OFFICE of the UNITED STATES TRADE REPRESENTATIVE EXECUTIVE OFFICE OF THE PRESIDENT FINDINGS OF 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 1974 March 22 2018 Abbreviations and Acronyms Acronym 3PLA 4WD AAFA ABA ABC ABPIA ACC AEI AGIC AI AmCham AML AMSC APEC APT AQSIQ ATI AVIC AVICEM AWD BCM BEA BGI BIO BIS BoC BRI BRIC C C CAAC CAIGA CAST CCBC CCC CCCME CCOIC CCP CCXR CDB CFIUS CG CGCC CIC CIGS CIPL Definition People’s Liberation Army Third Department four-wheel drive American Apparel Footwear Association American Bar Association Agriculture Bank of China American Bridal Prom Industry Association American Chemistry Council American Enterprise Institute Asia-Germany Industrial Promotion Capital artificial intelligence American Chamber of Commerce Shanghai Anti-Monopoly Law American Superconductor Corporation Asia-Pacific Economic Cooperation advanced persistent threat Administration of Quality Supervision Inspection and Quarantine Allegheny Technologies Inc Aviation Industry Corporation of China ACIF Electromechanical Systems Co Ltd all-wheel drive Bank of Communications U S Bureau of Economic Analysis Shenzhen Beijing Genomics Institute Biotechnology Innovation Organization Bureau of Industry and Security Bank of China Belt and Road Initiative Brazil Russia India and China command-and-control Civil Aviation Administration of China China Aviation Industry General Aircraft Co China Association of Science and Technology China Construction Bank Corporation China Compulsory Certification China Chamber of Commerce for Import Export of Machinery and Electronic Products China Chamber of International Commerce Chinese Communist Party China Chengxin Securities Rating Company China Development Bank Committee on Foreign Investment in the United States Complete Genomics China General Chamber of Commerce China Investment Corporation copper indium gallium selenide China Intellectual Property Law Society i CJV CMG CMOS CNOOC CNY COMAC CompTIA CPPCC CSI CSIS CSP CTA DHH DHS DOJ DRC EJV EXIM FADEC FAW FDI FIE FYP GA GAC GDP GMO HNA IaaS IAM IATA IC ICBC ICT ICTSD IDAR IDC IDDS IGBT IGCC IMF iML IP IPIRA ISS ISSI IT ITAR ITI contractual joint venture Continental Motors Group Limited complementary metal-oxide semiconductor China National Offshore Oil Corporation Chinese yuan Commercial Aircraft Corporation of China Ltd Computing Technology Industry Association Chinese People’s Political Consultative Conference Coalition of Services Industries Center for Strategic and International Studies cloud service providers Consumer Technology Association DHH Washington Law Office U S Department of Homeland Security U S Department of Justice Development and Reform Commission equity joint venture China Export-Import Bank full authority digital engine control First Automotive Workers foreign direct investment foreign-invested entities Five-Year Plan for National Economic and Social Development general aviation General Administration of Customs gross domestic product genetically modified organism Hainan Airlines infrastructure as a service International Association of Machinists and Aerospace Workers International Air Transport Association integrated circuit Industrial and Commercial Bank of China information and communications technology International Center for Trade and Sustainable Development introduce digest absorb and re-innovate internet data center innovation-driven development strategy insulated-gate bipolar transistors University of California Institute on Global Conflict and Cooperation International Monetary Fund Integrated Memory Logic Limited intellectual property Intellectual Property and Industry Research Alliances Imaging Solutions and Services Integrated Silicon Solutions Inc information technology International Traffic in Arms Regulations Information Technology Industry Council ii ITIF JCCT JV M A MCF MCM MEMA MEMS MERICS METI MIIT MLP MLPS MLR MNE MOA MOF MOFCOM MOST MPS MRO MSS MW NAM NBC NDRC NEA NEV NFTC NHI NPC NTE OCTG ODI OECD OFDI PaaS PBOC PERC PLA PMA PMDD PPD-28 PPP PRC PWM R D RMB S ED Information Technology Innovation Foundation U S -China Joint Commission on Commerce and Trade joint venture merger and acquisitions military-civil fusion multi-chip module Motor Equipment Manufacturers Association micro-electromechanical systems Mercator Institute for China Studies Ministry of Economy Trade and Industry Ministry of Industry and Information Technology National Medium- and Long-Term Plan for the Development of Science and Technology Multi-level Protection Scheme Ministry of Land and Resources of the People’s Republic of China multinational enterprise Ministry of Agriculture of the People’s Republic of China Ministry of Finance of the People’s Republic of China Ministry of Commerce of the People’s Republic of China Ministry of Science and Technology of the People’s Republic of China managed print services maintenance repair and overhaul China’s Ministry of State Security megawatt National Association of Manufacturers National Bureau of Statistics of the People’s Republic of China National Development and Reform Commission National Energy Administration new-energy vehicle National Foreign Trade Council Northern Heavy Industries Group National People’s Congress China National Trade Estimate oil country tubular goods overseas direct investment Organization for Economic Cooperation and Development outbound foreign direct investment computer platform as a service People’s Bank of China Passivated Emitter Rear Contact China’s People’s Liberation Army parts manufacturing and authorization Permanent-Magnet Direct Drive Presidential Policy Directive 28 private-public partnership People’s Republic of China pulse width modulation research and development renminbi official currency of China U S -China Strategic Economic Dialogue iii S T SaaS SAFE SAIC SASAC SASTIND SAT SEI SIA SIGINT SIPO SMIC SNPTC SOE SSLP TIA TIER TRB TRIPS UAV UNCTAD USC USCBC USCIB USD USITC USPTO USW UT VAT VC WFOE WIPO WNA ZGC science and technology computer software as a service State Administration of Foreign Exchange State Administration of Industry Commerce State-owned Assets Supervision and Administration Commission State Administration for Science Technology and Industry for National Defense State Administration of Taxes strategic and emerging industries Semiconductor Industry Association Signals intelligence State Intellectual Property Office Semiconductor Manufacturing International Corporation State Nuclear Power Technology Corporation state-owned enterprise seamless standard line pipes Telecommunications Industry Association Regulations of the PRC on Administration of Import and Export Technologies technical reconnaissance bureau Trade-Related Aspects of Intellectual Property Rights unmanned aerial vehicle United Nations Conference on Trade and Development United States Constitution U S -China Business Council U S Council for International Business U S dollars U S International Trade Commission U S Patent and Trademark Office United Steel Workers United Turbine value-added tax venture capital wholly foreign-owned entity UN’s World Intellectual Property Organization World Nuclear Association Zhongguancun iv CONTENTS I Overview 3 A Core Elements of Section 301 3 B Background to the Investigation 4 1 Initiation of the Investigation 5 2 China’s Bilateral Commitments to End its Technology Transfer Regime and to Refrain from State-Sponsored Cyber Intrusions and Theft 6 3 Input from the Public 9 C China’s Technology Drive 10 II China’s Unfair Technology Transfer Regime for U S Companies in China 19 A Introduction 19 1 Key Elements of China’s Technology Transfer Regime 19 2 A Persistent Problem for U S Business 22 B Foreign Ownership Restrictions as Used in China’s Technology Transfer Regime 23 1 The Foreign Investment Catalogue and Technology Transfer 24 2 Illustrative Examples of China’s Use of Investment Restrictions to Pressure Technology Transfer 29 C Administrative Review and Licensing Processes as Used in China’s Technology Transfer Regime 35 1 Technology Transfer Pressure in Administrative Approvals and Licensing 36 2 Forced Disclosure of Sensitive Technical Information 41 D China’s Acts Policies and Practices Are Unreasonable 43 E China’s Acts Policies and Practices Burden or Restrict U S Commerce 45 III China’s Discriminatory Licensing Restrictions 48 A Introduction 48 B Foreign Licensing Restrictions and China’s Technology Transfer Regime 48 1 Different Outcomes for U S Companies versus Chinese Competitors 51 2 Indemnification Against Infringement Claims 51 3 Ownership of Improvements to Licensed Technology 52 4 Use of Technology after the Technology Contract Expires 53 C Concerns Raised by Other Trading Partners 54 D China’s Acts Policies and Practices are Discriminatory 55 1 Justifications for Discrimination 55 2 Acts Polices and Practices of Other Countries 57 E China’s Acts Policies and Practices Burden U S Commerce 60 IV Outbound Investment 62 A Introduction 62 B Policy and Regulatory Framework 66 1 Major Policies to Acquire Foreign Technology 66 2 The Chinese Outbound Investment Approvals System 70 3 Sectors “Encouraged” for Outbound Investment 77 4 Outbound Investment Policy in Technology and Sectoral Policies 78 5 State-Backed Actors 80 1 C Impact of Policies and Implementing Measures on Chinese Investment in the United States 97 1 Chinese Investment Activity in the United States Analysis of Data 98 2 Effect of State Policies and Implementing Measures on Chinese Acquisitions 102 3 Leveraging “International Innovation Resources” Through Engagement with Silicon Valley 142 D China’s Acts Policies and Practices are Unreasonable 147 E China’s Acts Policies and Practices Burden U S Commerce 150 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information 153 A Introduction 153 B China’s Acts Policies and Practices Regarding Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information 154 1 The Chinese Government’s Extensive Cyber Activities 154 2 The United States Department of Justice Indicted Chinese Government Hackers in May 2014 157 3 China’s Institutional Framework Supports Cyber Intrusions into U S Commercial Networks 164 4 China’s Recent Cyber Intrusion Activities Against U S Commercial Networks 167 C China’s Acts Policies and Practices Regarding Cybertheft of Intellectual Property Are Unreasonable 171 D China’s Acts Policies and Practices Regarding Cybertheft of Intellectual Property Burden U S Commerce 173 VI Other Acts Policies and Practices of China 177 A Introduction 177 1 Measures Purportedly Related to National Security or Cybersecurity 177 2 Inadequate Intellectual Property Protection 179 3 China’s Anti-Monopoly Law 180 4 China’s Standardization Law 181 5 Talent Acquisition 181 B Conclusion 182 2 I Overview A Core Elements of Section 301 This investigation has been brought under Section 301 of the Trade Act of 1974 as amended the Trade Act 1 Section 301 is a key enforcement tool that may be used to address a wide variety of unfair acts policies and practices of U S trading partners Section 301 sets out three categories of acts policies or practices of a foreign country that are potentially actionable i trade agreement violations ii acts policies or practices that are unjustifiable defined as those that are inconsistent with U S international legal rights and that burden or restrict U S Commerce and iii acts policies or practices that are unreasonable or discriminatory and that burden or restrict U S Commerce 2 The third category of conduct is most relevant to this investigation Section 301 defines “discriminatory” to “include when appropriate any act policy and practice which denies national or most-favored nation treatment to United States goods service or investment ”3 An “unreasonable” act policy or practice is one that “while not necessarily in violation of or inconsistent with the international legal rights of the United States is otherwise unfair and inequitable ”4 The statute further provides that in determining if a foreign country’s practices are unreasonable reciprocal opportunities to those denied U S firms “shall be taken into account to the extent appropriate ”5 If the USTR determines that the Section 301 investigation “involves a trade agreement ” and if that trade agreement includes formal dispute settlement procedures USTR may pursue the investigation through consultations and dispute settlement under the trade agreement Otherwise USTR will conduct the investigation without recourse to formal dispute settlement Moreover if the USTR determines that the act policy or practice falls within any of the three categories of actionable conduct under Section 301 the USTR must also determine what action if any to take 6 For example if the USTR determines that an act policy or practice is unreasonable or discriminatory and that it burdens or restricts U S commerce The Trade Representative shall take all appropriate and feasible action authorized under Section 301 c subject to the specific direction if any of the President regarding any such action and all other appropriate and feasible action within the power of the President that the President may Unless otherwise specified “Section 301” refers generally to Chapter 1 of Title III of the Trade Act of 1974 codified as amended in 19 U S C §§ 2411-2417 Furthermore for ease of reference full citations are used throughout this report 2 Trade Act of 1974 19 U S C § 2411 a - b 3 19 U S C § 2411 d 5 Section III describes discriminatory acts practices and policies of the Chinese government 4 19 U S C § 2411 d 3 A 5 19 U S C § 2411 d 3 D 6 For example in 2014 USTR determined that action against Ukraine was not appropriate due to the political situation See Notice of Determination in Section 301 Investigation of Ukraine 79 Fed Reg 14 326-27 Mar 13 2014 1 3 I Overview direct the Trade Representative to take under this subsection to obtain the elimination of that act policy or practice 7 Actions specifically authorized under Section 301 c include i suspending withdrawing or preventing the application of benefits of trade agreement concessions ii imposing duties fees or other import restrictions on the goods or services of the foreign country for such time as deemed appropriate iii withdrawing or suspending preferential duty treatment under a preference program iv entering into binding agreements that commit the foreign country to eliminate or phase out the offending conduct or to provide compensatory trade benefits or v restricting or denying the issuance of service sector authorizations which are federal permits or other authorizations needed to supply services in some sectors in the United States 8 In addition to these specifically enumerated actions the USTR may take any actions that are “within the President’s power with respect to trade in goods or services or with respect to any other area of pertinent relations with the foreign country ”9 B Background to the Investigation On August 14 2017 the President issued a Memorandum to the Trade Representative stating inter alia that China has implemented laws policies and practices and has taken actions related to intellectual property innovation and technology that may encourage or require the transfer of American technology and intellectual property to enterprises in China or that may otherwise negatively affect American economic interests These laws policies practices and actions may inhibit United States exports deprive United States citizens of fair remuneration for their innovations divert American jobs to workers in China contribute to our trade deficit with China and otherwise undermine American manufacturing services and innovation 10 The President instructed USTR to determine under Section 301 whether to investigate China’s law policies practices or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights innovation or technology development 11 Concerns about a wide range of unfair practices of the Chinese government and the Chinese Communist Party CCP related to technology transfer intellectual property and innovation are longstanding USTR has pursued these issues multilaterally for example through the WTO dispute settlement process and in WTO committees and bilaterally through the annual Special 301 review These issues also have been raised in bilateral dialogues with China including the U S -China Joint Commission on Commerce and Trade JCCT and U S -China Strategic Economic Dialogue S ED to attempt to address some of the U S concerns 7 19 U S C § 2411 b In cases in which USTR determines that import restrictions are the appropriate action preference must be given to the imposition of duties over other forms of action 19 U S C §§ 2411 c 9 19 U S C § 2411 b 2 10 See Addressing China's Laws Policies Practices and Actions Related to Intellectual Property Innovation and Technology 82 Fed Reg 39 007 Aug 17 2017 11 Id 8 4 I Overview 1 Initiation of the Investigation USTR initiated this investigation on August 18 2017 after consultation with the interagency Section 301 committee and private sector advisory committees 12 On that same date USTR also requested consultations with the Government of China 13 China’s Minister of Commerce responded to this letter on August 28 opposing the initiation of a Section 301 investigation 14 The Federal Register Notice described the focus of the investigation as follows First the Chinese government reportedly uses a variety of tools including opaque and discretionary administrative approval processes joint venture requirements foreign equity limitations procurements and other mechanisms to regulate or intervene in U S companies’ operations in China in order to require or pressure the transfer of technologies and intellectual property to Chinese companies Moreover many U S companies report facing vague and unwritten rules as well as local rules that diverge from national ones which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer Second the Chinese government’s acts policies and practices reportedly deprive U S companies of the ability to set market-based terms in licensing and other technologyrelated negotiations with Chinese companies and undermine U S companies’ control over their technology in China For example the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology and other measures also impose nonmarket terms in licensing and technology contracts Third the Chinese government reportedly directs and or unfairly facilitates the systematic investment in and or acquisition of U S companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans Fourth the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U S commercial computer networks or cyberenabled theft of intellectual property trade secrets or confidential business information and whether this conduct harms U S companies or provides competitive advantages to Chinese companies or commercial sectors 12 See Initiation of Section 301 Investigation Hearing and Request for Public Comments China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation 82 Fed Reg 40 213-14 Aug 24 2017 Appendix A 13 See Appendix A 14 See Letter from Minster of Commerce Zhong Shan to Ambassador Robert Lighthizer Aug 28 2017 on file with author 5 I Overview In addition to these four types of conduct interested parties could submit for consideration information on other acts policies and practices of China relating to technology transfer intellectual property and innovation for potential inclusion in this investigation or to be addressed through other applicable mechanisms 15 The terms “technology” and “technology transfer” are key concepts in this investigation They are defined in Box I 1 Box I 1 Technology and Technology Transfer Defined Technology is defined broadly in this investigation to include knowledge and information needed to produce and deliver goods and services as well as other methods and processes used to solve practical technical or scientific problems In addition to information protected by patents copyrights trademarks trade secrets and other types of intellectual property IP protections the term also includes “know-how” such as production processes management techniques expertise and the knowledge of personnel Technology and innovation are critical factors in maintaining U S competitiveness in the global economy Among all major economies the United States has the highest concentration of knowledge- and technology-intensive industries as a share of total economic activity And in high-tech manufacturing the United States leads the world with a global share of production of 29 percent followed by China at 27 percent Technology transfers made on voluntary and mutually-agreed terms and without government interference or distortion are critical to the U S economy In fact U S companies are global leaders in the transfer of technology through legal mechanisms such as trade in high-tech goods and services the licensing of technology to companies and persons abroad and foreign direct investment FDI Sources OECD Glossary of Statistical Terms Keith E Maskus UNCTAD-ICTSD Encouraging International Technology Transfer 9 2004 U S Dept of Commerce Intellectual Property and the U S Economy 1 2012 National Science Board Science Engineering Indicators 4 4-17 2016 OECD Main Science and Technology Indicators Technology Balance of Payments Receipts Current Prices 2016 UNCTAD World Investment Report 2017 14 2 China’s Bilateral Commitments to End its Technology Transfer Regime and to Refrain from State-Sponsored Cyber Intrusions and Theft In the bilateral relationship China repeatedly has committed to eliminate aspects of its technology transfer regime On at least eight occasions since 2010 the Chinese government has committed not to use technology transfer as a condition for market access and to permit technology transfer decisions to be negotiated independently by businesses China has further committed not to pressure the disclosure of trade secrets in regulatory or administrative 15 See Appendix A 6 I Overview proceedings The evidence adduced in this investigation establishes that China’s technology transfer regime continues notwithstanding repeated bilateral commitments and government statements as summarized in Table I 1 below and discussed in the remainder of this report 7 I Overview Table I 1 China’s Bilateral Commitments Relating to Technology Transfer 2010 - 2016 Year Mechanism Commitment 2010 S ED China reaffirmed that the terms and conditions of technology transfer production processes and other proprietary information will be determined by individual enterprises 2011 JCCT China confirmed that it does not and will not maintain measures that mandate the transfer of technology in the New Energy Vehicles Sector China further clarified that “mastery of core technology” does not require technology transfer for NEVs 2012 S ED China reaffirmed its commitment that technology transfer is to be decided by firms independently and not to be used by the Chinese government as a pre-condition for market access 2012 Xi Visit Commitment China reiterated that technology transfer and technological cooperation shall be decided by businesses independently and will not be used by the Chinese government as a pre-condition for market access 2012 JCCT China reaffirmed that technology transfer and technology cooperation are the autonomous decisions of enterprises China committed that it would not make technology transfer a precondition for market access 2014 JCCT China committed that enterprises are free to base technology transfer decisions on business and market considerations and are free to independently negotiate and decide whether and under what circumstances to assign or license intellectual property rights to affiliated or unaffiliated enterprises 2014 JCCT China confirmed that trade secrets submitted to the government in administrative or regulatory proceedings are to be protected from improper disclosure to the public and only disclosed to government officials in connection with their official duties in accordance with law 2015 Xi Visit Commitment China committed not to advance generally applicable policies or practices that require the transfer of intellectual property rights or technology as a condition of doing business in the Chinese market 2015 Xi Visit Commitment China committed to refrain from conducting or knowingly supporting cyber-enabled theft of intellectual property cyberenabled theft of intellectual property including trade secrets or other confidential business information with the intent of providing competitive advantages to companies or commercial sectors 2016 Xi Visit Commitment China committed not to require the transfer of intellectual property rights or technology as a condition of doing business Source USTR CATALOGUE OF JCCT AND S ED COMMITMENTS 2016 2016 USTR REP TO CONG ON CHINA’S WTO COMPLIANCE 7 8 I Overview 3 Input from the Public USTR provided the public and interested persons with opportunities to present their views and perspectives on the issues highlighted in the Federal Register Notice including through a public hearing on October 10 2017 16 Witnesses with varied interests and perspectives testified and responded to questions from the interagency Section 301 committee including representatives of U S companies and workers trade and professional associations and think tanks as well as law firms and representatives of trade and professional associations headquartered in China 17 Interested persons also filed approximately 70 written submissions in the public docket for this investigation 18 As U S companies have stated for more than a decade 19 they fear that they will face retaliation or the loss of business opportunities if they come forward to complain about China’s unfair trade practices Concerns about Chinese retaliation arose in this investigation as well Multiple submissions noted the great reluctance of U S companies to share information on China’s technology transfer regime given the importance of the China market to their businesses and the fact that Chinese government officials are “not shy about retaliating against critics ”20 For example a representative of the Commission on the Theft of American Intellectual Property testified at the hearing “American companies are intimidated and reticent over the issue especially in China There they risk punishment by a powerful and opaque Chinese regulatory system ”21 In addition according to the U S China Business Council their member companies do not presently have “reliable channel s to report abuses and to appeal adverse decisions…without fear of retaliation ”22 Similarly a representative of SolarWorld stated that “many other companies face the same issues of cyberhacking and technology theft that it has faced but are unwilling to come forward publicly due to fear of lost sales or retaliation by China ”23 16 The transcript of the hearing is available on the Federal eRulemaking Portal https www regulations gov and on USTR’s website https ustr gov 17 The following individuals participated in the public hearing Richard Ellings Commission on the Theft of American Intellectual Property Stephen Ezell Information Technology and Innovation Foundation Erin Ennis USChina Business Council Owen Herrnstadt International Association of Machinists and Aerospace Workers Juergen Stein SolarWorld Daniel Patrick McGahn American Superconductor Corporation William Mansfield ABRO Industries Scott Partridge American Bar Association Intellectual Property Law Section Scott Kennedy Center for Strategic and International Studies Jin Haijun China Intellectual Property Law Society Chen Zhou and Liu Chao China Chamber of International Commerce XU Chen China General Chamber of Commerce John Tang DHH Washington Law Office Wang Guiqing China Chamber of Commerce for Import and Export of Machinery and Export Products See Appendix B 18 See Appendix C for a summary of the public submissions The submissions can be viewed on the Federal eRulemaking