SinoTech

U.S. Sanctions Curb Chinese Technology Exports to Russia

By Raquel Leslie, Brian Liu
Friday, June 3, 2022, 9:49 AM

Major Chinese technology companies have quietly exited Russia in the face of U.S. sanctions threats, despite Beijing’s promise of a “no limits” relationship with Russia. Chinese drone maker DJI openly announced in late April that it was suspending its business operations in Ukraine and Russia. Other firms, laptop maker Lenovo and phone maker Xiaomi, have left Russia with less fanfare, halting shipments to Russia but without explicit announcements that they were doing so. 

Chinese technology companies have faced pressure from the Chinese public and government to stay in Russia. The Chinese public has been largely supportive of the Russian war and has vocally called on Chinese tech firms to stand in solidarity with Russia. The Chinese Ministry of Commerce in April called on companies “not to submit to external coercion and make improper external statements.” Despite pressure from the Chinese public and official sources, the exit of these firms shows that Chinese companies have little appetite for running afoul of U.S. sanctions, particularly given that Chinese trade with Russia constitutes only 2 percent of China’s total trade. 

The threat of sanctions has had a pronounced effect on Chinese technology exports to Russia, whose consumer economy is highly dependent on Chinese technology. According to a speech from U.S. Commerce Secretary Gina Raimondo on May 10, Chinese laptop shipments to Russia dropped 40 percent in March compared with February, while exports of telecommunications equipment dropped 98 percent. The speech comes amid reports that the Commerce Department is planning on sanctioning additional Chinese companies over export control violations by adding them to the Entity List, a restriction on access to U.S. exports. 

While China’s “soft” technology exports like consumer electronics have decreased, Beijing has signaled that it may deepen cooperation on “hard” technology exports. In an interview with Russian state news agency Tass, Zhang Hanhui, China’s ambassador to Russia, stated that China would deepen cooperation with Russia on military technology, energy and space. Though the statement left out specific plans for military support, analysts predict that Russia would likely want space-grade radiation-resident electronic components, cooperation in establishing data centers, and military drones. 

U.S. sanctions have also not stopped Sino-Russian trade completely. Chinese state-owned firms not only have continued to purchase Russian oil and gas but also have increased their trade relations. Chinese imports from Russia rose 56.6 percent year-over-year in April to $8.9 billion, helping buoy Vladimir Putin’s government against a flagging economy. The increase in trade follows Russia and China’s announcement on Feb. 4, three weeks prior to the invasion, that the two countries had established a 30-year agreement to supply gas to China via a new pipeline. The agreement would increase their bilateral trade to the equivalent of $250 billion by 2024, a growth rate of 20 percent per year. While Chinese purchases of Russian oil and gas are not technically a violation of U.S. sanctions, the Biden administration has become increasingly exasperated with Chinese support for the Russian economy and may take measures to curb the loophole.

Chinese companies exiting Russia may be a prudent move in the short run, but it is unclear whether these companies will evade harsher action in the long run. In a speech at George Washington University on May 26, U.S. Secretary of State Antony Blinken criticized Chinese surveillance technology and announced a plan to bolster U.S. competitiveness with China by imposing stronger export controls and bolstering cyber defenses. The tenor of the speech may point to more robust U.S. sanctions against Chinese technology companies independent of their involvement in the Russia-Ukraine conflict. 

China Signals Easing of Tech Crackdown in Hopes of Lifting Economy

Beijing may be preparing to hit pause on its yearlong crackdown on the tech sector as the government faces pressure to boost the country’s economic outlook in the wake of a resurgence of the coronavirus and subsequent lockdowns. Any loosening of regulations for China’s tech giants would reflect the importance of economic stability for President Xi Jinping in a key political year in which he is expected to secure an unprecedented third term in power.

Over the past few years, Xi’s stated campaign to redistribute wealth and drive China toward technological self-sufficiency has taken precedence over almost all other policy goals. The country’s battle against the pandemic, including adherence to a strict “zero-COVID” policy, has complicated Xi’s vision and seen the economy take a back seat to the government’s desire to stop the spread at all costs.

