By Melinda Liu
Jan. 16, 2006 issue
Don't be fooled by Wang Xiaoyun's demure demeanor. The 39-year-old
mathematician is an instrument of China's campaign to become a tech
power. She is also a legend among Western cryptographers. "Please
don't write too much about my research; it's so difficult for
journalists to get the technical details right," Wang pleads in
rapid-fire English and Shandong dialect. She has a point: let's just
say she and two colleagues shocked the cryptography world last year
when they exposed a weakness in a key U.S. government encryption code
called SHA-1, thought to be virtually unbreakable. Renowned MIT
cryptographer Robert Rivest, who helped develop the SHA-1 algorithm,
calls the breakthrough "stunning." (The SHA-1 "hash" is used, among
other things, in technologies that transmit credit-card numbers over
Which explains why experts from Wall Street to Washington, from
Downing Street to Delhi, are beginning to pay attention to Chinese
scientists like Wang=97and the government campaign that helps sponsor
their work. The "863 Program"=97so named because in March 1986 Deng
Xiaoping decreed Beijing would begin bankrolling key science and
technology research=97aims to vault China into the ranks of developed
nations. When Deng, eager to make China a high-tech power, asked how
much funding should be earmarked to jump-start the effort, some
scientists suggested 5 billion yuan (about $625 million today),
recalls People's University professor Mao Shoulong, who was involved
at that stage. "But Deng said the program needed 10 billion yuan. So
that's what was invested."
Since then, Beijing has funneled 863 funds to new cutting-edge
projects each year, boosting research on everything from aviation
systems to mapping the rice genome. Nanjing University professor Wang
Yuanqing, who won funding for his work on 3-D computer monitors,
believes individual 863 projects are now "too numerous to be counted."
During the same period, China's economy has racked up white-hot growth
rates=97in 2005 GDP expanded 9.8 percent. Beijing's boom has prompted
some Western strategists to warn that China might supplant the United
States as a tech leader in the not-too-distant future, and threaten
Washington's Asian friends militarily. As China continues its economic
rise, senior U.S. officials are asking publicly whether Beijing can
become a "responsible stakeholder" in the international community.
More to the point, many analysts fear that Beijing, in order to feed
its high-tech hunger, is promoting not just legal research but
economic espionage and violations of intellectual-property rights
(IPR). Consultant James McGregor, author of "One Billion Customers:
Lessons From the Front Lines of Doing Business in China," argues that
"the biggest issue in [Sino-U.S.] commercial relations should be IPR,
To be sure, China currently lags behind the United States in most if
not all tech industries. Investment from multinationals such as
Motorola, Nokia, Microsoft and Cisco Systems has driven much of
China's high-tech growth. Although China recently supplanted America
as the world's biggest exporter of information and communications
technology, fully 80 percent of the mainland's high-tech and patented
exports last year were produced by foreign-controlled firms.
Tellingly, many foreign giants don't bring their cutting-edge tech to
China; some who do expect it to be copied within five years, says an
expert with one of the Big Four accounting firms. And although
glittering high-tech zones and incubator parks have proliferated, "not
many of them have actually produced science and technology projects
yet," admits Professor Mao. He says the United States outshines China
because it "has more money, more talent and more marketable products."
But 863 is transforming China. It's why China has more than 700
multinational R&D centers, compared with fewer than 50 eight years
ago. Why 59 percent of Chinese undergrads pursue science and
engineering degrees, compared with 32 percent in the United States.
Why a year ago Chinese computer giant Lenovo purchased IBM's PC unit.
Why foreign governments now worry about the overseas acquisition
efforts of other Chinese behemoths such as telecom-equipment maker
Huawei or the oil firm Cnooc, which dropped its bid to buy the U.S.
company Unocal after fierce opposition last year. And why FBI
officials fret that a small but worrisome proportion of the Chinese
firms and students in America may be engaged in covert
tech-acquisition schemes. Former head of FBI counterintelligence
operations David Szady says espionage has helped Beijing acquire in
just a couple of years what would normally take a decade to achieve.
The FBI isn't the only agency worrying.