Portal https www regulations gov 19 U S CHINA BUSINESS COUNCIL hereinafter “USCBC” Submission Section 301 Hearing 4 Sept 28 2017 see also SOLARWORLD Submission Section 301 Hearing 2 Oct 20 2017 20 James Lewis CENTER FOR STRATEGIC INT’L STUDIES hereinafter “CSIS” Submission Section 301 Hearing 6 Sept 27 2017 see also Lee Branstetter Submission Section 301 Hearing 4 Sept 28 2017 Stephen Zirschky Submission Section 301 Hearing 2 Sept 28 2017 21 USTR Hearing Transcript Section 301 Hearing 13 Oct 10 2017 see also COMM’N ON THE THEFT OF AM IP hereinafter “IP Commission” Submission Section 301 Hearing 8 Sept 28 2017 22 USCBC Submission Section 301 Hearing 4 Sept 28 2017 23 SOLARWORLD Submission Section 301 Hearing 2 Oct 20 2017 9 I Overview Because USTR self-initiated this action no particular company or group of companies was required to step forward and file a Section 301 petition to initiate this investigation Moreover in making this determination USTR and the interagency Section 301 committee took into account not just investigation submissions and testimony but also public reports scholarly articles and other reliable information In addition business confidential information has been provided and considered as part of the record in this investigation so that companies could share sensitive information without the threat of business loss or retaliation C China’s Technology Drive Official publications of the Chinese government and the CCP set out China’s ambitious technology-related industrial policies These policies are driven in large part by China’s goals of dominating its domestic market and becoming a global leader in a wide range of technologies especially advanced technologies The industrial policies reflect a top-down state-directed approach to technology development and are founded on concepts such as “indigenous innovation” and “re-innovation” of foreign technologies among others The Chinese government regards technology development as integral to its economic development and seeks to attain domestic dominance and global leadership in a wide range of technologies for economic and national security reasons 24 China accordingly seeks to reduce its dependence on technologies from other countries and move up the value chain advancing from low-cost manufacturing to become a “global innovation power in science and technology ”25 In pursuit of this overarching objective China has issued a large number of industrial policies including more than 100 five-year plans science and technology development plans and sectoral plans over the last decade 26 Some of the most prominent industrial policies include the National Medium- and Long-Term Science and Technology Development Plan Outline 2006-2020 MLP 27 the State Council Decision on Accelerating and Cultivating the Development of Strategic Emerging Industries SEI Decision 28 and more recently the Notice on Issuing “Made in China 2025” Made in China 2025 Notice 29 The MLP issued in 2005 and covering the period 2006 to 2020 is the seminal document articulating China’s long-term technology development strategy The MLP recognizes the country’s “relatively weak indigenous innovation capacity ” its “weak core competitiveness of enterprises ” and the fact that the country’s high-technology industries “lag” those of more developed nations ”30 24 See James Lewis Submission Section 301 Hearing 1 Sept 2017 CCP State Council Releases the “National Innovation-Driven Development Strategy Guidelines §2 3 Chinese XINHUA NEWS May 19 2016 http news xinhuanet com politics 2016-05 19 c_1118898033 htm see also TAI MING CHEUNG ET AL U S -CHINA ECON SEC REV COMM’N PLANNING FOR INNOVATION UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL ENERGY INDUSTRIAL AND DEFENSE DEVELOPMENT hereinafter “IGCC REPORT” xiii 2016 26 IGCC REPORT at 30 27 Notice on Issuing the National Medium- and Long-Term Science and Technology Development Plan Outline 2006-2020 hereinafter “MLP” State Council Guo Fa 2005 No 44 issued Dec 26 2005 28 Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries State Council Guo Fa 2010 No 32 issued Oct 10 2010 29 Notice on Issuing “Made in China 2025” State Council Guo Fa 2015 No 28 issued May 8 2015 30 MLP §1 25 10 I Overview As its focus the MLP identifies 11 key sectors and 68 priority areas within these sectors for technology development 31 It also designates eight fields of “frontier technology ” 32 within which 27 “breakthrough technologies” will be pursued and highlights four major scientific research programs 33 The MLP also establishes the cross-cutting goal of reducing the rate of dependence on foreign technologies in the identified sectors to below 30% by the year 2020 34 The MLP strategy for securing sought-after technology development includes several key elements which continue to have a negative impact on U S and other foreign companies  A top-down national strategy in which implementation requires the mobilization and participation of all sectors of society35 and the integration of civil and military resources 36  Prioritization of certain industries and technologies for development 37 particularly those that can advance “sustainable development ” “core competitiveness ” “public service ” and “national security” objectives 38  Leveraging state resources and regulatory systems 39  Import substitution to be achieved through “indigenous innovation”40 and re-innovation based on assimilation and absorption of foreign technologies 41 and  Promoting Chinese enterprises to become dominant in the domestic market42 and internationally competitive enterprises43 in key industries The MLP set in motion a web of policies and practices intended to drive innovation and reinnovation For example Section 8 2 of the MLP calls for “enhancing the absorption digestion 31 The sectors include energy water and mineral resources environment agriculture manufacturing transportation information and services population and health urbanization public security and national defense 32 The areas include biotech information technology advanced materials advanced manufacturing advanced energy technology marine technology laser technology and aerospace technology 33 The fields include protein science nanotechnology quantum physics and developmental and reproductive science 34 MLP § 2 2 ¶ 3 Guiding Directives Development Targets and Comprehensive Arrangements 35 MLP § 2 1 “In sum we must make enhancing indigenous innovation capacity our national strategy and implement it in all aspects of modernization construction and in every industry sector and region ” §8 5 also guides “all types of financial institutions and private funds to participate in science and technology development ” 36 MLP § 8 7 37 MLP § 3 sets out the “Key Sectors and their Priority Issues ” 38 MLP § 3 Preamble 39 MLP § 9 40 MLP § 2 1 41 MLP §§ 2 1 8 2 The term “introduce” used throughout MLP refers to introduction of technology through foreign investment This is made more explicit in the measures defining and discussing IDAR below 42 MLP § 2 2 states dependence on foreign technology should be reduced to only 30% by 2020 43 See IGCC REPORT at 157 See also MLP § 2 11 I Overview and re-innovation of introduced technology ”44 Following the issuance of the MLP China detailed these policies in the Several Supporting Policies for Implementing the “National Medium- and Long-Term Science and Technology Development Plan Outline 2006-2020 ” MLP Supporting Policies 45 and the Opinions on Encouraging Technology Introduction and Innovation and Promoting the Transformation of the Growth Mode in Foreign Trade IDAR Opinions 46 which articulate the concept of Introducing 47 Digesting 48 Absorbing 49 and Reinnovating50 foreign intellectual property and technology IDAR The IDAR approach involves four steps each of which hinges on close collaboration between the Chinese government and Chinese industry to take full advantage of foreign technologies  Introduce Chinese companies should target and acquire foreign technology Methods of “introducing” foreign technology that are specifically referenced include technology transfer agreements inbound investment technology imports establishing foreign R D centers outbound investment and the collection of market intelligence by state entities for the benefit of Chinese companies 51 Technology to be “introduced” from overseas includes “major equipment that cannot yet be supplied domestically” as well as “advanced design and manufacturing technology” 52 conversely the government discourages imports of technologies for which China is already deemed to “possess domestic R D capabilities ”53  Digest Following the acquisition of foreign technology the Chinese government should collaborate with China’s domestic industry to collect analyze and disseminate the information and technology that has been acquired 54  Absorb The Chinese government and China’s domestic industry should collaborate to develop products using the technology that has been acquired The Chinese government should provide financial assistance to develop products using technology obtained through IDAR including foreign trade development funds government procurement and fiscal incentives 55 To absorb foreign technologies authorities have established engineering research centers enterprise-based technology centers state laboratories national technology transfer centers and high-technology service centers 56 44 MLP §§ 2 1 8 2 Several Supporting Policies for Implementing the “National Medium- and Long-Term Science and Technology Development Plan Outline 2006-2020 ” State Council Guo Fa 2006 No 6 issued Feb 7 2006 46 Several Opinions on Encouraging Technology Introduction and Innovation and Promoting the Transformation of the Growth Mode in Foreign Trade MOFCOM NDRC MOST MOF GAC SAT SIPO SAFE Shang Fu Mao Fa 2006 No 13 issued July 14 2006 47 English translation of Chinese term yinjin 48 English translation of Chinese term xiaohua 49 English translation of Chinese term xishou 50 English translation of Chinese term zai chuangxin 51 IDAR Opinions § 7-9 11-12 See also IGCC REPORT at 118-119 52 MLP Supporting Policies § 28 29 53 MLP Supporting Policies § 29 54 IDAR Opinions § 7 MLP Supporting Policies § 31 55 IDAR Opinions § 15 18 MLP Supporting Policies § 30 32 56 IGCC REPORT at 118 45 12 I Overview  Re-innovate At this stage Chinese companies should “re-innovate” and improve upon the foreign technology The ultimate objective is to develop new home-grown products that are competitive internationally so as to “allow enterprises to possess more indigenous intellectual property for core products and core technologies ”57 The IDAR approach embraces a strong role for the Chinese government in guiding and assisting Chinese industry in technology development and has had profound implications in particular for the way in which China has sought to introduce foreign technologies into China over the last decade It has spurred Chinese government ministries and government officials to pursue an array of aggressive implementing acts policies and practices including those that are the subject of this investigation China has continued to emphasize the IDAR approach since it was first articulated in 2006 in broad-ranging five-year plans and technology development plans issued by China’s State Council central government ministries and provincial and municipal governments and the CCP The IDAR approach also has been incorporated into numerous economic development plans for specific sectors such as integrated circuits 58 In 2010 the Chinese government announced another seminal technology development strategy which calls for the accelerated development of seven so-called “strategic emerging industries” SEIs 1 energy efficient and environmental technologies 2 next generation information technology 3 biotechnology 4 high-end equipment manufacturing 5 new energy 6 new materials and 7 new energy vehicles 59 The 12th Five-year National Strategic Emerging Industries Development Plan 12th Five-year SEI Plan 60 subsequently recommended specific fiscal and taxation policy support and set a target for SEIs to account for 8% of China’s economy by 2015 and 15% by 2020 The 12th Five-year SEI Plan also aims to foster a group of Chinese enterprises – including state-owned enterprises – into “backbone enterprises” that can become 57 IDAR Opinions § 5 E g 12th Five-year Development Plan for the Integrated Circuit Industry Ministry of Industry and Information Technology published Feb 24 2012 § 3 1 ¶ 3 “Maintain innovation drivers Combine implementation of national science and technology major special projects and megaprojects using innovation in technologies modes mechanisms and systems as the impetus to make breakthroughs in a group of shared core technologies Strengthen introduce digest absorb and re-innovate to stride down the path of open-type innovation and internationalized development ” emphasis added 59 State Council Decision on Accelerating the Development of Strategic Emerging Industries State Council Guo Fa 2010 No 32 issued Oct 10 2010 60 Notice on Issuing the 12th Five-year National Strategic Emerging Industries Development Plan State Council Guo Fa 2012 No 28 issued July 9 2012 58 13 I Overview market leaders domestically and compete globally 61 The Chinese government later reaffirmed and refined this strategy in its 13th Five-year Strategic Emerging Industries Development Plan 62 Notably support for the IDAR strategy was reiterated in the CCP’s 2013 Third Plenum Decision63 Third Plenum Decision released in connection with the Third Plenary Session of the 18th National Congress of the CCP IDAR’s inclusion in the Third Plenum Decision is significant because the document was widely seen as setting forth the priorities of President Xi Jinping’s new administration with respect to China’s future economic development path 64 By reaffirming that China should “establish and perfect a mechanism to encourage original innovation integrated innovation and introduce absorb digest and re-innovate ”65 the Third Plenum Decision signaled the CCP’s continued high-level support for the IDAR approach to technology innovation In 2015 the State Council released the Made in China 2025 Notice 66 which is China’s ten-year plan for targeting ten strategic advanced technology manufacturing industries for promotion and development 1 advanced information technology 2 robotics and automated machine tools 3 aircraft and aircraft components 4 maritime vessels and marine engineering equipment 5 advanced rail equipment 6 new energy vehicles 7 electrical generation and transmission equipment 8 agricultural machinery and equipment 9 new materials and 10 pharmaceuticals and advanced medical devices 67 While the Made in China 2025 Notice references market-oriented principles it closely resembles China’s other state-led technology-related plans such as the MLP issued a decade earlier in that it  Reaffirms the Chinese government’s central role in economic planning 68 61 For example the 12th Five-year National Economic and Social Development Plan Outline adopted by the NPC on Mar 14 2011 calls for the cultivation of a group of backbone enterprises within strategic emerging industries Ch 10 §2 “Fostering the Development of Strategic Emerging Industries” The 12th Five-year SEI Plan further specifies that backbone enterprises are to have “relatively strong indigenous innovation capacity and a technological leadership effects ” § 2 3 “Guiding Thoughts Fundamental Principles and Development Targets” At the sectoral level the Guidelines for the Development and Promotion of the Integrated Circuit Industry State Council issued June 24 2014 laud the fact that China has established “a group of backbone enterprises with significant international competitiveness ” § 1 ¶ 1 The Guiding Opinion on Promoting International Industrial Capacity and Equipment Manufacturing Cooperation State Council Guo Fa 2015 No 30 issued May 13 2015 provides that a “main target” of the policy is to “establish a group of backbone enterprises that possess international competitiveness and the ability to open up markets ” § 2 6 62 Notice on Issuing the 13th Five-year National Strategic Emerging Industries Development Plan State Council Guo Fa 2016 No 67 issued Nov 29 2016 63 CCP Central Committee Decision on Several Major Issues for Comprehensively Deepening Reform CCP Central Committee issued Nov 12 2013 hereinafter “Third Plenum Decision” 64 Third Plenums have historically been used to announce major economic reforms such as the adoption of reform and opening during the Third Plenary Session of the 11th National Congress of the CCP in 1978 and the endorsement of the socialist market economy following the 14th National Congress of the CCP in 1993 65 Third Plenum Decision § 13 66 Decision on Issuing “China Manufacturing 2025” State Council Guo Fa 2015 No 28 issued May 8 2015 67 Made in China 2025 Notice § 3 6 68 Made in China 2025 Notice § 2 2 14 I Overview  Calls on all facets of society to mobilize behind the plan 69  Seeks technological breakthroughs in key areas for economic and security purposes  Promotes further civil-military integration and the two-way transfer and conversion of military and civilian technologies 70  Leverages state resources 71 policy support 72 and regulatory systems 73  Continues to promote import substitution and rely on indigenous products to meet growing demand in China 74  Reaffirms the leading role of backbone enterprises in technology development 75 and  Promotes Chinese enterprises to become dominant in the domestic market and internationally competitive in key industries 76 The Made in China 2025 Notice expressly calls for China to achieve 40% “self-sufficiency” by 2020 and 70% “self-sufficiency” by 2025 in core components and critical materials in a wide range of industries including aerospace equipment and telecommunications equipment 77 The “Made in China 2025” Key Area Technology Roadmap Made in China Roadmap sets explicit market share targets that are to be filled by Chinese producers both domestically and globally in dozens of high-tech industries 78 69 Made in China 2025 Notice § 1 3 Made in China 2025 Notice § 3 1 71 Made in China 2025 Notice § 4 72 Made in China 2025 Notice § 1 3 73 See generally Made in China 2025 Notice This is particularly the case in quality standard regulations as described in §§ 2 1 and 3 4 74 Made in China 2025 Notice § 1 2 describes the growing demand for new equipment consumption and safety while § 1 3 calls for China to “rely more on Chinese equipment and Chinese brands ” 75 Made in China 2025 Notice § 3 1 76 Made in China 2025 Notice § 1 3 77 Made in China 2025 Notice Box 3 78 Made in China 2025 Key Area Technology Roadmap National Strategic Advisory Committee on Building a Powerful Manufacturing Nation issued Oct 10 2015 see also U S CHAMBER MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 8 2017 The Made in China Roadmap was released by the National Strategic Advisory Committee on Building a Powerful Manufacturing Nation also known as the “National Manufacturing Strategy Advisory Committee” which was established pursuant to the Made in China 2025 Notice with responsibility to provide advice and assessments on China’s major manufacturing policies In August 2015 Vice Premier Ma Kai who leads the Strong Manufacturing Country Leading Small Group spoke at the Committee’s first meeting and lauded its establishment as a way to “strongly promote Made in China 2025 ” National Strategic Advisory Committee on Building a Powerful Manufacturing Nation Established Chaired by Ma Kai Chinese XINHUA Aug 26 2015 available at http www xinhuanet com info 2015-08 26 c_134556815 htm last visited Mar 16 2018 See also Notice on the Establishment of the Strong Manufacturing Country Leading Small Group General Office of the State Council Guo Ban Fa 2015 No 48 published June 24 2015 last visited March 16 2018 and National Strategic Advisory Committee on Building a Powerful Manufacturing Nation Established STATE INTELLECTUAL PROPERTY OFFICE OF THE P R C Aug 26 2015 available at http www sipo gov cn yw 2015 201508 t20150826_1165829 html last visited Dec 21 2017 70 15 I Overview For example indigenous new energy vehicles are to achieve an 80% domestic market share79 with foreign sales accounting for 10% of total sales by 2025 80 Similarly domestically produced energy equipment is to achieve 90% domestic market share with exports accounting for 30% of production by 2020 81 and renewable energy equipment with indigenous IP is to achieve 80% domestic market share by 2025 82 In comparison to previous plans Made in China 2025 expands its focus to capturing global market share not just dominance in the China market and is part of a “broader strategy to use state resources to alter and create comparative advantage in these sectors on a global scale ”83 The Made in China 2025 Notice sets forth clear principles tasks and tools to implement this strategy including government intervention and substantial government financial and other support to the targeted Chinese industries 84 Domestic dominance and global competitiveness are to be achieved by upgrading the entire research development and production chain with emphasis on localizing the output of components and finished products 85 Foreign technology acquisition through various means remains a prime focus under Made in China 2025 because China is still catching up in many of the areas prioritized for development and as U S companies are front-runners in many of these areas 86 China’s Ministry of Industry and Information Technology MIIT has explained that Made in China 2025 is part of a three-step strategy for China to become a world leader in advanced manufacturing Under the first step by 2025 China should “approach the level of manufacturing powers Germany and Japan during the period when they realized industrialization ” In the second step China should “enter the front ranks of second tier manufacturing powers” by 2035 In the final step China should “enter the first tier of global manufacturing powers” by 2045 at which point China will have “innovation-driving capabilities ” “clear competitive advantages ” and “world-leading technology systems and industrial systems ”87 In recent years China also issued policies specific to advanced technologies in which U S firms are market leaders Information and communications technologies have been a focal point with more and more strategies emanating from the National Informatization Development Strategy 2006-2020 such as the National Integrated Circuit Industry Development Outline the Internet 79 Made in China 2025 Key Area Technology Roadmap § 6 2 2 Made in China 2025 Key Area Technology Roadmap § 6 2 2 81 Made in China 2025 Key Area Technology Roadmap § 7 1 2 82 Made in China 2025 Key Area Technology Roadmap § 7 1 2 83 U S CHAMBER MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 6 2017 84 See AM CHAMBER OF COMMERCE IN SHANGHAI Submission Section 301 Hearing 2 Sept 28 2017 NAT’L ASS’N OF MANUFACTURERS hereinafter “NAM” Submission Section 301 Hearing 3 Sept 28 2017 WILEY REIN LLP Submission Section 301 Hearing 3-4 Sept 28 2017 BJÖRN CONRAD ET AL MERCATOR INST FOR CHINA STUDIES hereinafter “MERICS” MADE IN CHINA 2025 7 11 2016 and U S CHAMBER OF COMMERCE MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 7 15 18 2017 85 IGCC REPORT at 121 86 IGCC REPORT at 121 87 Made in China 2025 Explanation 6 The Manufacturing Power ‘Three-Step’ Strategy MINISTRY OF INDUSTRY AND INFORMATION TECHNOLOGY May 19 2015 http www miit gov cn n1146295 n1146562 n1146655 c3780688 content html see also IGCC REPORT at 47-48 80 16 I Overview Plus Plan the “Broadband China” strategy and corresponding implementation plan and the designation of next-generation information technology as a “strategic emerging industry ”88 In addition China recently announced that it will pursue an “innovation-driven” development strategy89 and that it has made breakthroughs in higher-end innovation a top priority 90 At the 19th National Congress of the CCP held in October 2017 President Xi Jinping’s remarks specifically referenced the goal of building China into a “powerful nation or power in science and technology quality aerospace the Internet and transportation” and called for “accelerating the construction of China as a manufacturing power” by “accelerating the development of advanced manufacturing industry” and “promoting the deep integration of the Internet big data and artificial intelligence with the real economy ”91 Like the MLP a decade ago newer plans such as the Made in China 2025 Notice and the various plans focused on information and communications technologies call for a wide array of Chinese government intervention and financial and other support designed to transform China into a world leader in technology While these policies and practices are not necessarily new their actual and potential effects on foreign companies and their technologies have become much more serious As James Lewis of CSIS explained in his submission to USTR What is new is that unfair trade security and industrial policies tolerable in a smaller developing economy are now combined with China’s immense government-directed investment and regulatory policies to put foreign firms at a disadvantage…China now has the wealth commercial sophistication and technical expertise to make its pursuit of technological leadership work The fundamental issue for the U S and other western nations and the IT sector is how to respond to a managed economy with a well-financed strategy to create a domestic industry intended to displace foreign suppliers 92 As detailed in Sections II through VI of this report a key part of China’s technology drive involves the acquisition of foreign technologies through acts policies and practices by the Chinese government that are unreasonable or discriminatory and burden or restrict U S commerce These acts policies and practices work collectively as part of a multi-faceted strategy to advance China’s industrial policy objectives They are applied across a broad range of sectors overlap in their use of policy tools e g the issuance of planning documents and guidance catalogues and are implemented through a diverse set of state and state-backed actors including state-owned enterprises  Section II describes the Chinese government’s use of foreign ownership restrictions such as joint venture JV requirements and foreign equity limitations other foreign 88 IGCC REPORT at 44 IGCC REPORT at 41 “This innovation-driven development strategy IDDS was officially promulgated by the Chinese authorities in May 2016 and provides a ‘top-level design and systemic plan’ for China’s innovation over next 30 years ” 90 IGCC REPORT at xiii-xiv 91 Xi Jinping Speech at the 19th CPC National Congress Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era Oct 18 2017 available in Chinese at http www gatj gov cn html 6 wjjh 17 10 3257-6 html 92 James Lewis CSIS Submission Section 301 Hearing 1 Sept 27 2017 89 17 I Overview investment restrictions and the administrative licensing and approvals process to require or pressure the transfer of technology from U S companies to Chinese entities  Section III describes how U S companies seeking to license technologies to Chinese entities must do so on non-market-based terms that favor Chinese recipients  Section IV describes how the Chinese government directs and unfairly facilitates the systematic investment in and acquisition of U S companies and assets by Chinese entities to obtain cutting-edge technologies and intellectual property and generate largescale technology transfer in industries deemed important by state industrial plans  Section V describes how the Chinese government has conducted or supported cyber intrusions into U S commercial networks targeting confidential business information held by U S firms Through these cyber intrusions China’s government has gained unauthorized access