A number of investment banks have slashed their forecasts for Chinese growth this year amid the spread of the omicron variant, which has led to the months-long lockdown of Shanghai and wreaked havoc on supply chains, logistics networks and business operations. In April, the International Monetary Fund said it expected growth of 4.4 percent this year, down from a previous forecast of 4.8 percent, citing risks from Beijing’s “zero-COVID” policy—well below China’s official forecast of around 5.5 percent. Manufacturing output and consumer demand have plummeted, and major companies like Alibaba have been forced to impose significant layoffs. 

But a series of high-level government meetings held throughout late April and May have fueled expectations that the end of the tech crackdown may be in sight. On April 26, Xi told officials to ensure that the country’s economic growth outpaces that of the U.S. this year, a mandate that government agencies plan to fulfill by embarking on an infrastructure spending spree in the manufacturing, technology, energy and food sectors. On April 29, the Politburo, the central decision-making body of the Chinese Communist Party, pledged to support the “healthy” development of the platform economy, which includes internet companies in areas ranging from social media to e-commerce. 

Acknowledging that the coronavirus and the Ukraine crisis have increased risks and challenges facing the economy, leaders said they would unveil policies to support coronavirus-hit industries and small businesses, shore up employment, protect the smooth operation of domestic logistics and supply chain networks, and ensure that residents have daily necessities. Among the measures is a raft of infrastructure spending. At the same time, however, the Politburo stressed the need to complete the “special rectification” of the tech sector and implement normalized supervision over tech giants.

On May 18, the Chinese People’s Political Consultative Conference (CPPCC) met with some of the country’s top tech executives in further signs of easing. Vice Premier Liu He encouraged platform enterprises to play a constructive role in the national economy by participating in scientific and technological innovation projects. Following the meeting, Liu pledged support for the sector and plans for internet companies to pursue overseas listings, though “significant issues remain” in reaching a deal with the U.S. given the Securities and Exchange Commission’s concerns about the auditing compliance of Chinese companies listed on U.S. stock exchanges.

Chinese tech stocks surged after the public announcements. Following the Politburo meeting, Hong Kong’s Hang Seng TECH Index rose 10 percent, while shares of tech giants Alibaba and Tencent rose 15 percent and 11 percent, respectively. Platform operators have expressed optimism that the government will finally offer clarity over what is and is not forbidden, such as which data can be collected and used, while encouraging them to prosper. Analysts expect the regulatory environment to be less stringent and more friendly to the tech sector in 2022.

But this doesn’t mean that the government’s push to enact antitrust and data privacy protections is over. Xi’s commitment to the “common prosperity” ideology means that the central government intends to maintain some measure of control over the future development of the sector. In fact, Beijing is reportedly expected to push some of its biggest tech companies to offer 1 percent equity stakes to the state and give officials more sway in corporate decisions. The government has already taken 1 percent stakes in ByteDance, the owner of short-video platform TikTok, and microblogging platform Weibo. Now, the plan is likely to be expanded to other tech platforms such as Tencent and Meituan.

Some experts doubt that the government’s renewed promises to ease regulations and boost economic growth will translate to a meaningful shift in policy. The market remains vulnerable to the Communist Party’s opaque and unpredictable decision-making. Traders are so nervous that Alibaba lost $26 billion in value within minutes in May, after an individual who shared co-founder Jack Ma’s surname was accused of endangering national security. It remains to be seen whether the government’s latest moves will restore investor confidence in the economy.

Other News

Biden Meets With Asian Allies to Boost Competitiveness on Semiconductors 

President Biden’s May 20-24 inaugural trip to Asia shored up key alliances and identified common ground in a critical sector: semiconductors. A first stop for Biden on a weekend visit to South Korea was a Samsung factory, which President Yoon Suk-yeol described as “the ‘global epicenter’ of cutting-edge semiconductor industry.” On May 23, U.S. Commerce Secretary Gina Raimondo met with her Japanese counterpart, Koichi Hagiuda, in Tokyo to discuss “cooperation in fields such as semiconductors and export control.”

