spione German DEUTSCHE WELLE Dec 11 2017 https www dw com de deutschland-im-visier-chinesischer-internet-spione a41739291 reporting on an investigation by Germany’s Federal Office for the Protection of the Constitution BfV which reportedly found that “China is increasing the focus of Chinese espionage activity on the Internet ” 148 Sanil Chohan Winnona DeSombre and Justin Grosfelt Chinese Cyberespionage Originating from Tsinghua University Infrastructure CTA-2018-0816 RECORDED FUTURE Aug 16 2018 at 12 149 See An Introduction to OLED Displays OLED INFO https www oled-info com introduction last visited Nov 19 2018 “OLED Organic Light-Emitting Diodes is a flat light-emitting technology made by placing a series of organic thin films between two conductors When electrical current is applied a bright light is emitted OLEDs are emissive display that do not require a backlight and so are thinner and more efficient than LCD displays which do require a white backlight ” See also Flexible OLEDs Introduction and Market Status OLED INFO 21 primarily used in TVs smartphones and other electronic devices 150 The Suwon District Prosecutor’s Office also indicted another Korean national for illegally removing thousands of files related to wind turbine blade testing and production technology from the Korea Institute of Machinery Equipment in February 2017 then passing on some of the files to a Chinese competitor for a consultation contract between October 2017 and May 2018 151 Korean firms such as Samsung Display have tried to prevent former employees from breaching their non-disclosure agreements and seeking work with Chinese competitors In this case the former employee allegedly misled Samsung Display into believing that he was seeking employment in a different business sector In fact he had taken a position with a Chinese company with close business ties to Samsung Display’s competitor in OLED technology Chinese companies have been struggling to narrow the gap with South Korean display makers especially in the field of flexible OLED displays 152 A Korean court found in favor of Samsung Display and prohibited the former researcher from taking employment with the Chinese company III China’s Unfair Technology Transfer Regime for U S Companies in China A Introduction As detailed in Section II of the Section 301 Report the Chinese government uses a variety of tools to regulate or intervene in U S companies’ operations in China in order to require or pressure the transfer of technologies and intellectual property to Chinese companies Two key aspects of China’s technology transfer regime act to pressure technology transfer foreign ownership restrictions and administrative licensing and approvals These two aspects of China’s technology transfer regime are furthered by the non-transparent and discretionary nature of China’s foreign investment approvals system wherein Chinese officials may use oral communication and informal administrative guidance to pressure foreign firms to transfer technology Despite the relaxation of some foreign ownership restrictions and certain other incremental changes in 2018 China’s acts policies and practices related to forced technology transfer in China persist Since the publication of the Section 301 Report companies and other trading partners have continued to report on and express concern regarding China’s technology transfer regime China has not effectively resolved the systemic or specific problems detailed therein https www oled-info com flexible-oled Foldable OLEDs also known as flexible OLEDs is an OLED “based on a flexible substrate which can be either plastic metal or flexible glass ” 150 A Chinese National Arrested and Indicted for Attempt to Leak National Core Technology – First Case of a Foreign National Korean MK NEWS June 27 2018 http news mk co kr newsRead php sc 30000022 year 2018 no 405034 151 A Chinese National Arrested and Indicted for Attempt to Leak National Core Technology – First Case of a Foreign National Korean MK NEWS June 27 2018 152 Court Bans Ex-Samsung Worker from Relocating to Chinese Firm YONHAP NEWS AGENCY July 5 2018 https en yna co kr view AEN20180705000800320 22 B U S and Foreign Companies and Other U S Trading Partners Continue to Share U S Concerns 1 Companies Since March 2018 a number of independent surveys have shown that foreign businesses remain very concerned about the technology transfer regime in China In July 2018 the 2018 China Business Report of the American Chamber of Commerce in Shanghai AmCham Shanghai reported that 21% of member companies had felt pressure to transfer technology in exchange for market access 153 This pressure was particularly notable in high-technology industries with 44% of aerospace and 41% of chemical companies having reported facing “notable” pressure to transfer technology According to AmCham Shanghai these findings affirm “the current U S administration’s concern about this pay-to-play tactic in technology-based industries ”154 In September 2018 the U S -China Business Council USCBC released its annual 2018 Member Survey which reported that over 58% of respondents had cited “licensing and regulatory approvals ” 34% had cited “foreign investment barriers ” and 27% had cited “government pressure to favor Chinese companies” as signs of protectionism in China 155 These findings confirm the persistent pattern of conduct highlighted in the Section 301 Report 156 Surveys of European companies indicate similar concerns In June 2018 the Business Confidence Survey 2018 of the European Union Chamber of Commerce in China found that “unfair technology transfers continue despite government assurances ” with 19% of Chamber members reporting that they had felt compelled to engage in unfair technology transfers to maintain market access in China 157 Consistent with the findings reported in AmCham Shanghai’s survey European companies in high-technology industries were significantly more likely to report in the affirmative including 36% of aerospace and aviation 33% of civil engineering and construction 27% of automotive and 23% of chemical and petroleum companies 158 This new information supports the Section 301 Report’s finding that “ industry surveys make clear that China’s technology transfer regime is a persistent problem for U S companies in China particularly in high-technology sectors targeted by the Chinese government ”159 In September 2018 the European Union Chamber of Commerce in China published its 2018 2019 Position Paper which outlines European companies’ dissatisfaction with China’s 153 AMERICAN CHAMBER OF COMMERCE IN SHANGHAI 2018 CHINA BUSINESS REPORT July 2018 at 18 AMERICAN CHAMBER OF COMMERCE IN SHANGHAI 2018 CHINA BUSINESS REPORT July 2018 at 18 155 U S -CHINA BUSINESS COUNCIL 2018 MEMBER SURVEY 2018 at 5 https www uschina org sites default files 2018_ucsbc_member_survey_final pdf 156 Unlike the 2017 survey cited in the Section 301 Report the USCBC’s 2018 Member Survey does not include statistics on technology transfer requests from the Chinese government 157 EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA EUROPEAN BUSINESS IN CHINA BUSINESS CONFIDENCE SURVEY 2018 2018 at 40 158 EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA EUROPEAN BUSINESS IN CHINA BUSINESS CONFIDENCE SURVEY 2018 2018 at 40 159 See Section II A 2 of the Section 301 Report 154 23 regulatory environment in a number of areas including “access to licenses ” “market access barriers ” “unequal and unfair treatment ” and “complex and lengthy administrative procedures ”160 These areas are the main focus of Section II of the Section 301 Report The 2018 2019 Position Paper states T he European Chamber shares many of the U S concerns about China including a general lack of market access—particularly in high-tech sectors—a business environment that favors domestic firms the continued existence of technology transfers as a precondition for market access and the requirement to localize information and industrial and innovation facilities 161 In November 2018 moreover the European Union Chamber of Commerce in China released an official statement expressing doubt about market opening promises made by President Xi Jinping in a keynote speech at the Chinese International Import Expo in Shanghai According to the statement China’s “constant repetition without sufficient concrete measures or timelines being introduced has left the European business community increasingly desensitized to these kinds of promises ”162 2 Other Trading Partners In a number of fora over the last year other U S trading partners have indicated that they share U S concerns about China’s technology transfer regime and the types of acts policies and practices in which China engages During China’s WTO Trade Policy Review in July 2018 the Concluding Remarks by the Chairperson noted that concerns were raised about China “regarding JV joint venture requirements and also with regards to what some perceived as being inconsistent and unpredictable regulatory practices and technology transfer requirements ”163 Referencing these remarks the European Union Chamber of Commerce in China’s 2018 2019 Position Paper states T he chairperson’s concluding remarks on the WTO’s 2018 Trade Policy Review and the more than 1 900 questions raised by other members reflect the international community’s mixed feelings towards the situation and indicate that concerns about China’s role in the global economy are widespread These concerns derive from issues such as unfair technology transfers which a reported 19 per cent of European Chamber members felt compelled to do to maintain market access in 2017 a lack of investment 160 EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA POSITION PAPER 2018 2019 Sep 18 2018 at 6-7 http www europeanchamber com cn en upcomingevents 14581 European_Business_in_China_Position_Paper_2018_2019 161 EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA POSITION PAPER 2018 2019 Sep 18 2018 at 155 162 Press Release European Union Chamber of Commerce in China European Chamber’s Statement on President Xi’s Speech at China International Import Export Nov 5 2018 http www europeanchamber com cn en pressreleases 2792 european_chamber_s_statement_on_president_xi_s_speech_at_the_china_international_import_expo 163 Concluding Remarks by the Chairperson WORLD TRADE ORGANIZATION July 11 and 13 2018 https www wto org english tratop_e tpr_e tp475_crc_e htm 24 reciprocity and concerns over how the China Manufacturing 2025 initiative will be pursued 164 On the occasion of the Chinese International Import Expo in Shanghai the French and German ambassadors to China co-authored an opinion piece advocating reform of China’s policies and practices The letter called on China to provide the same opportunities for European businesses in China that Chinese businesses enjoy in Europe including taking the significant step to abolish JV requirements across all sectors 165 The letter further urged China to complement these steps by allowing greater access to operational licenses and adopting other reforms in sectors that are formally open to foreign companies 166 A 2017 report from the Organisation for Economic Co-operation and Development OECD also confirmed the existence of China’s technology transfer regime In its discussion of sectorspecific equity restrictions and JV requirements the 2017 report pointed out that a survey of available literature shows with respect to China “several restrictions are explicitly aimed at mandating technology transfer ”167 The 2017 report also found that the Chinese government must approve certain JVs and that such approval process “explicitly involves a significant exchange of technology-related information with officials ”168 It specifically noted that “Chinese authorities retain the right to examine the machinery and proprietary technology provided by foreign parties and require submission of documentation on industrial property or proprietary technology… ”169 C China Has Made Only Incremental Changes to Foreign Investment Restrictions 1 Changes to Foreign Ownership Restrictions Since the publication of the Section 301 Report China has taken some actions to remove or relax certain