to a wide range of confidential business information including trade secrets technical data negotiating positions and sensitive and proprietary internal communications  Section VI describes other acts policies and practices of by the Chinese government to acquire foreign technologies including measures purportedly related to national security or cybersecurity inadequate intellectual property protection the Antimonopoly Law of the People’s Republic of China the Standardization Law of the People’s Republic of China and talent acquisition 18 II China’s Unfair Technology Transfer Regime for U S Companies in China A Introduction The previous section of this report detailed China’s technology drive and how it seeks to support prioritized industries and foster “national champions” by pursuing technology advancement through the acquisition and “re-innovation” of foreign technology 93 One method China uses to achieve this goal is through restrictions on foreign investment which it uses to selectively grant market access to foreign investors in exchange for commitments to transfer technology This section will detail how China uses inbound foreign ownership restrictions such as joint venture JV requirements and foreign equity limitations and the administrative licensing and approvals process to require or pressure the transfer of technology 1 Key Elements of China’s Technology Transfer Regime The evidence collected in this investigation from hearing witnesses written submissions public reports journal articles and other reliable sources indicates there are two key aspects of China’s technology transfer regime for inbound foreign investment First the Chinese government uses foreign ownership restrictions such as formal and informal JV requirements and other foreign investment restrictions to require or pressure technology transfer from U S companies to Chinese entities These requirements prohibit foreign investors from operating in certain industries unless they partner with a Chinese company and in some cases unless the Chinese partner is the controlling shareholder Second the Chinese government uses its administrative licensing and approvals processes to force technology transfer in exchange for the numerous administrative approvals needed to establish and operate a business in China These two aspects of China’s technology transfer regime are furthered by the non-transparent and discretionary nature of China’s foreign investment approvals system Prior to 2001 China often explicitly mandated technology transfer requiring the transfer of technology as a quid pro quo for market access 94 In 2001 China joined the WTO and committed not to condition the approval of investment or importation on technology transfer 95 Since then according to numerous sources China’s technology transfer policies and practices have become more implicit often carried out through oral instructions and “behind closed doors ”96 93 See Section I C See e g OFFICE OF TECH ASSESSMENT 100TH CONG OTA-ISC-3401 REP ON TECHNOLOGY TRANSFER TO CHINA 1987 OFFICE OF STRATEGIC INDUS ECON SEC BUREAU OF EXPORT ADMIN DFI INT’L U S DEPT COMMERCE U S COMMERCIAL TECHNOLOGY TRANSFER TO THE PEOPLE’S REPUBLIC OF CHINA Jan 1999 THOMAS J HOLMES ET AL FED RES BANK OF MINNEAPOLIS RES DEP’T STAFF REP 486 QUID PRO QUO TECHNOLOGY CAPITAL TRANSFERS FOR MARKET ACCESS IN CHINA 3 2015 95 China’s accession agreements include the Protocol on the Accession of the People’s Republic of China WTO Doc WT L 432 Nov 23 2001 hereinafter “Accession Protocol” and the Report of the Working Party on the Accession of China WTO Doc WT ACC CHN 49 Oct 1 2001 hereinafter “Working Party Report” China’s technology transfer commitments are contained in Accession Protocol General Provisions ¶ 7 3 and Working Party Report ¶ 203 incorporated into the Accession Protocol through ¶ 1 2 96 See e g THOMAS J HOLMES ET AL FED RES BANK OF MINNEAPOLIS RES DEP’T STAFF REP 486 QUID PRO QUO TECHNOLOGY CAPITAL TRANSFERS FOR MARKET ACCESS IN CHINA 3 2015 TAI MING CHEUNG ET AL U S 94 19 II China’s Unfair Technology Transfer Regime for U S Companies in China As the Information Technology and Innovation Foundation ITIF stated in its written submission in this investigation Chinese officials are careful not to put such requirements in writing often resorting to oral communications and informal ‘administrative guidance’ to pressure foreign firms to transfer technology 97 According to another expert Chinese measures and practices “no longer spell out the most controversial requirements in black and white Verbal instructions and requests to ‘volunteer’ one’s technology are today’s rules of the road ”98 Similarly a 2014 study of China’s foreign investment policies conducted for the European Union found that China has relied more heavily on opaque administrative processes to promote its technology transfer goals as international trade rules have limited its ability to formally codify foreign investment restraints 99 Another particular challenge is the complex relationship between China’s private sector and the government which provides both direct and indirect mechanisms by which the government may pressure foreign companies In some cases the Chinese government may directly pressure the foreign company to transfer technology but in other cases the demand may come from a Chinese partner 100 As discussed in more detail below when confronted with this latter scenario foreign companies often reasonably understand that the demand originated from the government 101 as “business decisions in China are very much influenced by the public policy objectives pursued by the State and the CCP ”102 Moreover because the Chinese partner serves as the applicant in the approval process on behalf of the JV the Chinese partner is able in many cases to control the communication channels between the foreign investor and the Chinese government authorities 103 Section IV of this report further details how the Chinese government and Chinese Communist Party CCP utilize a wide array of actors regulations and informal guidance to achieve China’s industrial policy objectives 104 CHINA ECON SEC REV COMM’N PLANNING FOR INNOVATION UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL ENERGY INDUSTRIAL AND DEFENSE DEVELOPMENT 163 2016 citing US-CHINA BUSINESS COUNCIL hereinafter “USCBC” CHINA’S STRATEGIC EMERGING INDUSTRIES POLICY IMPLEMENTATION CHALLENGES AND RECOMMENDATIONS Mar 2013 2016 USTR REPORT TO CONGRESS ON CHINA’S WTO COMPLIANCE 104 2017 97 ITIF Submission Section 301 Hearing 5-6 Oct 25 2017 98 See Covington Burling LLP Measures and Practices Restraining Foreign Investment in China prepared for the European Commission Directorate-General for Trade 63-4 Aug 2014 citing to JAMES MCGREGOR NO ANCIENT WISDOM NO FOLLOWERS THE CHALLENGES OF CHINESE AUTHORITARIAN CAPITALISM 38 2012 99 Covington Burling LLP Measures and Practices Restraining Foreign Investment in China prepared for the European Commission Directorate-General for Trade 11 Aug 2014 100 USCBC 2017 MEMBER SURVEY 9 2017 101 USCBC 2017 MEMBER SURVEY 9 2017 102 EUROPEAN COMM’N COMMISSION STAFF WORKING DOCUMENT ON SIGNIFICANT DISTORTIONS IN THE ECONOMY OF THE PEOPLE'S REPUBLIC OF CHINA FOR THE PURPOSES OF TRADE DEFENCE INVESTIGATIONS 426 SWD 2017 483 FINAL 2 39 Dec 20 2012 103 U S CHAMBER OF COMMERCE CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT IMPACT ON MARKET ACCESS NATIONAL TREATMENT AND TRANSPARENCY 38-9 Nov 2012 104 See e g Mark Wu The 'China Inc ' Challenge to Global Trade Governance 57 HARV INT’L L J 284 May 2016 “China’s economic structure involves a complex web of overlapping networks and relationships—some formal and others informal—between the state Party SOEs private enterprises financial institutions investment 20 II China’s Unfair Technology Transfer Regime for U S Companies in China The fact that China systematically implements its technology transfer regime in informal and indirect ways makes it “just as effective as written requirements but almost impossible to prosecute ”105 This difficulty is further exacerbated by the reality that foreign companies have no effective recourse in China and have been hesitant to report these informal pressures for fear of Chinese government retaliation and the potential loss of business opportunities 106 Nevertheless as shown below confidential industry surveys where companies may report their experiences anonymously make clear that they are receiving such pressure The lack of transparency in the regulatory environment the complex relationship between the State and the private sector and concerns about retaliation have enabled China’s technology transfer regime to persist for more than a decade 107 In the course of this investigation certain Chinese trade associations and law firms representing Chinese interests defended China’s technology transfer regime arguing that technology transfer decisions are products of “voluntary agreement” without “government intervention ”108 They also asserted that JV and technology transfer arrangements are distinct from broader national industrial policies and that domestic and foreign companies can choose when and whether to establish business partnerships 109 Further they stated that no Chinese laws or regulations explicitly force foreign investors to transfer technology and that the central government has instructed local governments not to require technology transfer 110 vehicles trade associations and so on ” See also EUROPEAN COMM’N COMMISSION STAFF WORKING DOCUMENT ON SIGNIFICANT DISTORTIONS IN THE ECONOMY OF THE PEOPLE'S REPUBLIC OF CHINA FOR THE PURPOSES OF TRADE DEFENCE INVESTIGATIONS 426 SWD 2017 483 FINAL 2 13 Dec 20 2012 “Therefore even though today the Chinese economy is to some extent made up of non-state actors…the decisive role of the State in the economy remains intact with tight interconnections between government and enterprises going far beyond the boundaries of SOEs in place ” 105 ITIF STOPPING CHINA’S MERCANTILISM A DOCTRINE OF CONSTRUCTIVE ALLIANCE-BACKED CONFRONTATION 18 Mar 2017 106 See U S CHAMBER OF COMMERCE CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT IMPACT ON MARKET ACCESS NATIONAL TREATMENT AND TRANSPARENCY 2 40 Nov 2012 ITIF’s submission in this investigation also illustrates how the threat of Chinese government retaliation leads U S companies to avoid seeking redress For example the ITIF submission provides that “ a top executive at a large U S plant biotechnology firm told ITIF recently of its experience in China China was dumping the chemicals for a particular herbicide the U S company sold on global markets The company confronted the Chinese agricultural minister with fact and said that it was planning to bring a complaint before the WTO The Chinese minister simply responded that if the case were brought the company would lose access to the Chinese market Needless to say the U S firm did not bring the case even as it continued to lose global market share and jobs in the U S ” ITIF Submission Section 301 Hearing 6 Oct 25 2017 107 See e g U S CHAMBER OF COMMERCE CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT IMPACT ON MARKET ACCESS NATIONAL TREATMENT AND TRANSPARENCY 38-9 Nov 2012 EUROPEAN CHAMBER OF COMMERCE CHINA MANUFACTURING 2025 15-16 2017 “For example a longstanding feature of China’s industrial policy is that foreign companies are often pushed to transfer technology as the price of market entry…Forced technology transfer is nothing new to FIEs However it is now an increasing requirement for more advanced technologies to be shared ” 108 See generally CHINA CHAMBER OF COMMERCE FOR IMPORT EXPORT OF MACHINERY ELECTRONIC PRODUCTS hereinafter “CCCME” Submission Section 301 Hearing 6 Oct 20 2017 CHINA CHAMBER OF INT’L COMMERCE hereinafter “CCOIC” Submission Section 301 Hearing 12 Sept 28 2017 109 CCCME Submission Section 301 Hearing 8-9 Sept 27 2017 110 CCOIC Submission Section 301 Hearing 124 Sept 28 2017 21 II China’s Unfair Technology Transfer Regime for U S Companies in China USTR has carefully considered these arguments and finds them unsupported by the evidence and unconvincing As set forth in detail below the weight of the evidence shows that China uses foreign ownership restrictions including joint venture requirements and equity limitations and other investment restrictions to require or pressure technology transfer from U S companies to Chinese entities The evidence further establishes that China uses discretionary and nontransparent administrative reviews and licensing processes to pressure technology transfer or force the unnecessary disclosure of sensitive technical information 2 A Persistent Problem for U S Business Due to the fact that much of China’s technology transfer regime occurs “behind closed doors ” confidential surveys provide an important source of information on how the regime works in practice These surveys make clear that China’s technology transfer regime is a persistent problem for U S companies in China particularly in high-tech sectors targeted by the Chinese government According to the US-China Business Council’s USCBC most recent member survey 19 percent of responding companies stated that in the last year they had been directly asked to transfer technology to China 111 Of these 33 percent said that the request came from a central government entity and 25 percent that it came from the local government 112 Annual surveys conducted by the American Chamber of Commerce in China AmCham China reflect a similar problem For example in a 2013 survey of 325 U S companies in various sectors more than one-third of respondents 35 percent reported that they were concerned about “de facto technology transfer requirements as a condition for market access ”113 In a 2017 survey 36 percent of respondents cited “reducing the need for us to engage in technology transfer” as one factor that would cause them to increase their investment levels in China 114 Other evidence indicates that this problem may be even more widespread than these surveys suggest For example one participant testified in the hearing for this investigation that while he was aware of these survey results his own research indicated through “many many private interviews with companies…we did not find a single instance in which companies had not felt pressure and in many cases caved into the pressure to share technology ”115 111 USCBC 2017 MEMBER SURVEY 9 2017 USCBC 2017 MEMBER SURVEY 9 2017 67 percent said the request was made directly by a Chinese company during the negotiations The survey states “ t he request most frequently comes from a Chinese partner rather than a government entity While some of these requests may be a normal part of commercial negotiations in many cases the hand of the Chinese government is behind these requests ” 113 THOMAS J HOLMES ET AL FED RES BANK OF MINNEAPOLIS RES DEP’T STAFF REP 486 QUID PRO QUO TECHNOLOGY CAPITAL TRANSFERS FOR MARKET ACCESS IN CHINA 8 2015 citing AM CHAMBER OF COMMERCE IN CHINA CHINA BUSINESS CLIMATE SURVEY REPORT 2013 114 AMCHAM CHINA 2018 CHINA BUSINESS CLIMATE SURVEY REPORT 44 2017 Of these 22 percent stated that this reduction would be somewhat significant to their investment decision 9 percent as very significant and 5 percent as extremely significant 115 Richard Ellings COMMISSION ON THE THEFT OF INTELLECTUAL PROPERTY hereinafter “IP Commission” Testimony Section 301 Hearing 37 Oct 10 2017 emphasis added 112 22 II China’s Unfair Technology Transfer Regime for U S Companies in China Moreover in sectors that are the focus of the Chinese government’s industrial policy initiatives the pressure on U S companies to form JVs and transfer technology is particularly intense For example according to AmCham China’s 2013 survey 42 percent of respondents in advanced technology sectors including aerospace automotive chemical and information technology were concerned about “de facto technology transfer requirements as a condition for market access ”116 Only 3 percent of surveyed companies reported that these technology transfer requirements were decreasing while 37 percent reported they were increasing and 26 percent that they were staying the same 117 A 2017 survey of the U S integrated circuit design and manufacturing industry conducted by the Department of Commerce’s Bureau of Industry and Security yielded similar results 25 U S integrated circuit companies responded that they will have to form JVs with Chinese entities and transfer intellectual property to obtain or maintain access to the China market 118 In 2017 these 25 integrated circuited companies accounted for more than $25 billion in total sales and over a quarter 26 percent of all integrated circuits made and sold in the United States 119 U S companies are not alone in their concerns about China’s technology transfer regime According to a 2011 public consultation process conducted by the EU the top barriers to investment in China included technology transfer requirements JV requirements foreign ownership limitations prohibitions or limitations on the scope of business investments licensing requirements procedures and regulatory approval procedures 120 B Foreign Ownership Restrictions as Used in China’s Technology Transfer Regime Foreign ownership restrictions such as JV requirements121 and foreign equity limitations are a cornerstone of China’s technology transfer regime China’s Catalogue of Industries for Guiding Foreign Investment Foreign Investment Catalogue and other rules and regulations require U S companies seeking to invest in certain industry sectors to enter into cooperative 116 AMCHAM CHINA 2013 CHINA BUSINESS CLIMATE SURVEY REPORT 10 2013 Id “N A or don’t know” responses omitted 118 U S DEP’T OF COMMERCE BUREAU OF INDUS SECURITY ASSESSMENT OF THE U S INTEGRATED CIRCUIT DESIGN AND MANUFACTURING INDUSTRY forthcoming 119 U S DEP’T OF COMMERCE BUREAU OF INDUS SECURITY ASSESSMENT OF THE U S INTEGRATED CIRCUIT DESIGN AND MANUFACTURING INDUSTRY forthcoming 120 EUROPEAN COMM’N IMPACT ASSESSMENT REPORT ON THE EU-CHINA INVESTMENT RELATIONS SWD 2013 185final 12 90 95 May 23 2013 121 The three most common corporate forms for foreign-invested entities FIEs in China are contractual joint ventures equity joint ventures and wholly foreign-owned enterprises Each of these forms has different requirements and restrictions under Chinese law See generally Law of the People’s Republic of China on ChineseForeign Contractual Joint Ventures adopted at the First Session of the Seventh NPC on Apr 13 1988 amended by the 18th Session of the Standing Committee of the Ninth NPC on Oct 31 2000 further amended Sep 3 2016 in Executive Order No 51 and Nov 7 2016 in Executive Order No 57 and Nov 4 2017 in Executive Order No 81 Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures adopted at the Second Session of the Fifth NPC on July 1 1979 amended Apr 4 1990 in Executive Order No 27 further amended Mar 15 2001 in Executive Order No 48 and Sept 3 2016 in Executive Order No 51 Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises adopted by NPC on Apr 12 1986 amended Oct 31 2000 further amended Sept 3 2016 117 23 II China’s Unfair Technology Transfer Regime for U S Companies in China arrangements with Chinese partners 122 According to submissions and testimony in this investigation China’s imposition of these requirements precludes U S companies from entering the market on their own terms and lays the foundation for the Chinese government to require or pressure technology transfer For example the U S Chamber of Commerce states in its written submission that As companies negotiate the terms of the joint venture the foreign side may be asked—or required—to transfer its technology in order to finalize the partnership Especially in instances where the Chinese partner is a state-owned or state-directed company foreign companies have limited leverage in the negotiation if they wish to access the market Although this type of technology transfer may not be explicitly mandated in a Chinese law or regulation it is often an unwritten rule for market access 123 The USCBC similarly states that JV and other investment restrictions necessarily create an “unbalanced negotiation” with respect to technology transfer Chinese companies are in an inherently stronger position since their participation is required to form a joint venture or to provide the remaining equity in restricted sectors As a consequence a request for technology transfer made by a Chinese party in a business negotiation can reasonably be interpreted by foreign parties as a requirement for the deal to be concluded 124 The National Association of Manufacturers NAM stressed the negative effects of China’s technology transfer regime on U S companies’ global competitiveness This tilting of the playing field leaves manufacturers with untenable choices they must either transfer their technology to the new China-based joint venture or they must cede the world’s fastest-growing market to foreign competitors thus harming both their shortterm growth and their long-term competitiveness 125 1 The Foreign Investment Catalogue and Technology Transfer China maintains a detailed system for administering inbound foreign investment The Foreign Investment Catalogue is a starting point for analyzing the restrictions on foreign investment in a particular industry and is an important element of China’s technology transfer regime 126 First 122 Catalogue of Industries for Guiding Foreign Investment 2017 Amendment NDRC MOFCOM Order No 4 issued June 28 2017 123 U S CHAMBER OF COMMERCE Submission Section 301 Hearing 15 Oct 3 2017 124 USCBC Submission Section 301 Hearing 6-7 Sept 28 2017 125 NAT’L ASS’N OF MANUFACTURERS hereinafter “NAM” Submission Section 301 Hearing 3 Sept 28 2017 See also Lee Branstetter Submission Section 301 Hearing 2 3 Sept 28 2017 U S companies are forced to choose between protecting their valuable technologies or losing access to a critical market If they choose to forego the Chinese market to protect their valuable intellectual property their foreign competitors exploit the market opportunity thereby inhibiting U S companies’ global competitiveness in the long-run 126 In addition to the Foreign Investment Catalogue there are thousands of other regulations rules and regulatory documents related to foreign investment that are issued by central government authorities as well as a countless local government regulations and restrictions that must be consulted to fully understand the restrictions foreign investors face in any particular sector See Covington Burling LLP Measures and Practices Restraining Foreign 24 II China’s Unfair Technology Transfer Regime for U S Companies in China issued in 1995 and most recently revised in 2017 the Foreign Investment Catalogue has historically divided industries into three basic categories 1 “encouraged ” 2 “restricted ” and 3 “prohibited ”127 Industries not listed in one of these categories generally are considered to be “permitted ” Different categories of investment generally lead to different degrees of approval scrutiny or application requirements For example foreign investments in “restricted” industries are subject to stricter government review and a case-by-case administrative approval process 128 “Encouraged” industries benefit from special preferences and from a file-for-the record system of approvals but can still be subject to investment restrictions 129 Moreover even for “encouraged” sectors stakeholders have expressed concerns based on past experiences that once China’s economy has achieved self-sufficiency in a particular industry and closed the technology gap it will impose additional requirements or restrictions in these industries 130 Since its inception the Foreign Investment Catalogue has required that investments in certain sectors take the form of a JV that the proportion of foreign equity investment in the JV be capped at a particular level that the Chinese party hold a controlling interest and imposed other restrictions 131 These arrangements may take different forms including i a requirement that the U S company enter into an equity joint venture EJV or contractual joint venture CJV with a Chinese party ii a requirement that Chinese parties must be controlling shareholders or hold Investment in China prepared for the European Commission Directorate-General for Trade 5 Aug 10 2014 reviewing 39 central government agencies that promulgated 137 328 measures affecting foreign investment that were in effect at the time of the survey 127 In 2017 a “negative list” approach was adopted under which the catalogue was divided between a list of “encouraged” sectors and a “Foreign Investment Access Negative List” Negative List which consisted of three types of industries a “restricted” b “prohibited” and c certain “encouraged” industries subject to limitations on shareholder structure or other limitations This approach is fundamentally similar to previous catalogues and merely re-categorizes the restricted and prohibited industries under the rubric of a Negative List Further the Negative List is not a comprehensive identification of all foreign investment restrictions as it is based on earlier catalogues which as described above do not comprehensively list all investments restrictions that may apply to foreign investors in China Foreign Investment Catalogue 128 See WTO Secretariat Trade Policy Review China ¶2 45-¶2 76 WT TPR S 300 May 27 2014 129 Projects in the “encouraged category” may be eligible for certain preferential policies such as customs duty preferences on the importation of certain capital goods See e g General Administration of Customs Announcement On Implementing Issues Regarding Foreign Investment Industry Guiding Catalogue amended 2017 §1 GAC 2017 Announcement No 30 issued July 17 2017 Encouraged industries subject to foreign equity restrictions are listed twice once under the encouraged category and then again under the restricted category Foreign Investment Catalogue 130 U S CHAMBER MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 27 2017 EUROPEAN CHAMBER OF COMMERCE CHINA MANUFACTURING 2025 15 2017 See also TAI MING CHEUNG ET AL U S -CHINA ECON SEC REV COMM’N PLANNING FOR INNOVATION UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL ENERGY INDUSTRIAL AND DEFENSE DEVELOPMENT 166 2016 “In cases where China has no bargaining power but wants the technology it will allow 100 percent foreign ownership since that is the only choice An example of an ‘encouraged’ investment with no JV or equity requirements is ‘IC design manufacturing of 28 nm and below large-scale digital IC manufacturing of 0 11-micron and below analog and mixed signal IC manufacturing of MEMS and compound semiconductor IC and BGA PGA CSP MCM and other advanced packaging and testing ’ This category does not specify any joint venture or Chinese controlled entity requirement ” 131 See TAI MING CHEUNG ET AL U S -CHINA ECON SEC REV COMM’N PLANNING FOR INNOVATION UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL ENERGY INDUSTRIAL AND DEFENSE DEVELOPMENT 166 2016 Foreign Investment Catalogue 25 China’s Unfair Technology Transfer Regime for U S Companies in China II the majority of shares in the venture and iii other types of restrictions on foreign ownership or control 132 Although reforms to China’s foreign investment regime have enabled other forms of investments including wholly-owned foreign enterprises WFOEs in certain sectors ownership restrictions continue to operate in many key sectors important to foreign investors including in the services agriculture extractive industries and manufacturing sectors Currently 35 sectors remain in the “restricted” category of the Foreign Investment Catalogue 133 The category includes inter alia the following sectors which are subject to equity limits and or local partner requirements see Table II 1 Table II 1 Examples of Equity Restrictions and Local Partner Requirements in China’s 2017 Foreign Investment Catalogue