Australia, India, Japan and the United States wrapped up their second Quad Leaders’ Summit on May 24 in Tokyo, where officials made clear that security is inherently tied to Asian countries’ economic interests. The Quad is an informal security alignment of four major democracies that came about in response to China’s rising strength in the Indo-Pacific region. Leaders have expressed interest in branching into areas such as tech, trade, the environment and pandemic response. 

President Biden has prioritized boosting economic competitiveness with China at home through his own aggressive domestic policy agenda. In early May, Biden demanded that Congress swiftly pass the Bipartisan Innovation Act, which includes $52 billion in government subsidies to ramp up semiconductor production and help insulate the country from future supply chain disruptions in Asia. Biden has also urged investments in other key tech sectors like artificial intelligence and quantum computing.

The Biden administration recognizes, however, that to play a central role in the geopolitics around semiconductors, the U.S. must also boost its economic relevance in Asia. To that end, the U.S. and 12 Asian countries announced on May 23 the Indo-Pacific Economic Framework (IPEF), an agreement designed to lay the groundwork for rules around the digital economy and supply chains in the region. The IPEF is not a free trade deal, unlike its failed predecessor the Trans-Pacific Partnership (TPP), nor does it involve a security component. The agreement includes Quad members Australia, India, and Japan, as well as Fiji, Brunei, Indonesia, Malaysia, New Zealand, the Philippines, Singapore, South Korea, Thailand and Vietnam.

The announcement of the IPEF may intensify Beijing’s drive for technology self-sufficiency, though experts caution that China should be careful not to decouple from foreign tech firms and institutions altogether. It also drew anger from Chinese leaders when Biden, perhaps inadvertently, stated that the U.S. would be willing to defend Taiwan militarily should China attack it. Though U.S. Defense Secretary Lloyd Austin tried to clarify that the U.S. stance on Taiwan hadn’t changed, Biden’s statement may signal a move away from the policy of “strategic ambiguity” favored by past presidents.

U.S. Weighs Additional Sanctions Against Chinese Surveillance Technology Company

The Financial Times reported on May 3 that the United States was considering imposing sanctions on Hikvision, the world’s largest manufacturer of surveillance equipment. According to the report, the Biden administration would impose human rights-related sanctions under the Global Magnitsky Act against Hikvision in response to Hikvision’s technology being used to facilitate human rights abuses against Uyghurs in Xinjiang. Citing unnamed sources, the report noted that the Biden administration has preemptively briefed allies of their intentions to place Hikvision on the Treasury Department’s Specially Designated Nationals and Blocked Persons (SDN) List. 

Hikvision has been heavily criticized for its role in supplying Uyghur detention camps with its surveillance technology to track and surveil Uyghurs in China. According to Human Rights Watch, since 2016, the Chinese government has subjected 13 million ethnic Uyghurs and other Turkic Muslims in Xinjiang to detention in mass camps. In addition to supplying the cameras for the detention camps, Hikvision has also filed patents for artificial intelligence technology that would screen crowds in cities for Uyghur faces, adding to concerns that Chinese law enforcement can target Uyghurs for discriminatory enforcement. In addition to allegations of its role in supporting Uyghur human rights abuses, Hikvision has also attracted criticism for its poor cybersecurity record, its role in facilitating Chinese domestic surveillance, and its connections with the Chinese military. These criticisms led the United States to sanction Hikvision back in 2019 by adding Hikvision to the Department of Commerce’s Entity List. 

Adding Hikvision to the SDN List would be an unprecedented move and an escalation in the U.S.-China technology and economic competition. Huawei, the most prominent sanctioned Chinese tech company, was added to the Entity List, which imposes a licensing requirement for businesses seeking to do business with the listed company. The SDN List, generally regarded as a more rigorous designation reserved for blocking terrorist financing and other foreign policy objectives, would block the assets of any persons or entities around the world owned by, controlled by or acting on behalf of the designated entity. The designation would impose criminal penalties on any individual or organization for doing business of any kind with Hikvision and would make Hikvision the most heavily sanctioned Chinese company. 

