US-China Bilateral Tech Investment Aids Chinese Military

February 14, 2022 Updated: February 15, 2022

News Analysis

The Trump administration fought to reduce the flow of U.S. technology and investor funds into the hands of the Chinese Communist Party (CCP). The trend continues under the Biden administration, but there is still much more to be done.

“Chinese companies are beholden to the Chinese Communist Party,” said Sen. Tom Cotton (R-Ark.) in a press release on Feb. 3, explaining why scrutiny of Chinese investment must be intensified.

The CCP uses billions of dollars’ worth of U.S. investor money to finance the People’s Liberation Army’s weapons and technology. Some of these funds are then used to acquire stakes in U.S. domestic firms to obtain their technology. Bilateral investment flows are a significant component in the CCP’s quest to become the preeminent global military power. Increasingly, the U.S. government is blocking Chinese investment in sensitive industries while prohibiting U.S. exports of certain technologies.

In June 2021, as a continuation of Trump-era policies, President Joe Biden signed an order, banning U.S. investment in 59 Chinese firms over security concerns. Among the companies now on the blacklist are military hardware developers Aviation Industry Corp. of China, China North Industries Group, China Aerospace Science and Industry Corp., and China Shipbuilding Industry Corp. These companies are all state-controlled and have ties to the PLA. The order enjoys bipartisan support in Congress.

Another significant restriction came in October 2021, when the U.S. government banned China Telecom from operating in the United States. The U.S. Federal Communications Commission (FCC) ordered China Telecom Americas Corp. to discontinue its services.

The CCP responded, alleging that “This is an unreasonable suppression of Chinese enterprises by abuse of state power and a serious breach of international economic trade rules.”

The FCC justified the move by pointing out that as a state-owned company, China Telecom “is subject to exploitation, influence, and control by the Chinese government and is highly likely to be forced to comply with Chinese government requests.”

A month after blocking China Telecom, the United States blacklisted 27 entities, including New H3C Semiconductor Technologies (H3C), which is jointly owned by Hewlett Packard Enterprise and China’s state-backed Tsinghua Unigroup. H3C has been the exclusive provider of Hewlett Packard’s server and storage services in China, raising questions of data security. Additionally, H3C also services the PLA, which seems a conflict of interests.

Other blacklisted companies include Hangzhou Hikvision Digital Technology, which developed the advanced surveillance cameras and facial recognition technology that are currently being used to repress the Uyghurs, an ethnic minority group in Xinjiang.

A Hikvision spokesperson on Feb. 11 condemned the blacklisting, saying that it was done with no justification, and that the United States keeps “targeting Hikvision simply because we happen to be headquartered in China.”

It is noteworthy that the company’s technology is employed in the “safe city” systems being sold to countries around the world. These systems can be exploited by authoritative regimes to control their own people, or by the CCP for spying.

Epoch Times Photo
Hikvision headquarters in Hangzhou, in eastern China’s Zhejiang Province on May 22, 2019. (STR/AFP via Getty Images)

The Committee on Foreign Investment in the United States (“CFIUS“) is an inter-agency committee that reviews certain foreign investments and advises the U.S. president on whether or not they pose a national security threat. Closer scrutiny is paid to mergers and acquisitions, where the foreign entity would obtain the controlling interest of a U.S. company. After being alerted by CFIUS, the president may suspend or prohibit the transaction. Foreign and domestic entities are not obligated to inform CFIUS before an investment takes place; however, many do, in order to avoid costly delays or prohibitions after the fact.

In 2018, then-President Donald Trump signed the Foreign Investment Risk Review Modernization Act, which expanded the jurisdiction and the powers of the national security review process, increasing the number of reviews that are mandatory rather than voluntary.

Where CFIUS monitors and prevents PLA- or CCP-linked companies from investing in the United States, the Department of Commerce’s Bureau of Industry and Security (BIS) investigates outbound U.S. investment. BIS protects U.S. national security and advances foreign policy and economic objectives by restricting U.S. export of sensitive technology to foreign countries. If a foreign entity is identified as posing a threat, the Office of Foreign Assets Control (OFAC) imposes sanctions.

These sanctions will prevent outbound investment as well as the export of emerging and foundational technologies, and information and communications technology. Increasingly, controls have been applied to prevent foreign investment or exports that could pose a threat to U.S. supply chains.

China has been the main focus of BIS and OFAC, ensuring that the United States maintains its position of strategic technology leadership. Through the year 2000, OFAC had imposed sanctions on fewer than 1,000 entities. By 2021, that number had shot up to nearly 10,000.

On Feb. 3, 2022, Sens. Rick Scott (R-Fla.), Marco Rubio (R-Fla.), and Tom Cotton (R-Ark.) introduced the “Countering CCP Drones Act.” The legislation prohibits federal departments and agencies, such as the Federal Communications Commission (FCC), from purchasing equipment produced by, or services provided by, DJI, a Chinese drone manufacturer with ties to the PLA.

The America COMPETES Act of 2022 was passed by the House of Representatives in early February, specifically targeted at competition with China. The bill—which involves the Department of Commerce, the Department of Energy, the National Science Foundation, and the White House—will increase U.S. competitiveness and strengthen the U.S. supply chain by supporting development in science, technology, engineering, and mathematics (STEM) education and training.

Despite increasing restrictions and a general slowdown of the economy due to COVID-19, bilateral investment remains high. In 2020, the United States invested $8.7 billion in China. In the same year, China invested $7.2 billion in the United States. Even more, U.S.-China portfolio holdings were reported to be $1.7 trillion, but the real number is estimated to be double if investments through offshore entities are included.

Washington is tightening the rules related to bilateral trade and investments that pose a threat to national security. Unfortunately, the problem is massive, and the trade and investment flows are very lucrative. Each review and ban take a great deal of time, with the piecemeal approach allowing other trade and investments to continue in the meantime.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Antonio Graceffo, Ph.D., has spent more than 20 years in Asia. He is a graduate of the Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Graceffo works as an economics professor and China economic analyst, writing for various international media. Some of his books on China include "Beyond the Belt and Road: China’s Global Economic Expansion" and "A Short Course on the Chinese Economy."