Sector Selection and cultivation of new varieties of crops and production of seeds Summary of Requirements Chinese party must be the controlling shareholder Exploration and development of oil and natural gas Limited to CJV or EJV Manufacturing whole automobiles Chinese party’s investment cannot be lower than 50 percent and the same foreign investor may establish no more than two JVs in China for the same kind of automobiles subject to certain exceptions Chinese party must be the controlling shareholder Manufacturing commercial aircraft Construction and operation of nuclear power plants Chinese party must be the controlling shareholder Value-added Telecommunications Services Foreign investment cannot exceed 50 percent excluding e-commerce and is limited to WTO commitments Note that China classifies a broad range of internet and technology-related services under this sector Basic telecommunications services Medical institutions Chinese party must be the controlling shareholder and foreign investment is limited to WTO commitments Foreign financial institution investment cannot exceed 20 percent or 25 percent depending on how the investment is structured Limited to CJV or EJV Surveying and mapping companies Chinese party must be the controlling shareholder Banks Source Foreign Investment Catalogue 2017 Amendment By promoting foreign investment in certain industries while limiting or altogether prohibiting investment in others the Chinese government uses its foreign investment regime to channel 132 133 Foreign Investment Catalogue Sectors in the “restricted” category are described in Appendix D to this Report 26 II China’s Unfair Technology Transfer Regime for U S Companies in China foreign investment into industries of its choosing to support policy objectives 134 For example the U S Chamber of Commerce in a March 2017 report on the Made in China 2025 initiative notes that foreign investment restrictions impact companies in the plan’s targeted industries These restrictions either block opportunities for foreign companies to operate in the market or in some cases create a de facto technology transfer requirement to the Chinese partner as a precondition for market access 135 These technology transfer pressures occur not only in the high-tech sectors targeted by Made in China 2025 but also in more traditional sectors in which China has sought to obtain advanced technologies through the imposition of JV requirements The shale gas industry provides one example of how the Foreign Investment Catalogue is used to channel investment to support industrial policy objectives In this industry China seeks to acquire foreign technologies in order to unlock the potential of its shale reserves located in geologically complex areas and has explicitly stated in its industrial policies that “cooperation” with foreign companies should be used as one way to introduce this technology to China For example China’s Shale Gas Development Plan 2011-2015 encourages international cooperation to “absorb and emulate mature advanced technologies from abroad and create core technologies for exploration and development that possess ‘Chinese characteristics ’”136 In addition China’s Shale Gas Industrial Policy reiterates that China will encourage domestic enterprises to engage with foreign enterprises “that possess advanced shale gas technology” in technical cooperation in order to “introduce”137 shale gas technology and operational experience 138 Accordingly oil and natural gas exploration and development continue to be subject to a JV requirement in the Foreign Investment Catalogue 139 As discussed in more detail in Section V B of this report China has also used cyber intrusions to obtain technology and sensitive commercial information from U S companies operating in the oil and gas sectors underscoring how the Chinese government uses a range of tools at its disposal to achieve its industrial policy objectives and to effect the transfer of technology from U S companies Foreign companies typically prefer to invest in China through a WFOE rather than a JV if the option is available This preference often stems from concerns about the loss of control over their valuable technologies 140 In a survey of 1 000 companies conducted on behalf of the EU only 12 percent of respondents reported they would have chosen their current JV structure in the USTR 2016 USTR REPORT TO CONGRESS ON CHINA’S WTO COMPLIANCE 103-4 2017 see also U S CHAMBER MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 26 2017 EUROPEAN CHAMBER OF COMMERCE CHINA MANUFACTURING 2025 15 2017 135 U S CHAMBER MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 26 2017 136 Notice on Issuing the Shale Gas Development Plan 2011-2015 Sec 5 1 2 NDRC MoF MLR NEA Fa Gai Neng Yuan 2012 No 612 issued Mar 13 2012 137 See Section I C for an explanation of China’s IDAR strategy and the concept of “introducing” technology from abroad 138 Shale Gas Industry Policy art 9 NEA 2013 Order No 5 issued Oct 22 2013 The policy at art 10 also encourages enterprises to participate in shale gas exploration and development through joint ventures 139 Foreign Investment Catalogue 140 INTERCHINA CONSULTING ESTABLISHMENT OF A JOINT VENTURE IN CHINA 5 June 2011 “Many foreign investors have discovered through hard found experience that one of the greatest exposures to IPR infringement is by having a Chinese partner ” EUROPEAN COMM’N IMPACT ASSESSMENT REPORT ON THE EU-CHINA INVESTMENT RELATIONS SWD 2013 185final 12 95-6 May 23 2013 134 27 II China’s Unfair Technology Transfer Regime for U S Companies in China absence of JV requirements Most 52 percent would have preferred a fully-owned business and 32 percent wanted a greater ownership stake in the JV than permitted 141 The risk of technology loss is exacerbated when the Chinese partner in the JV operation maintains other factories and workers that compete with the JV operation 142 The employees of the JV often are recruited from or have ties to the Chinese partner’s existing operations 143 Under these conditions there is a considerable likelihood that the JV’s technology and knowhow will leak either through “unintentional osmosis or through intentional diversion ”144 In contrast a WFOE has more control over its operations and can sometimes minimize operational decisions that create technology risks 145 Nevertheless WFOEs also face various technologyrelated pressures from the Chinese government as part of China’s numerous administrative review and licensing processes as described in more detail below 146 In this investigation the Intellectual Property Law Section of the American Bar Association noted that many U S companies—including American Superconductor Corporation AMSC Corning DuPont Eli Lilly and General Motors—have sued for the misappropriation of trade secrets by JV partners employees and others in Chinese courts 147 The U S International Trade Commission also has been a frequent forum for U S companies asserting trade secret misappropriation claims based on conduct by JV partners and others in China including SI Group Fellowes and Manitowoc Company 148 In response to these concerns defenders of China’s technology transfer regime argue that China has opened its economy to foreign investment in several respects such as the introduction of the “Negative List” system in which foreign investment in all sectors is permitted unless it is expressly included on a negative list 149 Despite these changes substantial restrictions on foreign EUROPEAN COMM’N IMPACT ASSESSMENT REPORT ON THE EU-CHINA INVESTMENT RELATIONS SWD 2013 185final 12 13 May 23 2013 142 OWEN D NEE JR SHAREHOLDER AGREEMENTS AND JOINT VENTURES IN CHINA 583 Thomson Reuters ed 2016 see also INTERCHINA CONSULTING ESTABLISHMENT OF A JOINT VENTURE IN CHINA 5 June 2011 ITIF Submission Section 301 Hearing 10 Oct 25 2017 stating that “ a nother way China acquires technology and intellectual property is to steal it ” 143 OWEN D NEE JR SHAREHOLDER AGREEMENTS AND JOINT VENTURES IN CHINA 583 Thomson Reuters ed 2016 144 OWEN D NEE JR SHAREHOLDER AGREEMENTS AND JOINT VENTURES IN CHINA 583 Thomson Reuters ed 2016 145 OWEN D NEE JR SHAREHOLDER AGREEMENTS AND JOINT VENTURES IN CHINA 583 Thomson Reuters ed 2016 146 See infra Section II C 147 AM BAR ASS’N SECTION OF IP LAW hereinafter “ABA Section” Submission Section 301 Hearing 3 Sept 27 2017 See also Daniel C K Chow Navigating the Minefield of Trade Secrets Protection in China 47 VAND J TRANSNAT’L L 1007 1009 2014 Paul Ranjard Benoit Misonne Study 12 Exploring China’s IP Environment in Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations 15 2007 describing a “common scenario” of IP violations by Chinese JV partners with competing businesses that use technology obtained from the foreign JV partner 148 ABA IP Law SECTION Submission Section 301 Hearing 3 Sept 27 2017 149 Opinions on the Implementation of the Market Access Negative List System § 1 1 State Council Guo Fa 2015 No 55 issued Oct 2 2015 effective from Dec 1 2015 to Dec 31 2017 CCOIC Submission Section 301 Hearing 33 Sept 26 2017 CHINA INTELLECTUAL PROPERTY LAW hereinafter “CIPL” Submission Section 301 Hearing 40 Sept 27 2017 141 28 II China’s Unfair Technology Transfer Regime for U S Companies in China investment remain First China continues to use an approach that is fundamentally similar to previous versions of the Foreign Investment Catalogue in which many “restricted” and “prohibited” investments are included under the “Negative List” 150 During the period of this investigation key sectors remain subject to JV and other investment restrictions 151 Moreover even if China dropped its JV and other foreign ownership requirements foreign investors would still continue to face pressures to transfer technology or disclose technical information through China’s licensing and administrative approvals regime detailed in Section II C below 2 Illustrative Examples of China’s Use of Investment Restrictions to Pressure Technology Transfer While companies from the United States and other advanced economies have long faced JV requirements and other limits on control over their technologies in China the most intensive technology transfer pressures often arise in sectors that align with the Chinese government’s industrial policy objectives For example studies commissioned by the European Commission have found that in key sectors including machinery and environmental technologies European companies have to enter into partnerships with Chinese state-owned enterprises SOEs and acquiesce to technology transfer demands to access the market or bid on government projects 152 Highlighted below for purposes of illustration are examples of technology transfer requirements or pressures imposed by the Chinese government in the automotive and aviation sectors a Auto Manufacturing and New Energy Vehicles When China initially opened the auto manufacturing sector to foreign investment its goal was to use the transfer of technology from U S and other foreign auto makers to modernize SOEs in the sector 153 To accomplish this goal China has long required U S and other foreign car makers to enter into JVs where non-Chinese ownership is capped at 50 percent 154 China’s strategy of leveraging the technology of foreign automakers through JV requirements to grow its indigenous innovation capability has been called the “Changan Model” by Chinese U S CHAMBER OF COMMERCE Submission Section 301 Hearing 14 Oct 3 2017 China’s latest changes to its investment regime have provided “…little in the way of comprehensive and meaningful openings to foreign investors ” 151 See Appendix D 152 Joachim Ihrcke Krystina Becker Study 1 Machinery in Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations 33 2007 Celine Louche Angus Lambkin Padraig Oliver Study 11 Sustainable Technologies and Services in Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations 66 2007 153 2015 U S -CHINA ECON SEC REV COMM’N ANN REP 84-5 2015 KATHERINE KOLESKI U S -CHINA ECON SEC REV COMM’N CHINA’S 13TH FIVE-YEAR PLAN 153 Feb 14 2017 see also USITC INV NO 332-519 CHINA EFFECTS OF INTELLECTUAL PROPERTY INFRINGEMENT AND INDIGENOUS INNOVATION POLICIES ON THE U S ECONOMY 5-33 2011 154 2015 U S -CHINA ECON SEC REV COMM’N ANN REP 84 2015 KATHERINE KOLESKI U S -CHINA ECON SEC REV COMM’N CHINA’S 13TH FIVE-YEAR PLAN 153 Feb 14 2017 see also USITC INV NO 332-519 CHINA EFFECTS OF INTELLECTUAL PROPERTY INFRINGEMENT AND INDIGENOUS INNOVATION POLICIES ON THE U S ECONOMY 5-33 2011 150 29 II China’s Unfair Technology Transfer Regime for U S Companies in China government entities 155 This model refers to the 50 50 JV entered into by a U S auto manufacturer and Chongqing Changan Automobile Changan a state-owned company ultimately controlled by the State-owned Assets Supervision and Administration Commission of the State Council SASAC through China South Industries Group 156 A research division under the State Council lauded the “Changan Model” as an example of China’s Introduce Digest Absorb Re-innovate IDAR approach157 to technology development through the “introduction of technology and the digestion and re-innovation of technology ”158 According to an article on the SASAC website the model’s advantages include Changan’s control of the JV’s core production technology the development of domestic innovation capabilities through control of that core technology and the gradual upgrading of the domestic brand 159 As China gained advanced auto manufacturing technology through JVs and sought to promote its own domestic brands foreign automakers have found their industry placed in increasingly restrictive sections of the Foreign Investment Catalogue Thus the Foreign Investment Catalogue “encouraged” the “manufacturing of complete automobiles” until 2010 “permitted” it from 2011-2014 and “restricted” it in 2015 as China’s domestic capability grew 160 Technology transfer pressures have intensified as China has sought to develop expertise in the manufacture of new energy vehicles NEVs which includes plug-in hybrids electric batteries and fuel cell vehicles The NEV sector was specifically targeted by the Chinese government in 2010 following the release by the State Council of the Decision on Accelerating the Development of Strategic Emerging Industries which designated NEVs as one of the seven “strategic emerging industries” selected for accelerated development In 2012 the State Council released the Energy-Saving and New-Energy Automotive Industry Development Plan 2012-2020 NEV Plan 161 which set forth an industrial development blueprint for NEVs calling for the 155 “Changan Model” Radiates at the China Auto Industry Indigenous Innovation Summit Chinese SASAC Nov 7 2006 http www sasac gov cn n2588025 n2588124 c3877435 content html last visited Nov 29 2017 156 CHONGQING CHANGAN AUTOMOBILE CO LTD 2016 ANNUAL REPORT 42 Chinese 2016 available at http www chinasouth com cn 1144 html last visited Dec 2 2017 China Southern Industries Group is a major Chinese arms manufacturer SASAC is a part of the Chinese government directly under the State Council tasked with overseeing China’s SOEs 157 See Section I C for an explanation of China’s IDAR strategy 158 Development Research Center of the State Council Changan Innovation Model Evokes Interest Chinese CHINA ENTERPRISE CONFEDERATION CHINA ENTERPRISE DIRECTORS ASSOCIATION Nov 14 2006 available at http info cec-ceda org cn jx pages 20061114_32467_6_2 html last visited Nov 29 2017 159 Changan Model” Radiates at the China Auto Industry Indigenous Innovation Summit Chinese SASAC Nov 7 2006 available at http www sasac gov cn n2588025 n2588124 c3877435 content html last visited Nov 29 2017 160 See 2015 U S -CHINA ECON SEC REV COMM’N ANN REP 85 2015 See also Catalogue of Industries for Guiding Foreign Investment National Planning Commission National Economic and Trade Commission Ministry of Foreign Economics and Trade Order No 21 issued Mar 4 2002 Catalogue of Industries for Guiding Foreign Investment amended 2004 NDRC MOFCOM Order No 24 issued Nov 30 2004 Catalogue of Industries for Guiding Foreign Investment amended 2007 NDRC MOFCOM Order No 57 issued Oct 31 2007 Catalogue of Industries for Guiding Foreign Investment amended 2011 NDRC MOFCOM Order No 12 issued Dec 24 2011 Catalogue of Industries for Guiding Foreign Investment amended 2015 NDRC MOFCOM Order No 22 issued Mar 10 2015 Catalogue of Industries for Guiding Foreign Investment amended 2017 NDRC MOFCOM Order No 4 issued June 28 2017 161 Energy-Saving and New-Energy Automotive Industry Development Plan 2012-2020 § 6 2 2 State Council Guo Fa 2012 No 22 issued June 28 2012 hereinafter “NEV Plan” 30 II China’s Unfair Technology Transfer Regime for U S Companies in China establishment of numerous regulations and subsidy programs to support domestic R D manufacturing and utilization of NEVs The NEV Plan sets a target of achieving cumulative production and sales volume of 5 million NEV units by 2020 162 A “basic principle” of the NEV Plan is to “expedite the formation of technology standards and brands using indigenous intellectual property ”163 China’s focus on developing its domestic capacity to produce NEVs was recently reconfirmed with the sector’s inclusion in the Made in China 2025 Key Area Technology Roadmap Made in China 2025 Roadmap which calls for inter alia indigenous NEVs to comprise 70 percent of domestic NEV sales by 2020 and 80 percent by 2025 164 Foreign NEV producers seeking to sell their products in China face pressure to produce their automobiles in China with a JV partner rather than exporting them to China due to a range of Chinese policies including steep import tariffs165 and subsidies available for domesticallyproduced NEVs 166 as well as a new NEV credit system 167 These pressures to produce NEVs locally work in tandem with China’s JV requirements to elicit the transfer of technology from foreign automakers to domestic Chinese automakers Specifically market access rules issued in 2009 by the Ministry of Industry and Information Technology MIIT which applied to all enterprises that manufactured NEVs in China for use in China168 and were a condition to be eligible for certain NEV preference programs 169 required that NEV JVs hold intellectual property rights in one of three key NEV technologies batteries drive systems or control systems 170 In effect this requirement forced foreign NEV 162 NEV Plan § 3 2 1 NEV Plan § 2 2 164 Made in China 2025 Key Area Technology Roadmap National Strategic Advisory Committee on Building a Powerful Manufacturing Nation issued Oct 2015 165 Imported passenger vehicles are generally subject to a 25 percent tariff rate See Customs Import and Export Tariff of the People’s Republic of China 2017 166 The Chinese government provides subsidies to NEV manufacturers in connection with their sales of NEVs to consumers in China In the current phase of the program the central government subsidy amount is based primarily upon vehicle range and is capped at CNY 44 000 $6 500 per vehicle In addition local governments are allowed to offer a subsidy of up to 50 percent of the value of the central government subsidy Notice on Adjusting Fiscal Subsidy Policies for Promoting the Expanded Use of NEVs MOF MOST MIIT NDRC Cai Jian 2016 No 958 Dec 30 2016 Eligibility requirements for these subsidies are described below in more detail 167 The NEV credit system requires all automakers selling vehicles in China to generate by 2018 a certain portion of their production and imports from NEVs in order to generate “NEV credits” or be subject to penalties See Provisional Measures for Administration of the NEV Fuel Use and Credit System art 36 MIIT MOF MOFCOM General Administration of Customs and General Administration of Quality Supervision Inspection and Quarantine 2017 Order No 44 issued Sept 27 2017 effective Apr 1 2018 see also ITIF Submission Section 301 Hearing 6 Oct 25 2017 168 Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products art 2 MIIT 2009 Order No 44 effective July 1 2009 169 NEV models that satisfy the market access rules were published in a catalogue See Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products art 8 MIIT 2009 Order No 44 effective July 1 2009 Only NEV models listed in the catalogue were eligible for certain subsidies See Notice on Developing Energy Efficient and New Energy Vehicle Demo Promotion Pilot Work § 3 art 7 1 MOST MOF Cai Jian 2009 No 6 issued Jan 23 2009 See also Notice on New Energy Vehicle Expanded Use Fiscal Support Policies for 2016-2020 § 1 2 MOF MOST MIIT NDRC Cai Jian 2015 No 134 issued Apr 22 2015 170 Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products MIIT 2009 Order No 44 effective July 1 2009 Appendix 2 Requirement 5 required the NEV manufacturer “possess intellectual property at least rights to make design changes or usage rights for the mastered core technology ” See 163 31 II China’s Unfair Technology Transfer Regime for U S Companies in China manufacturers to transfer their valuable technologies to the NEV JV which they do not control in order to gain market access 171 The pressure on NEV manufacturers to transfer core NEV technology to their JVs in China has intensified over the last year New market access rules issued by MIIT in 2017 which also apply to all enterprises that manufacture NEVs in China for use in China172 and are a condition to be eligible for certain NEV preference programs 173 impose an even more onerous standard These rules require that NEV manufacturers “master” the development and manufacturing technology for a complete NEV rather than just one of the three key technologies listed in the 2009 market access rules and possess key R D capacities 174 As foreign automaker investment in China must be through a JV in which the foreign company holds no more than 50 percent equity the foreign automaker effectively must transfer a high degree of key technologies and components to the JV in order for the JV to acquire mastery of the manufacturing process including electronic and electrical control systems on-board energy systems powertrains and dynamic coupling equipment 175 Several submissions from U S trade associations pointed to China’s NEV rules as evidence of China’s unfair technology transfer regime with one trade association stating in hearing testimony that China’s NEV rules present “a clear case in the electric vehicle sector that you’re simply not going to be able to sell that product in China unless that local partner has mastered the ability to leverage the technology and take it to produce it going forth ”176 also TAI MING CHEUNG ET AL U S -CHINA ECON SEC REV COMM’N PLANNING FOR INNOVATION UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL ENERGY INDUSTRIAL AND DEFENSE DEVELOPMENT 235-6 2016 U S CHAMBER Submission Section 301 Hearing 16 Oct 3 2017 See also Keith Bradsher Hybrid in a trade squeeze NEW YORK TIMES Sept 6 2011 reporting that the Chinese government was refusing to let GM’s electric vehicle the Chevrolet Volt qualify for certain subsidies unless GM agreed to transfer the technology for “one of the Volt’s three main technologies” electric motors electronic controls or power storage to a JV in China These subsidies were reportedly “crucial” for allowing electric vehicles to sell in meaningful quantities Ben Klayman GM SAIC to develop electric vehicles in China REUTERS Sept 20 2011 reporting that GM and its Chinese partner SAIC Motor Corp signed an agreement that they would build electric vehicles that would qualify for subsidies noting that as the Volt was not built in China it did not qualify for them 171 TAI MING CHEUNG ET AL U S -CHINA ECON SEC REV COMM’N PLANNING FOR INNOVATION UNDERSTANDING CHINA’S PLANS FOR TECHNOLOGICAL ENERGY INDUSTRIAL AND DEFENSE DEVELOPMENT 236 2016 citing Sabrina Howell Henry Lee Adam Heal HARVARD KENNEDY SCHOOL BELFER CENTER LEAPFROGGING OR STALLING OUT ELECTRIC VEHICLES IN CHINA May 2014 172 Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products art 2 MIIT 2017 Order No 39 effective July 1 2017 173 As with the 2009 rules NEV models that satisfy the market access rules are published in a catalogue and only those NEV models listed in the catalogue are eligible for certain subsidies Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products art 14 MIIT 2017 Order No 39 effective July 1 2017 Notice on New Energy Vehicle Expanded Use Fiscal Support Policies for 2016-2020 § 1 2 MOF MOST MIIT NDRC Cai Jian 2015 No 134 issued Apr 22 2015 174 Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products art 5 3 app 1 MIIT 2017 Order No 39 effective July 1 2017 see also U S CHAMBER Submission Section 301 Hearing 16 Oct 3 2017 175 Provisions on the Administration of Access for New Energy Vehicle Manufacturers and Products art 5 3 app 1 MIIT 2017 Order No 39 effective July 1 2017 176 Stephen Ezell ITIF Testimony Section 301 Hearing 38-39 Oct 10 2017 see also U S CHAMBER Submission 16 Oct 3 2017 U S CHAMBER MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 27 2017 32 II China’s Unfair Technology Transfer Regime for U S Companies in China b Aviation The state is the dominant force on the demand-side in many industries in China both through direct purchases made by the central and local governments and through purchases made by SOEs which account for a large share of purchasing decisions 177 According to one hearing participant “often an implicit part of the deal of whether or not a company has its product or good chosen and purchased is whether there’s going to be a transfer of technology concomitant with that sale ”178 Similarly AmCham China’s 2013 White Paper on Civil Aviation states “many US companies possess intellectual property IP that serves as their source of competitiveness and profitability yet they are sometimes required implicitly or explicitly to transfer such IP to their JV partners” 179 In the aviation industry China uses its purchasing power to require JVs and technology transfer in exchange for two types of business opportunities– the sale of commercial aircraft to China’s state-owned airlines and the sale of aircraft components to Chinese-made aircraft The fact that China’s three largest airlines – AirChina China Eastern and China Southern – are all state-owned and account for the vast majority of aircraft purchases provides the Chinese government with a significant degree of leverage over foreign aircraft makers 180 Purchases of commercial aircraft by China’s state-owned airlines require approval by the Chinese government 181 According to industry experts and participants China uses its leverage to maintain a balance between purchases of foreign aircraft182 and to pressure them to form JVs with Chinese companies and localize production 183 China is effectively able to exert this pressure over aircraft manufacturers because of the size of China’s commercial aircraft The European Chamber of Commerce in China in 2011 estimated that China’s government procurement market including SOEs ranges from 12 percent to 20percent of China’s GDP EU CHAMBER OF COMMERCE IN CHINA PUBLIC PROCUREMENT IN CHINA EUROPEAN BUSINESS EXPERIENCES COMPETING FOR PUBLIC CONTRACTS IN CHINA 16 Apr 2011 178 Stephen Ezell ITIF Testimony Section 301 Hearing 38 Oct 10 2017 179 AMCHAM CHINA 2013 WHITE PAPER 188 2012 180 See KEITH CRANE ET AL RAND THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING 27 2014 181 See e g CAAC Notice Regarding the Report on Civil Aviation System Management System Reform State Council Guo Fa 1985 No 3 Issued Dec 3 1984 See also Yan Yan Secrets of “Elderly” Aircraft PEOPLE’S DAILY Apr 6 2015 http paper people com cn gjjrb html 2015-04 06 content_1550497 htm last visited Dec 8 2017 for a description of the government approval process for purchasing and leasing aircraft in China 182 This problem has been widely discussed in industry and government fora including in two reports commissioned by the U S -China Economic and Security Review Commission which explain how the Chinese government