Chen used his close personal contacts within the Chinese system to create a central role for CDB in Chinese urban development. In the early part of the last decade, the bank used an innovative financing structure to help unleash a surge in infrastructure projects by Chinese local governments—all those new airports, highways, and high-speed trains that have attracted so much attention. Then, from the middle of the last decade, Chen decided to take his bank overseas. He bought a small stake in the U.K.’s Barclays Bank and flirted with a much bigger investment, before pulling out of the deal. Instead, when the financial crisis started, he realized there was a huge opportunity for China in the energy sector. Given the sharp drop in prices, energy-producing countries were “now in a difficult situation because they can’t raise capital from the West,” he said in 2008. “So they are shifting their focus to China. Therefore, we should grasp this opportunity to do deals.” He decided to build up an informal branch network for the bank overseas. Each of the main offices in China was given responsibility for a different region of the world. The Henan branch, in northern China, was told to scout for business in southern Africa; the Chongqing office, from central China, was sent to develop contacts in the Balkans. By the end of 2009, the bank had teams in 141 countries, including almost all the fifty-four countries in Africa. In a book he wrote about his experiences working overseas for CDB, Shi Jiyang recalls sitting in his office in Shenzhen in 2006, looking at a map of the world, and wondering if he would ever get the chance to visit South America; a month later, he was sent there to find new business. “South America is going to be the hotspot for Chinese investment over the next ten years,” he writes. “Entrepreneurs who want to ‘challenge the blue ocean’ should be ready to go to South America.” In early 2013, Chen Yuan stepped down from CDB, after more than a decade in charge. His new job is to establish the BRICS development bank.
Ambitious companies, not the Foreign Ministry, are forging many of China’s new international relationships. In a short period of time, CDB started to sign a rapid succession of eye-catching deals. It provided the financing for the $2-billion Burma pipeline, as well as a series of big deals in Russia, Kazakhstan, and Turkmenistan. The bank was also behind a $9-billion development-financing deal that China signed with the government of Ghana. Africa gets most of the attention in China’s overseas investments, but CDB has also made a big splash in Latin America. Kevin Gallagher, a development economist at Boston University, calculated the amount of loan commitments that China made to Latin America between 2005 and 2011. The figure he came up with, $75 billion, was more than the entire amount loaned to the region by the World Bank, the Inter-American Development Bank, and the U.S. government. Some of those funds went to countries such as Argentina and Bolivia, which had effectively been cut off from international financial markets. “The key thing is that the Chinese are financing the sorts of projects that Latin American governments actually want, rather than the projects that the Washington financial institutions think that they need for their development,” says Gallagher.
The World Bank insists that it does not really compete with CDB and China Eximbank. In the strict sense, that is often correct. The Chinese are not involved in anything similar to many of the projects that the World Bank supports, such as microcredit schemes or health-care initiatives. According to World Bank officials, the Chinese are mostly interested in using their loans to get access to energy and natural resources, which is a different sort of business. But this explanation leaves out a number of things. It ignores the way in which Chinese money can alter the development priorities of governments. Dams are one of the best examples. After the World Bank succumbed to pressure from NGOs and withdrew from backing large dams in the 1990s, their construction ground to a halt. But when Chinese banks entered the fray, developing countries’ governments could ignore Washington’s advice about the risks of dam building. Whatever China’s motives, the money it makes available gives governments new options and reduces the leverage of the Washington-based banks.
The World Bank’s argument also ignores the broader political implications of China’s overseas lending spurt. The China Development Bank’s biggest client is Venezuela, whose firebrand leader, Hugo Chávez, liked nothing better than taking potshots at Washington until his death in 2013. From 2007 to 2012, the bank lent $42.5 billion to the government of Venezuela—roughly a quarter of its overseas loans during that period. Venezuela is one of the world’s largest oil producers, and the loans are backed by oil revenues, which gives China some comfort about repayment. As part of the deal, Chinese companies are also getting access to some oil exploration projects which have become available because U.S. oil companies have been expelled. Most of the loans have gone into a development fund run by the Venezuelan government. It is not too much of an exaggeration to say that the Chinese money went a long way to securing Chávez’s hold on power. “Venezuela’s oil is at the service of China,” Chávez once told Xi Jinping. Ecuador, another Latin American country with a left-populist government that enjoys snubbing its nose at Washington, has negotiated a similar oil-for-loans deal with China. The $7.3 billion in loans it has signed are equivalent to around one-third of its annual budget.
