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Chinese Military Tied to Telecoms, Says Former Intelligence Agent

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The structure of modern Chinese society makes state control -- or at the least, involvement -- a near-certainty.

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MINYANVILLE ORIGINAL Last week on Capitol Hill, executives from Huawei Technologies Co. (002502.SZ) and ZTE Corp. (0763.HK) testified before the House Intelligence Committee in an attempt to assuage US lawmakers' concerns over the telecom companies' continued attempts to capture an increasing share of the US market.

First, a little background by way of Committee Chairman Rep. Mike Rogers's (R-Mich.) opening statement:

We invited these companies today as part of our ongoing investigation into the threat posed to the United States by telecommunications equipment manufactured by companies with believed ties to the Chinese government.

We have heard reports about backdoors or unexplained beaconing from the equipment sold by both companies. And our sources overseas tell us that there is a reason to question whether the companies are tied to the Chinese government or whether their equipment is as it appears.

Huawei and ZTE provide a wealth of opportunities for Chinese intelligence agencies to insert malicious hardware or software implants into critical telecommunications components and systems.

Ranking Member Rep. C.A. "Dutch" Ruppersberger (D-MD) followed Rep. Rogers by voicing his disappointment with "the lack of direct answers" and "vague responses" to the previous questioning of Huawei and ZTE.

"We are here today to give them another opportunity to thoroughly and accurately answer our questions," Ruppersberger said.

The men representing the two firms -- Huawei corporate senior vice president Charles Ding and ZTE senior vice president Zhu Jinyun -- spent several hours making the case for obtaining increased access to the US market.

"We have been hindered by unsubstantiated, non-specific concerns that Huawei poses a security threat," Ding testified.

Are the Concerns Unsubstantiated? Or Are Huawei and ZTE Under Beijing's Control?

"Huawei is an independent private employee-owned company. Neither the Chinese government nor the People's Liberation Army has an ownership interest in our company, or any influence on daily operations, investment decisions, profit distributions, or staffing," Ding told the Committee.

But Michel Juneau-Katsuya, a former senior intelligence officer who served as Asia-Pacific Bureau Chief for the Canadian Security Intelligence Service, says "it cannot exist any other way."

"The Chinese are masters at hiding their true intentions and they have been practicing it since Sun Tzu wrote The Art of War 2,000 years ago," Juneau-Katsuya, who is the founder and CEO of The Northgate Group, a security consulting concern in Ottawa, tells me. "What we saw was a masquerade, a smokescreen to make us believe these companies are not linked to the Chinese government."

Indeed, the military may not get involved in Huawei's day-to-day business, though it appears that American officials have been well aware of numerous ties for years.

From an October 2009 report by the US-China Economic and Security Review Commission, a body created in 2000 with a legislative mandate to "monitor, investigate, and submit to Congress an annual report on the national security implications of the bilateral trade and economic relationship between the United States and the People's Republic of China":
  • Huawei is a well established supplier of specialized telecommunications equipment, training and related technology to the PLA that has, along with others such as Zhongxing, and Datang, received direct funding for R&D on C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance) systems capabilities. All of these firms originated as state research institutes and continue to receive preferential funding and support from the PLA.
  • ZTE Corp, another of China's large telecommunications manufacturers, and Huawei, also provide certification training and related engineering training to PLA personnel assigned to communications and IW related positions, according to provincial level Communist Party military newspapers.
Three years later, a March 2012 report shored up the commission's previous findings (emphasis theirs):

Huawei's involvement with PLA research and development either directly as a vendor or indirectly as a research collaborator with various PLA affiliated organizations or universities all weaken claims by Huawei's leadership that it maintains no ties with the Chinese government or the military. The combination of recent infusions of cash, regular appearances at PLA defense industry events, and working relationship with various government research institutes on projects with dual use applications suggests that an ongoing relationship between Huawei and the Chinese military and Chinese political leadership may exist.