leverages purchases of aircraft in exchange for agreements that it hopes will lead to technology transfers into China’s aviation industry See e g KEITH CRANE ET AL RAND THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING 2014 ROGER CLIFF CHAD J R OHLANDT DAVID YANG RAND READY FOR TAKEOFF CHINA’S ADVANCING AEROSPACE INDUSTRY 38 Mar 2011 183 Owen Herrnstadt INT’L ASS’N OF MACHINISTS AEROSPACE WORKERS hereinafter “IAM” Testimony Section 301 Hearing 28-9 Oct 10 2017 KEITH CRANE ET AL RAND THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING 29 2014 The Impact of International Technology Transfer on American Research and Development Hearing Before the House Committee on Science Space and Technology Subcommittee on Investigations and Oversight 112th Cong 8 2012 Statement of Robert D Atkinson 177 33 II China’s Unfair Technology Transfer Regime for U S Companies in China market 184 coupled with required government approvals of aircraft purchases by state-owned airlines and fierce competition for a limited number of government-approved sales China similarly uses its purchasing power to foster the development of a domestic supply chain for Chinese-made aircraft particularly the C919 which will be China’s first “homegrown” large commercial aircraft 185 Industry observers have described the purchase order process for the C919 as “state directed ” “coerced ” and “choreographed” by the central government 186 Within this process JVs are used as a key mechanism for obtaining the technology needed to support the development of a domestic supply chain for Chinese-made aircraft Chinese government officials have clearly communicated to foreign firms in the commercial aviation manufacturing industry that their business in China would be much more likely to enjoy success if they are seen as a “friend of China ” Companies can demonstrate this by setting up local production facilities bringing in technologies or participating in the C919 project 187 Specifically the Commercial Aircraft Corporation of China COMAC a centrally-controlled SOE 188 has made clear that foreign suppliers to the C919 program must enter into JVs with Chinese suppliers to participate in tenders for key components and systems 189 This pressure is particularly prevalent in tenders for high-tech functions where Chinese capabilities are lagging The International Air Transport Association estimates that China’s aviation market will reach 1 3 billion passengers by 2035 compared to only 1 1 billion in the U S market Based on these projections some estimates predict that Chinese airlines will need to purchase 6 810 aircraft worth more than $1 trillion by 2035 Press Release International Air Transport Association IATA Forecasts Passenger Demand to Double Over 20 Years Oct 18 2016 Boeing lifts long-term outlook for China plane demand to $1 trillion REUTERS Sept 13 2016 185 This problem has been widely discussed in industry and government fora including in two reports commissioned by the U S -China Economic and Security Review Commission which explain how the Chinese government leverages purchases of aircraft in exchange for agreements that it hopes will lead to technology transfers into China’s aviation industry See e g KEITH CRANE ET AL RAND THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING 2014 ROGER CLIFF CHAD J R OHLANDT DAVID YANG RAND READY FOR TAKEOFF CHINA’S ADVANCING AEROSPACE INDUSTRY 38 Mar 2011 186 Steve Wilhelm Mighty 737 Has Rivals on its Tail—and not Just Airbus PUGET SOUND BUSINESS JOURNAL Aug 17 2012 The Enduring Jetliner Duopoly AEROSPACE AMERICA Oct 2012 C919 May Suffer Order Bottleneck over Next 4 Yrs SINOCAST Sept 20 2012 National Priority COMAC Is Behind Schedule on C919 Supplier Selection but Has State Directed Orders in the Bag AVIATION WEEK SPACE TECHNOLOGY June 28 2010 Alexey Komarov Michael A Taverna Growing Pains AVIATION WEEK SPACE TECHNOLOGY Nov 22 2010 187 KEITH CRANE ET AL RAND THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING 31 2014 188 See List of Central Enterprises Chinese ASSET SUPERVISION AND ADMINISTRATION COMMISSION OF THE CHINESE STATE COUNCIL available at http www sasac gov cn n2588035 n2641579 n2641645 index html last visited Jan 7 2018 189 Why the “Main Manufacturer – Supplier” Model Chinese COMMERCIAL AIRCRAFT CORPORATION OF CHINA COMAC June 24 2013 http www comac cc xw mtjj 201306 24 t20130624_941203 shtml last visited Dec 11 2017 “As a result of the drive to develop domestic industry during the supplier bidding process COMAC has explicitly put forward that for five systems including avionics it seeks technological advancements and at the same time requires the establishment of joint ventures with domestic suppliers build-out of R D integration production and assembly and testing capabilities for system-level products as well as the formation of a complete set of batch-production and customer service capabilities Concurrently COMAC has supported the participation of domestic suppliers in system-level and equipment-level R D cooperation and encouraged domestic enterprises and institutions to cooperate with foreign suppliers in the form of subcontracted production to participate in research and procurement projects for other large aircraft systems and equipment ” 184 34 II China’s Unfair Technology Transfer Regime for U S Companies in China such as advanced materials and flight control systems 190 A 2015 press statement issued by COMAC explains that it selected sixteen leading international suppliers and it pushed for these suppliers to partner with domestic enterprises to develop key technologies for the C919 As a result these sixteen JVs have “improved the overall level of China’s aerospace R D and manufacturing through technology transfer diffusion and spillover ”191 AmCham China’s 2012 White Paper on Civil Aviation makes clear how China’s technology transfer regime puts pressure on U S aviation companies Indigenous innovation industrial policy in the aerospace sector is forcing US companies to form joint ventures JV or localize manufacturing in order to participate in domestic aircraft programs such as the C919 Rather than being market-driven these JVs are often with the Aviation Industry Corporation of China AVIC or COMAC designated partners… Additionally many US companies possess intellectual property that serves as the source of their competitiveness and profitability yet they are being forced to transfer their intellectual property in order to participate in this sector It is challenging enough for companies to manage a successful JV when they choose their own JV partner When JV partners are designated by an outside party the difficulty of running a successful JV increases further 192 In this investigation the International Association of Machinists and Aerospace Workers IAM criticized U S aviation companies for responding to this pressure by transferring certain technologies and production to China 193 Other submissions stated however that aviation companies face few realistic alternatives even if U S companies did not accede those from other countries would do so to and gain a critical competitive advantage 194 Another submission put the matter more starkly A ‘voluntary’ technology transfer takes place but one that is only voluntary in the sense that the business transactions engaged in by the fictional gangster of the Godfather series Vito Corleone were voluntary China is effectively making an offer multinationals cannot refuse Once Chinese producers are able to produce commercial aircraft the state-owned airlines can be induced to buy them even if they lag multinational products in terms of reliability or performance Shut out of the world’s largest market for their product multinational players are forced to shrink export opportunities are lost and the leading firms have fewer resources to invest in the next generation of products ”195 C Administrative Review and Licensing Processes as Used in China’s Technology Transfer Regime KEITH CRANE ET AL RAND THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING at 31 2014 191 The C919 First Large Passenger Plane Comes Off General Assembly Line Xi Jinping Issues Important Directive Premier Li Keqiang Issues Comments Ma Kai and Han Zheng Attend the Ceremony Chinese COMAC Nov 2 2015 http www comac cc xwzx gsxw 201511 02 t20151102_3031037 shtml last visited Dec 11 2017 192 AMCHAM CHINA 2012 WHITE PAPER 190 2012 193 IAM Submission Section 301 Hearing 1 Sept 29 2017 194 Lewis Submission Section 301 Hearing 3 Sept 27 2017 195 Lee Branstetter Submission Section 301 Hearing 2 Sept 28 2017 190 35 II China’s Unfair Technology Transfer Regime for U S Companies in China China also uses its administrative review and licensing processes to force the disclosure of sensitive technical information and to achieve its technology transfer objectives China maintains numerous administrative review and licensing processes that companies must comply with before establishing or expanding operations or offering products or services in the China market 196 These review and licensing processes which occur in agencies at the central provincial and municipal levels often are used as an opportunity to require technology transfer 197 Vaguely worded provisions and uncertainty about the applicable rules provide Chinese authorities with wide discretion to use administrative processes to pressure technology transfer restrict investments to protect domestic competitors or otherwise act in furtherance of industrial policy objectives 198 1 Technology Transfer Pressure in Administrative Approvals and Licensing Foreign investment in China requires obtaining numerous government approvals depending on the terms of the investment and the industry and location in which the investment occurs For instance a foreign investment may be required to obtain 1 investment approval from the Ministry of Commerce MOFCOM or its local counterpart 2 project approval from the National Development and Reform Commission NDRC its local counterpart or the State Council 3 national security and 4 anti-monopoly approval by MOFCOM and 5 local approvals for site-related requirements 199 At each stage of the approval process vaguely worded provisions provide government officials with significant discretion to impose technology transfer requirements For example China’s regulations governing JVs expressly state that equity joint ventures should raise China’s level of science and technology 200 Moreover China’s JV regulations stipulate that MOFCOM in conducting its approval review of an EJV or CJV must consider inter alia whether the 196 USCBC UPDATE LICENSING CHALLENGES AND BEST PRACTICES IN CHINA 2 Jan 2014 USCBC Submission Section 301 Hearing 4 Sept 28 2017 U S CHAMBER Submission Section 301 Hearing 17 Oct 3 2017 misuse of administrative license procedures provides the opportunity for a company’s trade secrets to be put at risk of unnecessary disclosure U S DEP’T OF STATE INVESTMENT CLIMATE STATEMENT 6 2017 Covington Burling LLP Measures and Practices Restraining Foreign Investment in China prepared for the European Commission Directorate-General for Trade 65 Aug 2014 198 USCBC Submission Section 301 Hearing 4 Sept 28 2017 U S CHAMBER Submission Section 301 Hearing 17 Oct 3 2017 misuse of administrative license procedures provides the opportunity for a company’s trade secrets to be put at risk of unnecessary disclosure U S DEP’T OF STATE INVESTMENT CLIMATE STATEMENT 6 2017 Covington Burling LLP Measures and Practices Restraining Foreign Investment in China prepared for the European Commission Directorate-General for Trade 65 Aug 2014 U S CHAMBER MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 27-29 33 2017 199 See generally U S CHAMBER OF COMMERCE CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT IMPACT ON MARKET ACCESS NATIONAL TREATMENT AND TRANSPARENCY Nov 2012 see also JAMES M ZIMMERMAN CHINA LAW DESKBOOK 4th ed 2014 In 2016 some MOFCOM approvals were replaced with a record filing requirement but MOFCOM approval is still required for those industries listed on the Negative List and all FIEs are still subject to national security or anti-monopoly reviews where applicable 200 Regulations for the Implementation of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures art 3 State Council Guo Fa 1983 No 148 issued Sep 20 1983 effective Sep 20 1983 amended Jan 15 1986 in Guo Fa 1986 No 6 further amended Dec 21 1987 in Guo Fa 1987 No 110 Jul 22 2001 in Order of the State Council No 311 Jan 8 2011 in Order of the State Council No 588 and Feb 19 2014 in Order of the State Council No 648 197 36 II China’s Unfair Technology Transfer Regime for U S Companies in China investment is consistent with China’s national economic development needs or industrial policy goals respectively 201 In addition China imposes administrative licensing202 requirements on more than 100 different business activities such as food and drug production mining or telecommunications services for all enterprises in China 203 Even if a foreign investment in a particular industry is technically permitted a foreign invested enterprise FIE must still obtain an industry-specific license in order to conduct these activities 204 The specific requirements and approval timelines vary widely depending on the industry at issue For heavily regulated industries the industry regulator review process can take more than a year 205 The US Chamber of Commerce has highlighted how the Chinese government uses its discretion in the review process to apply vague and unwritten rules in a selective and non-transparent manner The relatively opaque nature of the inbound FDI approval processes enables China’s investment approval authorities to favor domestic competitors over foreign investors should they so desire without leaving a paper trail of discriminatory written regulations that could clearly offend WTO obligations Foreign investors have reported this favoritism occurring in two ways i through the application of vaguely worded or unpublished rules or requirements in ways that discriminate against foreign investors and ii through the imposition of deal-specific conditions that go beyond any written legal requirements 206 In one investigation submission a former in-house counsel reported similar practices from his time doing business in China T here is a very clear discretionary administrative approval processes and other restrictions adopted by the Government of China that pressure the transfer of intellectual property to Chinese companies and or to Chinese State Owned Enterprises in order to ‘do business’ in China and receive required licensing approvals Often the language in Chinese licensing and business registration forms may not be clear as to its required and mandatory expectation for technology transfer by U S companies to Chinese firms or state agencies but licensing officials within regional Chinese centers clarify in person what is expected without providing written documents that could be subsequently shared 201 Regulations for the Implementation of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures art 4 Rules for the Implementation of the Law of the People’s Republic of China on ChineseForeign Contractual Joint Ventures art 9 Order of the State Council issued September 4 1995 last amended March 1 2017 see also JAMES M ZIMMERMAN CHINA LAW DESKBOOK 147 4th ed 2014 202 The Chinese term xuke zheng is often translated as “license” or “permit” 203 U S CHAMBER OF COMMERCE CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT IMPACT ON MARKET ACCESS NATIONAL TREATMENT AND TRANSPARENCY 17 Nov 2012 204 U S CHAMBER OF COMMERCE CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT IMPACT ON MARKET ACCESS NATIONAL TREATMENT AND TRANSPARENCY 18 Nov 2012 205 U S CHAMBER OF COMMERCE CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT IMPACT ON MARKET ACCESS NATIONAL TREATMENT AND TRANSPARENCY 18 Nov 2012 206 U S CHAMBER OF COMMERCE CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT IMPACT ON MARKET ACCESS NATIONAL TREATMENT AND TRANSPARENCY 35-36 Nov 2012 37 II China’s Unfair Technology Transfer Regime for U S Companies in China with global trade organizations So a carefully crafted and structured process has been developed to avoid obvious demands for U S technology 207 The administrative licensing and approvals process can also work in tandem with the JV requirements described above to require or pressure technology transfer A study conducted by the U S Chamber of Commerce concluded The JV requirement creates numerous circumstances where investment approval authorities are able to work in an nontransparent way with the local partner to ensure that valuable intellectual property market channels and other assets of the foreign investor are made available to the joint venture — often on extremely favorable commercial terms for the local partner This problem is exacerbated by the fact that in Sino-foreign joint ventures the local partner serves as the investment approval process applicant on behalf of the prospective joint venture As a result Chinese joint venture partners are able in many cases to control the communication channels between the foreign investor and the government approval authorities making the process even more opaque for the foreign investor and enabling the local partner to shape the approval requirement imposed by the authorities to its advantage 208 Problems with administrative licensing processes are consistently identified as top concerns in annual surveys of U S companies in China 209 According to the most recent USCBC member survey for example companies specifically ranked “obtaining licenses and approvals” and “investment barriers” as the second and third greatest challenges respectively 210 Moreover 65 percent of respondent companies experienced problems obtaining necessary licenses and approvals in China According to the survey these licensing problems occurred overwhelmingly at the central government level 80 percent and almost three-fourths of respondents report that China’s licensing reforms have had no impact to date 211 Similarly in each of AmCham China’s 2017 and 2018 annual surveys U S companies ranked China’s inconsistent regulatory interpretations as a top challenge 212 Companies also repeatedly identified “difficulty in obtaining required licenses” as a top challenge 213 As one legal treatise on foreign investment in China explains Even under the existing laws where approvals are required for foreign investment it is not unusual to experience a situation where the Catalogue on Guiding Foreign Investment may provide that a certain activity may be conducted by a WFOE while the Chinese 207 Stephen Zirschky Submission Section 301 Hearing Sept 28 2017 U S CHAMBER OF COMMERCE CHINA’S APPROVAL PROCESS FOR INBOUND FOREIGN INVESTMENT IMPACT ON MARKET ACCESS NATIONAL TREATMENT AND TRANSPARENCY 38-39 Nov 2012 209 AMCHAM CHINA 2016 AMCHAM CHINA WHITE PAPER AMERICAN BUSINESS IN CHINA 8 2016 USCBC UPDATE LICENSING CHALLENGES AND BEST PRACTICES IN CHINA 1 Apr 2016 210 USCBC 2017 MEMBER SURVEY 2 2017 211 USCBC 2017 MEMBER SURVEY 12 2017 212 AMCHAM CHINA 2017 CHINA BUSINESS CLIMATE SURVEY REPORT 28 2017 AMCHAM CHINA 2018 CHINA BUSINESS CLIMATE SURVEY REPORT 40 2018 213 AMCHAM CHINA 2017 CHINA BUSINESS CLIMATE SURVEY REPORT 28 2017 AMCHAM CHINA 2018 CHINA BUSINESS CLIMATE SURVEY REPORT 40 2018 208 38 II China’s Unfair Technology Transfer Regime for U S Companies in China authorities openly state that a WFOE will never be approved—only a joint venture and only if all material technology is transferred to the joint venture 214 ITIF’s submission in this investigation provides further example of how China’s administrative authorities pressure foreign investors’ decisions on technology and R D localization The CEO of a large multinational telecommunications equipment company recently shared with ITIF that he opened up a large R D facility in Beijing that employs over 500 scientists and engineers When asked if he did this to access Chinese engineering talent he responded bluntly “Unless I promised the Chinese Government that I would open up an advanced technology lab there I was told that I would not be able to sell to the Chinese telecommunications providers ” most of which are de facto controlled by the Chinese government 215 As described above discretion in China’s administrative licensing process can be used to require technology transfer or impose deal-specific conditions in exchange for the licenses necessary for a foreign investor to operate in China Similarly ambiguity in the administrative licensing and approvals process may also result in technology transfer where existing laws and regulations are unclear as to the relevant requirements for foreign investors— this problem is particularly acute in new and emerging industries As one submission noted “ U ncertainty surrounding administrative licensing regulations can also serve as a de facto limit for companies hoping to move into certain sectors Businesses are often particularly cautious about advancing into new and under-regulated business sectors such as telemedicine fearing that they might find themselves in violation of new regulations after investing ”216 These violations may lead to technology transfer in circumstances where foreign-invested enterprises must quickly comply with new regulations or new interpretations of existing regulations that threaten to shut down their existing business in China According to numerous submissions in this investigation an important example of how ambiguity in China’s administrative licensing process is used to pressure technology transfer arises in the field of cloud computing 217 Cloud Computing 214 OWEN D NEE JR SHAREHOLDER AGREEMENTS AND JOINT VENTURES IN CHINA 57 Thomson Reuters ed 2016 The authors further conclude that even if China does adopt a Negative List approach “it is doubtful that a negative list will effectively abolish such internal regulations or “neibu wenjian ” 215 ITIF Submission Section 301 Hearing 6 Oct 25 2017 216 USCBC Follow-Up Submission Section 301 Hearing 4-5 Oct 30 2017 217 CONSUMER TECHNOLOGY ASS’N hereinafter “CTA” Submission Section 301 Hearing 10 Sept 28 2017 COMPTIA Submission Section 301 Hearing 4 Sept 28 2017 INFORMATION TECHNOLOGY INDUSTRY COUNCIL hereinafter “ITI” Submission Section 301 Hearing 3-4 Sept 28 2017 COALITION OF SERVICES INDUSTRIES Submission Section 301 Hearing 2 Sept 28 2017 see generally TELECOMMUNICATIONS INDUSTRY ASS’N Submission Section 301 Hearing Sept 28 2017 39 II China’s Unfair Technology Transfer Regime for U S Companies in China China has prioritized the development of its cloud computing sector and seeks to raise its indigenous cloud computing capability and achieve “systematic breakthroughs” in “indigenously innovated core technology” by 2020 218 Submissions in this investigation raised concerns with China’s restrictions on foreign investment and related licensing practices and policies in this field 219 These submissions indicate that the Chinese government has used regulatory ambiguity to benefit Chinese cloud computing businesses and pressure technology transfer China first tacitly permitted foreign investors to partner with licensed Chinese cloud service providers in order to gain market access and then once key technology and know-how had been injected into these partnerships China resolved the regulatory ambiguities that had necessitated these arrangements in favor of the Chinese partner resulting in the transfer of technology to the Chinese partner China precludes U S cloud service providers CSPs from directly participating in the three most common forms of cloud computing computing infrastructure as a service IaaS computer platform as a service PaaS and computer software as a service SaaS 220 CSPs must obtain certain value-added telecommunication licenses such as an internet data center IDC license from China’s MIIT or its local counterpart to operate their businesses 221 According to numerous submissions in this investigation in practice China does not grant such licenses to U S investors and thus does not permit U S CSPs to provide cloud computing services directly to customers in China 222 However the global nature of cloud computing means that forgoing the China market is simply not a commercially viable option for U S CSPs whose customers demand globally available services 223 This is particularly the case for technology companies that have invested in and built up a market share in China in areas that are rapidly transitioning to cloud-based delivery Thus a business built on managing a customer’s computing resources or supplying and maintaining software applications has little option but to offer those services on a cloud basis given the economic technical and security superiority of the cloud model the transition to which customers now demand 218 Notice on Issuing 13th Five-year Plan for National Informatization Sec 2 3 State Council Guo Fa 2016 No 73 issued Dec 15 2016 In addition the plan states that by 2020 China should have “basically established a secure and controllable IT industry ecosystem” and asserts that “digitization comprehensively underpins the development of Party and national government initiatives ” 219 CTA Submission Section 301 Hearing 10 Sept 28 2017 COMPTIA Submission Section 301 Hearing 4 Sept 28 2017 ITI Submission Section 301 Hearing 3-4 Sept 28 2017 U S CHAMBER OF COMMERCE Submission Section 301 Hearing 18-19 Oct 3 2017 see generally TELECOMMUNICATIONS INDUSTRY ASS’N hereinafter “TIA” Submission Section 301 Hearing Sept 28 2017 220 U S companies are global leaders in these sectors USITC GLOBAL DIGITAL TRADE 1 MARKET OPPORTUNITIES AND KEY FOREIGN TRADE RESTRICTIONS 19-20 Aug 2017 221 See Telecommunications Regulations of the People’s Republic of China art 7 and the Telecommunications Services Catalogue attached as the Annex State Council Order No 291 issued Sept 25 2000 and amended on July 29 2014 and Feb 6 2016 which lists IDC under the VATS operator license 222 IDC licenses have only been granted to Chinese companies and joint ventures with Hong Kong or Macau investors and have not been granted to joint ventures with investors from the U S and other jurisdictions See Samuel Yang Regulation of Cloud Computing in China PRACTICAL LAW Apr 26 2017 223 BSA THE SOFTWARE ALLIANCE hereinafter “BSA” Submission Section 301 Hearing 3 Sept 28 2017 40 II China’s Unfair Technology Transfer Regime for U S Companies in China In view of this commercial reality the only way U S suppliers are able to participate in the market is through contractual arrangements with Chinese entities eligible to obtain the required licenses 224 Under these arrangements U S suppliers will train the employees of the Chinese license holder how to operate complex technology and are effectively forced to provide their proprietary cloud computing technology brands and know-how to their Chinese partners in exchange for a fee or a share of revenue 225 This reality disadvantages U S companies in China as these contractual arrangements provide even less rights and protections with respect to their investment and technology than would be available through an equity investment Until 2016 China permitted such contractual arrangements by granting the requisite license to the Chinese partner However recent draft regulations prohibit these arrangements which have long been relied upon by foreign CSPs for market access In March 2016 China released the Notice on Regulating Business Operations in Cloud Service Market Draft for Public Comment and the Circular on Cleaning Up and Regulating the Internet Access Service Market which exacerbated the challenges facings U S CSPs operating in the Chinese market 226 According to the written submissions in this investigation these measures effectively prohibit inter alia 1 the Chinese license holder from providing any facilities or other resources to the foreign CSP 2 the foreign