foreign ownership restrictions As set out in the Section 301 Report China’s inbound foreign investment catalogue provides a starting point for understanding China’s restrictions applying to foreign investment On June 28 2018 entering into force on July 28 2018 the NDRC and the Ministry of Commerce MOFCOM issued the Special Administrative Measures Negative List for the Access of Foreign Investment 2018 “2018 Negative List” which 164 EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA POSITION PAPER 2018 2019 Sep 18 2018 at 4 emphasis added 165 Jean-Maurice Ripert Clemens Von Goetze “Will Shanghai Become Milestone for China’s Opening-Up ” Ask French German Ambassadors CAIXIN Nov 1 2018 https www caixinglobal com 2018-11-01 opinion-willshanghai-become-milestone-for-chinas-opening-up-101341138 html 166 Jean-Maurice Ripert Clemens Von Goetze “Will Shanghai Become Milestone for China’s Opening-Up ” Ask French German Ambassadors CAIXIN Nov 1 2018 167 Kowalski P D Rabaioli and S Vallejo International Technology Transfer Measures in an Interconnected World 206 OECD TRADE POLICY PAPER 39 OECD Publishing Paris 2017 https www oecdilibrary org docserver ada51ec0en pdf expires 1541535691 id id accname guest checksum 4A6A6D1DB0FB9D748CE70D7595C41858 168 Kowalski P D Rabaioli and S Vallejo International Technology Transfer Measures in an Interconnected World 206 OECD TRADE POLICY PAPER 40 OECD Publishing Paris 2017 169 Kowalski P D Rabaioli and S Vallejo International Technology Transfer Measures in an Interconnected World 206 OECD TRADE POLICY PAPER 40 OECD Publishing Paris 2017 25 replaces the negative list in China’s most recent 2017 Foreign Investment Catalogue 170 See Appendix A for an updated table of examples of equity restrictions and local partner requirements in the 2018 Negative List 171 Among other changes the 2018 Negative List eases or removes foreign equity caps and certain other restrictions for the automotive aircraft and shipbuilding industries and for certain financial sectors Some of these changes take place immediately and some over time 172 As analysts and industry stakeholders have noted however these revisions reflect only incremental changes to China’s foreign ownership restrictions Several of the industries opened in the 2018 Negative List are in sectors in which China already has an internal reason for inviting more foreign participation including in connection with attracting more foreign investment and potentially technology transfer in manufacturing and extractive industries or in which market conditions are already overwhelmingly favorable to Chinese companies e g railway lines or electricity grid construction and management 173 Following its release the European Union Chamber of Commerce in China criticized the list for continuing “to discriminate against nonChinese companies by maintaining the distinction between domestically-invested and foreigninvested enterprises with respect to market entry and approval requirements ”174 The Chamber’s president noted that while these reductions represent a further step towards China’s opening “a negative list of 48 areas is excessive and a lot more needs to be done ”175 Using foreign ownership restrictions including in connection with its administrative review and licensing processes China continues to pressure technology transfer from foreign companies in numerous ways For example a September 2018 report by the Wall Street Journal provides case-specific examples of Chinese actions to obtain technology from five major U S companies DuPont General Electric Advanced Micro Devices Huntsman Corp and Micron 170 Special Administrative Measures Negative List for the Access of Foreign Investment 2018 NDRC and MOFCOM 2018 Order No 18 issued June 28 2018 effective July 28 2018 171 China also adopted other specific policies related to the 2018 Negative List For example a tax preference previously available only to foreign companies in sectors “encouraged” for inbound investment was expanded as of Sep 29 2018 to apply to all foreign investments except those related to increasing transferring or purchasing shares of publicly traded companies and which are not in “prohibited” sectors Notice on the Applicable Scope of the Policy of Temporary Exemption of Withholding Taxes on the Direct Investment Made by Overseas Investors with Distributed Profits MOF State Administration of Taxation NDRC MOFCOM Cai Shui 2018 No 102 issued Sep 29 2018 172 Notably in conjunction with making certain incremental changes to foreign investment restrictions China continues to designate sectors “encouraged” for foreign investment See the official notice attached to the 2018 Negative List which provides that sectors “encouraged” in 2017 will maintain their “encouraged” status 173 See e g David Fickling China’s Foreign Investment Door Opens But Only Barely BLOOMBERG July 1 2018 stating that 2018 Negative List allows China “to proclaim a more open market while in practice making little tangible difference ” 174 Press Release Benelux Chamber of Commerce in China European Chamber’s Statement on the New Negative List 2018 July 9 2018 https beijing bencham org news european-chambers-statement-new-negative-list-2018 175 Press Release Benelux Chamber of Commerce in China European Chamber’s Statement on the New Negative List 2018 July 9 2018 https beijing bencham org news european-chambers-statement-new-negative-list-2018 26 Technologies 176 Several of these companies faced coercive pressure from Chinese officials 177 According to the article China’s tactics “include pressuring U S partners in JVs to relinquish technology using local courts to invalidate American firms’ patents and licensing arrangements dispatching antitrust and other investigators and filling regulatory panels with experts who may pass secrets to Chinese competitors ”178 Similar policies and practices are described in the Section 301 Report 179 2 The Automotive Sector as an Illustrative Example of China’s Continued Use of Foreign Investment Restrictions In the automotive sector discussed in detail in Section II B 2 a of the Section 301 Report China has eased certain restrictions on foreign investment As first announced by NDRC in April 2018 180 and as written into the 2018 Negative List see Appendix A China removed foreign equity caps for special-purpose vehicles and new energy vehicles NEVs as of July 28 2018 and has pledged to remove foreign equity caps for non-NEV commercial vehicles by 2020 and non-NEV passenger vehicles by 2022 The 2018 Negative List also provides that in 2022 China will remove the current restriction that limits foreign automakers to two JVs 181 However several factors suggest that non-Chinese automakers will continue to face significant pressure to share their technology with Chinese partners First China is contemplating new restrictions on automotive investments that would be more onerous on non-Chinese entities The draft Regulations for the Administration of Investment in the Automobile Industry 182 published in May 2018 would prohibit certain investments in new fuel-vehicle manufacturing plants 183 176 Lingling Wei and Bob Davis How China Systematically Pries Technology From U S Companies WALL ST J Sep 26 2018 https www wsj com articles how-china-systematically-pries-technology-from-u-s-companies1537972066 177 Lingling Wei and Bob Davis How China Systematically Pries Technology From U S Companies WALL ST J Sep 26 2018 178 Lingling Wei and Bob Davis How China Systematically Pries Technology From U S Companies WALL ST J Sep 26 2018 179 See e g Section II B Section VI A 2 Section VI A 3 and Section II C 2 of the Section 301 Report 180 National Development and Reform Commission Answers Journalists’ Questions Regarding the Formulation of a New Foreign Investment Negative List and the Opening of the Manufacturing Sector NDRC published Apr 17 2018 http www ndrc gov cn xwzx xwfb 201804 t20180417_882711 html 181 In a widely reported case involving U S NEV manufacturer Tesla China has apparently allowed Tesla to establish a WFOE for manufacture of NEVs in conformity with the 2018 Negative List See Brenda Goh Tesla Goes Big in China with Shanghai Plant REUTERS July 10 2018 https www reuters com article us-teslachina tesla-goes-big-in-china-with-shanghai-plant-idUSKBN1K01HL Evelyn Chang Tesla Buys New Plot for China Factory for $140 Million CNBC Oct 17 2018 https www cnbc com 2018 10 17 tesla-buys-new-plot-forits-first-china-factory html In another reported case BMW has stated it will pay about $4 billion to increase its stake in its existing JV with Brilliance China Automotive Holdings Ltd to 75% from 50% The change would come into effect in 2022 the year that China has committed to lifting the foreign equity cap on manufacturing of nonNEV passenger vehicles The new joint-venture agreement lasts through 2040 extended from 2028 See BMW to Take Control of China Joint Venture in $4 Billion Deal WALL ST J Oct 11 2018 https www wsj com articles bmw-to-take-control-of-china-joint-venture-in-4-1-billion-deal-1539233722 182 NDRC Notice on Soliciting Comments on the “ For-Comment Draft Regulations for the Administration of Investment in the Automobile Industry” NDRC issued July 4 2018 183 NDRC Notice on Soliciting Comments on the “ For-Comment Draft Regulations for the Administration of Investment in the Automobile Industry” NDRC issued July 4 2018 at Art 11 27 and would subject existing fuel-vehicle manufacturing enterprises to new requirements relating to existing vehicle production vehicle exports and NEV output 184 The draft regulations would also subject newly established pure-electric vehicle PEV manufacturing enterprises as well as fuel-vehicle manufacturing enterprises seeking to expand PEV production capacity to a number of onerous requirements 185 Foreign automakers seeking to establish new manufacturing facilities without a Chinese JV partner would find it particularly difficult to meet these requirements These draft investment restrictions also serve to illustrate how foreign automakers like foreign companies in various sectors in China continue to be subject to administrative review and licensing processes used in China’s technology transfer regime The European Union Chamber of Commerce in China’s Automotive Working Group comments in its 2018 2019 Position Paper “ T here are still concerns over investment from an industry standpoint First administrative and permit approvals that are closely linked to major investments are sometimes a deterrent either intentionally or unintentionally ”186 Second China’s automotive policy is transitioning to a new phase that may exacerbate pressure on foreign automakers to remain in JVs with their Chinese competitors Since 2010 the Chinese government has subsidized NEVs manufactured and sold in China through a program known as Promoted Use 187 This financial support has gone predominately to Chinese domestic automakers who have scaled up NEV production While the Promoted Use program is scheduled to be phased out by the end of 2020 188 as of 2019 a new “Credit System” will require all automakers including foreign automakers who currently produce no or very few NEVs in China to generate or purchase credits based on their fuel-vehicle fleet’s corporate average fuel consumption as well as their NEV production 189 NDRC Notice on Soliciting Comments on the “ For-Comment Draft Regulations for the Administration of Investment in the Automobile Industry” NDRC issued July 4 2018 at Art 12 185 NDRC Notice on Soliciting Comments on the “ For-Comment Draft Regulations for the Administration of Investment in the Automobile Industry” NDRC issued July 4 2018 at Chapter IV 186 EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA POSITION PAPER 2018 2019 Sep 18 2018 at 181 For further discussion of administrative licensing and approvals see also key recommendations by the European Union Chamber of Commerce in China’s Standards and Conformity Assessment Working Group 187 Notice on Adjusting Fiscal Subsidy Policies for Promoting Use of NEVs MOF Ministry of Science and Technology MIIT NDRC Cai Jian 2016 No 958 issued Dec 30 2016 188 Promoted Use is currently in the third of three scheduled phases Phase III