This would appear to contradict Charles Ding's testimony that "Huawei does not engage in customized R&D or production for military purposes." Or maybe it's all a big misunderstanding, as Zhu Jinyun proffered, calling the fears of back doors in ZTE's telecom equipment "not fact-based," pointing out that American companies, including Microsoft (MSFT), Apple (AAPL), and Google (GOOG), operate in much the same fashion.

"What they have been calling back doors are actually software bugs and those are the types of bugs you find in all high tech companies," Zhu said. "I want to emphasize that a bug is not a back door."

It Is Not Like Any State We Have an Understanding of in the Western World

Michel Juneau-Katsuya maintains that the structure of modern Chinese society makes state control -- or at the least, involvement -- a near-certainty.

"China is not like any state we have an understanding of in the Western world," Juneau-Katsuya tells me. "In China, you will not be put in charge of a company as important as Huawei without having been a loyal servant of the state and having demonstrated that on a constant basis for years and years and years."

He describes the corporate class as those who "were either people in power in the government, are the children of people who are or were in power, or are those with close relationships to people in power. These are the people with power now in the private sector."

These people, as Cisco (CSCO) CEO John Chambers said in April, don't always "play by the rules." And Juneau-Katsuya says the strategic access companies like Huawei and ZTE can provide is far too important to leave to a run-of-the-mill executive.

"Do you think the Chinese government would let that slip away, a company that is embedded in peoples' communications all around the world?" he asks. "You're going to keep your distance from that? I don't think so."

Philosophically, Juneau-Katsuya says, the Chinese cannot "simply abandon the ideological conflict" that has been entrenched since the Communists took power in 1949.

"It has translated into a business culture that keeps the ideology very much alive, and institutions must remain loyal to the government or they will lose control." Juneau-Katsuya tells me. "You have generation after generation after generation of people indoctrinated into thinking a certain way. Not to fall into the overly simplistic position I hear coming from far-right Republicans, but we need to recognize that society will mold the way people think. And here's the thing: The first guy who warned us about this was called Marx."

Obfuscation? Evasion? Or Just a Simple Series of Misunderstandings?

During his testimony on Capitol Hill, ZTE's Zhu Jinyun was asked the following question:

Given all that ZTE is doing to promote cyber security, the Committee's inquiry whether ZTE may pose a threat to critical US telecom infrastructure is very disturbing for us, as you must expect. The Committee's central question has been: Would ZTE grant China's government access to ZTE telecom infrastructure equipment for a cyber attack?

The answer:

Mr. Chairman, let me answer emphatically: No! China's government has never made such a request. We expect the Chinese government never to make such a request of ZTE. If such a request were made, ZTE would be bound by US law.

How this would apply in practice is debatable. However, when the House Intelligence Committee requested various documents related to the current investigation, ZTE "flatly refused," claiming that supplying that information would violate China's state-secrets laws.

"It is very strange the internal corporate documents of purportedly private sector firms are considered classified secrets in China," retorted Rep. Rogers. "This alone gives us a reason to question their independence."

All of these doubts and fears have real-world implications for Chinese telecoms. In March, the Australian government blocked Huawei from bidding on a $38 billion broadband infrastructure initiative, citing security concerns. And in July, the FBI began an investigation into illegal exports of banned technology -- a surveillance system capable of monitoring the citizenry's communications -- to Iran, by ZTE.

Of course, the connection between Chinese telecoms like Huawei and ZTE and the central government could also all be one gigantic misunderstanding.

In Huawei's case, Huawei's American government-relations representative, William Plummer, told Fortune magazine last year that the mix-up goes back to 2001, when an article in the Wall Street Journal referenced "another Chinese company with a similar name which was in fact headed by a PLA officer and may have sold optical communications gear to Iraq under Saddam Hussein."

"There was some confusion there," Plummer said. "Huawei has never delivered any military technologies at any time."

Well, that settles it. Nevertheless, the House Intelligence Committee will issue its final report in early October.
No positions in stocks mentioned.
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