Category Archives: China-U.S.

Sony Cyber Attack: The China Connection

IT WAS, PERHAPS, only a matter of time before China was dragged publicly into the war of words between the U.S. and North Korea over Pyongyang’s alleged cyber attack on Sony Corp. in retaliation for the company’s provocative Hollywood comedy about a plot to assassinate North Korean leader Kim Jong Un. China is North Korea’s main onramp to the internet. North Korea runs the overwhelming majority of its telecoms traffic through Chinese state-owned telco China Unicom. Its own networks are limited, as are its telecoms connections to its other outlet to the world, Russia. To get its cyber warriors even close to the internet backbone, Pyongyang stations some of them over the border in China.

Now Washington has reportedly asked Beijing to rein in Pyongyang’s use of Chinese routers and servers for cyber attacks, including expelling North Korean hackers based in China — a request Beijing has met with polite silence or neutral platitudes. The Sony incident is another Pyongyang embarrassment it could do without — even if it doesn’t mind a company with one foot in Hollywood and the other in Japan being embarrassed even more. Yet it is not going to open that particular can of worms. And especially not in public.

Cyber warfare is almost as sensitive a topic in Beijing as even a fictional assassination attempt on the Beloved Leader is in Pyongyang. Washington has repeatedly accused Beijing of hacking into U.S. companies, charges Beijing has repeatedly denied, saying it is a victim of cyber attacks not a perpetrator. But for both countries’ cyber warfare has become the “fifth dimension” of defence, adding to land, sea, air and space military operations.

Pyongyang, for the record, has also denied that it cyber attacked Sony. It has demanded a joint investigation with the U.S., following that up with a predictable burst of typical bombastic rhetoric.

So far, Beijing has walked a fine line over the Sony incident. It has condemned both the movie as being culturally arrogant and cyber attacks and terror threats. But, it is equally aware that the U.S. has become more forceful this year in pressing cyber-attack allegations against Beijing. In May, Washington broke new ground in bilateral relations by bringing its first cyber-spying case against China, charging five Chinese army officers in May with hacking into U.S. companies. The following month a Chinese businessman was charged with hacking into the computer systems of U.S. defence contractors, including Boeing.

For North Korea’s part, it could now return to the U.S.’s list of state sponsors of terrorism, from which it was removed in 2008 after agreeing to verification of its nuclear sites. The incident has also thrown a spotlight on Unit 121 of North Korea’s military intelligence agency. This is an elite if shadowy group of cyber warriors, some of whom are based in the Chilbosan hotel, a Chinese-North Korean joint venture in Shenyang in Liaoning  province. Estimates of their number vary from a few hundred to several thousand.

Little is known definitively about the group outside its own circles. What there is comes from defectors from several years ago. In truth, not much if anything new about it has been learned lately despite Unit 121 being written about relatively widely in the Western press since the Sony attack. A sign of how active it is is that North Korea has reputedly carried out more cyber attacks than another nation. Denial of service attacks on South Korea are its weapon of choice, but it is believed to have hacked about in the U.S., penetrating both the U.S. Department of Defense and U.S.-based companies. Part of its brief is to cause North Korea’s enemies monetary loss.

Some note similarities between the Sony attack and a broad based hack of South Korean banking and media companies last year widely believed to be the work of Unit 121. If it was responsible for the cyber hack of Sony, as charged, that would mark its boldest and most sophisticated attack to date.

With or without Beijing’s help, U.S. President Barack Obama has promised “proportionate” retaliation for what he has called an act of “cyber vandalism.” It is difficult to know what that might be. The hermit kingdom’s internet isolation has long offered Unit 121 an unlikely degree of protection. There isn’t much internet infrastructure in North Korea against which to retaliate; there are barely a dozen web sites using the country’s domain, .kp, all state run. Washington’s best bet is to get China to lean on its ally — which isn’t much of a bet at all.

Update: The internet went down in North Korea for nine and a half hours on Dec. 22 after more than a day of increasingly instability, suggesting an onslaught of denial-of-service attacks.  It could also be a result of a power failure, accidental or because someone pulled the plug. On either score, China has said it wasn’t its doing. The U.S. has declined to make comment. Well, both would, wouldn’t they — and hacktavist groups are just as likely suspects.

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Xi Blows Hot And Cold Over Apec

The Asia-Pacific Economic Co-operation Summit (Apec) in Beijing brought together the leaders of the world’s three biggest national economies, President Xi Jinxing, Japan’s Prime Minister Shintaro Abe and U.S. President Barack Obama. It was not a particularly happy confluence.