started in 2016 and is scheduled to conclude at the end of 2020 The first of the three measures that govern Phase III explicitly indicates a 2020 end date for administering Promoted Use See Notice on 2016-2020 Fiscal Support Policies for Promoting Use of New Energy Vehicles MOF Ministry of Science and Technology MIIT NDRC issued Apr 22 2015 Cai Jian 2015 No 134 The second of the three measures also indicates a scheduled 2020 end date See Notice on Adjusting Fiscal Subsidy Policies for Promoting Use of New Energy Vehicles MOF Ministry of Science and Technology MIIT NDRC issued Dec 29 2016 effective Jan 1 2017 Cai Jian 2016 No 958 The third of the three measures which is currently in force indicates an implementation period pursuant to the two aforementioned measures See Notice on Adjusting and Improving Fiscal Subsidy Policies for the Promotion and Application of New Energy Vehicles MOF Ministry of Science and Technology MIIT NDRC issued Feb 12 2018 Cai Jian 2018 No 18 189 Measures for Parallel Management of the Passenger Vehicle Corporate Average Fuel Consumption and New Energy Vehicle Credit System MIIT MOFCOM MOF General Administration of Customs and General 184 28 To comply with this new Credit System foreign automakers will have a strong incentive to establish JVs with Chinese domestic automakers who are already large NEV producers and can generate the requisite NEV credits For example in August 2018 Ford signed a memorandum of understanding with China’s Zotye Automobile to build a 50-50 JV to develop produce and sell electric passenger cars and was reportedly in talks with at least three Chinese automakers to produce NEVs in China According to a news report by China Daily “An industry insider close to the matter said the move is primarily to brace Ford for the credit system that is designed to stimulate the development of new energy cars ”190 As a general matter the fact that China has maintained foreign ownership restrictions in the automotive sector for over two decades191 now places many foreign automakers in an unfavorable position to make wholly foreign-owned investments The China-based spokesman for Japanese automaker Honda Motor Co stated in April 2018 that “we have no plan to change our investment ratio ”192 The spokesman further explained that “If we had this option 20 years ago when we were first coming into the market we might have thought differently ”193 The European Union Chamber of Commerce in China has similarly commented For European companies in China that have previously faced JV requirements most have already developed a strong and entrenched relationship with their required partners In most cases it is unlikely that this will change 194 IV China’s Discriminatory Licensing Restrictions As discussed earlier in Section I A USTR is pursuing dispute settlement against China at the WTO to address China’s discriminatory technology licensing requirements USTR initiated a request for consultations on March 23 2018 after President Trump directed the U S Trade Representative to pursue dispute settlement in the WTO to confront China over its policies that result in unfair treatment for U S companies and innovators trying to do business in China 195 Administration of Quality Supervision Inspection and Quarantine 2017 Order No 44 issued Sep 27 2017 effective Apr 1 2018 190 Li Fusheng Ford Prepares for New Energy Credit System CHINA DAILY Aug 28 2017 emphasis added http www chinadaily com cn business motoring 2017-08 28 content_31212064 htm See also Alysha Webb Strict Emission Laws Push EV Plans for China WARD’S AUTO June 18 2018 https www wardsauto com engines strictemissions-laws-push-ev-plans-china 191 See State Council Notice on Issuing the “Automotive Industry Industrial Policy” State Council Guo Fa 1994 No 17 issued Mar 12 1994 replaced in 2004 by the Automotive Industry Development Policy NDRC 2004 Order No 8 issued May 21 2004 192 Trefor Moss and Mike Colias China to Ease Rules on Foreign Auto Makers WALL ST J Apr 17 2018 https www wsj com articles china-to-ease-rules-on-foreign-auto-makers-1523963345 193 Trefor Moss and Mike Colias China to Ease Rules on Foreign Auto Makers WALL ST J Apr 17 2018 194 EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA POSITION PAPER 2018 2019 Sep 18 2018 at 181 195 Press Release Office of the U S Trade Representative Following President Trump’s Section 301 Decisions USTR Launches New WTO Challenge against China Mar 23 2018 https ustr gov about-us policy-offices pressoffice press-releases 2018 march following-president-trump%E2%80%99s-section See also Request for 29 The U S consultations request details how China appears to breach WTO rules by denying foreign patent holders including U S companies basic patent rights to stop a Chinese entity from using the technology after a licensing contract ends China also appears to break WTO rules by imposing mandatory adverse contract terms that discriminate against and are less favorable for imported foreign technology These Chinese policies hurt innovators in the United States and worldwide by interfering with the ability of foreign technology holders to set marketbased terms in licensing and other technology-related contracts Japan the EU Ukraine the Separate Customs Territory of Taiwan Penghu Kinmen and Matsu and Saudi Arabia requested to join the U S consultations as third parties 196 Following the U S request the EU also filed a request for consultations with China at the WTO to address China’s discriminatory technology licensing requirements 197 In July 2018 the United States consulted with China with Japan and the EU attending as third parties 198 The dispute was not resolved during consultations Accordingly on October 18 2018 the United States requested that the WTO establish a panel to examine the matter 199 In support of its request for a panel at the meeting of the WTO Dispute Settlement Body on October 29 2018 the United States recalled that “all WTO Members including China have committed through the Agreement on Trade-Related Aspects of Intellectual Property Rights TRIPS Agreement to provide certain protections for intellectual property rights a core element of a free and fair international trading system Among those intellectual property rights are the commitments to protect exclusive rights of patent holders and to accord to the nationals of other Members treatment no less favorable than that the Member accords to its own nationals with Consultations by the United States China — Certain Measures Concerning the Protection of Intellectual Property Rights WTO Doc WT DS542 1 Mar 26 2018 196 Request to Join Consultations – Communication from Japan China — Certain Measures Concerning the Protection of Intellectual Property Rights WTO Doc WT DS542 2 Apr 5 2018 Request to Join Consultations – Communication from the European Union China — Certain Measures Concerning the Protection of Intellectual Property Rights WTO Doc WT DS542 3 Apr 5 2018 Request to Join Consultations – Communication from Ukraine China — Certain Measures Concerning the Protection of Intellectual Property Rights WTO Doc WT DS542 4 Apr 6 2018 Request to Join Consultations – Communication from the Separate Customs Territory of Taiwan Penghu Kinmen and Matsu China — Certain Measures Concerning the Protection of Intellectual Property Rights WTO Doc WT DS542 5 Apr 6 2018 Request to Join Consultations – Communication from Saudi Arabia China — Certain Measures Concerning the Protection of Intellectual Property Rights WTO Doc WT DS542 6 Apr 6 2018 197 Request for Consultations by the European Union China — Certain Measures on the Transfer of Technology WTO Doc WT DS549 1 June 6 2018 https www wto org english tratop_e dispu_e cases_e ds549_e htm 198 See Acceptance by China of the Requests to Join Consultations China — Certain Measures Concerning the Protection of Intellectual Property Rights WTO Doc WT DS542 7 July 17 2018 Although China accepted the requests to join consultations as a third party from Japan and the EU it did not accept the requests of Ukraine the Separate Customs Territory of Taiwan Penghu Kinmen and Matsu and Saudi Arabia and China did not provide an explanation as to why those requests were not granted 199 Request for the Establishment of a Panel by the United States China — Certain Measures Concerning the Protection of Intellectual Property Rights WTO Doc WT DS542 8 Oct 19 2018 30 regard to the protection of intellectual property ”200 The U S delegation went on to note that “China agreed to these commitments when it acceded to the WTO However for the past several years the United States has repeatedly raised concerns about China’s policies relating to technology licensing that do not comport with China’s WTO commitments ”201 China blocked the first U S request for a WTO dispute settlement panel as provided for in the rules for dispute settlement proceedings but the United States intends to repeat its request to establish a WTO dispute settlement panel at the November 21 2018 meeting of the Dispute Settlement Body V Outbound Investment A Introduction The Chinese government continues to direct and or unfairly facilitate the systematic investment in and or acquisition of U S companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans The Section 301 Report considered China’s outbound foreign direct investment OFDI trends for the period 2005-2016 Since March 2018 new data has become available that suggests that growth in total OFDI from China slowed in 2017 and 2018 According to China’s official 2017 China Foreign Direct Investment Statistical Report 202 China registered $158 29 billion in total OFDI worldwide in 2017 a year-on-year decrease of 19 3% 203 In particular China’s nonfinancial investment dropped 23% in 2017 to $139 5 billion 204 and in the first three quarters of 200 Press Release U S Mission to International Organizations in Geneva Statements by the United States at the October 29 2018 DSB Meeting https geneva usmission gov wp-content uploads sites 290 Oct29 DSB_ Stmt_ asdelivered fin_ rev_ public pdf last visited Nov 19 2018 201 Press Release U S Mission to International Organizations in Geneva Statements by the United States at the October 29 2018 DSB Meeting 202 MINISTRY OF COMMERCE NATIONAL STATISTICS BUREAU AND STATE ADMINISTRATION OF FOREIGN EXCHANGE THE PEOPLE’S REPUBLIC OF CHINA 2017 CHINA FOREIGN DIRECT INVESTMENT STATISTICAL REPORT Chinese Sep 28 2018 The report was issued at a press conference hosted by MOF See Press Release Ministry of Finance The People’s Republic of China Ministry of Finance Hosts Press Conference on the 2017 China Foreign Direct Investment Statistical Report Chinese Sep 28 2018 http www mofcom gov cn article ae ah diaocd 201809 20180902791597 shtml 203 MINISTRY OF COMMERCE NATIONAL STATISTICS BUREAU AND STATE ADMINISTRATION OF FOREIGN EXCHANGE THE PEOPLE’S REPUBLIC OF CHINA 2017 CHINA FOREIGN DIRECT INVESTMENT STATISTICAL REPORT Chinese Sep 28 2018 at 3 and 83 204 MINISTRY OF COMMERCE NATIONAL STATISTICS BUREAU AND STATE ADMINISTRATION OF FOREIGN EXCHANGE THE PEOPLE’S REPUBLIC OF CHINA 2017 CHINA FOREIGN DIRECT INVESTMENT STATISTICAL REPORT Chinese Sep 28 2018 at 5 and 86 31 2018 there has only been a marginal recovery of non-financial investment205 compared to the same period in 2017 206 With respect to Chinese investment in the United States transaction-based data from Rhodium Group and the American Enterprise Institute AEI 207 likewise indicate a declining trend in 2017 and 2018 According to a Rhodium report in the first half of 2018 Chinese companies completed acquisitions and Greenfield investments worth only $1 8 billion in the United States – a drop of more than 90% from 1H 2017 and the lowest level in seven years – and “the pace of newly announced transactions remained similarly depressed ”208 China’s official data for 2017 also shows a year-on-year decrease in Chinese OFDI in the United States 209 This tapering off of China’s overall outbound investment is not surprising nor does it indicate that China has fundamentally changed its acts policies and practices for high-technology acquisition A number of factors are at work that help to explain the overall decrease First the United