China Builds Up Navy, Conducts Large-Scale Cyberespionage, Says Report

By Gary Feuerberg
Gary Feuerberg
Gary Feuerberg
November 26, 2013 Updated: December 15, 2013

WASHINGTON—The U.S.–China Economic and Security Review Commission (USCC) has warned the U.S. Congress of troubling developments in security-related matters involving China and of the lack of progress in economic reform by the Asian giant.

The commission’s 453-page report, released on Nov. 20, made 41 recommendations to Congress. The top recommendation was for the United States to continue with the plan to “rebalance” the Navy toward Asia, and deploy 60 ships in the Asia–Pacific and rebalance U.S. homeports to 60 percent in the region by 2020.

If the sequester and budget caps continue, the U.S. Navy will stay at about 50 ships in the region in 2020. According to Chief of Naval Operations Adm. Jonathan Greenert, 50 ships would be insufficient to “project power” to counter potential adversaries’ anti-access/area denial capabilities, and the Navy portion of the objective of “rebalance” in Asia would fail.

Several of commissioners said they would be testifying before the Senate Armed Services Committee directly following the news conference to urge the 60-ship schedule.

Regarding economics, the report discusses the widening trade deficit with the United States, continuation of an export-driven economy, China’s troubled financial system, restrictions on foreign investment, a weakly regulated shadow banking system, anti-competitive state-owned companies, food import safety issues, and restrictions on China’s imports of U.S. agriculture products.

China’s Navy Buildup

The 2013 report focused on China’s growing naval capability in the Pacific. It is known to be building seven classes of ships, and perhaps other classes as well. An article by two Chinese military experts, Andrew Erickson and Gabe Collins, was quoted in the report, “By 2015, China will likely be second globally in numbers of large warships built and commissioned since the Cold War’s end.”

The commission asked the Office of Naval Intelligence for an assessment of China’s navy. It projected “China will have between 313 and 342 submarines and surface combatants by 2020, including approximately 60 submarines that are able to employ submarine-launched intercontinental ballistic missiles or anti-ship missiles and approximately 75 surface combatants.”

On May 13, China fired a missile into space that DOD said appeared to be on a “ballistic trajectory nearly to geosynchronous Earth orbit.” Although Beijing claims it was part of a high-altitude, scientific experiment with no military purpose, the commission cites several U.S. press reports that it was the “first test of a new antisatellite (ASAT) capability.” DOD was mum about what the intent was.

Vice Chairman Dennis Shea said at the press conference, “China may be developing an anti-satellite capability to target satellites in an altitude range that includes GPS and many U.S. military and intelligence satellites.”

This means that in a conflict, China could “threaten the U.S. military ability to detect foreign missiles and provide secure communications, navigation, and precision guidance,” states the report.

Large-Scale Cyberespionage

“In 2013, strong evidence emerged that the Chinese government is directing and executing a large-scale cyberespionage campaign against the United States,” states the report.

The evidence cited is that the People’s Liberation Army has penetrated the networks of at least 141 organizations, of which 81 percent are U.S.-based. The report notes that DOD no longer says the cyberespionage originated in China, but attributes some of the intrusions directly to the Chinese government and military.

“The public exposure of Chinese espionage in 2013 has apparently not changed China’s attitude about the use of cyberespionage to steal intellectual property and proprietary information,” said Shea.

China Exports Growing Again

“China remains a difficult place for U.S. companies to do business. A recent survey of the Chinese affiliates of U.S. companies cited competition with Chinese government-owned companies, onerous licensing procedures, lax intellectual property protections, discriminatory laws and standards, and restrictions on foreign investment,” said William Reinsch, chairman of the commission for 2013, quoting in part from the introduction to the report, in a Nov. 20 press conference.

The decades of averaging 10 percent growth per year are over, says the report. “China’s economy grew at a 7.6 percent annualized rate in the first half of 2013”—a continuation of a three year downward trend.

Despite the demand from China from certain sectors in the U.S. economy in aerospace, automobiles, and agriculture, “the U.S. trade deficit with China continues to widen,” says the report. For the first time, the monthly deficit exceeded $30 billion in July. China’s trade surplus with the United States in 2012 was $315 billion—a record.

This year marked the transition to new leadership in China with Xi Jinping becoming Communist Party head and Li Keqiang premier. The new leadership indicated that China’s economic policy is to transition from an export-driven growth model to more reliance on domestic consumption. Economic reforms are long overdue.

However, economic reform is not occurring. Instead, a strengthening of the state-owned sector and the continuation of huge trade surpluses are occurring.

“Trade data for 2012–13 show that Chinese exports are again growing at a higher rate than imports, signaling a continued reliance on exports to fuel economic growth and a reversal on reducing China’s massive trade surplus,” states the report.

Their monetary policies, including manipulating its currency, led to China’s central bank accumulating the world record foreign currency reserve, reaching $3.66 trillion at the end of September.

Rather than reduce the state-owned sector in the economy, the incoming government supports a “large and powerful state-owned sector in the economy.” Due to significant state subsidies, these large state-owned companies in the fields of energy, telecommunications, finance, transportation, construction, and metals have global competitive advantages.

Unregulated Shadow Banking System

Much discussion is given in the report on China’s “shadow banking” system that fills a need that the big, state-owned banks are not filling. The usual way that people get loans to start or expand a business is largely unavailable to Chinese entrepreneurs and small- to medium-sized enterprises. “China’s financial system is dominated by large, state-owned banks that mainly service government-directed projects,” states the report.

Beijing has allowed this system to fill the credit gap, but it is “insufficiently regulated” and could threaten China’s economic stability. The problem with the shadow banking system is that it fosters “risky off-balance-sheet lending by banks and nonbank financial institutions,” states the report.

Food Regulation Lacking

Food shipments from China are unsafe, states the report. China’s own food safety regulation is insufficient and the U.S. Food and Drug Administration can only inspect a small fraction of the food that enters through U.S. borders. The commission recommends that Congress require the FDA to increase inspections of Chinese food imports at the border.

China has become the largest and primary export market for U.S. agriculture products, states the report. It is one of the few areas where the trade balance favors the United States, with a $21 billion surplus in agriculture in 2012. However, China restricts its imports and “concentrates its U.S. purchases on bulk commodities, such as animal feeds,” said Reinsch. The report noted that processed commodities and other higher value-added products haven’t increased at the same pace as the overall growth in agriculture trade.

This year, approval of the report to Congress was not unanimous as it has been in recent years. The dissenter, Commissioner Robin Cleveland, contended that the investigation and report of the Macau section was biased.

The commission held seven public hearings, one public roundtable, and took testimony from government officials and experts from academia, industry, and policy groups. It also conducted classified briefings on Chinese investment, China’s cyberoperations, China’s foreign policy, and China’s navy.

The USCC is a congressional commission established in Oct. 30, 2000, to report to Congress on the national security implications of the bilateral trade and economic relationship between the United States and communist China. The commissioners are appointed by the majority and minority leaders of the U.S. Senate and the minority leader and Speaker of the House of Representatives. Hence, the commission’s composition is bipartisan.