The European Commission’s Directorate General just released a 700-page report on the economic distortions created by the Chinese government – writes John Strand of Strand Consult Research.

This fact-based report, which updates analysis from 2017, has more 3500 authoritative references citing official Chinese documents and information from the International Monetary Fund, the Organization for Economic Cooperation and Development, the World Trade Organization, and other authorities. The report examines China’s economic distortions on three fronts: the role of central planning and state ownership of enterprises and resources; the control of factors of production land, labour, and capital; and its direction of industrial sectors of chips, telecommunications, railways, steel, aluminium, chemicals, ceramics, renewables, and electric vehicles. The document is a must-read for policymakers, business leaders, journalists, students, and others. The information on telecommunications appears on p. 518-548, and Strand Consult offers highlights below.

Some dismiss concerns about China’s economic practices as irrational, unfounded, or driven by politics in the USA. The evidence compiled by European Commission analysts using official Chinese government materials shows systematic, persistent, and comprehensive distortion directed by the Chinese state. Importantly, the EU document provides only facts; there are no recommendations, guidance, or conclusions.

Strand Consult has followed these issues for some years. In November 2018, Strand Consult published a research note debunking the view that Trump invented “tough on China” policy. In fact it was Australia already in 2012 whose center-left Social Democratic Prime Minister Julia Gillard banned the use of Chinese telecom equipment. Other countries have since followed.

Strand Consult has published many reports and research notes to help create transparency and debunk myths related to China policy and telecom security in general. See Strand Consult’s library.

Key findings of the report on telecommunications

The report contains much important and interesting information. Here are key points for leaders and policymakers in telecommunications:

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• China’s control of the economy extends beyond state-owned companies to many major corporations.Many Chinese companies demonstrate de facto government control through organizational structure even though these enterprises are not classified as State-Owned Enterprises (SOE). Moreover, corporate reporting may list a set of private owners but actual practice suggests a government actor is in charge. Corporate control in China does not necessarily line up to ownership but is delivered instead through informal, even unwritten, agreements among political and corporate elites called “networked hierarchy.”

• According to the IMF, China’s state ownership of total assets of SOEs represented 194% of GDP in 2018, though some believe it to be as high as 220%. Not only has this percentage increased significantly from the early 2000s, SOEs are vastly larger than most large “private” firms.

• While present in most sectors of the Chinese economy, State-Owned Enterprises are dominant in telecommunication, energy, transportation, public utilities, and other strategic sectors, reflecting State Council strategy.
• Chinese government control is growing in the modern services and technology sector. As stated by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) in 2019, “The focus will be on ramping up technological innovation by SOEs and making the most of SOEs to encourage innovation and develop the advanced manufacturing sector. It should be noted that the concepts of ‘technological innovation’ or ‘advanced manufacturing’ are cross-sectoral in nature.”

• China’s designation of the telecommunications equipment industry as critical for technological development and leadership is reflected in the myriad plans, policies, and strategies that the country’s national and sub-national governments have promulgated. This web of government planning is implemented through a broad array of policies that benefit domestic firms – at the expense of foreign firms. By protecting the domestic market and promoting Chinese firms abroad, China has assisted its key stakeholders in developing a significant presence in the global telecommunications equipment market. 5G infrastructure is a case in point where China’s policies have allowed its firms (notably Huawei and ZTE) to operate relatively expensively on the protected home market while helping them to offer services abroad.

• China’s distortions of the telecommunications equipment market come in a variety of forms. The State provides support to firms through procurement preferences, below-market lending, tax relief and subsidies and grants. The government both explicitly and implicitly forces the transfer of technology from foreign firms to domestic entities. Internationally, China uses generous export financing to convince foreign governments and other buyers to purchase Chinese-made telecommunications equipment. China has also developed a national standardisation strategy that includes seeking leadership positions and exercising influence in international standards-setting bodies to promote Chinese commercial interests. China further protects its internal market through complex regulatory and licensing barriers. Finally, the government’s inconsistent intellectual property enforcement leaves foreign firms vulnerable to intellectual property right violations and involuntary and uncompensated technology transfer.

• Two major entities dominate the Chinese telecommunications equipment market – Huawei and ZTE. They combine for a total of 90% of Chinese telecommunications equipment revenue. Other manufacturers in the industry, such as FiberHome Telecommunication Technologies Co., Ltd; Datang Mobile Communications Equipment Co., Ltd; Hytera; Unisplendour Co., Ltd; Fujian Star-net Communication Co., Ltd and Nokia Shanghai Bell Co., Ltd account for the other 10%.