States has both highlighted its longstanding concerns about China’s outbound investment policies and practices and increasingly taken direct action to address them Second China has been reducing overall OFDI by discouraging acquisitions in sectors such as real estate Despite the reduction in overall OFDI China’s targeted acquisitions of technology and intellectual property persist In particular Chinese VC investment in U S technology centers such as Silicon Valley has intensified in recent months China has not addressed the problems caused by its outbound investment regime Indeed this investment regime appears to be essentially unchanged and – as of the publication of this supplemental report – no reform proposals are on the horizon China’s official data reported in October 2018 records $82 billion of total non-financial OFDI for JanuarySeptember 2018 a 5 1% increase year-on-year over the same period The Major Trend of Chinese Enterprises ‘Going Out’ Has Not Changed Chinese PEOPLE’S DAILY FOREIGN EDITION via gov cn Oct 19 2018 http www gov cn xinwen 2018-10 19 content_5332323 htm 206 China’s official data indicates non-financial investment in the first three quarters of 2017 was $78 billion See Press Release Ministry of Commerce The People’s Republic of China Ministry of Commerce Cooperation Division Representative Speaks on Our Nation’s Foreign Investment Cooperation Situation Chinese Oct 10 2017 http www mofcom gov cn article ae ag 201710 20171002656667 shtml 207 Given the different methods of data collection between Rhodium and AEI it is impossible to compare the figures directly AEI compiles data from publicly available or voluntarily submitted information for all announced investment transactions over $100 million in value This data is premised on the entire value of the transaction including U S domestic financing e g bonds and loans for projects China Global Investment Tracker AEI http www aei org china-global-investment-tracker last visited Nov 7 2018 For its part Rhodium collects data through publicly available or voluntarily submitted information for completed direct investment transactions valued at $500 000 or more Transaction values are based on the entire value of the transaction including U S domestic financing e g bonds and loans for projects China Investment Monitor RHODIUM GROUP http rhg com interactive china-investment-monitor last visited Nov 7 2018 208 See also Thilo Hanemann Arrested Development Chinese FDI in the US in 1H 2018 RHODIUM GROUP June 19 2018 https rhg com research arrested-development-chinese-fdi-in-the-us-in-1h-2018 209 MINISTRY OF COMMERCE NATIONAL STATISTICS BUREAU AND STATE ADMINISTRATION OF FOREIGN EXCHANGE THE PEOPLE’S REPUBLIC OF CHINA 2017 CHINA FOREIGN DIRECT INVESTMENT STATISTICAL REPORT Chinese Sep 28 2018 at 97 reporting $6 43 billion of Chinese investment in the United States in 2017 a year-on-year decrease of 62 1% 205 32 B Actions by the United States and Other Trading Partners to Enhance Investment Review Processes The United States and other trading partners have taken steps to enhance their national securityrelated investment review processes – in part to address concerns over Chinese outbound investment These efforts may have contributed to the overall decline in Chinese OFDI in 2017 and 2018 1 Actions by the United States The United States has highlighted national security-related concerns regarding Chinese outbound investment for some time and has increasingly taken direct action The President recently signed into law legislation that expands the jurisdiction and authority of the Committee on Foreign Investment in the United States CFIUS to review transactions raising potential national security concerns 210 This legislation the Foreign Investment Risk Review Modernization Act of 2018 FIRRMA Subtitle A of Title XVII of Pub L 115-232 Aug 13 2018 211 amends section 721 of the Defense Production Act of 1950 DPA 212 CFIUS recently launched a pilot program to implement several of these new authorities with respect to certain categories of transactions pending full implementation of FIRRMA 213 Moreover CFIUS has continued to fulfill its longstanding mandate and vigilantly review mergers acquisitions and takeovers from all countries – including China – based on national security considerations In 2017 and 2018 the President prohibited two transactions following CFIUS review 214 In addition reports suggest that a significant number of transactions may not have been entered into due to concerns about possible CFIUS review or were abandoned after CFIUS began its review 215 2 Actions by Other Trading Partners Several of the United States’ trading partners have worked to enhance their investment review processes In particular the EU has taken steps to help coordinate and improve Member State 210 Press Release U S Department of the Treasury Treasury Secretary Mnuchin Statement on Signing of FIRRMA to Strengthen CFIUS Aug 13 2018 https home treasury gov news press-releases sm457 211 Foreign Investment Risk Review Modernization Act of 2018 Pub L No 115-232 tit XVII Subtitle A 132 Stat 2289 212 50 U S C § 4565 213 Determination and Temporary Provisions Pertaining to a Pilot Program to Review Certain Transactions Involving Foreign Persons and Critical Technologies 83 Fed Reg 51322 Oct 11 2018 214 Executive Order Regarding the Proposed Takeover of Qualcomm Incorporated by Broadcom Limited 83 Fed Reg 11631 Mar 12 2018 Executive Order Regarding the Proposed Acquisition of Lattice Semiconductor Corporation by China Venture Capital Fund Corporation Ltd 82 Fed Reg 43665 Sep 13 2017 215 See e g Thilo Hanemann and Daniel H Rosen Chinese FDI in the US in 2017 A Double Policy Punch RHODIUM GROUP Jan 17 2018 https rhg com research chinese-fdi-us-2017-double-policy-punch contending that CFIUS concerns played a supporting role in declining OFDI in 2017 but that “2018 will be a different story” given possible passage of FIRRMA and noting that a series of “deal failures” in 2017 and 2018 suggest that “CFIUS concerns are already swelling” Chinese Investing Nine Times More in Europe Than North America as Policies Force Divergence BAKER MCKENZIE July 16 2018 reporting that in the first half of 2018 seven deals were canceled in the United States due to “unresolved CFIUS concerns” 33 mechanisms for screening foreign investment The official website of the European Parliament describes these steps as follows The EU has no single foreign direct investment FDI screening mechanism comparable to well-established schemes in Australia Canada Japan and the USA Currently less than half of EU Member States have legislation in place that allows them to review FDI on grounds of national security or public order in line with their commitments under international and EU law In its May 2017 Reflection paper on Harnessing Globalisation the European Commission stressed the need for the EU to maintain an open investment environment but acknowledged increasing concerns about changing FDI patterns and the need to defend the EU’s essential interests On 13 September 2017 the European Commission published a proposal for a regulation establishing a legal framework for the screening of FDI inflows into the EU Parliament’s Committee on international trade INTA adopted its report on 28 May 2018 as well as the decision to enter into inter-institutional trilogue negotiations As there were no requests for a vote in Parliament INTA was authorised to start negotiations based on the INTA report On 13 June 2018 the permanent representatives of the EU Member States agreed on the Council's position The first trilogue took place on 10 July 2018 the second on 27 September 2018 and the third on 11 October 2018 216 In its proposal the European Commission seeks  “to create an enabling legal framework which embraces the diversity of Member States’ approaches to FDI screening and their exclusive responsibility for national security while taking into account the EU’s competence for FDI ”  “to introduce a new Commission competence to screen FDI and issue a non-binding opinion if i an FDI in a Member State may affect the security or public order of projects or programmes “of Union interest” in the areas of research space transport energy and telecommunications ii an FDI in a Member State may affect the security or public order of another other Member State s ” and  “to create a cooperation mechanism between Member States and the Commission which aims to enhance the coordination of screening decisions taken by the Member State s concerned and to increase the awareness of Member States and the Commission about planned or completed FDI that may affect security or public order by way of exchanges of information ”217 Legislative Train Schedule – A Balanced and Progressive Trade Policy to Harness Globalisation – Screening of Foreign Direct Investment in Strategic Sectors EUROPEAN PARLIAMENT http www europarl europa eu legislativetrain theme-a-balanced-and-progressive-trade-policy-to-harness-globalisation file-screening-of-foreign-directinvestment-in-strategic-sectors last visited Nov 19 2018 217 Legislative Train Schedule – A Balanced and Progressive Trade Policy to Harness Globalisation – Screening of Foreign Direct Investment in Strategic Sectors EUROPEAN PARLIAMENT 216 34 By the end of 2018 the European Commission intends to “carry out an in-depth analysis of FDI flows into the EU” which “will focus on strategic sectors and assets whose control may raise security or public order concerns ”218 In parallel with these efforts at the EU level individual EU member states are also taking actions to improve their investment screening mechanisms In July 2017 Germany amended its Foreign Trade and Payments Ordinance to clarify which industry sectors implicate national security concerns and are thus more likely to trigger a foreign investment review 219 Germany is now considering additional measures that would lower the threshold amount for government review of inbound acquisitions by non-EU investors from the current 25% ownership stake to 15% 220 News sources reported in late October 2018 that the Federation of German Industries BDI a leading German industry association had drafted a 25-page China position paper that calls on German companies to reduce their dependence on China 221 The position paper reportedly calls for “a new EU instrument to prevent state-subsidized takeovers including requiring Chinese firms to present accounts based on internationally agreed standards when acquiring European firms so their ownership structures and financing can be vetted ”222 The BDI also reportedly calls for “closer coordination on China strategy within the German government and between the EU and like-minded partners including the United States ”223 France and the United Kingdom have also taken actions similar to those in Germany In May 2014 the French government issued a decree permitting the government to block foreign takeovers of French firms in strategic sectors 224 In June 2018 the UK government amended the Enterprise Act 2002 to lower the screening threshold for proposed foreign acquisitions of companies developing military and dual-use technology computer hardware and quantum technology 225 In July 2018 the UK government released a white paper entitled National Security and Investment A Consultation on Proposed Legislative Reforms that sets out the government’s intent to further reform its investment screening regime to “protect national Legislative Train Schedule – A Balanced and Progressive Trade Policy to Harness Globalisation – Screening of Foreign Direct Investment in Strategic Sectors EUROPEAN PARLIAMENT 219 Jana Dammann de Chapto Joachim Grittmann German Government Increases Foreign Investment Oversight LATHAM WATKINS CLIENT ALERT July 19 2017 https www lw com thoughtLeadership lw-germangovernment-increases-foreign-investment-oversight See also Erik Brattberg and Etienne Soula Is Europe Finally Pushing Back on Chinese Investments THE DIPLOMAT Sep 14 2018 https thediplomat com 2018 09 is-europefinally-pushing-back-on-chinese-investments stating that the July 2017 amendment will “allow Berlin to screen and ultimately block a wider range of foreign takeovers ” 220 Germany Plans Tighter Scrutiny of Foreign Investments in Defense REUTERS Aug 8 2018 https www reuters com article us-germany-m-a germany-plans-tighter-scrutiny-of-foreign-investments-in-defenseidUSKBN1KT17C 221 Noah Barkin Exclusive German Firms Urged to Cut Dependence on China REUTERS Oct 31 2018 https in reuters com article germany-china-report exclusive-german-firms-urged-to-cut-dependence-on-chinaidINKCN1N51H9 222 Noah Barkin Exclusive German Firms Urged to Cut Dependence on China REUTERS Oct 31 2018 223 Noah Barkin Exclusive German Firms Urged to Cut Dependence on China REUTERS Oct 31 2018 224 Jean-Baptiste Vey and Benjamin Mallet France Boosts Say on GE Bid for Alstom with Takeover Law Reuters May 15 2014 225 Department for Business Energy and industrial Strategy New Merger and Takeover Rules Come into Force Gov UK June 11 2018 218 35 security from hostile actors using ownership of or influence over businesses and assets to harm the country ”226 The white paper notes that the United Kingdom’s reforms take place “as many other governments are also updating their powers in light of the same technological economic and national security-related changes ”227 C China’s Outbound Investment Regime The available evidence indicates that aggregate Chinese OFDI has also declined because China has curtailed investments in certain non-strategic sectors to channel private and public resources towards high-technology sectors designated in its industrial policies 1 Outbound Investment Approvals and Their Influence on Investment Decisions As detailed in the Section 301 Report despite two decades of reforms China continues to use various tools to direct and or unfairly facilitate outbound investment The latest measure through which China exercises such authority is the Measures on the Administration of Enterprise Outbound Investment “2018 NDRC Approval Measures” 228 The 2018 NDRC Approval Measures are beginning to factor into company-level decisions regarding outbound investment 229 The 2018 NDRC Approval Measures have served to curtail outbound investment in certain nonstrategic sectors by classifying them as “sensitive investment projects ” which increases the regulatory burden to obtain government approval 230 Corresponding to this provision is an updated Sensitive Industry Catalogue 231 which was released on January 31 2018 and took effect on March 1 2018 – the same day that the 2018 NDRC Approval Measures went into effect The Sensitive Industry Catalogue includes a wide range of industries that are classified as 226 SECRETARY OF STATE FOR BUSINESS ENERGY AND INDUSTRIAL STRATEGY BY COMMAND OF HER MAJESTY NATIONAL SECURITY AND INVESTMENT A CONSULTATION ON PROPOSED LEGISLATIVE REFORMS Presented to Parliament in July 2018 at 9 https beisgovuk citizenspace com ccp nsi supporting_documents 20180723%20%20National%20security%20and %20investment%20%20final%20version%20for%20printing%201 pdf 227 SECRETARY OF STATE FOR BUSINESS ENERGY AND INDUSTRIAL STRATEGY BY COMMAND OF HER MAJESTY NATIONAL SECURITY AND INVESTMENT A CONSULTATION ON PROPOSED LEGISLATIVE REFORMS 9 Presented to Parliament in July 2018 228 Measures on the Administration of Enterprise Outbound Investment NDRC Order No 11 issued Dec 26 2017 effective Mar 1 2018 These measures replace the 2014 Measures on the Administration of Examination and Approval and Filing-for-Records of Overseas Investment Projects NDRC 2014 Order No 9 issued Apr 8 2014 2014 NDRC Approval Measures 229 For example Fujian Xing Wang Rui Jie Telecommunication Holding Co Ltd updated its “Foreign Investment Administrative Measures ” according to a March 30 2018 filing In the measures the company cites to the 2018 NDRC Approval Measures as part of the basis of its internal “Foreign Investment Administrative Measures ” The company further states its investments will “revolve around the State’s overseas investment guidance and be in accordance with the State’s overseas investment industrial policy ” Fujian Xing Wang Rui Jie Telecommunication Holding Co Ltd updated its “Foreign Investment Administrative Measures ” http disclosure szse cn finalpage 2018-03-30 1204543719 PDF 230 2018 NDRC Approval Measures Art 13 231 National Development and Reform Commission Notice on Issuing the Overseas Investment Sensitive Industry Catalogue 2018 Edition NDRC Gai Ge Wai Zi 2018 No 251 issued Jan 31 2018 36 “sensitive ” including 1 real estate 2 hotels 3 movie studios 4 the amusement industry 5 sports clubs and 6 “the establishment of equity investment funds or investment platforms outside China that are for non-specific commercial projects ”232 Due to their classification as “sensitive industries ” investments in these industries must go through additional examination and approval 233 Notably none of these ostensibly “sensitive” industries falls within areas such as biotechnology or robotics that are targeted by industrial policies like Made in China 2025 China’s expansive definition of “sensitive” sectors and the resulting discouragement and tighter regulation of OFDI in sectors such as real estate entertainment hospitality tourism and sports clubs has likely contributed to lower Chinese OFDI growth 234 Data from the 2017 China Foreign Direct Investment Statistical Report shows that between 2016 and 2017 Chinese OFDI in real estate decreased by 55 1% Similarly in residential services OFDI decreased by 65 5% and in culture sports and entertainment by 93 3% 235 These decreases occurred alongside a series of highly publicized government enforcement actions against companies such as Dalian Wanda HNA and Anbang Insurance which were known for their aggressive international dealmaking in these sectors 236 These restrictions have reportedly had a significant impact on Chinese OFDI in the United States 237 As the Section 301 Report found these types of restrictions on commercial outbound investment create an incentive for Chinese investors to orient their investments toward industries favored by industrial plans and other government policies especially when viewed in conjunction with China’s closed capital account which allows government authorities to restrict access to foreign exchange and limit outbound investment flows An illustrative example is the recent acquisition of NEV manufacturer Faraday Future FF by Evergrande Health Evergrande Health is the Hong Kong-listed238 subsidiary of China’s largest real estate company Evergrande Real Estate Group 239 While the group itself is private and controlled by its chairman Xu Jiayin Xu Jiayin has been the chairman of his company’s CCP 232 Overseas Investment Sensitive Industry Catalogue 2018 Section 4 2018 NDRC Approval Measures Art 13 234 See also Chinese Investing Nine Times More in Europe than North America as Policies Force Divergence BAKER MCKENZIE July 16 2018 stating that “The initial decline in Chinese OFDI was primarily caused by Chinese regulatory tightening over outward investments Facing large capital outflows Beijing began to crack down on outbound FDI in the second half of 2016 ” 235 2017 China Foreign Direct Investment Statistical Report 96 Table 6 Ministry of Commerce National Statistics Bureau and State Administration of Foreign Exchange published Sep 28 2018 236 See e g Sumeet Chatterjee and Matthew Miller China’s Latest Conglomerate Crackdown Casts Dealmaking Shadow REUTERS Mar 2 2018 Wei Lingling and Deng Chao Xi’s Sign-off Deals Blow to China Inc ’s Global Spending Spree Measure is a Warning to China’s Other Big Private Businesses that Loaded up on Debt to Buy Assets Overseas WALL ST J July 23 2017 237 See e g Thilo Hanemann and Daniel H Rosen Chinese FDI in the US in 2017 A Double Policy Punch RHODIUM GROUP Jan 17 2018 stating that “Some of the restricted sectors have been important drivers of Chinese FDI in the US in recent years including real estate and hospitality which accounted for 36% of total US investment in the past 3 years and sports and entertainment another 7% of total investment in the past 3 years ” 238 Hong Kong Stock Exchange 0708 http www hkex hk com 239 Hong Kong Stock Exchange 3333 http www hkex hk com See also Real Estate 25 2018 The Most Valuable Real Estate Brands of 2018 BRAND FINANCE http brandirectory com league_tables table real-estate-25-2018 last visited Nov 19 2018 233 37 cadre since its establishment in 2002 240 and he has made public his belief in the CCP stating “everything that Evergrande and I have it is all given by the Party given by the State given by society ”241 In November 2017 Evergrande Health agreed to invest $2 billion for a 45% share in FF 242 and the deal was finalized in June 2018 243 Based in Southern California FF seeks to produce highend NEVs to compete with Tesla 244 Evergrande’s focus on acquiring technology is evident in the press release announcing the acquisition which claimed that “by taking control of FF Xu Jiaying Evergrande’s owner will bring the peak of world technology into China greatly improving the core competitiveness of China’s vehicle engine industry ”245 Evergrande’s financial report for the first half of 2018 includes an entire section about the FF investment and its role in providing Evergrande new technology246 and diversifying Evergrande’s sector portfolio 247 Evergrande also emphasizes that FF between its U S and Chinese operations has already acquired 380 patents 248 NEVs are a major focus of China’s industrial policies including the Energy-Saving and NewEnergy Automotive Industry Development Plan 2012-2020 249 Strategic Emerging Enterprises 250 and Made in China 2025 251 Evergrande cites China’s industrial policies particularly Made in China 2025 as a chief rationale for investing in FF 252 A Chinese 240 Party Building Work Chinese CHINA EVERGRANDE GROUP http www evergrande com about aspx tags 8 last visited Nov 8 2018 241 The Eight Time Consecutive Winner of the “China Charity Award ” Xu Jiayin at the Hall of the People’s National Congress Discusses Charity and GratitudeI Chinese XINHUA NEWS Sep 14 2018 http www xinhuanet com 2018-09 14 c_1123429501 htm 242 FF Statement of Evergrande Health Investment FARADAY FUTURE Oct 8 2018 https www ff com us pressroom faraday-future-evergrande-statement last visited Nov 8 2018 Zhao Chao State Automobile National Power Strategy Adds “Capable” Evergrande Dominating FF in Forcefully Entering the High-Technology Industry Chinese GUANGXI DAILY June 27 2018 http www gxst gov cn gxkjt dtxx 20180627 001002_334d528d-dbd04d11-a054-546e8f065775 htm 243 California Based Faraday Future Confirms $2 Billion USD in First Round Funding and Clears Government Approval FARADAY FUTURE June 25 2018 https www ff com us press-room funding 244 Clare Jim Evergrande Health Slumps as EV Maker Faraday Seeks to Scrap Stake Sale REUTERS Oct 8 2018 https www reuters com article us-everg-health-lawsuit-faraday-future evergrande-health-slumps-as-ev-makerfaraday-seeks-to-scrap-stake-sale-idUSKCN1MI0SK last visited Nov 8 2018 245 Taking Control of FF’s New Energy Vehicle Structure Evergrande Acquires the Peak of Global Technology as it Enters Production in Guangzhou Chinese CHINA EVERGRANDE GROUP July 4 2018 http cs evergrande com Newsshow php cid 22 id 1433 last visited Nov 8 2018 246 CHINA EVERGRANDE GROUP 2018 MID TERM REPORT Chinese Aug 8 2018 at 7 247 CHINA EVERGRANDE GROUP 2018 MID TERM REPORT Chinese Aug 8 2018 at 7 248 CHINA EVERGRANDE GROUP 2018 MID TERM REPORT Chinese Aug 8 2018 at 7 249 Energy-Saving and New-Energy Automotive Industry Development Plan 2012-2020 State Council Guo Fa 2012 No 22 issued June 28 2012 250 Notice on Issuing the 13th Five-year National Strategic Emerging Industries Development Plan State Council Guo Fa 2016 No 67 issued Nov 29 2016 251 Notice on Issuing “Made in China 2025” State Council Guo Fa 2015 No 28 issued May 8 2015 252 Taking Control of FF’s New Energy Vehicle Structure Evergrande Acquires the Peak of Global Technology as it Enters Production in Guangzhou Chinese CHINA EVERGRANDE GROUP July 4 2018 http cs evergrande com Newsshow php cid 22 id 1433 last visited Nov 8 2018 38 automotive industry expert also pointed out the importance of the deal to the Made in China 2025 policy and China’s ambitions to catch up with world-leading