CSP from entering into contracts with customers directly and 3 the provision of cloud services under the trademark of the foreign CSP 227 U S and other foreign CSPs operating in China through contractual arrangements inconsistent with this draft notice are now faced with the prospect of needing to restructure their existing arrangements and relinquish ownership and operations of their cloud business to a Chinese company in order to comply with the new rules 228 Indeed although the draft notice has yet to be finalized some U S suppliers have already done just that 229 2 Forced Disclosure of Sensitive Technical Information A second technology transfer mechanism used by Chinese administrative agencies is the forced disclosure of sensitive technical information In a wide variety of industry sectors the Chinese 224 See e g Jason Verge Microsoft Launches Azure in China Via 21Vianet Group DATACENTER KNOWLEDGE May 22 2013 “In November 2012 Microsoft 21Vianet and the Shanghai Municipal Government announced a strategic partnership agreement in which Microsoft licensed the technology know-how and rights to operate and provide Office 365 and Windows Azure services in China to 21Vianet ‘21Vianet will act as an operation entity for Azure hosting the service in its data centers and handling the customer relationship ’ said Vianet's CFO Shang Hsiao ” 225 NAT’L FOREIGN TRADE COUNCIL hereinafter “NFTC” Submission Section 301 Hearing 3 Sept 28 2017 226 See Notice on Regulating Business Operations in Cloud Service Market Draft for Public Comment § 4 1 -4 5 released by MIIT Mar 2016 Circular on Cleaning up and Regulating the Internet Access Service Market MIIT Gong Xin Bu Xin Guan Han 2017 No 32 issued Jan 17 2017 227 ITI Submission Section 301 Hearing 4 Oct 4 2017 U S CHAMBER Submission Section 301 Hearing 19 Oct 3 2017 NFTC Submission Section 301 Hearing 3-4 Sept 28 2017 CompTIA Submission Section 301 Hearing 7-8 Sept 28 2017 228 See e g Stratford et al How China's Draft Regulations Will Control Cloud Services LAW360 Dec 15 2016 McGinty et al HOGAN LOVELLS DRAFT LEGISLATION TO AFFECT CHINA CLOUD SERVICES MARKET ACCESS Jan 2017 229 Cate Cadell Amazon Sells off China Cloud Assets as Tough New Rules Bite REUTERS Nov 13 2017 “In November 2017 for example Amazon com Inc sold off its public cloud business in China to its local partner for $301 2 million According to Amazon this was done ‘to comply with Chinese law ’” 41 II China’s Unfair Technology Transfer Regime for U S Companies in China government requires the disclosure of unreasonable amounts of sensitive technical information in exchange for necessary administrative approvals As noted by European researchers A particular concern amongst various industries including but not limited to ICT pharmaceuticals chemicals agro-food in particular GMOs machinery and financial services centers on the depth of information which needs to be provided to the authorities for obtaining the authorization to build a factory to market a product etc In some cases this information was provided to the local industry who used this data to develop similar activities 230 U S stakeholders are particularly concerned because the forced disclosures put technology and intellectual property at risk 231 Forced disclosures of information are especially problematic in cases in which the disclosure must be made not just to government officials but also to outsiders This occurs when China requires reviews by “expert panels” that may include representatives from Chinese government industry academia or others who may have a competitive interest in the information 232 Information disclosure and expert panel review requirements can arise at any stage of a company’s operations in China and in a wide variety of industries For example in the preestablishment phase a company may be subject to expert review panels to assess the safety environmental impact and energy conservation of the proposed investment 233 Panels typically require companies to respond to “detailed information requests about project costs and revenue capacity and equipment information raw material and energy requirements and other sensitive details about the operations ”234 The information required to be disclosed may include trade secrets For example One company that submitted its safety assessment to an approval agency was required to provide specific temperature and pressure range information for its process equipment that would make it easier for a competitor to learn about a production process the company considered to be a trade secret 235 As noted by the American Chamber of Commerce in Shanghai 230 Paul Ranjard Benoit Misonne Study 12 Exploring China’s IP Environment in Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations 24 2007 231 USCBC Submission Section 301 Hearing 4-5 Sept 28 2017 U S CHAMBER Submission Section 301 Hearing 17 Oct 3 2017 232 USCBC UPDATE LICENSING CHALLENGES AND BEST PRACTICES IN CHINA 8 Jan 2014 USCBC IMPROVING CHINA’S LICENSING SYSTEM RECOMMENDATIONS FOR KEY SECTORS 2 Mar 2014 Paul Ranjard Benoit Misonne Study 12 Exploring China’s IP Environment in Study on the Future Opportunities and Challenges of EU-China Trade and Investment Relations 15 2007 233 USCBC Submission Section 301 Hearing 5 Sept 28 2017 See e g China Energy Conservation Product Certification Management Measures National Economic and Trade Commission issued Feb 11 1999 art 3 states that evidence a product meets “standards or technological needs” is one of the criteria for receiving the Energy Conservation Certificate 234 USCBC IMPROVING CHINA’S LICENSING SYSTEM RECOMMENDATIONS FOR KEY SECTORS 4 Mar 2014 235 USCBC IMPROVING CHINA’S LICENSING SYSTEM RECOMMENDATIONS FOR KEY SECTORS 3 Mar 2014 42 II China’s Unfair Technology Transfer Regime for U S Companies in China Companies have also expressed concerns about some of China’s product approval requirements In particular for companies to gain approval from regulatory agencies they must disclose proprietary formula or designs Despite assurances by regulators companies are still not confident that the information will be protected Some companies report that they have been able to push back but others have not been as successful and must face the difficult choice of seeking product approval which could put proprietary information at risk or not pursuing market opportunities in China in order to protect their IP 236 Similarly environmental impact and energy conservation assessments require expert panel reviews 237 and sometimes involve a “pre-review” by a separate panel prior to application 238 Environmental impact panels “frequently include competitors or scholars affiliated with competitors ”239 In general the panels introduce significant liability for companies seeking to safeguard their trade secrets particularly since there are few safeguards in place to ensure that information is not misused 240 Expert review panels do not just apply before a company is established in China For example in the post-establishment phase expert review panels may be required for security reviews in a range of industries under China’s Cybersecurity Law of the People’s Republic of China Cybersecurity Law 241 Although many implementing regulations of the cyber-review regime are in draft form only stakeholders report concerns that current ambiguities in the law will be used to pressure unnecessary disclosure of companies’ most critical technologies 242 For example companies may be forced to disclose critical technologies including source code complete design databases behavior models logic models and even floor plans and physical layouts of central processing units 243 D China’s Acts Policies and Practices Are Unreasonable 236 AM CHAMBER OF COMMERCE SHANGHAI Submission Section 301 Hearing 2 Sept 28 2017 See Environmental Impact Assessment Law of the People’s Republic of China PRC Environmental Impact Assessment Law ¸ art 11 13 adopted at the 30th Meeting of the Standing Committee of the Ninth NPC Order No 77 on Oct 28 2002 effective Sept 1 2003 amended July 2 2016 Art 13 stipulates that the “expert working groups” shall be comprised of government representatives and other experts from the list of experts within the expert database created by the relevant government authority 238 USCBC Submission Section 301 Hearing 1 Oct 20 2017 See PRC Environmental Impact Assessment Law¸ art 11 239 USCBC Submission Section 301 Hearing 1 Oct 20 2017 240 USCBC UPDATE LICENSING CHALLENGES AND BEST PRACTICES IN CHINA 8-9 Jan 2014 See e g Administrative License Law of the People’s Republic of China PRC Administrative License Law adopted by the Fourth Session of the Standing Committee of the Tenth NPC Order No 7 on Aug 27 2003 effective July 1 2004 art 31 regarding scope of required information art 54-55 regarding the types of technical material which need to be submitted for certain licenses and art 76 regarding compensation in the event of violation 241 Cybersecurity Law of the People’s Republic of China adopted by the Twenty-fourth Session of the Twelfth NPC on Nov 7 2016 effective June 1 2017 Submissions received in this investigation are summarized in Appendix C to this report 242 See CTA Submission Section 301 Hearing 6 Sept 28 2017 U S CHAMBER Submission at 31 TIA Submission Section 301 Hearing 2 Sept 28 2017 243 SEMICONDUCTOR INDUSTRY ASS’N hereinafter “SIA” Submission Section 301 Hearing 10 fn 42 Sept 28 2017 237 43 II China’s Unfair Technology Transfer Regime for U S Companies in China Conduct that is “unreasonable” is actionable under Section 301 provided that it also burdens or restricts U S commerce The statute defines an “unreasonable” act practice or policy as one that “while not necessarily in violation of or inconsistent with the international legal rights of the United States is otherwise unfair and inequitable ”244 The statute further provides that in determining unreasonableness the USTR shall take into account to the extent appropriate whether foreign companies in the United States have access to reciprocal opportunities to those denied U S companies 245 Based on the foregoing factors China’s technology transfer regime is unreasonable According to the Organization for Economic Co-operation and Development OECD very few countries employ foreign equity limitations or screen foreign investments on the basis of potential technology-related benefits 246 China’s foreign investment restrictions and administrative review and licensing systems not only exert great technology transfer pressures on U S companies but also are substantially more restrictive than those of the United States and most other countries Indeed the OECD has consistently ranked China’s foreign investment regulatory regime as one of the most restrictive in the world based on an evaluation of i equity restrictions on foreign ownership ii screening and prior approval requirements iii rules for key personnel and iv restrictions on the operation of foreign enterprises 247 For example in 2016 China was ranked the fourth most restrictive economy out of 63 OECD and non-OECD member economies measured—only the Philippines Saudi Arabia and Myanmar were more restrictive This low ranking is particularly striking given that China is the world’s second largest economy and it has extensive global trading relationships as compared to the other economies at the bottom of the index China’s restrictiveness score was also 3 7 times higher than that of the United States 248 Moreover the OECD’s regulatory restrictiveness index does not even account for the full breadth of restrictive practices used by China to pressure technology transfer The OECD index only captures those laws and policies pertaining to equity caps and pre-establishment administrative screening processes that have been formally adopted by the Chinese central government 249 As discussed above China’s technology transfer requirements often do not take 244 19 U S C § 2411 d 3 A 19 U S C § 2411 d 3 D 246 PRZEMYSLAW KOWALSKI DANIEL RABAIOLI SEBASTIAN VALLEJO OECD INTERNATIONAL TECHNOLOGY TRANSFER MEASURES IN AN INTERCONNECTED WORLD LESSONS AND POLICY IMPLICATIONS TAD TC WP 2017 1 FINAL 2017 43-45 ¶ 130-1 2017 “In particular making FDI in technology-related sectors conditional upon joint ventures…or requiring direct transfer of technology to the local partner… are not found in most of the countries surveyed This may be a result of awareness that such laws deter investors and may be counterproductive However such measures are still present in two developing countries namely China and Nigeria…Screening on the basis of potential technology-related benefits… is present in only five countries For example in China for a project to be approved it should meet the requirements of mid and long term planning for national economic development de facto meaning that the government will screen investment on the basis of its technology-transfer potential ” 247 FDI Regulatory Restrictiveness Index OECD http www oecd org investment fdiindex htm last visited Oct 20 2017 248 FDI Regulatory Restrictiveness Index OECD http www oecd org investment fdiindex htm last visited Oct 20 2017 249 In its methodology the OECD specifies that its regulatory restrictiveness measures do not account for measures imposed at the sub-national level and do not account for variability in restrictiveness stemming from implementation of formally adopted laws or policies In other words the regulatory restrictiveness index does not 245 44 II China’s Unfair Technology Transfer Regime for U S Companies in China the form of written laws or policies promulgated by China’s central government and are often carried out orally and “behind closed doors ”250 Evidence collected in this investigation also has demonstrated that forced disclosure of technical information occurs throughout the life span of U S companies’ operations in China through a variety of administrative reviews and licensing processes 251 These practices are not captured by the OECD’s index China’s regime is ultimately unfair and inequitable because it greatly restricts the freedom of U S companies to deploy and fully protect their valuable and hard-won technologies to compete in China Instead of fostering a level playing field China’s regime gives systematic and structural support for technology acquisition by Chinese companies from U S and other foreign competitors 252 Faced with China’s regime U S companies must either cede substantial control over their valuable technologies or be closed out of one of the world’s largest and fastestgrowing economies 253 This results in a highly asymmetric playing field where U S companies face immensely restrictive policies in China while Chinese companies are not equally restricted in the United States 254 Accordingly China’s technology transfer regime—including foreign ownership restrictions and administrative approval and licensing process that are used to require or pressure the transfer of technology from U S companies to Chinese entities— is unfair inequitable and results in nonreciprocal opportunities relative to Chinese companies operating in the United States These acts practices or policies are unreasonable as defined in Section 301 E China’s Acts Policies and Practices Burden or Restrict U S Commerce The unreasonable act policy or practice of a foreign country must also burden or restrict U S commerce to be actionable under Section 301 In the present case required or pressured technology transfer significantly undermines the value of American technology including IP thereby distorting markets and compromising U S companies’ global competitiveness Therefore China’s acts policies and practices that effectuate technology transfer burden and restrict U S commerce Technology and IP drive economic growth and sustain the competitive edge of the U S economy 255 According to the Department of Commerce in 2014 IP-intensive industries account for restrictions that are informally applied “behind closed doors” by government officials See Blanka Kalinova et al OECD FDI RESTRICTIVENESS INDEX 2010 UPDATE 6 2010 250 See supra Section II A-C 251 See supra Section II C In a recent AmCham China survey 52% of respondents believe that in China the risk of “IP leakage and IT and data security threats” was greater than those in other countries AMCHAM CHINA 2018 CHINA BUSINESS CLIMATE SURVEY REPORT 31 2018 252 BSA Submission Section 301 Hearing 3-4 Sept 28 2017 CSI Submission Section 301 Hearing 5 Sept 28 2017 NAM Submission Section 301 Hearing 12-13 Sept 28 2017 253 BSA Submission Section 301 Hearing 3 Sept 28 2017 U S CHAMBER Submission Section 301 Hearing 15 Oct 3 2017 254 U S CHAMBER Submission Section 301 Hearing 40 Oct 3 2017 255 U S PATENT TRADEMARK OFFICE hereinafter “USPTO” ECON STATISTICS ADMIN INTELLECTUAL PROPERTY AND THE U S ECONOMY 2016 UPDATE 1 2016 see also NAT’L SCIENCE BOARD SCIENCE ENGINEERING INDICATORS 6-20 2016 among all major economies the United States has the highest concentration of knowledge-intensive and technology-intensive industries as a share of total economic activity 45 II China’s Unfair Technology Transfer Regime for U S Companies in China supported approximately 45 5 million jobs in the United States and workers in those industries earned significantly higher wages on average than those working in non-IP-intensive industries 256 Further IP-intensive companies represented more than 39 percent of U S GDP and accounted for 52 percent of U S exports 257 Therefore as noted by multiple submissions in this investigation the well-being of U S companies and their workers along with the broader U S economy is dependent in substantial part on the continued strength of IP-intensive industries 258 China’s technology transfer policies effectively deprive U S companies of the full value of their IP and technology and inhibit them from fairly competing in the large China market When U S companies are required or pressured to transfer their technology they may experience not only a direct loss of key competitive assets but also may lose their technological competitive edge in global markets Moreover as noted by submissions in this investigation Chinese beneficiaries of technology transfer under the highly favorable circumstances created by China acquire powerful advantages without the expense or risk of developing the technology themselves and thus enjoy an additional competitive advantage over foreign innovators 259 If U S companies alternatively elect not to comply with Chinese requirements the companies are excluded from an important and growing market foregoing sales and export opportunities and economies of scale 260 No matter how a U S company responds the Chinese government’s technology transfer regime generates considerable negative impacts on competition by depriving U S companies of the ability to achieve reasonable returns on their investments in the Chinese market and exploit legitimately obtained intellectual property rights and prevents them from making investments at all 261 Given the strategic importance of the large and growing Chinese market obstacles to level competition are acutely harmful to U S companies Moreover U S companies that lose the option of exclusive enjoyment of their valuable technology and are therefore unable to compete fairly in China may become less globally competitive in the long run When U S companies are deprived of fair returns on their investment in IP they are unable to achieve the growth necessary to reinvest in innovation 262 In this sense China’s technology transfer regime directly burdens the innovation ecosystem that is an engine of economic growth in the United States and similarly-situated economies 263 256 USPTO INTELLECTUAL PROPERTY AND THE U S ECONOMY 2016 UPDATE 4 30 2016 USPTO INTELLECTUAL PROPERTY AND THE U S ECONOMY 2016 UPDATE iii 2016 258 WILEYREIN Submission Section 301 Hearing 11 Sept 28 2017 IP COMMISSION Submission Section 301 Hearing 6 Sept 28 2017 see generally USPTO INTELLECTUAL PROPERTY AND THE U S ECONOMY 2016 UPDATE 2016 259 WILEYREIN Submission Section 301 Hearing 11 Sept 28 2017 SOLARWORLD Submission Section 301 Hearing 2 Oct 20 2017 NAM Submission Section 301 Hearing 9-10 Sept 28 2017 CSIS Submission Section 301 Hearing 1 Sept 28 2017 260 AMCHAM SHANGHAI Submission Section 301 Hearing 2 Sept 28 2017 NAM Submission Section 301 Hearing 13 Sept 28 2017 261 WILEYREIN Submission Section 301 Hearing 11 Sept 28 2017 262 WILEYREIN Submission Section 301 Hearing 11 Sept 28 2017 see also IAM Submission Section 301 Hearing 1 Sept 29 2017 263 WILEYREIN Submission Section 301 Hearing 11 Sept 28 2017 257 46 II China’s Unfair Technology Transfer Regime for U S Companies in China In fact the displacement of global industrial leaders—including U S companies—so that China may achieve global market dominance is an explicit policy goal of the Chinese government 264 According to China’s Made in China 2025 initiative for example the Chinese government seeks to acquire foreign technology absorb that technology to boost indigenous innovation and displace foreign competitors in both domestic and international markets 265 China’s technology transfer regime is a key mechanism to achieve this goal 266 Annual surveys of companies conducted by AmCham China and USCBC indicate that addressing China’s technology transfer regime would significantly increase U S investment in China According to the 2018 AmCham China survey of U S companies surveyed companies stated that they would significantly increase investment if China’s government were able to provide greater regulatory transparency and predictability limit the use of industrial policies that create barriers allow U S companies to enter business segments that are currently restricted provide recourse for unfair investment treatment allow U S companies to increase control over their operations by reducing the need for joint ventures and local business partners allow strategic acquisitions and reduce the need to engage in technology transfer 267 Ultimately China’s acts policies and practices that require or pressure technology transfer undermine U S companies’ valuable IP weaken their global competitiveness and stunt investment in innovation 268 Therefore China’s acts policies and practices with respect to technology transfer burden and restrict U S commerce 269 264 U S CHAMBER MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 13 2017 BJÖRN CONRAD ET AL MERCATOR INST FOR CHINA STUDIES hereinafter “MERICS” MADE IN CHINA 2025 14 16 2016 265 MERICS MADE IN CHINA 2025 16 2016 technological development to achieve the ultimate objective of import substitution is pervasive throughout the plan which specifically calls for the development and usage of indigenous products in a variety of industries 266 See MERICS MADE IN CHINA 2025 41 2016 267 AMCHAM CHINA 2018 CHINA BUSINESS CLIMATE SURVEY REPORT 53 2018 268 WILEYREIN Submission Section 301 Hearing 11 Sept 28 2017 U S CHAMBER MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 7 2017 269 This finding is consistent with numerous other sources that confirm that Chinese technology transfer practices burden U S commerce See generally USTR NTE SPECIAL 301 AND WTO COMPLIANCE REPORTS U S -CHINA EC SEC REV COMM’N 2016 USITC INV NO 332-519 CHINA EFFECTS OF INTELLECTUAL PROPERTY INFRINGEMENT AND INDIGENOUS INNOVATION POLICIES ON THE U S ECONOMY 2011 USITC INV NO 332-514 CHINA INTELLECTUAL PROPERTY INFRINGEMENT INDIGENOUS INNOVATION POLICIES AND FRAMEWORKS FOR MEASURING THE EFFECTS ON THE U S ECONOMY 2010 U S -CHINA ECON SEC REV COMM’N CHINA’S FIVEYEAR PLAN INDIGENOUS INNOVATION AND TECHNOLOGY TRANSFERS AND OUTSOURCING 2011 47 III China’s Discriminatory Licensing Restrictions A Introduction The second category of conduct set forth in the Federal Register Notice issued on August 24 2017 addresses China’s acts policies and practices depriving U S companies of the ability to set market-based mutually-desirable terms in licensing and other technology-related negotiations with Chinese companies In addition to the difficulties with administrative licensing discussed in Section II China also intervenes in U S firms’ investments and related activities in China through restrictions on their technology licensing These restrictions result in discriminatory technology transfer-related acts policies and practices that burden U S commerce China’s regime of technology regulations deprives U S technology owners of the ability to bargain and set terms for technology transfer that are free from interference by China U S firms seeking to license technologies to Chinese enterprises must do so on non-market-based terms that favor Chinese recipients Moreover the bureaucratic hurdles contained in licensing regulations provide China with an additional opportunity to pressure firms to transfer more technology or transfer it on more favorable terms in exchange for administrative approvals China’s imposition of mandatory adverse licensing terms is reflected in official measures that impose a different set of rules for imported technology transfers originating from outside China such as from U S entities attempting to do business in China compared to separate rules for technology transfers occurring between two domestic companies The mandatory requirements for importation of foreign technology are discriminatory and clearly more burdensome than the domestic requirements as explained in detail below The result of these mandatory terms imposed only on technology import contracts is that foreign entities including U S entities doing business in China are at a disadvantage compared to Chinese entities These restrictions benefit domestic entities at the expense of foreign competitors including U S competitors because the mandatory terms are only imposed on technology import contracts and do not govern technology contracts between two domestic parties From the outset the regime is tipped in favor of Chinese entities before a U S company even attempts to enter the market in China through a legal framework adversely influencing all technology negotiations and contracts As explained in more detail below due to mandatory provisions in China’s regime of technology regulations U S entities seeking to license foreign technologies to enterprises in China must do so on non-market-based terms that favor Chinese recipients One such entity the Office of Intellectual Property IP and Industry Research Alliances IPIRA at the University of California Berkeley summarized its experiences with these unacceptable terms mandated by the Chinese regime provided at Appendix E to this report B Foreign Licensing Restrictions and China’s Technology Transfer Regime China regulates instances in which an entity seeks to transfer technology into China under its Regulations of the People’s Republic of China on the Administration of the Import and Export of 48 III China’s Discriminatory Licensing Restrictions Technologies TIER 270 and situations in which a foreign entity seeks — as part of its investment in its foreign-invested enterprise in China — to transfer technology to that entity by means of the Regulations for the Implementation of the Law of the People’s Republic of China on ChineseForeign Equity Joint Ventures JV Regulations 271 These Chinese regulations provide less favorable treatment of foreign entities than the comparable treatment of domestic Chinese entities under the Contract Law of the People’s Republic of China PRC Contract Law 272 Specifically TIER imposes the following restrictions among others on the ability of U S technology owners to negotiate market-based terms for the transfer of technology into China 273  Indemnity terms TIER mandates that all indemnity risks be borne by the foreign technology transferor Parties cannot negotiate the allocation of this risk even if the transferee would like to bear the risk for a variety of reasons Specifically the licensor typically a foreign entity for a technology import contract is liable