• Many telecommunications companies are at least partially state-owned or are otherwise connected to the government, even if this is not (at least publicly) required. ZTE, for example, previously operated as a state-owned military enterprise and maintains a mix of partial state ownership and private management. 3 of the 10 largest shareholders of ZTE are SOEs. Though Huawei claims it is held by its employees, they actually hold only virtual shares that do not constitute ownership and confer no voting rights. The actual shares issued by Huawei are held by the Trade Union Committee. Therefore, taking into account the regulatory framework applicable to trade unions in China, not least the Trade Unions’ Charter, the government and/or the CCP have ample leeway to interfere in any of Huawei’s business decisions.

• In 2017, China implemented a National Intelligence Law which compels any Chinese subject to conduct espionage on behalf of the government (article 7). While ordinary citizens can be compelled to spy, operationalizing passive surveillance within networks through backdoors and other means is more effective. Given the increasing integration of software in network equipment, these backdoors are increasingly difficult to detect, as they can be shipped in subsequent software upgrades or activated after security clearances are concluded.

• To develop a leading telecommunications equipment industry, China has encouraged the frequent pooling and rotation of talent and expertise between the government and equipment manufacturers. Chinese telecommunications equipment firms benefit from deep connections with government agencies and the military, creating pathways ‘for personnel transfers, commercialization of state-sponsored R&D (“spin-off”), and militarization of commercial R&D. The rotation of engineers and other relevant personnel between and among the government and equipment providers is reported to have aided both Huawei and ZTE in their technological development.

• Chinese technological independence and self-reliance are core goals for the country’s economic development. The 14th Five-Year Plan of China addresses telecommunications equipment. It directs the provision of various forms of policy support like central fiscal funding for major projects, simplifying the processes for project approval and providing the land needed for projects. Made in China 2025 identifies telecommunications equipment as a critical sector where technological breakthroughs should be pursued. With Made in China 2025, China’s support for telecommunications equipment consists of four parts. The first part is to promote the intellectual property rights of firms in the telecommunications equipment industry. Second, China seeks to support major projects for Chinese telecommunications equipment manufacturers. Third, Made in China 2025 explains that “5G spectrum planning” should “account for the spectrum requirements of mobile communications, radio and television, satellite, and military-civil fusion so as to maximize the value of spectrum utilization and achieve the integrated development of related industries”. Finally, Made in China 2025 calls for the creation of an inter-ministerial coordination mechanism to encourage the creation of an ‘information silk road’ and for the industry to go global. Moreover, the Four Essentials catalogue specifically directs financial institutions, creditors and insurers to support R&D and production of the products in the catalogue.

• China’s ten-year objectives include having 75% of its domestic market for mobile communications system equipment supplied by Chinese companies. Huawei and ZTE´s 5G market share in China is today more than 95%.

• China’s plans for the electronic information and ICT industries also impact the telecommunications equipment industry. Plans such as the Adjustment and Revitalisation Plan for the Electronic Information Industry and the ICT Industry Development Plan (2016–2020) addressed telecommunications equipment directly. The 13th Five Year Plan articulated China’s ‘cyber development strategy’, which included widespread deployment of telecommunications networks such as high-speed fibreoptic networks and wireless broadband networks.

• Cybersecurity certification requirements can amount to a regulatory barrier to accessing the Chinese telecommunications equipment market. More generally, China has repeatedly highlighted cybersecurity as part of its information technology ambitions. In 2016, the 13th Five-Year Plan noted the relationship between cybersecurity and informatisation development. China enacted its Cybersecurity Law in November, which, serves as a barrier to access the Chinese telecommunications equipment market. As part of the implementation of the Cybersecurity Law, the Cyberspace Administration of China (‘CAC’) issued the National Cyberspace Security Strategy, which called for developing a strong cybersecurity foundation through the development of network infrastructure, promoting safe technological products and strengthening cybersecurity standards. The need for strengthened cybersecurity is reiterated in the chapter on the digital economy in the 14th FYP2430.