Venezuela’s experience in recent years demonstrates the potential of Chinese financing to alter some of the dynamics of international politics. When its oil revenues plummeted during previous financial crises, Caracas was often obliged to look to the Washington institutions for support. The price of that help was to adopt some of their advice about how the economy should be run. During the 2009 crisis, Venezuela’s finances were under heavy pressure as oil prices fell. But, courtesy of the Chinese money, Chávez was able to carry on as if nothing had happened. Indeed, as a result of Beijing’s backing, Chávez went so far as to pull out of the World Bank and IMF formally in 2010. “We will no longer have to go to Washington,” Chávez boasted.
Lurking behind the surge in Chinese lending there is also an economic philosophy that puts China at odds with the Washington institutions. When Deng Xiaoping decided to start opening up the Chinese economy, one of the first things the government did was to take out a large loan from Japan in 1978, on terms quite similar to the sorts of deals China has struck over the last five years in Africa and Latin America. China pledged to import $10 billion of Japanese technology and capital equipment, which it repaid with exports of coal and oil. (This was an era when Japan, not China, was the country scouring the world for natural resources to feed its rapid industrialization.) China used the funds to build new ports and roads, to construct power plants, and to build up its telecommunications network—the core industrial foundations it needed to help kick-start the economy. “China was getting a discount on finance the country needed for its modernization,” according to Deborah Brautigam, an American academic who has done extensive research on China’s links with Africa. China sees its hands-off financing in Africa and Latin America in a similar vein. Little of this is aid: the borrowing countries have to repay the loans, which are at international interest rates. But Chinese officials argue that economic development can only take place if governments are given the freedom to experiment with the sorts of projects that might work in their countries and which are important for their economy. “We had to learn from our own mistakes,” as a senior Chinese official explained to me. “We are letting other countries do the same. We cannot tell them what they need or how to run their economy. All we can do is share some of our own recent experiences.”
HACKED OFF
In 2004, a security officer at Nortel, a leading maker of telecommunications equipment, noticed something peculiar on the group’s computer network. One of Nortel’s senior executives appeared to be downloading a large series of sensitive documents about the company’s technology and strategy. The executive claimed to know nothing about the downloads, so the company’s IT-security staff started to investigate. They eventually followed the intrusion in Nortel’s networks all the way back to Internet servers in China.
/> Over the next few years, Nortel continued to notice signals that hackers were still present in its system. Brian Shields, a longtime Nortel executive who led the company’s internal investigation, concluded that the passwords of seven senior company officials, including the chief executive, had been stolen. Every so often, one of the company’s computers would send a large packet of electronic data that would end up at one of the Internet addresses in China. The hacking had probably started as far back as 2000, Nortel concluded. “They had plenty of time to get pretty much anything they wanted,” says Shields. “This is not the kind of thing that ordinary hackers can do. It has to be something organized by a state.”
Nortel is already an also-ran of the fast-moving IT industry. One of the pioneers in making the electronic switches that power mobile-phone networks, the Canadian company filed for bankruptcy in 2009 and has since been sold off in different pieces. The company could never definitively prove that China was behind the hacking of its system, and Beijing has denied it. It is also not clear whether there was any link between the hacking and the company’s deteriorating results. But the accusations that Shields has aired have become part of a familiar refrain in recent years, as American companies and politicians have started to accuse China of a staggering campaign of stealing trade secrets. The most detailed case has been compiled by Mandiant, a U.S. Internet-security company, which claims to have traced hacking attacks on 141 companies in the U.S. and fifteen other countries to one particular Chinese military unit based in Shanghai. According to the Mandiant report, a well-known group of hackers named APT1 is actually part of a PLA group called Unit 61398. By tracing a large volume of hacking activity back to telecom networks near the unit’s base in a twelve-story building in central Shanghai, Mandiant concluded that the PLA had to be involved. Amid the increasing volume of evidence linking China to hacking, senior U.S. politicians and officials have taken to denouncing Beijing. In Congress, there is a strong move to try and find some sort of payback, to punish the companies that are benefiting from cybertheft. “What has been happening over the course of the last five years is that China—let’s call it for what it is—has been hacking its way into every corporation it can find listed in Dun & Bradstreet,” says Richard Clarke, former White House counterterrorism officer under Bill Clinton and George W. Bush. “Every corporation in the U.S., every corporation in Asia, every corporation in Germany. And using a vacuum cleaner to suck data out in terabytes and petabytes.”
If China is having second thoughts about its close economic links with the U.S., then America is returning the compliment. The business community was once the most important supporter in the U.S. of strong ties with China, but over the last five years many companies have become much more wary. “I am not sure that in the end they want any of us to win, or any of us to be successful,” Jeffrey Immelt, chief executive of General Electric, America’s biggest manufacturing company, complained in 2010 at a dinner in Rome.