automakers stating Currently the large gap between the technology of domestic electric vehicle enterprises and global leaders is obvious By becoming the dominant player in FF Evergrande comprehensively masters world-leading technology and is able to synchronize the sharing of research and development which will help China realize its strategic goal of becoming a strong automotive nation 253 After Evergrande made its initial $800 million payment FF and Evergrande came into conflict According to a press release issued by FF the conflict centered around Evergrande withholding future payments and blocking FF from seeking other financing claiming “Evergrande held the payments back to try to gain control and ownership over FF China and all of FF’s IP ”254 FF further stated that “Evergrande’s breach in its funding obligations and its attempts to prevent FF from obtaining other investments or even using its assets to obtain short-term financing caused a serious and unexpected cash shortfall that led us to take immediate steps to re-evaluate business priorities ”255 2 Major Policies and State-Backed Actors Since the publication of the Section 301 report China has continued to pursue its major policies to acquire foreign technology For example the State Council’s August 2017 Guiding Opinion on Further Guiding and Standardizing the Direction of Foreign Investment “2017 Investment Opinion” remains in place calling for “catalyzing the ‘Going Out’ strategy for products technologies and services ” while restricting or prohibiting investment in real estate and other sectors disfavored by the government 256 Significantly in October 2018 the state-owned People’s Daily newspaper published an article entitled The Major Trend of Chinese Enterprises ‘Going Out’ Has Not Changed 257 The article emphasizes the growth in Chinese outbound investment in the first nine months of 2018 based on MOFCOM statistics including 265 “acquisition projects” worth $43 3 billion spread across 49 countries including advanced economies such as France and Germany 258 The article highlights the government’s One Belt Zhao Chao State Automobile National Power Strategy Adds “Capable” Evergrande Dominating FF in Forcefully Entering the High-Technology Industry Chinese GUANGXI DAILY June 27 2018 http www gxst gov cn gxkjt dtxx 20180627 001002_334d528d-dbd0-4d11-a054-546e8f065775 htm last visited Nov 8 2018 254 FF Statement of Evergrande Health Investment FARADAY FUTURE Oct 8 2018 https www ff com us pressroom faraday-future-evergrande-statement last visited Nov 8 2018 255 Faraday Future Decisive Victory on Its Emergency Relief Application FARADAY FUTURE Oct 25 2018 https www ff com us press-room emergency-arbitration-victory last visited Nov 8 2018 256 Guiding Opinion on Further Guiding and Standardizing the Direction of Foreign Investment preamble NDRC MOFCOM People’s Bank of China Ministry of Foreign Affairs issued by the State Council in Guo Ban Fa 2017 No 74 on Aug 4 2017 emphasis added 257 The Major Trend of Chinese Enterprises ‘Going Out’ Has Not Changed Chinese PEOPLE’S DAILY FOREIGN EDITION via gov cn Oct 19 2018 258 The Major Trend of Chinese Enterprises ‘Going Out’ Has Not Changed Chinese PEOPLE’S DAILY FOREIGN EDITION via gov cn Oct 19 2018 253 39 One Road initiative as a catalyst for China’s outbound investments while also lauding the “effective suppression of irrational investments ”259 State-backed actors also continue to constitute a prominent feature of China’s outbound investment activity SOEs remain prevalent throughout the Chinese economy and are market leaders in key sectors deemed strategic by the government As the Section 301 Report detailed SOEs are subject to state direction and control in particular those central SOEs administered by the State Council’s State-owned Assets Supervision and Administration Commission SASAC Through the CCP the Chinese government exercises additional control over both SOEs and nominally private companies State-backed funds and investment companies continue to represent an important feature of China’s financial sector as illustrated by the recent activities of the National Integrated Circuit IC Fund As described in the Section 301 Report the National IC Fund was established in 2014 to upgrade China’s industrial capacity and support the development of an indigenous IC industry The National IC Fund achieves this in part by supporting overseas investment and technology acquisition The fund has been linked with numerous technology-related outbound investments in the United States In May 2018 official Chinese media reported that the National IC Fund was preparing to raise a second round of funding targeted at about CNY 150-200 billion260 $23-$30 billion There have also been new National IC Fund partnerships with local governments in China for example in June 2018 the National IC Fund and Wuxi City signed a strategic agreement 261 and in September 2018 Chongqing City established a local CNY 50 billion $7 6 billion IC Fund 262 D China Is Increasingly Focusing on Venture Capital Investment 1 Trends in Chinese Venture Capital Investment in the United States China continues to explore new means of securing cutting-edge technologies and intellectual property Analysis based on multiple data sources suggests that since the release of the Section 301 Report China’s sustained interest in acquiring technology in the United States increasingly relies upon VC investment 263 The Major Trend of Chinese Enterprises ‘Going Out’ Has Not Changed Chinese PEOPLE’S DAILY FOREIGN EDITION via gov cn Oct 19 2018 260 National Big Fund Is Raising Phase Two Hundreds of Billions Deployed to the IC Industry Supply Chain Chinese XINHUA NEWS May 3 2018 http www xinhuanet com money 2018-05 03 c_129863730 htm last visited Nov 13 2018 261 The City Signed a Strategic Agreement with the National Integrated Circuit Industry Investment Fund Chinese WUXI MUNICIPAL GOVERNMENT posted on the Wuxi municipal government website on June 12 2018 at stc wuxi gov cn doc 2018 06 12 1865063 shtml last visited Nov 13 2018 262 Chongqing Establishes CNY 50 Billion Fund to Support Integrated Circuit Industry Development Chinese XINHUA NEWS article posted on the State Council’s website on Sep 1 2018 at http www gov cn xinwen 201809 01 content_5318367 htm last visited Nov 13 2018 263 Multiple recent media articles discuss this trend including Kate O’Keeffe and Eliot Brown China Targets U S Tech Startups in Investment Loophole WALL ST J July 16 2018 https www wsj com articles china-targets-u-stech-startups-in-investment-loophole-1531742441 Jackie Northam China Makes a Big Play in Silicon Valley NPR Oct 7 2018 https www npr org 2018 10 07 654339389 china-makes-a-big-play-in-silicon-valley Don Weinland 259 40 According to Rhodium Group data Chinese VC investment in the United States from January to May 2018 reached almost $2 4 billion equivalent to the previous full-year high set in 2015 264 Similarly investment data compiled by Bloomberg show that the value of VC deals with at least one Chinese-domiciled investor has increased in 2018 reaching a record high by November 15 2018 see Figure 1 As this data makes clear Chinese VC investors are increasingly active in the U S VC ecosystem Analysts estimate that Chinese investors participated in 10-16% of all venture deals in the United States between 2015 and 2017 265 According to Bloomberg data Chinese VC investors have participated in 151 deals through November 15 2018 which roughly matches the pace set in 2017 when Chinese investors participated in an all-time high of 167 deals see Figure 2 $ Billions Figure 1 – Value of VC Investment Deals in the United States Involving at Least One Chinese Investor $ Billions 10 9 8 7 6 5 4 3 2 1 2010 2011 2012 2013 2014 2015 2016 2017 2018 through Nov 15 Source Bloomberg Chinese VC Funds Pour $2 4bn into Silicon Valley Start-ups FINANCIAL TIMES July 18 2018 https www ft com content 463b162a-8a3d-11e8-b18d-0181731a0340 264 Thilo Hanemann Adam Lysenko and Daniel H Rosen Chinese Venture Capital in the US in 1H 2018 Still Going Strong RHODIUM GROUP July 13 2018 See also Kate O’Keeffe and Eliot Brown China Targets U S Tech Startups in Investment Loophole WALL ST J July 16 2018 265 Michael Brown and Pavneet Singh China’s Technology Transfer Strategy How Chinese Investments in Emerging Technology Enable a Strategic Competitor to Access the Crown Jewels of U S Innovation DEFENSE INNOVATION UNIT EXPERIMENTAL DIUX Jan 2018 at 2 See also Jackie Northam China Makes a Big Play in Silicon Valley NPR Oct 7 2018 citing Adam Lysenko a senior analyst at Rhodium Group as saying “Chinese investment accounts for about 15 percent of the deals in startup technology companies ” 41 Deals Figure 2 – Number of VC Investment Deals in the United States Involving at Least One Chinese Investor Deals 180 160 140 120 100 80 60 40 20 2010 2011 2012 2013 2014 2015 2016 2017 2018 through Nov 15 Source Bloomberg Significantly the sectoral focus of China’s VC investors in the United States aligns with the Chinese government’s continued focus on acquiring emerging technologies via foreign investment and international engagement China’s VC investment in the United States began in earnest in 2014 and has historically been focused on the information and communication technology ICT sector While investment in the ICT sector remains strong Chinese VC investors in the United States have demonstrated growing interest in emerging sectors identified as strategic priorities by Chinese government industrial policies and plans These sectors include robotics and artificial intelligence AI and especially biotechnology which accounts for much of the increase in Chinese VC activity in the United States in recent years 266 Other reports have noted the sectoral focus of Chinese VC investment in the United States In its January 2018 report the Defense Innovation Unit Experimental DIUx sheds light on the sectoral focus of recent Chinese VC investment in the United States  AI Between 2010 and 2017 Chinese investors participated in eighty-one AI financings contributing to the roughly $1 3 billion in total financing that was raised Participation accelerated in 2014 and has continued through the end of the third quarter of 2017 with Chinese investors active in sixty-nine deals and $1 2 billion in financing  Robotics Chinese entities were active in nearly $237 million of financing for robotics startups between 2010 and 2017 Deal activity peaked in 2015 with Chinese participation in twelve deals and $113 million in financing 266 According to Bloomberg data the value of VC investment deals in the U S biotechnology sector involving at least one Chinese investor increased from $690 million in 2016 to $1 53 billion in 2017 and has already exceeded $2 2 billion in 2018 through November 15 2018 42  Augmented Reality Virtual Reality AR VR Chinese investors participated in $2 1 billion worth of deals during the period 2010-2017 In 2016 China-based investors participated in seventeen deals contributing to the $1 3 billion in total funding value  Financial Technology Fintech Investments in Fintech continued their rapid pace in 2016 and 2017 with Chinese investors participating in forty-nine deals valued at approximately $1 4 billion Overall Chinese investors have participated in 100 deals representing $3 5 billion in funding for Fintech companies during 2010-2017 267 2 The Significance of Venture Capital Investment for Technology and Intellectual Property Acquisition Chinese VC investment in the United States can play a significant role in technology transfer According to the National Venture Capital Association NVCA T ypically a venture capitalist becomes intimately involved at a policy-making level in a company he or she invests in including taking a seat on the board of directors acting as a coach and close confidant to the CEO providing strategic counsel regarding development and production making introductions to key contacts and facilitating strategic partnerships that will help the company achieve success 268 Numerous academic studies have shown that VC firms have been linked to technology diffusion especially between a VC firm’s various portfolio companies 269 VC