• China’s emphasis on self-sufficiency in the telecommunications industry and related technologies is reflected in its public procurement and SOE purchasing practices, with both explicit and implicit ‘buy China’ requirements included in public procurement tenders, especially for products in ‘sensitive sectors’ such as ICT. China’s Government Procurement Law directs government entities to grant preference to domestic products over foreign products, but there is no clear or consistent definition of what constitutes a ‘domestic’ product. Practice among procuring entities is inconsistent as to whether products produced domestically by foreign-owned companies or through Sino-foreign joint ventures will qualify, or whether products must be produced by wholly Chinese-owned companies.

• In the ICT sector, State-Owned Enterprises (SOE) prefer Chinese products over foreign ones, apparently having ‘non-public plans to replace foreign products with domestic alternatives in the ICT sector during the 2020–2022 period’. Moreover, the lack of transparency in assessment and certification processes creates difficulties for foreign firms to determine how they can qualify their products as ‘domestic’, particularly with increased weight being placed on difficult-to-quantify security concerns.

• Public reporting suggests that Chinese telecommunications equipment firms have received significant credit assistance from the government and state-owned banks. In 2019, it was reported that in the past 20 years, Huawei had USD 30.6 billion (~EUR 27.3 billion) available in credit from China’s policy banks. In 2019, Chinese media reported that Huawei received a five-year CNY 14 billion (~EUR 1.8 billion) loan from a group of state-owned banks. Because there are no disclosure requirements for such lending, identifying the scale and extent of preferential credit made available to Huawei, ZTE and other telecommunications equipment producers is difficult.

• Chinese authorities provide an array of support to the telecommunications equipment industry, including through grants, loans, and favourable land sales. The government has made available substantial grant money through initiatives such as the major science and technology projects, first developed in the National Medium- and Long-Term Science and Technology Development Plan (2006–2020). Thereafter, the State Council’s 13th FYP for National Science and Technology Innovation in 2016, which extended the prior plan to 2030, includes among its projects New Generation Broadband Wireless Mobile Telecommunication, under which both national and sub-national governments have provided significant financial support.

• China’s practice of requiring foreign firms to share intellectual property and other proprietary information as a condition for market access has been well documented. In 2018, the EU brought a dispute at the WTO raising allegations relating to these practices. In that dispute, the EU alleged that China’s regulatory framework discriminates against foreign IP rights holders. The United States Trade Representative documented similar problems in its 2018 Findings on the Investigation into China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation Under Section 301 of the Trade Act of 19742455. In that report, the USTR highlighted China’s Joint Venture requirements, market access conditioned on technology transfer, discretionary and informal approval of foreign investments and the close coordination between the government and commercial entities as ways in which foreign entities are compelled to transfer technology to domestic firms.

• In December 1998, the Ministry of Information Industry (now MIIT) issued the Administrative Measures for the Examination and Approval of Telecommunications Equipment Network Access, which requires that any equipment used to connect to public and special-use telecommunications networks must first obtain a network access license from the ministry. Moreover, MIIT developed with the State Bureau of Quality Supervision a catalogue of telecommunications equipment that must receive a license, based on three categories: telecommunications terminal equipment, wireless telecommunications equipment and network connection equipment.

• Following the adoption of China’s Cybersecurity Law in 2016, some telecommunications equipment must undergo additional certification requirements. Under that law, a qualified institution must certify the security of and test critical network equipment and network security-specific products. The government also promulgates a catalogue of network equipment and network security-specific products that must undergo testing and certification before they can be marketed in China.

• China’s Catalogue of Network Equipment and Network Security Products outlines the requirements for certification and testing to qualify for sale in China. Article 7 requires that telecommunications equipment must undergo ‘implementation testing’ by certain Chinese ministries and state-controlled organizations and also must retain an installation license. Article 8 of China’s Critical Network Equipment Security Testing Rules states that MIIT ‘shall review and verify critical network equipment security testing reports and materials and issue a list of critical network equipment that has passed security testing [...] in accordance with relevant state regulations, valid for 3 years’. Available analyses suggest that these regulations operate as market access barriers to foreign businesses attempting to supply the Chinese market, with ambiguity in how these laws, regulations and standards would be applied creating opportunities for discriminatory enforcement.

• China issued a document “New Measures for Cybersecurity Review” in 2022. A detailed review is available from White & Chase. The Measures list the following main factors for assessing national security risk during cybersecurity review.