While Xi and Abe shook hands  — the first meeting of the leaders of China and Japan for more than two years — the rest of the body language was scarcely cordial. Icy, in fact. The tension over the two nations’ maritime territorial dispute in the East China Sea won’t easily be shaken off.

Obama arrived bearing gifts, extensions to the terms of multiple entry visas, from one year to 10 for business people and tourists, and to five years for students. But while China and South Korea agreed to sign their proposed bilateral free-trade agreement (FTA), the U.S-led Trans-Pacific Partnership (TTP) continued to tread water. Nor did the U.S. make any apparent progress in its negotiations to update the 18-year old agreement it has with China on trade in high-tech goods and services.

If anything, in rounding out its FTAs with Japan and the U.S. by signing one with China, South Korea has less need to pursue membership of the TTP with any urgency. While that could be read as score one for Xi, similarly Seoul also has less need to pursue the Beijing-proposed rival to the TTP, the Free Trade Area of the Asia-Pacific (FTAAP). Washington has been, behind the scenes, resisting that determinedly, though it couldn’t prevent Apec leaders agreeing to a two-year study of the scope of an FTAAP. That wasn’t as much movement towards a drawing up a roadmap as Beijing wanted, but it was still more ground than Washington had wanted to yield.

The summit was Xi’s show, his first big international meeting since he assumed power, and an opportunity to show how China is increasingly dictating the region’s pecking order. In the group photograph at the end of the summit, Russia’s Vladimir Putin is standing next to Xi on his right. The two countries signed a big oil-and-gas deal ahead of the summit and promised further cooperation. Obama is down the line to Xi’s left, halfway to the end of the front row. Abe is relegated to the second row.

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Washington Lays Out Its Annual View Of China’s Military Capabilities

The U.S. military’s newly released annual assessment of China’s defense capabilities will surprise no one in saying that Beijing is improving its military training, weapons and surveillance so as to be able to conduct more sophisticated attacks against Washington and other adversaries closer to home. Neither is it any surprise that this is a result of China’s two-decades-long drive to modernize the People’s Liberation Army (PLA).

If anything, this report to the U.S. Congress is a restatement of the justifications for Washington’s ‘Asian pivot’ announced in 2012. It is also perhaps the clearest statement to date of how that doctrinal shift is being tempered by U.S. budget cuts — and provides an implicit counterargument for curtailing them.

In light of those budget-cutting pressure, the Pentagon sees an opportunity for offshoring some of the cost of its increased Asian presence to its Asian allies. In every region of the world, the Pentagon says, it will seek to build the capacity of partners’ forces so that they, not Washington, can take the lead in providing security. That should also provide a bonus for America’s arms manufacturers who should see increased export demand for their wares as a result.

Equally predictably, Beijing has dismissed the report as a holdover of Cold War thinking, and says that its armed forces are still 20-30 years behind those of the U.S., which spends more than another nation on its military at 4% of GDP. Beijing also asserts that its military build-up is solely for defending its own sovereignty, though as the continuing conflicts in the South and East China Seas testify, sovereignty can be in the eye of the beholder.

“Probable” drone reconnaissance in the East China Sea was among the most significant military developments of last year identified by the Pentagon in its report. Others include:

  • air-defense upgrades to destroyers and frigates;
  • test flights of China’s Y-20 transport planes to move ground forces quickly across great distances;
  • at least eight launches to expand intelligence and surveillance from space;
  • integration of anti-radar missiles into the PLA Air Force’s fighter-bomber fleet; and
  • the PLA Navy’s development of long-range, over-the-horizon radar as a targeting mechanism for DF-21D anti-ship ballistic missiles carried on new Jiangdo-class corvettes, which previous Pentagon reports have identified as a threat to the U.S. new Littoral Combat ships.

The Pentagon’s assessment is couched in terms that suggest its working assumption for any future China-U.S. military conflict is that it would be a high-tech naval and missile fight. Thus the U.S. military’s need is to invest in technology more than capacity, and to ensure that its partner militaries in Tokyo, Manila and elsewhere in the region are willing and able to undertake U.S.-led training.

They may want to wait until after 2016 when the U.S. will have a new administration which may have a new set of priorities. Beijing will be quite happy to continue its PLA modernization in the meantime.

