Time for Five Eyes to coordinate on Chinese tech investment

A common assessment system for the Five Eyes allies would assist in safeguarding interlinked telecommunications and high-tech sectors.

John Hemmings

27 July 20174 min read

The recent exposure of Chinese influence-peddling inside the Australian political system is just one example of China’s growing influence and willingness to act in Western states. In these days of austerity for many Western nations, money speaks loudly and in recent years Chinese investment into Western liberal democracies has surged.

Chinese foreign direct investment is shifting from commodities in the developing world to high-tech acquisitions, equity stakes and mergers in advanced economies. In Europe alone, Chinese investment increased 44% between 2014 and 2015, when it reached €20 billion. For the most part, these funds have been welcomed by cash-strapped Western states seeking to reinvigorate their economies. However, there are also risks associated with Chinese investment in telecommunications and other mainstays of modern commerce.

Research carried out by the Henry Jackson Society suggests that Chinese investment in national infrastructure is taking on critical proportions, and Western states – particularly the five countries involved in the Five Eyes intelligence alliance – are responding in piecemeal fashion with each screening investments in different ways. A number of incidents in recent years have underlined the need for better co-ordination between nations, particularly those that share intelligence, and improved understanding of China’s investment strategy into the West.

In 2016, for example, a Chinese consortium that included a subsidiary of the Chinese defence industrial giant AVIC, bought a large stake in the UK’s largest data centre operator, Global Switch. Whitehall approved the deal, only to see the Australian Department of Defence pull out of future business with Global Switch, citing the AVIC buy-in. Then came the Canadian government's approval of a Chinese takeover of the Canadian satellite communications company, Norsat. After the Trudeau administration confirmed that change in ownership, the Pentagon announced it would have to re-examine its contracts with the Vancouver firm.

MERICS research suggests China's state owned enterprises (SOEs) accounted for more than 60% of China FDI in Europe in 2015. While this is not as high as it has been, the trend is upward which adds to the argument that much of the investment surge is strategic in nature. Beijing has also recently announced its intention to become the global leader in artificial intelligence (AI), a cutting-edge technology upon which the defence of the West will depend. One can see China’s intentions in its Made in China: 2025 strategy that was announced in 2014. The strategy involves subsidising Chinese firms targeting acquisitions and mergers of Western AI, IT, and telecoms firms and using non-tariff barriers to provide a sanctuary for Chinese firms inside China so they can advance safely away from the harsh glare of competition. The goal is to give China strategic dominance in the technologies of future warfare.

Such goals are alarming, and it's not just policy analysts who think so.The Trump administration, for example, demanded an investigation in Chinese investment into Silicon Valley start-ups and the resulting report indicates that many of the Chinese firms operating in this field have state support and direction.

The recent decision by Berlin to restrict Chinese investment into parts of its digital economy and infrastructure is another indicator of how critical this issue has become. As one of the West's most open economies, this action demonstrates Berlin is taking the situation very seriously indeed. While London mulls over a body similar to the Committee for Foreign Investment in the United States or Australia's Foreign Investment Review Board to supplement its current ad hoc system, it is imperative that the Five Eyes alliance members systemically overhaul the range of sectors open to Chinese investment. Some practices that could assist include:

Instituting a regular Five Eyes meeting between the heads of their investment review boards.
Use this process to build a ‘common operating picture’ of Chinese investment practices and targets.
Sharing more information on what Chinese firms are doing in each of the Five Eyes economies, their ownership structures, and any past instances of serving Chinese national security objectives.
Considering an overhaul of the Five Eyes working groups in telecoms and AI, giving them greater prominence than they now have, and creating stronger links between private sector actors and security agencies.
Developing better monitoring by Ministries of Economy; presently, governments capture statistics without giving much background. They can and should provide more information to regulatory bodies.

The surge of Chinese SOE-led interest into Western infrastructure and high-tech can help bridge the gap between supply and demand for investment dollars. However, we need to be realistic about Beijing’s own industrial goals and objectives and the nature of its investment strategy. A common assessment system for the Five Eyes allies would assist in safeguarding our interlinked telecommunications and high-tech sectors.

John Hemmings

About the author

John Hemmings

John Hemmings is Director of the Asia Studies Centre at the Henry Jackson Society and an Adjunct Fellow at the Center for Strategic and International Studies .

Topics

China Intelligence & security