On January 28, the U.S. Justice Department announced two indictments against China’s largest telecommunications company, Huawei, alleging that the company tried to steal information from T- Mobile and committed fraud to evade U.S. sanctions against Iran.
During the announcement of the indictment, FBI Director Christopher Wray clarified that while there was no alleged illegal conduct by the Chinese Communist Party, it is public record that, under China’s Cyber-security Law, Huawei and other Chinese companies must furnish Chinese government access to its data, undermining U.S. national security. This statement encapsulates a new broadly held view of U.S. policymakers: All Chinese companies are controlled by the party.
Western governments should not automatically conclude that Chinese companies are acting as agents of the party because such firms are ultimately still in charge of their own business decisions. But the lines have been dangerously blurred. Chinese domestic laws and administrative guidelines, as well as unspoken regulations and internal party committees, make it quite difficult to distinguish between what is private and what is state-owned.
Foreign companies and governments began paying closer attention to China’s domestic regulations on the relationship between the company and the state in 2015, when China’s National Security Law came into effect, and the next year, when a Cyber-security Law was enacted. The National Security Law requires all parties, including citizens, state authorities, public institutions, social organisations, and enterprises, “to maintain national security.”
More specifically, and worryingly for the telecommunications industry, Article 28 of the Cyber-security Law states that network operators, which include telecommunications companies such as Huawei, have to provide “technical support and assistance” to government offices involved in protecting national security. U.S. government officials, including at the FBI, interpreted this vague language to mean that all Chinese companies, including Huawei, are subject to the direct orders of the Chinese government.
Even in light of these legal restrictions, Chinese companies and the party are not natural partners. Until recently, Chinese tech companies have been reluctant to display their affiliation with the Communist Party. Other companies have also diverged their spending priorities from those of the party, with the share of private companies investing in the Belt and Road Initiative decreasing. Huawei and other companies have also expressed a dislike of the government’s push for “indigenous innovation.”
In general, the interest of cultivating stakeholder profit not only diverges from the party’s interest but often directly clashes with it. Tencent, another large Chinese tech company, which counts video games as one of its core businesses, has also seen its priorities clash with those of the party, which believes the medium is ruining the lives of young people. The Chinese government, through a state paper, called Tencent’s biggest hit, Wangzhe Rongyao (known as Arena of Valor internationally), “poison” and has refused to approve a Tencent game since last March.
Outside of legal documents, Beijing has also been Signalling domestically that ties are tightening between the private sector and the government.
Yet in the last four years in particular, the Chinese government has been actively working to increase its influence over private companies through regulatory measures. The National Intelligence Law of 2017 was an important milestone. It instructs every organisation or citizen to support, assist, and cooperate with national intelligence work, building upon the legal framework set forth by both the national security and cybersecurity laws.
Outside of legal documents, Beijing has also been signalling domestically that ties are tightening between the private sector and the government.
At high-tech enterprises such as Baidu, Alibaba, and Tencent, company campuses have police-embedded cells, in which employees hand over sensitive information without due process. This approach isn’t just limited to domestic companies, which may face greater pressure to comply with demands from the Ministry of Public Security.
Foreign companies that are involved in joint ventures have also been asked to allow Communist Party cells a formal role in business decisions. While party cells are not a new idea originating in Article 19 of the China’s Corporate Law the increased implementation and expanded jurisdiction are an alarming development.
Chinese company employees with ties to the government or the party also continue to blur the line between public and private. Recently, the People’s Daily, the official party newspaper, revealed that Jack Ma, the head of Alibaba, was a party member, implying that there were closer ties between the party and the company than previously thought.
Most successful entrepreneurs and high-profile officials in China do hold party membership, often joining in college because they believed this would aid their careers. More infamously, most observers believe that Huawei’s founder, Ren Zhengfei, the former director of the People’s Liberation Army’s Information Engineering Academy, continues his connections with the military.
His daughter and current chief financial officer of Huawei, Meng Wanzhou, also formerly possessed a public affairs passport issued by the Chinese government, something typically only given to people who are closely related to the government.
Another way the government is infiltrating the private sector is its increasing use of state-backed venture capitalist funds to invest in companies developing critical technologies, such as 5G and semiconductors.
In April 2018, the Cyberspace Administration of China, the internet administrative and enforcement agency, and the China Securities Regulatory Commission jointly released a plan to promote domestic Chinese markets to serve China’s strategy to becoming a cyber superpower, further blurring the lines between the private and public spheres.
However, Chinese companies still have some autonomy. They’re able to direct their own research and development, decide where to expand, and have control over most everyday decisions. But when the party comes calling, they have almost no power to resist direct requests, lest they want to lose their privileged positions. Alibaba’s Ma characterised the company’s relationship with the party as “be in love with them but don’t marry them.”
His quote represents the sentiment among many Chinese companies, in which their commercial interests diverge from those of the government, but because they need regulatory and procedural approval domestically, they have no choice but to appease government requests.
Although the United States should not automatically assume that all Chinese companies are vessels of the party, it should still take the necessary steps to safeguard national security. The United States may not be able to influence how tight the party’s grip is on Chinese companies, but U.S. policy leaders can do a much better job of clarifying the matter when those firms seek to exert control in the United States and over U.S. businesses.
The new U.S. Congress should consider reintroducing and passing legislation like the True Incorporation Transparency for Law Enforcement Act or the Corporate Responsibility and Taxpayer Protection Act, which expose beneficial ownership in U.S. incorporated companies and foreign joint ventures.
This will increase transparency around when China, and the Communist Party in particular, actually benefits from U.S. mergers and acquisitions. This will help to better determine the national security implications of Chinese Foreign Direct Investments in the United States.