for any claims of “infringing a third party’s lawful rights” made against the licensee resulting from the use of the licensed or transferred technology 274 This requirement is particularly onerous for small U S firms seeking to license technology as they typically would not have the expertise or resources necessary to assess and cover the risk of third party litigation  Rights in technology improvements TIER mandates that all improvements belong to the party making the improvement TIER further provides that the licensor cannot stop the licensee from making improvements to the technology 275 Parties cannot negotiate shared ownership or that the licensor will own improvements made by the licensee 276 These provisions are particularly harmful to a U S licensor if the Chinese licensee makes an improvement severable from the original invention and then patents the severable improvement in China or elsewhere The TIER’s provision on mandatory ownership of improvements enables the Chinese licensee to enjoy the 270 Regulations of the People’s Republic of China on the Administration of the Import and Export of Technologies hereinafter “TIER” Order of the State Council No 331 issued Dec 10 2001 effective Jan 1 2002 amended Jan 8 2011 in Order of the State Council No 588 Art 2 of TIER defines technology import and export as “the act of transferring technology from outside the territory of … China to inside the territory of … China or from inside the territory of … China to outside the territory of … China ” Several key provisions impose mandatory terms only on technology import contracts For example art 24 provides that “ t he licensor of a technology import contract shall …” while art 27 applies “ d uring the valid term of a technology import contract” and art 29 provides that “ a technology import contract may not contain … ” emphases added 271 Regulations for the Implementation of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures hereinafter “JV Regulations” State Council Guo Fa 1983 No 148 issued Sep 20 1983 effective Sep 20 1983 amended Jan 15 1986 in Guo Fa 1986 No 6 further amended Dec 21 1987 in Guo Fa 1987 No 110 Jul 22 2001 in Order of the State Council No 311 Jan 8 2011 in Order of the State Council No 588 and Feb 19 2014 in Order of the State Council No 648 272 Contract Law of the People’s Republic of China hereinafter “PRC Contract Law” adopted at the Second Session of the Ninth NPC on Mar 15 1999 effective Oct 1 1999 273 TIER art 2 274 TIER art 24 275 TIER art 29 3 276 TIER art 27 49 III China’s Discriminatory Licensing Restrictions severable improvement without the original technology licensed by the U S entity to the Chinese entity and block the U S entity from enjoying the benefit of the severable improvement The provisions prevent the U S entity from restricting its Chinese licensee from making improvements to the transferred U S technology or from using such improvements in the market place including using the improvements to the detriment of the U S licensor The JV Regulations also mandate terms that are non-market-based for technology agreements in joint ventures between Chinese and foreign entities Among other provisions the JV Regulations generally limit technology contracts to a duration of ten years and provide that the Chinese joint venture must be granted the right to use the technology in perpetuity after the technology contract expires 277 The JV Regulations further impose requirements on the characteristics of transferred technologies The technologies must be capable of i significantly improving the performance or quality of existing products and increasing productivity or ii significantly saving raw materials fuel or power and iii being applicable and advanced such that the joint venture’s products generate significant social and economic benefits in the domestic market or are competitive in the international market 278 These requirements provide opportunities for Chinese officials to pressure foreign firms to transfer the latest and most advanced versions of their technologies restricting their freedom to deploy the technology as they choose and notwithstanding any intellectual property infringement concerns the firm may have The JV Regulations in particular provide ample opportunities for Chinese officials to review foreign technologies in detail and pressure transfer to Chinese partners For example as with wholly foreign-owned enterprises initial capital contributions from the foreign party may include industrial property rights know-how and other intellectual property rights 279 The foreign party may also license the right to use technology to the joint venture The license must be reviewed and approved by China typically at the same time as the joint venture application Although there are no express limits on the amount that the foreign licensor is paid for the license Chinese regulations provide guidelines to determine if the payments are appropriate and should be approved by China 280 The technology licensing regime in China applies to all importers of foreign technology The TIER JV Regulations and the PRC Contract Law all have provisions applicable to technology transfer agreements involving a foreign party TIER applies to “acts of transferring technology from outside the territory of the People’s Republic of China into the territory of the People’s Republic of China or vice versa by way of trade investment or economic and technical 277 JV Regulations art 43 JV Regulations arts 25 41 279 JV Regulations art 5 See also Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures art 8 adopted at the First Session of the Seventh NPC on Apr 13 1988 amended by the 18th Session of the Standing Committee of the NPC on Oct 31 2000 further amended Sep 3 2016 in Executive Order No 51 and Nov 7 2016 in Executive Order No 57 and Nov 4 2017 in Executive Order No 81 280 JAMES ZIMMERMAN CHINA LAW DESKBOOK A LEGAL GUIDE FOR FOREIGN-INVESTED ENTERPRISES 102 109– 110 Am Bar Ass’n 4th ed 2014 278 50 III China’s Discriminatory Licensing Restrictions cooperation ”281 The TIER further defines these acts to “include assignment of the patent right or right to apply for patents licensing for patent exploitation assignment of technical know-how technical services and transfer of technology by other means ”282 The JV Regulations apply to technology “introduction” contracts under Article 40 defined as the “necessary technology obtained by the joint venture by means of technology transfer from a third party or parties to the joint venture ” The PRC Contract Law addresses “Technology Contracts” in its Chapter 18 Within Chapter 18 Article 322 defines a technology contract as a “contract made by the parties to define their mutual rights and obligations for technology development transfer consultation or service ” 1 Different Outcomes for U S Companies versus Chinese Competitors Foreign entities cannot fully take advantage of the domestic Chinese contract licensing regime under the PRC Contract Law because conflicting articles of the TIER and JV Regulations control over the PRC Contract Law Article 123 of the PRC Contract Law provides that the PRC Contract Law will not control under Chinese law “where other laws stipulate otherwise on contracts ” In addition Chapter 18 of the PRC Contract Law which covers technology contracts specifically addresses the “Applicability of Other Laws of Administrative Regulations” in Article 355 which stipulates that “ w here laws and administrative regulations stipulate otherwise on contracts for technology import and export or on contracts for patents and patent applications the relevant provisions thereof shall govern ” Thereby and as explained in detail below where the provisions of the TIER and the JV Regulations are in conflict with those of the PRC Contract Law the TIER and the JV Regulations respectively control under the licensing regime in China 283 TIER imposes a number of procedural requirements that the PRC Contract Law does not impose Under TIER all technology import contracts must be notified to China and copies of such contracts provided 284 If such contracts are not duly notified as required the foreign technology licensor is denied the ability to remit any royalty payments back to its home country 285 From the outset foreign imported technology licensors including U S technology licensors must meet obligations that are not imposed on their Chinese competitors under the PRC Contract Law 2 Indemnification Against Infringement Claims The TIER imposes obligatory indemnifications and other special treatment in favor of Chinese licensees of imported technology 286 Under Article 24 in a technology import contract the “liabilities shall be borne by the licensor” for any infringement of the “lawful interests of any other person ” The TIER does not permit parties to freely contract issues of liability Therefore 281 TIER art 2 TIER art 2 283 See NATIONAL FOREIGN TRADE COUNCIL hereinafter “NFTC” Submission Section 301 Hearing 7 Sept 28 2017 284 TIER art 18 285 See TIER art 20 286 TIER art 24 See also BSA THE SOFTWARE ALLIANCE hereinafter “BSA” Submission Section 301 Hearing § II A Sept 28 2017 referring to art 24 of the TIER as part of “insufficient and contradictory laws relating to contracts and liability for infringement” in China 282 51 III China’s Discriminatory Licensing Restrictions all U S technology licensors of imported technology are required to indemnify Chinese technology licensees for among other things third party infringement claims based on use of the imported technology 287 In addition the indemnification requirement in the TIER on “lawful interests of any other person” does not appear to be limited to the “other person’s” intellectual property rights Therefore the TIER potentially obligates a U S technology licensor to indemnify its Chinese licensee for any infringement suit by a third party 288 In contrast Article 353 of the PRC Contract Law provides parties negotiating for the transfer of domestic technology within China with flexibility to determine the scope of the licensor’s liability for indemnification Article 353 sets out that “ w here the exploitation of the patent or utilization of the technical know-how by the transferee as contracted infringes upon the legitimate rights and interests of others the liability therefor shall be borne by the transferor unless the parties stipulate otherwise ”289 Unlike for licensors of foreign technology the PRC Contract Law permits parties to a domestic technology transfer agreement to negotiate issues of liability in Article 353 whereas Article 24 of the TIER does not permit parties to contract around liability for infringement claims and no other article of the TIER permits parties to agree to terms on liability 290 3 Ownership of Improvements to Licensed Technology Article 29 3 of the TIER prohibits U S technology licensors from restricting their Chinese licensees to make or use improvements to the transferred technology Article 29 3 prohibits technology import contracts from including any clause that “restrict s the receiving party from improving the technology supplied by the supplying party or restricting the receiving party from using the improved technology ” This prohibition means that U S licensors cannot restrict their Chinese licensees from using the transferred technologies which could include valuable information protected not only by patent laws but also by trade secret protections resulting from research and development conducted and paid for by the U S licensors to then improve the transferred technologies By prohibiting any restriction on the licensee to make or use improved technology Article 29 permits Chinese licensees to free ride on U S technology licensors’ research and development costs in any imported technology transfer agreement Article 27 of the TIER requires that the rights to any of these improvements to imported technology will vest in the party making the improvement 291 As with the liability issues in 287 See CHINA CHAMBER OF COMMERCE FOR IMPORT EXPORT OF MACHINERY AND ELECTRONIC PRODUCTS hereinafter “CCCME” Submission Section 301 Hearing 10 Sept 27 2017 “the provision only mentions the liability of the licensor” 288 See INFORMATION TECHNOLOGY INNOVATION FOUNDATION hereinafter “ITIF” Submission Section 301 Hearing 15–16 Oct 25 2017 “Article 24 requires that licensor licensor importing technology into China for that matter to bear full liability regardless whether or sic the licensor is aware that use of the licensed technology may ‘infringe upon the lawful rights and interests of another person ’ In fact not only does awareness not matter the liability could result from any third party’s ‘lawful rights and interest ’ That is the liability could include tort and other liability beyond IP infringements ” 289 Emphasis added 290 See NFTC Submission Section 301 Hearing 7 Sept 28 2017 291 See e g CHINA CHAMBER OF INT’L COMMERCE hereinafter “CCOIC” Submission Section 301 Hearing 62 Sept 28 2017 stating that “the basic meaning is that an achievement made in improving the technology 52 III China’s Discriminatory Licensing Restrictions Article 24 the TIER restrictions on the ownership of improvements cannot be contractually avoided by parties to the imported technology contract because “ the right over any improvement on the technologies shall be vested with the party which has made the improvement ” The “shall be vested” language in Article 27 of the TIER does not permit the parties to a technology import contract to negotiate other terms The restriction means that a U S technology licensor cannot negotiate for ownership rights to any improvements made by its Chinese licensee while that licensee is using the U S licensor’s technology and with the restriction against prohibiting improvements from Article 29 the U S technology licensor has no means to negotiate how its technology will be “improved” or how rights in that improved technology will be vested in the Chinese licensee By contrast under Article 354 of the PRC Contract Law domestic Chinese companies have flexibility to determine how any benefits licenses and ownership rights arising from improvements to technology will be shared between the parties to the technology transfer contract Article 354 provides that “ t he parties to a technological transfer contract may in accordance with the principle of mutual benefit stipulate the method for sharing any subsequently improved technological result obtained from the patent exploitation or utilization of the technical know-how ” Unlike the restrictions placed on U S importing technology licensors licensors party to domestic technology transfer agreements can negotiate the terms for sharing the benefits of any improvements to a licensed patent or trade secret 292 The PRC Contract Law also provides a default position for parties to domestic technology transfer agreements such that should the parties fail to agree on how to determine ownership of any improvements or if the contractual language regarding improvements is vague 293 then the default is that neither party owns any improvement made by the other party to the contract This default provision only provides a non-mandatory backstop position for technology transfer contracts as well as a position from which to negotiate such contracts yet such flexibility is only available to companies transferring technology domestically 4 Use of Technology after the Technology Contract Expires concerned belongs to the party making the improvement” CCCME Submission Section 301 Hearing 10 Oct 23 2017 292 A Chinese commentator has also identified this inconsistency between the terms of art 27 of TIER and art 354 of the PRC Contract Law In a general overview to TIER published shortly after its promulgation a Chinese patent attorney noted that it was a “very real problem” that a foreign party might see its co-ownership rights to an improvement rescinded by a Chinese court even if the foreign party and Chinese party had agreed to share ownership of such improvements based on the PRC Contract Law In that writer’s opinion the PRC Contract Law permitted “a comparatively flexible and elastic means” by which the parties may on the principle of mutual benefit contract for ownership of these improvements which are “seeking truth from facts in the long term interests of the parties ” Wang Chongfang Thoughts and Interpretations of TIER 13 INTELLECTUAL PROPERTY RIGHTS 31 2003 293 Art 61 of the PRC Contract Law applies to “Indeterminate Terms Supplementary Agreement” and states that if a “ f or a contract that has become valid where the parties have not stipulated the contents regarding quality price or remuneration or the place of performance or have stipulated them unclearly the parties may supplement them by agreement if they are unable to reach a supplementary agreement the problem shall be determined in accordance with the related clauses of the contract or with trade practices ” Art 354 of the PRC Contract Law specifies that art 61 applies when determining whether the method of sharing improvement is “not stipulated or not clearly stipulated nor can … be determined pursuant to the provisions of Article 61 ” and is therefore vague 53 III China’s Discriminatory Licensing Restrictions In the course of the Section 301 investigation USTR identified additional licensing restrictions in the JV Regulations In addition to the TIER the JV Regulations too include licensing restrictions on technology exporting parties involved in joint ventures within China’s territory e g U S parties exporting technology to their Chinese joint venture The licensing restrictions result in securing benefits for technology importing parties the Chinese joint ventures importing technology into China from the United States Article 43 3 of the JV Regulations states that the term of the technology transfer agreement to the JV shall “generally not exceed ten years ” The provision may result in U S companies only having control over their transferred technology for ten years even though some forms of technology such as patents and trade secrets may be protectable for much longer than ten years After the conclusion of the JVrelated technology transfer agreement Article 43 4 stipulates that the “technology importing party shall have the right to continue using the technology ” The result of Article 43 4 is that Chinese joint ventures to technology contracts have the right under the JV Regulations to continue to use transferred technology after the expiration of the related technology contract even if the transferred technology would otherwise be protected from use by that Chinese party This means that under the JV Regulations the Chinese joint venture licensee has the right to use the U S licensor’s technology in perpetuity after the technology contract expires without paying compensation or subject to other terms C Concerns Raised by Other Trading Partners Other governments have identified China’s technology transfer licensing regime as a problem In connection with the Trade-Related Aspects of Intellectual Property Rights TRIPS Council transitional reviews of China at the World Trade Organization in 2009 and 2011 Japan the EU and the United States requested information from China to explain its technology transfer regime and address other areas of concern as well In the last review of China in 2011 Japan specifically noted its concern that the TIER contains discriminatory provisions as to the treatment of foreign licensors when compared to their domestic counterparts 294 Japan continues to raise concerns about the system in China for regulating importation of technology 295 In its 2016 Annual Compliance Report Japan’s Ministry of Economy Trade and Industry METI devoted a section of its report on China specifically to the discriminatory articles of the TIER including Articles 24 27 and 29 METI notes that “ i n many cases of technology import and export subject to the TIER foreign companies are assumed to be the parties providing the technology” and that therefore the “mandatory provisions of the TIER are applied only to foreign companies providing the technology and therefore can be a measure that discriminates between Chinese and foreign technology transfer ”296 Foreign stakeholders also have raised concerns The European Union Chamber of Commerce in China concluded in its “Intellectual Property Rights Working Group Position Paper 2016 2017” 294 China’s only response to these criticisms was that there are no discriminatory regulations in the TIER For a summary of the 2011 TRIPS Council meeting see the 2016 report of the Ministry of Economy Trade and Industry METI of Japan THE 2016 REPORT ON COMPLIANCE BY MAJOR TRADING PARTNERS WITH TRADE AGREEMENTS WTO EPA FTA AND IIA hereinafter “2016 Report on Compliance” 67 2016 available at http www meti go jp english report data 2016WTO pdf 01_01 pdf 295 See 2016 REPORT ON COMPLIANCE at 64–67 296 2016 REPORT ON COMPLIANCE at 65 54 III China’s Discriminatory Licensing Restrictions that due to TIER “parties to a cross-border technology transfer contract are not allowed to freely negotiate clauses concerning the ownership of subsequent developments or the liability for infringement of third parties rights… A s a consequence TIER interfere s with the needs of Chinese and foreign companies for effective technology trade mechanisms ”297 In its position paper for 2017 2018 the Chamber recommended that Article 27 of the TIER be deleted 298 D China’s Acts Policies and Practices are Discriminatory The above articles of the TIER and the JV Regulations constitute discriminatory acts policies and practices of China 299 The TIER and JV Regulations put foreign technology importers including U S entities at a disadvantage relative to their domestic Chinese counterparts because the TIER and JV Regulations impose additional restrictions on importers of foreign technology and their use and enjoyment of their rights in technology including but not limited to rights in intellectual property 300 Through these restrictions U S technology importers into China often are forced to grant ownership or usage rights to valuable intellectual property to domestic Chinese entities At the same time the licensing restrictions result in benefits for the Chinese counterparty to those forced arrangements 301 1 Justifications for Discrimination In this Section 301 investigation USTR received submissions and testimony stating that the licensing restrictions in China are necessary to protect Chinese companies which are in a “weak position” in technology transfer negotiations and contracts 302 Other submissions stated that 297 EUROPEAN CHAMBER IN CHINA INTELLECTUAL PROPERTY RIGHTS WORKING GROUP POSITION PAPER 2016 2017 87 available at http www europeanchamber com cn documents download start en pdf 429 298 See EUROPEAN CHAMBER IN CHINA INTELLECTUAL PROPERTY RIGHTS WORKING GROUP POSITION PAPER 2017 2018 89 available at http www europeanchamber com cn documents download start en pdf 545 299 See NFTC Submission Section 301 Hearing 7 Sept 28 2017 “This lack of freedom of contract under art 24 of the TIER discriminates against overseas licensors… ” US–CHINA BUSINESS COUNCIL hereinafter “USCBC” Submission Section 301 Hearing 10 Sept 28 2017 300 NFTC Submission Section 301 Hearing 6 Sept 28 2017 “The Regulations on the Administration of the Import and Export of Technology impose greater risks and liabilities on foreign technology licensors than China’s Contract Law imposes on domestic licensors ” 301 ITIF Submission Section 301 Hearing 16 Oct 25 2017 “In summary China imposes onerous restrictions on foreign parties involved in technology licensing activities in China which disadvantages foreign parties to the benefit of the Chinese counterparty ” 302 See Yang Guohua Submission Section 301 Hearing Sept 28 2017 “The relevant provisions of China’s Regulation on Technology Import and Export Administration are well-founded The provisions are intended to safeguard the legitimate rights and interests of the licensees who have a weak position in international technology transfer negotiations as similar laws and policies of other countries do in such circumstances ” CCOIC Submission Section 301 Hearing 63–4 Sept 28 2017 “In the context of cross-border technology transfer the status of the licensor from developed countries and licensee from developing countries in a negotiation is usually unequal often greatly…the Regulations are based on the same principle which is to redress the imbalance of powers leading to imbalance of interests and to protect the rights of the licensee having a weak negotiation position ” 55 III China’s Discriminatory Licensing Restrictions licensing negotiations and contracts are based on market conditions without interference from China303 and that the TIER does not favor Chinese companies 304 Other submissions stated that licensing restrictions like the TIER could not constitute a problem for U S industry because there were no legal cases brought in China based on the TIER 305 These submissions do not account for the continuing existence of the TIER as well as the JV Regulations in China and the effects of such restrictions on contract negotiations for U S technology owners 306 These concerns increase when a company has valuable intellectual property and other proprietary information that may be affected by China’s licensing restriction regime 307 Moreover none of the submissions justifying the discriminatory policies addressed how such a licensing regime meets a national treatment standard National treatment means that a country like China accords to the nationals of other countries like the United States treatment that is no less favorable than that it accords to its own nationals with regard to the policies at issue Instead the submissions appear to implicitly acknowledge that China has discriminatory acts polices and practices concerning technology import contracts by justifying their existence Section 301 defines acts policies and practices that are discriminatory to “include when appropriate any act policy and practice which denies national or most-favored nation treatment to United States goods services or investment ”308 Technology transfer agreements as defined by the TIER and the JV Regulations in China cover U S goods service or investment as related to the licensing and importing of U S -owned technology into China when compared to the treatment of domestic licensing of Chinese goods services or investment The TIER and JV Regulations place U S technology owners at a disadvantage relative to their Chinese counterparts when licensing technology into the Chinese market The disparate treatment is effectively based on nationality resulting in discrimination under Section 301 303 See CCCME Submission Section 301 Hearing 9 Oct 23 2017 alleging that “contracts are concluded according to companies’ independent willingness Chinese governments at all levels neither participate nor intervene in any of those business decisions or activities…The intellectual property licensing or technology negotiations are carried out based on market conditions by Chinese companies and U S companies ” CCOIC Submission Section 301 Hearing 64 Sept 28 2017 304 CCCME Submission Section 301 Hearing 10 Oct 23 2017 305 E g CCCME Submission Section 301 Hearing 5 Oct 23 2017 “Over the past five years however CCCME received neither dispute nor complaints related to intellectual property and technology transfer ” 306 USCBC Submission Section 301 Hearing 10 Sept 28 2017 “China’s JV requirements and foreign equity limitations create an unequal negotiation for companies…Elimination of these policies would create a meaningful change in companies’ ability to negotiate market-based terms for their IP and technology in China ” 307 Id at 3 “In USCBC’s recent survey most companies report that they are concerned about transferring their technology to China regardless of the circumstances