Tech Startups Seeking U.S. Funding Under New Scrutiny for China Links

A new Department of Defense study has found that China is exploiting a popular program that funds innovation among small American companies, indicating that Congress may soon require government agencies to vet tech startups seeking federal funding. The report, dated April 2021 but released in May 2022, provides evidence that China is using state-sponsored methods to target companies that have received Pentagon funding from the Small Business Innovation Research (SBIR) program.

The study details eight case studies that have “national and economic security implications,” including examples of program participants who dissolve their American companies, join Chinese government talent programs, and continue their work at institutions linked to the People’s Liberation Army. Pentagon researchers cited a U.S. developer of polymer solar cells called Solarmer Energy Inc., which received SBIR funding from the Defense Department and others. Solarmer then dissolved its U.S.-based businesses and transferred its research and development and intellectual property to a Beijing-based subsidiary that works with a Chinese government-run lab on research with defense applications.

The report also flagged Soluxra LLC, a now-dissolved firm developing solar technology for spacecraft and drones that received four Defense Department SBIR grants. Two of the company’s co-founders and one of its research scientists were allegedly recruited by Chinese government talent programs while employed by the company and then joined universities affiliated with China’s State Administration for Science, Technology and Industry for National Defense.

The authors of the Pentagon report cautioned that their study “represents a small data sample and should not be considered comprehensive or exhaustive.” The Defense Department provided the researchers with a list of SBIR applicants and grantees totaling more than 10,000 firms, which they then cross-referenced with a separate Pentagon database on Chinese state-sponsored talent recruitment programs.

The report’s conclusions are reminiscent of allegations brought against academics with undisclosed China ties under the Department of Justice’s now-rebranded China Initiative. In 2020, Sen. Marco Rubio questioned how agencies participating in small business innovation programs were ensuring awardees “do not have improper ties to foreign entities” after c was charged with lying about receiving millions of dollars in funding from a Chinese government talent program. Lieber was convicted by a federal jury in December 2021.

The Pentagon report ultimately recommends that the SBIR program enact a due diligence process to identify entities of potential concern that would then require a more detailed review. Lawmakers may take up this call as they seek a five-year reauthorization of the SBIR and a related Small Business Technology Transfer program.

Commentary

Jon Bateman of the Carnegie Endowment warns that imposing human rights sanctions on Chinese tech company Hikvision would dangerously escalate U.S.-China tensions. 
Angela Huyue Zhang argues that the Chinese government’s new approach to tech regulation—acquiring a 1 percent “golden-share” in tech companies—is an imperfect solution to restore economic growth. 

Min-Hua Chiang of the Heritage Foundation dissects Huawei’s failure to achieve self-sufficiency after the United States imposed sanctions against the company in 2019. 

Zeyi Yang argues that China’s censorship of Gitee, China’s government-backed equivalent to U.S. open-source code repository GitHub, risks inhibiting China’s economic growth. 

Kevin Klyman of the Harvard Belfer Center argues that, contrary to popular consensus, China’s tech crackdown has made companies more innovative and improved consumer protection at minimal economic cost. 

Tim Culpan assesses recent reports that China plans to ease technology regulations, and argues  that the signals point to a temporary reprieve rather than a permanent pardon. 

Bonnie Glick warns that enacting the American Innovation and Choice Online Act, Congress’s latest effort to regulate tech companies, will weaken America’s competitive position against China. 

Dingding Chen and Wang Lei analyze the United States’ attempts to regulate Huawei as a case study on the extent and limits of U.S. power to check China’s technology industry. 

Shira Ovide observes that the threads connecting U.S. and Chinese internet users, like Facebook’s Chinese advertising revenue, is evidence that China can’t completely wall off the outside world from its internet. 

Jordan Schneider interviews John Bateman of the Carnegie Endowment on U.S.-China tech policy and related topics for the ChinaTalk podcast.