US Funds and Technology Fuel China’s Advanced Weapons Systems

December 15, 2021 Updated: December 15, 2021

News Analysis

China has been able to accelerate the technological capabilities of its military, the People’s Liberation Army (PLA), by stealing U.S. technology, accessing U.S. capital markets, and courting American investors.

The U.S. defense community has been very concerned over the PLA’s recent test of hypersonic missiles. These technologically advanced weapons have capabilities, making them extremely difficult to defend against. They are also expensive, at over $105 million per missile. Beijing’s high-tech weapons arsenal—such as satellites, magnetic rail guns, nuclear and hypersonic arms—is very expensive, which is why 41 percent of China’s $252 billion defense budget is spent on research and development.

Part of the PLA’s R&D cost is defrayed by stealing U.S. technology. And some of the technology is purchased from American developers, using funds from U.S. investors. For example, China Aerodynamics Research and Development Center (CARDC), a hypersonic test facility, relies on a super computer that uses American chip technology.

By listing on U.S. exchanges and gaining access to American capital markets, the Chinese Communist Party (CCP) benefits from the deep pockets of American investors to fund its development projects. At present, 248 Chinese companies are listed on the three largest U.S. exchanges, with a total market value of $2.1 trillion. Eight of those companies are state-owned enterprises. A much larger percentage have significant state-ownership or are owned by state-owned companies. About half of them use a variable interest entity (VIE), a Cayman Island shell company, to list on U.S. exchanges, so the true owners are not known. Other firms, such as Weibo Corporation, are not state-owned, but act on CCP orders to carry out operations, including surveillance.

The Biden administration has announced that it will maintain Trump-era bans on U.S. investment in firms that have ties to the Chinese military. Under the regulations, American companies and citizens are barred from buying or selling shares in restricted Chinese companies, including top chipmakers, oil producers, and tech companies. The tech companies have become a particular threat, as they are helping China develop its quantum computing capabilities.

Under the rules implemented by the U.S. Securities and Exchange Commission (SEC) in May, Chinese companies wishing to list on U.S. exchanges must disclose if they are owned or controlled by Beijing. These new rules extend to Chinese companies, listing in the United States, under VIEs. This structure is often used by tech firms because, under Chinese law, they cannot have foreign ownership. Thus, Chinese tech companies form shell companies that are registered in the Cayman Islands, and those shell companies list on U.S. exchanges. Under the new SEC rules, more than 200 firms could be delisted.

Chinese companies involved in quantum computing, as well as manufacturing memory chips and navigation chips, are among the businesses that have been added to the U.S. blacklist. The U.S. entity list contains the names of Chinese companies, most of them state-owned, that Washington wants to block from obtaining U.S. intellectual property (IP) and defense technology. The Trump administration put numerous Chinese firms on the list and the Biden administration has added dozens more.

Along with the direct threat posed by funding Chinese companies, which increase the military capabilities of a belligerent state, Chinese law effectively turns every company and citizen into an agent. Under the national security law, national intelligence law, and the national cyber security law, citizens and entities are obligated to aid the CCP in intelligence gathering. This includes stealing IP.

One of the primary reasons for the U.S.-China trade war is China’s theft of U.S. intellectual property. In a survey of the CNBC Global CFO Council, nearly a third of North American companies said that China had stolen IP from them in the past decade. As of 2020, the FBI had more than 1,000 cases open, regarding IP theft by entities with ties to the CCP. William Evanina, director of the National Counterintelligence and Security Center (NCSC), estimated the value of China’s theft at $500 billion per year. The U.S. Department of Justice has stated that the Chinese regime is the primary culprit in roughly 80 percent of its industrial espionage investigations.

Epoch Times Photo
This wanted poster—five Chinese military officials charged with economic espionage and trade secret theft—is displayed at the Justice Department in Washington on May 19, 2014. (AP Photo)

Legal and illegal acquisition of U.S. technology, combined with state subsidies, are driving Chinese technological advancement, including in the field of advanced weaponry. From an economic standpoint, stealing technology alleviates China of having to pay hundreds of millions of dollars for research and development. This puts Chinese companies in a position to undercut their U.S. competitors. From a defense standpoint, China stealing U.S. technology means that, in the event of a war, the U.S. military would be facing its own weapons, and that the PLA would know the capabilities and vulnerabilities of U.S. hardware and defense systems.

The United States has some export controls, preventing certain technologies and equipment being sold to certain foreign entities. The ban on U.S. exports to China includes “U.S. origin items”—components that could be used in military hardware.

However, U.S. companies can circumvent these rules by directly investing in these technologies in China. It is much harder for a democracy, like the United States, to curtail the behavior of citizens, than it is for the CCP. Consequently, U.S. investors, determined to invest in China directly, are free to do so. According to U.S. trade officials, Washington will most likely not crack down on or increase scrutiny of U.S. outbound investment.

Along with investments in defense technology, Beijing is also working to control defense-critical raw materials. The Biden administration has warned that China is trying to control world cobalt markets, depriving the United States and other countries of a key element that is necessary for electric weapons and vehicles.

President Joe Biden’s son, Hunter Biden, was instrumental in aiding the CCP in purchasing $3.8 billion of cobalt. Hunter’s company, BHR, formally named Bohai Harvest RST (Shanghai) Equity Investment Fund Management Company, partnered with Chinese state-owned firms to purchase cobalt from the Democratic Republic of Congo. Bohai also helped a Chinese defense conglomerate purchase a U.S. auto parts maker.

U.S. lawmakers are working to restrict the flow of technology and money to the CCP. But each law is merely a band-aid solution for a very large problem.

Working together with U.S. allies on a combined program of reshoring domestic manufacturing, restricting investment in China, as well as restricting Beijing’s access to Western capital markets, would deprive the Chinese regime of the opportunity to steal or acquire technology from the West, as well as inhibit its ability to invest in research and development. Additionally, it would create incentives for the United States and Western nations to redirect their supply chains away from China and to expand their own manufacturing base.

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."