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Chinese Buy Up Manhattan Apartments

THIS BYSTANDER IS not surprised to read a Reuters report saying that when it comes to buying apartments in Manhattan Chinese buyers are outspending all other foreign buyers for the first time. The news agency polled leading estate agents in the city who were unanimous in their view, though divided as to whether Russians, other Europeans or South Americans were the new number 2.

Chinese buyers have been pouring money into U.S. property ever since the housing market collapsed in 2008. Even though prices fell less in New York City than elsewhere in the country, and the price for luxury apartments hit a record in the first quarter, the city still appears a bargain compared to China’s big cities and other favored havens for wealthy Chinese such as Hong Kong and Singapore. In London, where Chinese have been the leading foreign buyers since last year, luxury apartments are selling for twice the price per square foot of New York’s.

One broker says Chinese buyers in New York City typically buy in the $1million-$5 million range, but will often buy two or three properties at a time. This has driven a boom in new construction in New York. There is an estimated 2 years supply of unsold luxury apartments and more coming on the market, which leads some to wonder if the rate of price rises may tail off.

Really well heeled Chinese, Reuters says, are flocking to One57, a luxury skyscraper on Central Park designed by Pritzker Prize-winning French architect Christian de Portzamparc. A three bedroomed apartment there starts at $19 million; a whole floor could cost $55 million.

As well as providing a bolt hole for their cash, Chinese buyers have been particularly attracted to cities where there a leading universities. Most wealthy Chinese want their children to attend an overseas college, surveys have found. New York is well situated with Columbia and New York University both having large campuses in Manhattan.

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China’s Green Carmakers Look To Buy America’s Fisker

Chinese industry’s pursuit of all things green and technological looks set to continue with an investment in the cash-strapped U.S. hybrid electric carmaker Fisker. Dongfeng Motor, Geely Auto and Beijing Auto have all reportedly been in conversations with the California-based company that is looking to raise $200 million-300 million to develop its new sedan, the Atlantic, on which its future rides.

The car company has also been talking to Wanxiang, the car parts group that had recently bought Fisker’s main battery supplier, A123 Systems. We understand that there is also a European car maker in the mix. Discussions are expected to be concluded this quarter. A key point is whether majority control would pass to one partner–Dongfeng is reportedly seeking an 85% stake–or whether to have multiple minority partners.

We recall that another U.S. electric carmaker, Tesla, partnered with Toyota and Daimler before becoming a public company in 2010. Fisker looks to be traveling the same road, which would make it a doubly attractive destination to a Chinese partner.

However, a Chinese investment could be controversial in the U.S. Fisker got a $529 million line of credit from the U.S. energy department in 2009, though this was frozen last year with $200 million outstanding. The Obama administration’s support for green technology companies has become a touchstone for the president’s opponents of industrial policy following the collapse of Solyndra, a solar cells maker prominently backed by the administration before going bankrupt.

Americans’ attitudes to Chinese investment in the U.S. are changing, as the U.S.’s approval of CNOOC’s acquisition of Canada’s Nexen, and Wanxiang’s takeover over bankrupt A123 show. But scratch the surface and raw nerves are still to be found. To mitigate the political opposition, any deal with a Chinese company would probably have to ensure that production of the Atlanta would move from Finland to Delaware, as planned, and not move directly to China.

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What Can Beijing Expect From Obama 2.0?

U.S. President Barack Obama’s re-election has made moot the vacuous threat that China would be declared a currency manipulator on day one of the new administration as the Republican challenger Mitt Romney had promised to do had he won. Though China’s senior officials know enough of American presidential campaigns to ignore the shrillest words spoken on the campaign trail (and we may have Harvard University to thank for some of that, according to Bloomberg), Beijing is rarely a big fan of change. It will be happier with the devil it knows. One point of relief all round is that the unpredictability of an early test of a President Romney by Pyongyang will have been avoided. Yet it is worth asking how a second term Obama administration’s policy towards China could change from the first.

That was marked by Washington’s Asian pivot in foreign policy, still seen as a policy of containment of China by a hegemonic U.S. It will not escape Beijing’s notice that Obama’s first post-re-election-victory foreign trip will take in its old ally, Myanmar, which is shaping up as a testing ground of the competing thesis of whether economic reform has to precede political reform, the so-called Beijing consensus, or whether the two can move in lockstep, the Washington view. Yet the relationship between the superpowers is better characterized as increasingly tetchy, particularly over trade, tempered by the reality that they still have to deal with each other on a range of issues where their interests also range from competitive to common.

