The Department of Defense (“DoD” or “the Department”) released its annual report to Congress on the Military and Security Developments Involving the People’s Republic of China (“PRC”) on May 2, 2019. This annual report details DoD’s assessment of Chinese security strategy and military strategy over the next 20 years, with a particular focus on China’s future course of military-technological developments. The Secretary of Defense sends both a classified and unclassified version of the report to Congress each year to fulfill the requirements of Section 1202 of the National Defense Authorization Act for Fiscal Year (“FY”) 2000, as amended by Section 1260 of the NDAA for FY 2019. Notably, the 2019 amendments refined the scope of the reporting requirements to include elements regarding emerging efforts by the PRC on espionage, technology transfer, economic pressure, political coercion, information operations, and predatory lending under its Belt and Road initiative.

The report highlights significant strategic challenges presented by Chinese foreign and military policy. Its tone underscores sharp differences with several recent policy decisions and comments that take a more accommodating view of Chinese policy. The UK defense minister, for example, was recently ousted over a leak concerning Britain’s proposed decision to allow Huawei to participate in certain parts of its 5G network. The DoD report, by contrast, describes serious threats from China’s coercive military-civilian strategy. China is taking major steps to modernize its military capabilities and can force cooperation under its laws from all potential sources of innovation within its borders.

Industry leaders in the United States should take note of this approach. As they engage with U.S. government leaders and policy makers, it will be important to look for ways to continue building on key innovation efforts in the United States, and with allies and partners, to harness dual-use emerging technologies for future capabilities. The report also makes clear that cybersecurity and counter-espionage protocols will be key to thwarting efforts of the Chinese government – acting either through governmental agencies or through Chinese companies – to gain insight into the military and industrial capabilities of the United States.

China’s Force Modernization, Defense Budget, and Defense Industry

Striving for modernization by 2035, President Xi Jingping announced at the 19th Party Congress in October 2017 that he wants China to become the most “innovation-oriented” nations. Part of the plan to achieve this goal by 2035 is centered on investments in nuclear deterrence, space, counterspace, electronic warfare, and cyber operations. The U.S. Government continues to face threats from Chinese cyber actors, which have targeted the U.S. industrial base supply chain for intelligence gathering and theft of intellectual property in order to gain insights into U.S. operations and networks.

Military spending in China is not done with the same transparency as in the United States and allied nations, but DoD estimates that China’s overall defense budget will hit $260 billion by 2022. China has been committed to growing its defense budget over the past 20 years, including a 6.1% percent inflation-adjusted increase in defense spending beginning in 2018. This puts China’s total military expenditures at $170.4 billion (1.3% of GDP) officially. China has a separate, classified budget for its foreign weapons procurements and research and development efforts that brought its total defense spending beyond $200 billion as of 2018. These figures are significant, as the next three largest defense budgets in the region are those of India at $60.8 billion, Japan at $47.4 billion, and Russia at $43.8 billion.

The Department highlights in the report that a major focus on China’s defense industrial base has been to develop a fully integrated military-civilian defense industry. China has put out a call to the civilian sector, accompanied by opportunities for significant funding, to work with the PLA to develop dual-use technologies and to capture intellectual property through foreign direct investment and tech transfer methods. The United States has been monitoring this strategy. In March 2018, the office of the U.S. Trade Representative completed its Section 301 work, finding that the Chinese government was causes $50 billion per year in harm to the U.S. economy through its technology transfer, intellectual property, and innovation practices.

Emerging Technology in China

The approach of the Chinese government on emerging technology is to use a whole-country method. China’s leadership is pressing academia, private industry, universities, and provincial government to begin cooperating with the PLA to develop and field advanced technologies with military capabilities. China seeks to become the AI center of the world by 2030 and establish itself as to world’s leader in the critical areas of cloud computing, e-commerce, semiconductors, hypersonic vehicles and weapons, global quantum-encrypted communications, next-generation broadband wireless (to include the development and deployment of 5G), and big data industry. The Department particularly cautions that the information sharing requirements in China, whereby cooperating with the government and IP sharing is required by law for private industry, will lead to widespread security and network resiliency challenges if Chinese technology is incorporated into worldwide networks. It is clear from the similarities in national focus that China is working to develop capabilities in these critical areas ahead of the United States and our allies wherever possible.

In addition to developments in 5G, China’s private sector telecommunications firms, including equipment manufacturers Huawei and ZTE, are mastering facial recognition, establishing innovation centers, and funding tech startups globally. China’s focus on the overseas market is centered on deploying 5G technology and establishing smart cities enabled by Chinese equipment. The Chinese government intends for these efforts to allow them to use foreign workforce talent and data captured through IP agreements. This is an area where the United States and its allies should be particularly mindful.

Chinese Espionage

In response to the 2019 amendment requiring an analysis of Chinese state-sponsored espionage, the report included a section on recent cases to underscore the gravity of the threat and to reemphasize that the Chinese government does not seek to play by the same rules as democratic nations. This posture is reflected in multiple areas. For instance, China’s largest state-run media outlet, Xinhua News Agency, refuses to register its U.S. staff under the Foreign Agents Registration Act despite repeated requests by the U.S. Department of Justice.

These cases also include the following:

(1) In November 2018, a Chinese national charged with conspiring to export U.S. devices with sonar, hydrophone, and robotics military applications to the Chinese government and military under the director of the Chinese military.

(2) In October 2018, a group of Chinese Ministry of State Security (MSS) intelligence offices were indicated on charges of conspiracy to steal sensitive turbofan engine technology from commercial airliners while China was trying to develop a similar engine for commercial sales.

(3) In October 2018, a Chinese MSS officer was charged with economic espionage for theft of trade secrets pertaining to military and civilian aircraft technology.

(4) In September 2018, a Chinese state-owned enterprise was implicated in an economic espionage conspiracy for theft, conveyance, and possession of stolen trade secrets from a U.S. semiconductor company.

(5) In September 2018, a Chinese national was charged for acting as an illegal agent of the Chinese government within the U.S. for collecting biographical data for potential PLA recruitment on individuals working as engineers and scientists, including Chinese nationals working in the United States. This Chinese national entered the U.S. on a student visa and enlisted in the U.S. Army Reserves under the now-suspended Military Accessions Vital to the National Interest program.

Conclusions

The report provides an important update to Congress on China’s increasing investments and activities in the areas of emerging and critical technologies, espionage, economic and political coercion, and information operations in the broader context of China’s Belt and Road initiative. While the congressional defense committees will receive a classified version and briefing on the report, there will likely be upcoming public hearings on similar topics that will provide the members an opportunity to further examine these critical findings in a public setting.

This analysis was particularly timely as both the Committees on Armed Services of the Senate and the House of Representatives will soon mark up their versions of the FY 2020 NDAA. It is likely that the committees will be debating legislation in the policy areas of 5G development and deployment, supply chain security, emerging and critical technologies, and technology transfer as necessary to meet the National Defense Strategy goal of deterring Chinese aggression. Industry partners and policy analysts should be on the lookout for provisions of this nature in the annual defense bill.