firms often encourage their portfolio companies to participate in research alliances 270 which have been shown to diffuse knowledge 271 VC firms also facilitate the movement of human resources across their networks which diffuses technology and knowledge 272 The movement of human resources is critical because for some emerging technologies most of the “technology” is in fact know-how 273 Michael Brown and Pavneet Singh China’s Technology Transfer Strategy How Chinese Investments in Emerging Technology Enable a Strategic Competitor to Access the Crown Jewels of U S Innovation DEFENSE INNOVATION UNIT EXPERIMENTAL DIUX Jan 2018 at 7 268 Funding Innovation NATIONAL VENTURE CAPITAL ASSOCIATION https nvca org ecosystem fundinginnovation last visited Nov 6 2018 269 Juanita Gonzalez-Uribe Venture Capital and the Diffusion of Knowledge COLUMBIA GRADUATE SCHOOL OF BUSINESS 3 Feb 2013 stating that “the increase in portfolio-linked citations is four times stronger than the increase in non-portfolio-linked citations ” 270 Laura Lindsey Blurring Firm Boundaries The Role of Venture Capital in Strategic Alliances 63 3 JOURNAL OF FINANCE 1137-1168 June 2008 271 Thomas Hellmann Manju Puri Venture Capital and the Professionalization of Start-Up Firms Empirical Evidence 58 1 JOURNAL OF FINANCE 169-198 Feb 2002 272 Benjamin Gomes-Casseres John Hagedoorn and Adam B Jaffe Do Alliances Promote Knowledge Flows 80 1 JOURNAL OF FINANCIAL ECONOMICS 5-33 Apr 2006 273 China’s Threat to American Government and Private Sector Research and Innovation Leadership Hearing Before the House Permanent Select Committee on Intelligence 115th Cong 2018 statement of Elsa B Kania stating that “if there is a U S -China ‘AI arms race’ today then the primary battlefield is talent ” In her testimony Kania also cites Elsa Kania The Pursuit of AI Is More Than an Arms Race DEFENSE ONE Apr 19 2018 267 43 Researchers estimate that VC investment accounts for about 14% of U S innovative activity i e patent production 274 The openness at the heart of the VC model allows the possibility of exploitation by foreign governments Small investments for minority stakes by state-backed Chinese VC firms can enable Chinese government access to cutting-edge U S technology and private technologyrelated information U S business leaders technology industry experts and China experts have emphasized this risk For instance  Bryan Ware CEO of Haystax Technology which works with law enforcement defense and intelligence clients on securing their technologies was recently quoted as follows If you’ve got a Chinese investor and that’s the lifeblood that’s going to allow you to get your product out the door or allow you to hire your next developer telling them “No you can’t do that ” or “No you shouldn’t do that ” while you have no other alternatives for financing — that’s just the nature of the dilemma … Every investment comes with a risk of some loss of intellectual property or foreign influence and control 275  Adam Lysenko a senior analyst at Rhodium Group said “I think it's become increasingly acknowledged that this risk exists that venture capital and other minority investments provide Chinese investors to access potentially sensitive technologies particularly ones that are in ascent in an early stage where U S government military and other security individuals haven't had a full chance to evaluate the implications of those technologies ”276 This access to technology is problematic because of the pervasive control of the Chinese government over Chinese VC firms As Lysenko noted It is very common for Chinese firms to have some sort of ties to the government and those ties can be in many different forms It might just be because they have to answer to the government and party leaders back at home And that confers on the state some level of control essentially over every Chinese firm 277  Elsa B Kania Adjunct Fellow at the Technology and National Security Center for a New American Security also noted The potential benefits and negative externalities of these engagements via venture capital and incubation should receive further consideration going forward given the clear linkages to government priorities and initiatives to advance Chinese indigenous innovation Even when there is not evidence that a particular mechanism has been exploited thus far for tech transfer in ways that are illegal or obviously concerning 274 Samuel Kortum and Josh Lerner Assessing the Contribution of venture capital to innovation 31 4 RAND JOURNAL OF ECONOMICS 674-692 Winter 2000 275 Cory Bennett and Bryan Bender How China Acquires “The Crown Jewels” of U S Technology POLITICO May 22 2018 https www politico com story 2018 05 22 china-us-tech-companies-cfius-572413 276 Jackie Northam China Makes a Big Play in Silicon Valley NPR Oct 7 2018 277 Jackie Northam China Makes a Big Play in Silicon Valley NPR Oct 7 2018 44 the access to and knowledge of prioritized technologies can still be beneficial to future targeting and acquisitions Potentially as Chinese investments are subjected to greater scrutiny the focus of tactics for tech transfer could shift further towards these alternative techniques for access to tech and talent resources via accelerators and innovation centers Again the factor that should raise questions and differentiate these from purely commercial activities is the consistent government involvement in guidance and direction 278 Some Chinese VC firms make no secret of their intention to access U S technology through VC investment to build Chinese companies in sectors that the Chinese government has deemed strategic For instance 6 Dimensions Capital is a healthcare-focused Chinese VC firm with over CNY 10 billion $1 5 billion in assets under management making it one of the largest healthcare-focused VC firms in the world 279 It is behind much of the recent increase in Chinese VC investment in the U S biotechnology sector and touts its “access to innovative startups in the U S ” as a “proven advantage ”280 having built a portfolio of about 60 companies in the United States and China 281 On its website 6 Dimensions Capital states that it “specializes in the investment of innovative life science companies with business focuses on those strategic life science and technology areas promoted by the Chinese government for growth and China’s Threat to American Government and Private Sector Research and Innovation Leadership Hearing Before the House Permanent Select Committee on Intelligence 115th Cong 2018 statement of Elsa B Kania emphasis added 279 News 6 Dimensions Capital Closed Oversubscribed 1st USD Fund and RMB Fund Bringing Total AUM Over RMB 10Bn USD 1 5Bn WUXI APPTEC Dec 7 2017 http wxpress wuxiapptec com 6-dimensions-capitalclosed-oversubscribed-1st-usd-fund-rmb-fund-bringing-total-aum-rmb-10bn-usd-1-5bn News 6 Dimensions Capital Closed Oversubscribed 1st USD Fund and RMB Fund Bringing Total AUM Over RMB 10Bn USD 1 5Bn 6 DIMENSIONS CAPITAL Dec 7 2017 http www 6dimensionscapital com en newslist newsfolder news-6dimensions-capital-closed-oversubscribed-1st-usd-fund-and-rmb-fund-bringing-total-aum-over-rmb-10bn-usd-15bn last visited Nov 16 2018 In November 2016 China’s MIIT issued the Pharmaceutical Industry Development Planning Guide Gong Xin Bu Lian Gui 2016 No 350 which put forward a “pharmaceutical industry venture capital plan” that called for the mobilization of societal capital to create VC funds totaling over CNY 10 billion $1 5 billion to “provide financial support to pharmaceutical technology innovation projects ” In May 2017 6 Dimensions Capital was formed through a merger between Frontline BioVentures and WuXi Healthcare Ventures The largest investor in Frontline BioVentures is a fund of funds led by Oriza Holdings an investment arm of the Suzhou municipal government See SHANGHAI HILE BIO-TECHNOLOGY CO LTD IPO PROSPECTUS filed with the Shanghai Stock Exchange on May 5 2015 at 1-1-73 6 Dimensions Capital also lists the following key state backers Suzhou Industrial Park Biotech Development bioBAY China Development Bank CDB Capital FOF II Shanghai Zhangjiang Science and Technology Venture Capital Management Co Ltd and SDIC National Venture Capital Guidance Fund for Emerging Industries by State Development and Investment Corporation SDIC See Frontline BioVentures’ Total AUM Reached RMB 3Bn after Announcing RMB Fund II Fundraising Closed 6 DIMENSIONS CAPITAL Mar 1 2017 http 6dimensionscapital com en newslist newsfolder frontline-bioventurestotal-aum-reached-rmb-3bn 280 News 6 Dimensions Capital Closed Oversubscribed 1st USD Fund and RMB Fund Bringing Total AUM Over RMB 10Bn USD 1 5Bn 6 DIMENSIONS CAPITAL Dec 7 2017 http www 6dimensionscapital com en newslist newsfolder news-6-dimensions-capital-closed-oversubscribed-1stusd-fund-and-rmb-fund-bringing-total-aum-over-rmb-10bn-usd-15bn 281 News 6 Dimensions Capital Closed Oversubscribed 1st USD Fund and RMB Fund Bringing Total AUM Over RMB 10Bn USD 1 5Bn 6 DIMENSIONS CAPITAL Dec 7 2017 278 45 development”282 and aims to “find and invest in global innovation in the US and build healthcare industry leaders in China ”283 3 Illustrative Examples of Chinese Venture Capital Investments Available evidence indicates that the Chinese government has created and supported a web of entities that have established a presence in Silicon Valley and other U S technology centers to invest in high-technology U S startups and engage in a variety of VC investment related activities to further the industrial policy goals of the Chinese government VC firms invest in dozens and sometimes hundreds of startup companies creating a diverse set of portfolio companies VC firms then engage with their portfolio companies and to varying degrees have access to information technology and the ability to influence and potentially coerce management The following cases exemplify this pattern of activity a Digital Horizon Capital Formerly “Danhua Capital” As discussed in Section IV C 3 of the Section 301 Report Zhongguancun Development Group ZDG an SOE established by the Beijing municipal government established an investment arm in Silicon Valley in October 2014 – ZGC Capital Corporation ZGC Capital Corporation subsequently founded the ZGC Innovation Center @ Silicon Valley in May 2016 The Section 301 Report also noted that ZGC Capital has partnered with Stanford University engaged in talent recruitment made VC investments – including Meta Everstring and Optimizely – and invested in other VC funds – including Plug Play KiloAngel and Danhua ZDG continues to support VC investments in Silicon Valley and elsewhere In total it has backed at least 59 investment funds including Danhua Capital 284 In May 2013 Beijing’s Mayor Wang Anshu attended the Danhua Capital signing ceremony in Silicon Valley 285 In a press release posted on the ZDG website ZDG stated that Danhua Capital would focus on supporting original and disruptive technologies developed at Stanford and nearby universities to work with the ZGC Group Silicon Valley Incubator Center and guide those projects back to Zhongguancun in Beijing to commercialize thereby advancing the strategy whereby “Zhongguancun capital goes out and foreign advanced technology and human capital is brought in ”286 See Frontline BioVentures’ Total AUM Reached RMB 3Bn after Announcing RMB Fund II Fundraising Closed 6 DIMENSIONS CAPITAL Mar 1 2017 283 Home 6 DIMENSIONS CAPITAL http www 6dimensionscapital com en home last visited Nov 16 2018 284 Established Funds Chinese ZHONGGUANCUN DEVELOPMENT GROUP http www zgcgroup com cn investor_relations list03 html last visited Nov 6 2018 285 The Group Establishes “Zhongguancun-Stanford Emerging Technologies Venture Capital Fund” Chinese ZHONGGUANCUN DEVELOPMENT GROUP May 15 2013 http www zgcgroup com cn news details_16_979 html last visited Nov 8 2018 286 The Group Establishes “Zhongguancun-Stanford Emerging Technologies Venture Capital Fund” Chinese ZHONGGUANCUN DEVELOPMENT GROUP May 15 2013 282 46 These efforts appear to be continuing In March 2018 Wei Xiaodong a member of the Beijing Municipal CCP Standing Committee led a delegation of ZDG executives to officially open the Zhongguancun Boston Innovation Center in Cambridge