There was a cautionary note in Beijing’s official congratulations to Obama on his re-election, an expression of hope that the end to the election campaign would put an end to what it called the China-bashing game. That was played louder and more irrationally on the campaign trail by Romney, as is the wont of challengers unencumbered by the reality of office. Obama, as an incumbent, gets to play it for real.

The Obama administration has been ratcheting up the number of complaints about China it has filed to the World Trade Organization (and Beijing has responded in kind, we should note). There was one that is particularly significant to this Bystander’s eye. In September, Washington formally complained to the WTO about what it said were unfair subsidies to China’s auto and auto-parts makers. Obama needed, and got, the American auto workers vote this week. It won for him Ohio, one of half dozen key swing states with large numbers of electoral college votes and where one in eight jobs is tied to the auto industry, and Michigan, home state of Detroit and the Romney family as it happens. The labour vote also won for Obama Wisconsin, home state of Romney’s running mate, Paul Ryan.

One WTO complaint filing doesn’t make a swing, of course. Obama’s bail out of General Motors and Chrysler after the 2008 global financial crisis mattered a great deal more. Oddly, that was a lot less politically popular at the time of 2010’s mid-term elections, in which Obama’s Democrats were pummeled. But we do expect organized labor to be looking for a thank-you for turning that round and rallying to Obama’s cause this time.

We think that will manifest itself as intensifying trade disputes with Beijing, not just over the traditional parts of the car industry, such as tires and auto parts, but also wherever it touches the new technologies for alternative fuels and electric vehicles, solar power being one example of where it is already happening. As the Obama administration has been subsidizing electric vehicle development, that will provide plenty of scope, too, for Beijing to retaliate.

Greater trade friction is also inevitable as recovery of the U.S. economy requires export growth, an avowed Obama goal, and with that acceleration of  bi- and multi-lateral free trade negotiations, a game Beijing is playing, too. The TransPacific Trade Partnership could become a priority project for Obama as he looks to foreign policy in his second term to define his legacy. If there is a silver lining to any of that, it is that the detailed and unglamorous work of trade diplomacy could become a proxy for the security relationship, which then has some room to deteriorate, if it needs to on a rhetorical rather than real basis–and that might be driven as much as anything by internal Chinese politics as Xi Jinping establishes his grip on power with former Presidents Hu and Jiang looking over either shoulder.

There is one piece of change that we know is coming to Washington’s diplomatic front. U.S. Secretary of State Hilary Clinton has said she won’t do a second term in that exhausting office, and her assistant secretary of state for East Asia, Kurt Campbell, is also unlikely to continue. Senator John Kerry and U.N. ambassador Susan Rice are two names being floated as Clinton’s successor. Kerry might be the more welcome in Beijing. Rice would come fresh from the Security Council battles over Iraq and Syria.

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Beijing, Tokyo and Seoul To Start Formal Free Trade Pact Talks

As regular readers will know, we have been following the progress on a potential free trade agreement between China, South Korea and Japan for some time–and the shadow play for economic influence in the Asia-Pacific region being acted out through trade agreements by Beijing and Washington. The leaders of the three Asian neighbors have now agreed to start formal negotiations. We thought it timely to republish our post from last December.

China, Japan and South Korea have been discussing creating a free-trade zone for some years. Every time their leaders meet, in pairs or collectively, the language used to describe progress is increasingly purposeful. Prime Minister Wen Jiabao and his visiting Japanese counterpart, Yoshihiko Noda, now say the discussions have reached the point where formal negotiations could start next year.

The three countries are already closely tied by trade and investment as well as physical proximity. Japan and South Korea are China’s largest trade partners after the U.S. and the E.U. The agreement to settle yuan-yen trade currency conversions directly, also announced during Noda’s visit, will only help boost economic ties.

Similarly Beijing’s approval for the Japan Bank for International Cooperation (the old Ex-Im Bank) to issue yuan-denominated bonds in China–a first for a foreign government agency– and Tokyo’s plan to hold a small amount of Chinese government bonds in its official reserves support the internationalization of the yuan, and thus provide a growing alternative to the dollar as the working currency of any trilateral free-trade zone.

Those existing and coming economic links make it more likely that a free trade agreement can be stuck between the three before agreement is reached on setting up the much larger proposed Trans-Pacific Partnership (TPP) that the U.S. now wants to join and promote but from which China is being excluded. Indeed the TPP may have provided some impetus to China, Japan and South Korea’s discussions. Together the trio account for 16% of world GDP, so a free trade agreement between them would create a formidable bloc just by dint of their economic size alone.


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