A Japanese magazine recently reported that tech secrets were a factor
in the mysterious 2004 suicide of a Japanese consul in Shanghai. A
Chinese intelligence agent threatened to make public a relationship
the Japanese official had with a karaoke hostess unless the consul
divulged information on Tokyo's diplomatic encryption system, the
Shukan Bunshun reported; the consul decided to hang himself instead.
In 2001, U.S. intel sources reportedly alerted their Indian
counterparts to "suspicious" activities by the Chinese firm Huawei
(next story). Telecom software developed at Huawei's Bangalore R&D
center allegedly wound up in the hands of the Pakistan government, New
Delhi's archrival, by way of Huawei's Afghan operations. (Huawei has
denied the allegations.) Indian intelligence officials, in particular,
oppose allowing Huawei to expand its presence in their country because
they fear strategic telecom networks would become vulnerable to China.
Beijing denies that it engages in high-tech theft, attributing such
charges to a "cold-war mentality." In fact, China may be able to feed
the bulk of its high-tech appetite through legal means. Chinese
state-owned enterprises pressure foreign partners to share advanced
technology. Foreign nuclear-reactor suppliers, for example, are
required to allow local technicians to work alongside their foreign
counterparts. While Western suppliers are reluctant to share software
codes that actually run the reactors, they routinely divulge
construction and operation details. U.S. firms generally consider such
tech transfers the "price for admission" to the China market, states a
November 2005 congressional report, which asserts that technology
transfers are "a major source of advanced technology for the PRC."
Former U.S. military intelligence officer Larry Wortzel, now with the
conservative Heritage Foundation, contends 863 is part of a "climate
inside China that rewards stealing secrets." He says centralized
Chinese government efforts, "such as the 863 Program, are specifically
designed to acquire foreign high technology with military
To deter spies, FBI agents find themselves eyeballing a confusing
welter of Chinese students, academics, business travelers, tourists
and some 3,000 "front companies" in the United States, says former FBI
official Szady. At present, the United States is prosecuting about a
dozen cases involving individuals alleged to have smuggled
technologies=97such as night-vision systems or the proprietary source
code for seismic imaging=97to China. In one of the most recent cases,
U.S. authorities detained mainland-born electronics engineer Mak Chi,
his brother and his wife in late October. Mak worked for Power
Paragon, a top U.S. defense contractor, and he had access to
classified technology related to quiet electronic drive (QED)
submarine propulsion systems=97secrets that could prove valuable to
Chinese strategists in the event of conflict in the Taiwan Strait.
During phone calls tapped by the FBI, the three suspects allegedly
discussed smuggling QED data, which Washington bans for export to the
mainland, to Guangzhou on an encrypted disc. They were indicted only
for illegally "acting as agents for a foreign government," however,
since the smuggled disc didn't contain classified information. "I
believe [they] are foreign intelligence operatives," wrote FBI Special
Agent James Gaylord in an affidavit. (The three have pleaded not
Tech advances make it easier to steal some secrets. For the past two
years a group of Chinese hackers suspected of intelligence-gathering
cyber-attacks have assaulted U.S. government computer systems.
Nicknamed "Titan Rain," they have vacuumed up data on everything from
aerospace propulsion systems to flight-planning software used by the
U.S. Army and Air Force. (China calls reports of Titan Rain
"groundless and irresponsible.")
The big question is whether such efforts are government-sponsored or
freelance. The answer is probably both. One Beijing hacker says two
Chinese officials approached him a couple of years ago requesting
"help in obtaining classified information" from foreign governments.
He says he refused the "assignment," but admits he perused a top U.S.
general's personal documents once while scanning for weaknesses in
Pentagon information systems "for fun." The hacker, who requested
anonymity to avoid detection, acknowledges that Chinese companies now
hire people like him to conduct industrial espionage. "It used to be
that hackers wouldn't do that because we all had a sense of social
responsibility," says the well-groomed thirtysomething, "but now
people do anything for money." If that principle takes hold, China's
high-tech appetite may well be cause for concern.
With Craig Simons In Beijing, Sudip Mazumdar In New Delhi And Hideko
Takayama In Tokyo
=A9 2006 Newsweek, Inc.
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