Massachusetts 287 According to a press release posted on the ZDG website the Boston center marks the “substantial progress of ZDG’s overseas strategy to radiate the technological and innovation resources concentrated in the Eastern United States ”288 Danhua Capital which currently goes by the name “Digital Horizon Capital ”289 originally planned to raise a first fund of $50 million 290 but ZDG spurred Chinese heavyweights including Alibaba and Baidu to contribute funding which ended up at $91 25 million in 2014 291 In 2016 Danhua raised $250 million for a second fund 292 Other notable Chinese companies with state connections and strong interests in technology also allocated funds to Danhua Capital  iFlyTek a voice recognition company committed to invest $5 million in Danhua Capital funds in November 2016 for the purpose of “participating in investment in hightechnology areas in the United States following leading edge technology development trends strengthening iFlyTek’s communication and cooperation with outstanding U S companies obtaining overseas market investment and acquisition opportunities ”293 iFlyTek’s extensive state-connections were detailed in the Section 301 Report 294  BOE Technology Group Co Ltd “BOE Group” had invested almost CNY 60 million $8 9 million in Danhua Capital funds by the end of 2017 295 BOE Group’s largest and controlling shareholder is the State-owned Assets Supervision and Administration Commission of Beijing Municipality 296 In total Danhua lists 113 U S companies in its portfolio and most of those companies fall within emerging sectors and technologies such as biotechnology and AI that the Chinese government has identified as strategic priorities 297 Subsequently at least one of those 287 A New Journey on Our Eighth Anniversary Zhongguancun Launches Innovation Center in Boston Chinese ZHONGGUANCUN DEVELOPMENT GROUP Apr 3 2018 http www zgcgroup com cn news details_16_2225 html 288 A New Journey on Our Eighth Anniversary Zhongguancun Launches Innovation Center in Boston Chinese ZHONGGUANCUN DEVELOPMENT GROUP Apr 3 2018 289 See United States Patent and Trademark Office Trademark Electronic Search System Digital Horizon Capital Trademark Filed by DanHua Capital Management LLC Limited Liability Company Delaware Serial Number 87871380 Apr 10 2018 290 The Group Establishes “Zhongguancun-Stanford Emerging Technologies Venture Capital Fund” Chinese ZHONGGUANCUN DEVELOPMENT GROUP May 15 2013 291 Shao Shunchang Exploring and Realizing the International Development of Zhongguancun Chinese ZHONGGUANCUN DEVELOPMENT GROUP http www zgcgroup com cn content details_63_1324 html last visited Nov 19 2018 292 See Danhua Capital II L P Form D Notice of Exempt Offering of Securities filed with the SEC on Aug 24 2016 293 iFlyTek Co Ltd Announcement on External Investment 1 filed with the Shanghai Stock Exchange on Nov 1 2016 2016-072 294 See Section IV C 3 of the Section 301 Report 295 BOE TECHNOLOGY GROUP 2017 ANNUAL REPORT at 69 296 BOE TECHNOLOGY GROUP 2017 ANNUAL REPORT at 60-67 297 See Companies DIGITAL HORIZON CAPITAL http dh vc companies last visited Nov 15 2018 47 companies has reportedly decided to reduce operations in Silicon Valley and open operations in China 298 Notable investments include Meta a Silicon Valley company that makes augmented reality products 299 and Cohesity a California-based data storage company 300 b Oriza Ventures Oriza Holdings 301 which is 100% owned by the Suzhou Industrial Park Administration Committee 302 an arm of the Suzhou municipal government 303 is also active in the U S VC ecosystem Oriza Holdings is the lead manager of the Silicon Valley-based Oriza Ventures Technology Fund “Oriza Ventures” where it had invested over CNY 340 million $50 million as of September 30 2017 304 Oriza Holdings links its VC investments in the United States to Chinese industrial policies In a February 2017 Oriza Holdings press release announcing a technological achievement by one of Oriza Ventures’ portfolio companies in California Oriza Holdings tied the founding of Oriza Ventures to China’s “Going Out” strategy aimed at acquiring foreign technology 305 Oriza Ventures has invested in at least 61 early stage technology companies in the U S 306 These companies often fall within sectors or design technologies that the Chinese government has identified as strategic priorities Notable investments include 307 298 As of September 2018 Meta a Silicon Valley-based augmented reality company is reportedly laying off over half of its employees in Silicon Valley and opening operations in China to be more “resource-effective” after the Chinese government pressured Chinese investors See Augmented Reality Company Meta to Put 75% of Employees on Hiatus CTECH Sep 26 2018 See also Selina Wang Trade War Is Hurting San Mateo Augmented Reality Startup Meta SFGATE Sep 10 2018 https www sfgate com business article Trade-war-is-hurting-San-Mateoaugmented-reality-13218976 php 299 About Us META https www metavision com about-us last visited Nov 16 2018 See also Signe Brewster Meta raises $23M Series A to Refine Its Augmented Reality Glasses GIGAOAM Jan 28 2015 The Digital Horizon Capital website no longer lists Meta as a portfolio company however a version of the Danhua Capital website danhuacap com archived on April 5 2018 lists Meta as a portfolio company 300 Company COHESITY https www cohesity com company last visited Nov 16 2018 See also Companies DIGITAL HORIZON CAPITAL http dh vc companies last visited Nov 15 2018 301 Oriza Holdings Chinese name is Suzhou Yuanhe Konggu Youxian Gongsi Oriza Ventures Technology Fund is a U S entity and does not appear to have a Chinese name 302 Oriza Holdings Co Ltd Reply to the Pre-audit Feedback about Suzhou Oriza Holdings Co Ltd Public Issuance to Qualified Investors of Innovation and Entrepreneurship Corporate Bonds Chinese filed with the Shanghai Stock Exchange on Mar 7 2018 at 25 303 Approval on Issues Regarding Starting Construction on Suzhou Industrial Park State Council Letter 1994 No 9 published Dec 2 2010 See also Heather Somerville China’s Penetration of Silicon Valley Creates Risks for Startups REUTERS June 28 2018 https www reuters com article us-usa-china-techinvesting-insight chinaspenetration-of-silicon-valley-creates-risks-for-startups-idUSKBN1JP08V 304 Oriza Holdings Co Ltd Reply to the Pre-audit Feedback about Suzhou Oriza Holdings Co Ltd Public Issuance to Qualified Investors of Innovation and Entrepreneurship Corporate Bonds Chinese filed with the Shanghai Stock Exchange on Mar 7 2018 at 6 305 Oriza Holdings Overseas Investment Reveals Outstanding Talent ORIZA HOLDINGS Feb 17 2017 http www sipac gov cn SIPNEWS jwhg 2017yqdt 02 201702 t20170217_532083 htm last visited Nov 13 2018 306 Oriza Holdings Co Ltd Public Offering of 2018 Innovation and Entrepreneurship Corporate Bonds First Phase Prospectus for Qualified Investors Chinese filed with the Shanghai Stock Exchange on May 22 2018 307 Portfolio ORIZA VENTURES https www orizaventures com portfolio last visited Nov 8 2018 48  Omniscience a company that produces big data analytics software with “technical origins in the U S intelligence community” that “help government agencies to protect the homeland ”308  Petuum based in Pittsburgh an AI and machine learning startup 309  Drive ai which works on AI for self-driving cars 310 and  Aromyx “a Stanford University- and VC-backed biotech and data science startup in Palo Alto” whose “early technology was funded by DARPA” and “accelerated by both the Stanford StartX Accelerator and the Plug and Play innovation center ”311 Oriza Holdings has played a central role in China’s industrial policy particularly in pioneering the Chinese government’s use of industry investment funds and VC funds Oriza Holdings was established in 2001 as of June 2018 it has directly invested CNY 17 5 billion $2 7 billion in 593 projects 312 Oriza has also established 84 subsidiary VC funds that manage over CNY 67 2 billion $10 2 billion which in turn have invested in over 1 200 companies 68 of which Oriza has “cultivated” to go public 313 Oriza Holdings claims to have established a “Thousand Talents” Venture Capital Center which has 96 equity investment management teams that manage 152 funds exceeding over CNY 131 billion $20 billion in value as well as seven debt financing service organizations which have serviced over 4 200 enterprises 314 VI Conclusion As the evidence gathered in this update demonstrates China fundamentally has not altered its acts policies and practices related to technology transfer intellectual property and innovation and indeed appears to have taken further unreasonable actions in recent months USTR intends to continue its efforts to monitor any new developments and actions in this area About Omniscience OMNISCIENCE https www omni sc last visited Nov 8 2018 “With its technical origins in the US intelligence community and its founders’ experiences developing and deploying Internet-scale applications Omniscience created a software execution framework to handle the high data volumes and combinatorial complexity of the real world Omniscience’s team brings extensive experience in machine learning algorithmic distribution finance insurance and data science Omniscience is headquartered in Palo Alto California the heart of Silicon Valley Investors include Plug and Play and Oriza Ventures Omniscience’s software solutions enable leading financial firms and insurers to increase revenues lower costs reduce risk and improve return on equity And Omniscience’s software help government agencies to protect the homeland ” 309 About Petuum PETUUM https petuum com about html last visited Nov 13 2018 310 Home DRIVE AI https www drive ai last visited Nov 13 2018 311 About AROMYX http www aromyx com about last visited Nov 13 2018 312 Company Introduction ORIZA HOLDING http www oriza com cn About aspx cid 24 last visited Nov 7 2018 313 Company Introduction ORIZA HOLDING http www oriza com cn About aspx cid 24 last visited Nov 7 2018 314 Oriza Holdings Talent Recruitment Guide and Recruitment Procedure February 2018 Chinese ORIZA HOLDINGS http www o-hr cn html sipac gqzp-12 pdf last visited Nov 7 2018 308 49 Appendix A – China’s Foreign Investment Catalogue Overview of Key Changes in 2018 Version Sector Selection and cultivation of new varieties of crops and production of seeds Summary of Requirements in 2017 FIC Chinese entity must be the controlling shareholder Changes in 2018 FIC Removed controlling shareholder requirement for selection and cultivation of new varieties of crops other than corn and wheat Exploration and development of oil and natural gas Limited to CJV or EJV No Change Manufacturing of fully-assembled automobiles Chinese entity’s investment cannot be lower than 50 percent and the same foreign investor may establish no more than two JVs in China for the same kind of automobiles subject to certain exceptions Removed foreign equity cap for manufacturing of special use vehicles and new energy vehicles Manufacturing commercial aircraft Chinese entity must be the controlling shareholder Controlling shareholder requirement removed Construction and operation of nuclear power plants Chinese entity must be the controlling shareholder No Change Value-added Telecommunications Services Foreign investment cannot exceed 50 percent excluding e-commerce and is limited to WTO commitments Note that China classifies a broad range of internet and technology-related services under this sector No Change Basic telecommunications services No Change Foreign equity restriction removed Medical institutions Chinese entity must be the controlling shareholder and foreign investment is limited to WTO commitments Foreign financial institution investment cannot exceed 20 percent or 25 percent depending on how the investment is structured Limited to CJV or EJV Surveying and mapping companies Chinese entity must be the controlling shareholder Controlling shareholder requirement removed Banking 50 In addition i in 2020 the foreign equity cap for manufacturing of commercial vehicles will be removed and ii in 2022 the two JV cap and the foreign equity cap for manufacturing of passenger vehicles will be removed No Change