• The risk of any critical information infrastructure being illegally controlled, tampered with or sabotaged after any product or service is used.
  • The risk of an interruption in the supply of any product or service endangers the continuity of any critical information infrastructure.The security, openness, transparency, diversity of sources and reliability of any supply channel of any product or service, and the risk of its supply being interrupted due to political, diplomatic, trade or other factors.The compliance of the provider of any product or service with the laws, administrative regulations, and departmental rules of China.The risk of any core data, important data or a large amount of personal information being stolen, leaked, destroyed, illegally used, or illegally transferred abroad.The risk of any critical information infrastructure, core data, important data, or a large amount of personal information being affected, controlled, or maliciously used by foreign governments, as well as any network information security risk.
  • Any other factor that may endanger the security of any critical information infrastructure, network security or data security.

China’s rules are significantly more rigid than those of the US and EU. The effect of these rules is to limit foreign providers from the market from the start and to favor Chinese providers. These rules do not entail the same process and transparency which are standard and expected in the West.

Transparency and critical reflection are important.

Strand Consult receives great interest in its research on China, network security, and supply chain policy. Many journalists write stories about Huawei and ZTE, but few examine how foreign companies are systematically restricted in China. Such foreign firms receive little to no notice or process when the restriction is imposed, and there is little to no chance for redress or relief. However Chinese firms like Huawei and ZTE enjoy the rule of law outside China, and they are respected as litigants to challenge restrictions in foreign jurisdictions, receiving full access to the provisions and resources of US and EU legal systems.

Here are some of Strand Consult’s reports and research on the topic.

• Strand Consult addresses China’s restrictions in its 2020 report You Are Not Welcome: An Analysis of Thousands of Foreign Technology Companies Blocked by China Since 1996.It describes how and why China has systematically restricted thousands of foreign internet technologies like online news and media outlets, social media platforms, virtual private networks, content delivery networks, mobile applications, telecommunications equipment, cloud services, and other technologies.

• Following a rejection of an application by Huawei to provide 5G equipment in Romania, erroneous information appeared in the media. Strand Consult did a fact check is in the research note: https://strandconsult.dk/huawei-banned-in-romania-here-are-15-facts-huawei-doesnt-want-you-to-know/

• The leaders of Latin America, a set of some two dozen diverse, emerging countries with some 700 million people, face a strategic choice for security. This decision to secure trusted digital information networks will impact the region for the next century. It will determine whether the region develops in a prosperous, inclusive, sustainable, and democratic direction or an authoritarian one. Latin America faces some important choices in its digital development. It wants to ensure its citizens and enterprises enjoy world-class technology; to protect and preserve human rights and sovereignty; and to innovate regionally with compelling digital solutions and services. Strand Consult did a research note about this subject: https://strandconsult.dk/latin-americas-digital-development-this-centurys-strategic-choice-for-security/

• In June 2023 Commissioner Thierry Breton presented the European Commission’s status report on “Member States’ Progress in implementing the EU Toolbox on 5G Cybersecurity.” Breton’s message is that the member must move more quickly to implement the 5G toolbox. Here are Breton’s key points with Strand Consult’s assessment: https://strandconsult.dk/european-commission-presents-second-5g-toolbox-report-what-it-means-for-eu-mobile-operators-comparison-of-rules-to-china/

• In March 2023 TikTok CEO Shou Zi Chew sat in the hot seat at a US House of Representatives Energy & Commerce Committee hearing for some 5 hours. It was very clear that there was a long list of critical questions which he could not answer and that he would rather answer in writing once the cameras were off and the public focus had cooled down. Read Strand Consult´s research note about that hearing: https://strandconsult.dk/in-congressional-hearing-tiktoks-ceo-shou-zi-chew-repeated-statedly-that-tiktok-protects-his-kids-better-in-singapore-than-tiktok-protect-children-in-usa/

The EC 2024 report marks some important changes since 2017. For one, the number of sectors subject to China’s economic distortion has more than doubled. In 2017, the sectors were steel, aluminium, chemicals, and ceramics. In 2024, new sectors have been impacted: telecom, chips, railways, renewables, and EVs. This development reflects the Chinese government’s larger strategy for self-sufficiency and dominance in critical sectors of the global economy.

The report documents growing, not lessening, control by the Chinese government of the economy through central planning, direct ownership, and informal practices. The report also demonstrates that foreign firms are denied market access. The EC’s report can be accessed here.

Author: John Strand — Strand Consult Research. [email protected]

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