The hacking revelations have only added to the impression that China is stacking the cards against Western multinationals, especially when it comes to actually doing business in China. The country may be the second-largest economy in the world and the biggest market for many industries, but many foreign businesses have had a bruising experience over the last few years, which makes them think that the opportunities available to them in China are gradually being squeezed. They point to a complex web of Chinese industrial policies that affect their ability to compete, including generous financial subsidies for important Chinese state-owned companies, new industrial standards that favor Chinese competitors, and predatory regulations that seek to get foreign companies to hand over important technologies in return for market access. Chinese regulators believe that, because the Chinese market is so large, they can drive a very hard bargain with foreign companies who want to do business in the country. The fear that the Chinese military and security services are helping foreign companies’ competitors steal their trade secrets has only added to the sense of disillusionment. “Many U.S. companies believe they are not competing with similar entities,” says John Veroneau, a former deputy U.S. trade representative. “They are used to competing with market players, but not against governments. Not only are they up against subsidies, but they are also up against China’s intelligence services.”
The lightning rod for a lot of these suspicions has been a Chinese company called Huawei, one of the world’s biggest makers of telecom equipment. Huawei has become a sort of Rorschach test for views on China: its supporters believe it is a shining example of Chinese innovation, whereas its critics argue it is a secretive, military-friendly corporation that could be a Trojan Horse for a future cyberwar. Along with Ericsson of Sweden and Cisco of the U.S., Huawei is one of the main companies making the essential infrastructure that goes into modern phone systems, including mobile networks. (Nortel used to be a leader in this market.) That is where the cyberwar fears come in. Security experts say that such expertise means that Huawei could leave devices in American phone systems that might be used to listen into telephone conversations, or it could hide corrupted computer code that would allow China to disable a phone network during a conflict.
Huawei has become such a sensitive political issue in part because of its background. The company was founded by Ren Zhengfei in 1987, when he started selling telephone-exchange equipment imported from Hong Kong. For much of the 1970s, however, Ren had served in the People’s Liberation Army, latterly in its information-technology research unit. As a result of that PLA connection, Huawei has never been able to shake the impression that it cooperates with the military and China’s security services. The suspicion is enhanced by the opaque management structure of the company, which revolves around the mercurial Ren. He has now become chairman of the company, but his idea of stepping back from the business has been to appoint three people to act as chief executive on a rotating basis, a recipe for backseat control.
Every time it has tried to expand in the U.S., Huawei has found itself frustrated. In 2008, its $2.2-billion attempt to buy an American company called 3Com, which makes Internet routers and networking equipment, was blocked on national security grounds. It had the same experience in 2011, when it tried to buy some assets from 3Leaf, another American technology company. The Intelligence Committee of the U.S. House of Representatives effectively fingered Huawei as a threat to national security in 2012 in a report which recommended not only that it be blocked from all U.S. government business, but that American telecom companies should not buy any equipment made by Huawei. “We simply cannot trust such vital systems to companies with known ties to the Chinese state, a country that is the largest perpetrator of cyberespionage against the U.S.,” says Mike Rogers, chairman of the House Intelligence Committee. “You would have to be mad to let that company into our networks.”
Not every Western country is quite as hostile to Huawei as is the U.S. In order to do business in the U.K., Huawei, which has invested $2 billion in the country, has established a separate testing center which works closely with British government agencies to ensure that the equipment and software sold by Huawei are reliable. Governments can never know for sure that the equipment they are buying is not compromised, but this British unit is as good a way as any of getting reassurance. There are also some members of the U.S. security establishment who are not opposed to Huawei. One former senior official at the U.S. National Security Agency says that if the Chinese wanted to set traps in U.S. communication networks or in its infrastructure, the last route they would use is equipment made by high-profile Chinese companies, because of the inevitable scrutiny: instead, they would look for ways to plant hidden code in the products of other suppliers. Yet the high-level political opposition to Huawei is so strong in Washington that it is hard to imagine a compromise emerging. One former senior Pentagon official says, “It is simply too dangerous to let a Chinese company near our phone networks, the potential problems are so great.”
Perhaps telecom equipment in t
he twenty-first century is destined to be like the defense industry, a tightly controlled domain that is open only to companies from that nation. But the U.S. also runs a great risk in rejecting companies like Huawei so aggressively. There is bound to be retaliation: China is as afraid of Cisco as the U.S. is of Huawei. Banning major Chinese companies can also easily become a slippery slope. The initial focus has been on telecom equipment, but the U.S. Congress has started introducing restrictions in some areas for all Chinese information-technology products, from computers to smartphones. This sort of action raises the prospect that a core industry in the modern economy will end up being divided into two distinct camps, a group of companies that America politically approves of, and another group of companies that Washington does not trust, mostly from China. Such techno-nationalism can easily become the gateway to a broader outbreak of protectionism. The financial crisis and the great recession that followed did not lead to the flood of protectionist measures that many expected, but the panic over cybertheft of trade secrets might just do so.
The Contest of the Century Page 31