because of concerns about the protection of intellectual property rights and proprietary information as well as concerns about enforcing technology licensing agreements ” 308 19 U S C § 2411 d 5 56 III China’s Discriminatory Licensing Restrictions 2 Acts Polices and Practices of Other Countries In addition USTR received submissions regarding the acts policies and practices of other trading partners relating to licensing and technology transfer including submissions regarding the technology licensing regime in the United States None of the cited acts policies or practices in comments submitted to USTR was the same as or similar to those of China Instead these very different examples highlight that the acts policies and practices of China in technology licensing discriminate against importers of foreign technology including U S entities USTR received comments and testimony asserting without support or discussion that the PRC Contract Law provisions regarding technology transfer “equally apply to domestic and foreign invested companies without favoring either group ”309 As discussed above in Section III B 1 the PRC Contract Law does not equally apply to domestic and foreign companies 310 A Chinese company seeking to transfer technology within China can take full advantage of the provisions of the PRC Contract Law while a U S technology owner seeking to transfer technology into China must adhere to the adverse terms imposed by TIER or the JV Regulations 311 Some submissions characterized other indemnity clauses in international codes and national laws as similar to those in the TIER For example two submissions highlighted language from the Draft International Code of Conduct on the Transfer of Technology Draft Code a United Nations text 312 Article 24 of TIER states in relevant part that “ w here any of the lawful interests of any other person is infringed upon the liabilities shall be borne by the licensor Chapter 5 Paragraph 4 Romanette vi Rights to the technology transferred of the Draft Code states that “ t he technology supplier's representation that on the date of the signing of the agreement it is to the best of its knowledge not aware of third parties' valid patent rights or similar protection for inventions which would be infringed by the use of the technology when used as specified in the agreement… ” The Draft Code drafted over thirty years ago does not address indemnification for future liability which is what is required by Article 24 of TIER Instead the Draft Code addresses a warranty issue regarding known past infringement at the time the contract is signed 313 The TIER addresses all indemnification issues not just past warranties as the Draft Code addresses 309 CHINA GENERAL CHAMBER OF COMMERCE – USA hereinafter “CGCC” Submission Section 301 Hearing Sept 28 2017 The CGCC submission adds that “ i n addition to the Contract Law the Regulations on Technology Import and Export Administration of the People’s Republic of China passed in 2001 have additionally bolstered the protection of technology transfer licensing ownership and indemnity in cross border transactions ” but does not include information as to how the TIER bolsters such protections nor how the TIER’s separate regime for foreign technology transfers works alongside the PRC Contract Law Id 14-5 310 ITIF Submission Section 301 Hearing 15 Oct 25 2017 “CCCME…holds that TIER’s relevant Articles 24 and 27 are ‘neutral in nature ’ Yet they are not for CCCME omits that the articles only apply in a ‘technology import contract ’” 311 See id “CCCME contends that these provisions are ‘neutral in nature’… But this fails to rebut or address the real issue at hand for it omits the fact that both articles 24 and 27 of TIER only apply ‘in a technology import contract’ but do not hold with regard to a technology license contract ” 312 CCCME Submission Section 301 Hearing 10 Oct 23 2017 CCOIC Submission Section 301 Hearing 61–2 Sept 28 2017 313 ITIF Submission Section 301 Hearing 15 Oct 25 2017 “The unaware-of-dominant-patent fundamentally differs from TIER Article 24’s ‘licensor shall bear liability ’” 57 III China’s Discriminatory Licensing Restrictions Instead of adopting the Draft Code certain Members like China and the United States have adopted the Convention on Contracts for the International Sale of Goods which includes a provision expressly providing for the freedom of contract around such terms The Convention does include a related warranty provision that a seller of goods “must deliver goods which are free from any right or claim of a third party based on industrial property or other intellectual property” in Article 42 but the Convention also provides in Article 6 that parties “may…derogate from or vary the effect of any of the Convention provisions ” A similar freedom of contract provision is incorporated into the “Successful Technology Licensing” publication of the UN’s World Intellectual Property Organization WIPO WIPO of which China and the United States are also members provides guidance through its Successful Technology Licensing document which recognizes the “legal complexity” of terms regarding issues like indemnity and the importance of parties being able to freely negotiate such terms In its Successful Technology Licensing WIPO makes clear that “there is no set answer” and “nothing is ‘standard’ or ‘customary ’” These freedom to contract provisions in the UN Convention and the WIPO document are reflected in Article 353 of the PRC Contract Law but the TIER conflicts for U S technology importers into China Some submitters asserted that additional relevant laws of trading partners including the United States address indemnification but the submitters failed to provide supporting legal analysis for such allegations 314 USTR was unable to analyze unsupported allegations such as these particularly when the submitters were provided an opportunity during the hearing to respond to these questions and chose not to do so in the hearing or afterwards in written submissions during the rebuttal comment period 315 For example a submission identified the Philippines as having similar indemnification and improvement ownership clauses to China in the Voluntary Licensing chapter of the Intellectual Property Code of the Philippines Republic Act No 8293 316 However the cited provisions of the Philippine law are not similar to the Chinese regime under the TIER As discussed above the TIER in China requires a technology importing licensor to be responsible for all liabilities resulting from use of the technology provided “ w here any of the 314 For example the China Intellectual Property Law Society submitted that German case law and the U S Uniform Commercial Code both included similar rules to the TIER but did not cite to any provision in either that required foreign licensors to indemnify domestic licensees for all infringement liability China Intellectual Property Law Society hereinafter “CIPL” Submission Section 301 Hearing 80–1 Sept 27 2017 Instead CIPL only cited German case law and the U S Uniform Commercial Code with regard to express and implied warranty language for goods in Germany and the United States regarding known defects of products Jin Haijun CIPL Testimony Section 301 Hearing 140–1 Oct 10 2017 315 E g Jin Haijun CIPL Testimony Section 301 Hearing 140–1 Oct 10 2017 “We provided the explanation of your question in our written comments… We give some examples like the judgment in Germany and the UCC in the United States and the draft code in the United Nations ” John Tang DHH WASHINGTON DC LAW OFFICE P C hereinafter “DHH” Testimony Section 301 Hearing 164 Oct 10 2017 responding that “I believe in our supplemental comments we will address your answer in a more complete way” regarding questions about TIER compare with DHH Submission Section 301 Hearing 4 Oct 23 2017 “In particular China does not have any laws rules or regulations that force foreign investors to transfer their technology Should such situations arise it would be an agreement among corporations subject to market conditions instead of by government interference ” 316 CCOIC Submission Section 301 Hearing 62 Sept 28 2017 58 III China’s Discriminatory Licensing Restrictions lawful interests of any other person is infringed upon ”317 The cited Philippine law states that there is a prima facie presumption that an adverse effect on competition and trade arises for technology transfer arrangements that “exempt the licensor for liability for non-fulfilment of his responsibilities under the technology transfer arrangement and or liability arising from third party suits brought about by the use of the licensed product or the licensed technology ” Given that it is a presumption the Philippine measure significantly differs from the TIER’s broad indemnification requirement Additionally there is an exception to the presumption under Philippine law for situations listed under Section 91 of the law which include technology transfer arrangements that are “exceptional or meritorious cases where substantial benefits will accrue to the economy such as high technology content increase in foreign exchange earnings employment generation… ” The submission fails to account for the exception cited in the section that the presumption applies “ e xcept in cases under Section 91 of the Intellectual Property Code ” Section 91 of the Intellectual Property Code of the Philippines specifically permits entities to seek exemptions from the cited Sections 87 14 and 87 16 including in cases “where substantial benefits will accrue to the economy such as high technology content ” Most importantly the Philippine law appears to apply to all technology transfer arrangements under Philippine law whereas the Chinese TIER provision only applies to importers of foreign technology such as U S industry For the ownership clause Article 27 of the TIER requires that improvements to imported technology belong to the party making the improvement As discussed above in Section III B 3 the obligation in Article 27 means that Chinese parties to technology importing contracts have the automatic right to any improvements made by those same parties without negotiating terms with their U S partners The cited Philippine law318 in Section 87 6 states that there is a prima facie presumption that technology transfer arrangements that “obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use of the licensed technology” have an adverse effect on competition and trade The TIER requires that all improvements made by a licensee vest with that licensee not that there is a prima facie presumption of adverse effect on competition and trade where a licensee must transfer any improvements for free as set out in the Philippine intellectual property law Also and as with Section 87 14 there is an exception to the presumption under Philippine law for situations listed under Section 91 of the same law which include technology transfer arrangements that are “exceptional or meritorious cases where substantial benefits will accrue to the economy such as high technology content increase in foreign exchange earnings employment generation… ” Similarly the Philippine law appears to apply to all technology transfer arrangements under Philippine law whereas the Chinese TIER provision only applies to importers of foreign technology such as U S industry USTR also received statements that the intellectual property regime in Vietnam is similar to the TIER 319 However just as for the Philippine system Vietnam does not have a provision like Article 27 of the TIER in China The regime in Vietnam addresses contracts that require licensees to transfer improvement made by the licensee free of charge to licensors Article 144 2 a of Vietnam’s Law on Intellectual Property Law states that “an industrial property object 317 TIER art 24 CCOIC Submission Section 301 Hearing 63 Sept 28 2017 319 CCOIC Submission Section 301 Hearing 63 Sept 28 2017 318 59 III China’s Discriminatory Licensing Restrictions license contract must not have provisions which unreasonably restrict the right of the licensee ” Specific examples include “ p rohibiting the licensee to improve the industrial property object other than marks” and “compelling the licensee to transfer free of charge to the licensor improvements of the industrial property object made by the licensee or the right of industrial property registration or industrial property rights to such improvements ” However the TIER in China forbids the parties from freely contracting as to how improvements are allocated between the parties taking into consideration that the technology at issue was provided by the licensor in the first place 320 Similar submissions failed to address whether any of these cited provisions only apply to foreign technology owners and provide different treatment for domestic technology transfers as is the regime in China All of the so-called “similar” legal and guidance provisions in other countries and international fora do not solely apply to imported technology transfers as the TIER does in China but instead apply equally to all technology transfers in licensing contracts USTR received comments stating that U S companies are not treated differently under the TIER as compared to Chinese domestic companies 321 As explained above in Section I B 2 et seq and Section I D 1 this is not the case One submission states that “as long as the patent on the technology is still valid or the technology remains subject to confidentiality the use of the technology by the licensee still requires licensing by the licensor” under the TIER 322 Such comments do not account for the other requirements of the licensing regime in China including the JV Regulations that among other things authorize the licensee to use the technology without compensation after the conclusion of the agreement Other comments stated without citations that the Chinese contract law system “originated from those in major European countries such as Germany and the law has evolved into a very similar one to its U S counterpart ”323 Assertions of such a general nature are not responsive to the concern articulated above regarding the differential and discriminatory treatment of U S and other foreign technology owners relative to Chinese counterparts The submitters’ failure to provide citations to the asserted relevant U S counterpart contract provisions precludes USTR from concluding such statements are sound and supported by law Moreover no submission addressed the fact that the contract laws of the United States do not provide different treatment for domestic transfers of technology versus foreign imported transfers of technology USTR did not receive any submissions establishing that the United States or any third country has enacted any act policy or practice similar to the JV Regulations E China’s Acts Policies and Practices Burden U S Commerce As discussed earlier under Section II E China’s acts policies and practices regarding restrictions on technology transfer — including licensing and other technology-related 320 See TIER art 27 See CCCME Submission Section 301 Hearing 10 Oct 23 2017 alleging that “these two provisions arts 24 and 27 of the TIER are neutral in nature… Either Chinese companies or U S companies can be the licensor and the party who has made the improvement ” CCCME Submission Section 301 Hearing 7 Oct 23 2017 asserting without citations that “enterprises usually agree on the ownership of improved technology” 322 CCOIC Submission Section 301 Hearing 62 Sept 28 2017 323 CGCC Submission Section 301 Hearing §2 C Sept 28 2017 321 60 III China’s Discriminatory Licensing Restrictions negotiations for U S entities — clearly burden U S commerce Acts policies and practices that burden U S commerce include licensing requirements that result in discrimination against U S technologies 324 as well as acts policies and practices that do not adequately protect U S intellectual property rights 325 The licensing restrictions described in Section III B on U S entities clearly meet these standards because they deprive U S entities from benefiting from their innovative technology that has been transferred into China under a discriminatory licensing regime 326 324 See Initiation of Section 302 Investigation and Request for Public Comment Japan Market Access Barriers to Agricultural Products 62 Fed Reg 53 853 Oct 16 1997 Petition of National Canners Association 40 Fed Reg 44 635 Sept 29 1975 325 See Termination of Action Protection of Intellectual Property Rights by the Government of Honduras 63 Fed Reg 37 943 June 30 1998 326 WILEY REIN LLP Submission Section 301 Hearing 11 Sept 28 2017 “Chinese companies would be able to employ ‘winner-take-all’ strategies to keep U S companies from regaining market share Therefore it is clear that the Chinese government’s action burden and restrict U S commerce ” 61 IV Outbound Investment A Introduction Over the past decade China’s outbound foreign direct investment OFDI has grown at a rapid rate 327 A longstanding focus of China’s OFDI has been the acquisition of mineral deposits and other natural resource assets principally in developing regions such as Africa and Latin America 328 Yet as China’s OFDI flows have increased technology-focused investments have become more prevalent particularly in the United States and Europe 329 Various motives inform China’s outbound investment behavior Under the general marketbased theory of foreign direct investment FDI foreign investors seek 1 market expansion 2 efficiency gains and or 3 resources broadly defined to include natural resources and other strategic assets 330 These motives also apply to an extent in China’s case particularly with respect to natural resource investments that aim to mitigate China’s reliance on resource imports 331 327 Thilo Hanneman Daniel H Rosen RHODIUM GROUP CHINESE INVESTMENT IN THE UNITED STATES RECENT TRENDS AND THE POLICY AGENDA 6 Dec 2016 stating that “The rapid growth of outbound foreign direct investment FDI by firms from China is changing the patterns of global capital flows Chinese FDI flows grew at an average annual rate of 27 percent over the past decade from $3 billion in 2005 to $123 billion in 2015 ” For a definition of FDI see Shun Chiao Chang The Determinants and Motivations of China’s Outward Foreign Direct Investment A Spatial Gravity Model Approach 43 GLOBAL ECON REV 260 2014 “‘Foreign direct investment’ is the category of international investment that reflects the objective of a resident entity in one economy ‘direct investor’ or parent enterprise to obtain a ‘lasting interest’ and control in an enterprise resident in another economy ‘direct investment enterprise’ The two criteria incorporated in the notion of a ‘lasting interest’ are the existence of a long-term relationship between the direct investor and the enterprise and the significant degree of influence that gives the direct investor an effective voice in the management of the enterprise ” 328 See e g Ernst Young data for the period 2010-2014 shows that Chinese firms transacted a total of 223 M A deals in energy and mining totaling $143 billion and 54 M A deals in agribusiness and food totaling $16 7 billion ERNST YOUNG RIDING THE SILK ROAD CHINA SEES OUTBOUND INVESTMENT BOOM 7-11 Mar 2015 329 Thilo Hanneman Daniel H Rosen RHODIUM GROUP CHINESE INVESTMENT IN THE UNITED STATES RECENT TRENDS AND THE POLICY AGENDA 6 Dec 2016 stating that “Initially focused on extractive sectors in developing countries today Chinese FDI flows increasingly to advanced economies where technology brands and sophisticated manufacturing assets are abundant ” see also ERNST YOUNG RIDING THE SILK ROAD CHINA SEES OUTBOUND INVESTMENT BOOM 7-11 15-16 Mar 2015 “European countries especially the developed ones are increasingly sought after by Chinese investors for their advanced technology and expertise well-accepted and recognized brands and mature marketing networks … The industrial technology media and telecommunications and automotive sectors are favorites for Chinese investors ” 330 For a general theory of FDI motives often referred to as the “eclectic paradigm” John H Dunning The Eclectic Paradigm of International Production A Restatement and Some Possible Extensions 19 J OF INT’L BUS STUDIES 1-31 1988 331 Yi Zhang Hein Roelfsema Unravelling the Complex Motivations behind China’s Outward FDI 19 J OF THE ASIA PACIFIC ECONOMY 92 2013 “The third pattern is that host country resources including natural resources and strategic assets are of growing importance in attracting China’s outward FDI Many Chinese firms specialize in mass production which involves natural resource intensive processes Nevertheless natural resources per capita in China are only 20 percent–25 percent of the world’s average level Guo 1996 To secure supplies for domestic firms the outward FDI has been used to acquire scarce natural resources such as energy petroleum and minerals Wu and Sia 2002 For example over years Chinese multinationals have invested in large projects to exploit oil in countries such as Algeria Angola Kenya Nigeria and Sudan copper in Congo and Zambia as well as iron ore in Gabon With the fast expansion of the Chinese economy in recent years there is an increasing demand for natural resources to support domestic economic growth This path thereby leads to a more urgent need for conducting 62 IV Outbound Investment But as numerous studies have noted China’s OFDI is also driven by non-market factors These factors stem from the Chinese government’s extensive intervention – in the Chinese economy in general and in foreign investment in particular – to achieve industrial policy objectives  The U S Chamber of Commerce observed in a 2017 report In several Made in China 2025 sectors the technological gap between domestic and foreign competitors is significant and closing that gap would require extended timelines and high levels of financial commitment that could stress budgets To accelerate the learning process the Chinese state appears to be supporting acquisition strategies of Chinese state-owned and state-supported companies tied to Made in China 2025 priority sectors 332  The European Union Chamber of Commerce in China states in a 2017 report Over the course of 2015 and 2016 an unprecedented wave of outbound investments into firms in Europe and elsewhere in industries of relevance to Made in China 2025 have either been successfully completed or attempted Significantly many of these investments have been in areas where European business is unable to make equivalent investments in China and have also enabled Chinese firms to access technology brands and management expertise that they would not otherwise have been able to acquire In some industries such as semiconductors attempted and completed investments have spanned entire industrial supply chains 333  The 2017 European Commission report on Chinese economic distortions states A clear acceleration of Chinese outbound investments in Europe and elsewhere is noticeable in the last few years … Most of these overseas acquisitions have the direct backing of the State Through that state-support process Chinese state-owned enterprises SOEs gain market share build additional capacities and capital assets and gain access to inputs 334  The Mercator Institute for China Studies a leading German think tank states in a 2016 report natural-resource-seeking FDI over time ” See also Shun Chiao Chang The Determinants and Motivations of China’s Outward Foreign Direct Investment A Spatial Gravity Model Approach 43 GLOBAL ECON REV 244 260 2014 The study which reviews China’s outbound investment in 138 countries between 2003 and 2009 finds that the “fuel extraction motive plays a key role in China’s OFDI ” 332 U S CHAMBER OF COMMERCE hereinafter “U S Chamber” MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 22 2017 333 EUROPEAN UNION CHAMBER OF COMMERCE IN CHINA hereinafter “E U Chamber” CHINA MANUFACTURING 2025 PUTTING INDUSTRIAL POLICY AHEAD OF MARKET FORCES 18-19 2017 334 EUROPEAN COMMISSION COMMISSION STAFF WORKING DOCUMENT ON SIGNIFICANT DISTORTIONS IN THE ECONOMY OF THE PEOPLE'S REPUBLIC OF CHINA FOR THE PURPOSES OF TRADE DEFENCE INVESTIGATIONS 426 SWD 2017 483 final 2 Dec 20 2012 63 IV Outbound Investment To speed up China’s technological catch-up and to leapfrog stages of technological development Chinese companies are acquiring core technologies through investment abroad In itself this is neither surprising nor objectionable However China’s technology acquisitions are partly supported and guided by the state China pursues an outbound industrial policy with government capital and highly opaque investor networks to facilitate high-tech acquisitions abroad This undermines the principles of fair competition China’s state-led economic system is exploiting the openness of market economies in Europe and the United States Chinese high-tech investments need to be interpreted as building blocks of an overarching political programme It aims to systematically acquire cutting-edge technology and generate large-scale technology transfer 335  Rhodium Group in a 2016 study on Chinese investment in the United States observes that while it is difficult to draw clear-cut conclusions concerning aggregate FDI data “Chinese government policies are important variables in FDI patterns ” and that “the surge in global takeover offers in the semiconductor industry is the most notable example of the industrial policy-outbound investment nexus ”336  Ernst and Young in a 2016 annual report on China’s outbound investment states that “ t he Chinese government is actively improving the strategy of outbound investment to facilitate Chinese enterprises to ‘Go Global’ by launching fiscal and financial support policies and establishing cooperation platforms ”337  Numerous academic studies note the significance of state involvement in shaping China’s OFDI 338 For example in a widely-cited study on the determinants of China’s outbound 335 Jost Wübbeke et al MERCATOR INSTITUTE FOR CHINA STUDIES hereinafter “MERICS” MADE IN CHINA 2025 THE MAKING OF A HIGH-TECH SUPERPOWER AND CONSEQUENCES FOR INDUSTRIAL COUNTRIES 7-8 Dec 2016 emphasis added 336 Thilo Hanneman Daniel H Rosen RHODIUM GROUP CHINESE INVESTMENT IN THE UNITED STATES RECENT TRENDS AND THE POLICY AGENDA 7 Dec 2016 “Government policies impact patterns in Chinese companies’ outbound investment both indirectly through economic policy and directly through incentives and policies aimed at promoting overseas investment in specific industries technologies and geographies ” see also RHODIUM GROUP hereinafter “Rhodium” Submission Section 301 Hearing 4 Sept 28 2017 337 ERNST YOUNG GOING OUT – THE GLOBAL DREAM OF A MANUFACTURING POWER 2016 CHINA OUTBOUND INVESTMENT OUTLOOK 7 Mar 2016 “In 2015 China began to comprehensively implement its ‘One Belt One Road’ strategy It also introduced the ‘Made in China 2025’ plan and ‘Guiding Opinions on Promoting International Cooperation in Industrial Capacity and Machinery Manufacturing’ aiming at encouraging the manufacturing industry to ‘Go Global’ and to develop international capacity cooperation These efforts have already taken some effect In 2015 Chinese enterprises invested USD 14 8 billion along the Belt and Road territories up 18 2 percent from 2014 meanwhile the outward FDI from the machinery manufacturing industry has grown by 154 2 percent ” 338 See e g Alvaro Cuervo-Cazurra et al Government as Owners State-owned Multinational Companies J OF INT’L BUS STUDIES July 9 2014 Lin Cui Fuming Jiang State Ownership Effect on Firms’ FDI Ownership Decisions under Institutional Pressure A Study of Chinese Outward-Investing Firms 43 J OF INT’L BUS STUDIES 264-284 2012 Chengqi Wang et al Exploring the Role of Government Involvement in Outward FDI from Emerging Economies 43 J OF INT’L BUS STUDIES 655-676 2012 Luke Hurst Comparative Analysis of the Determinants of China’s State-owned Outward Direct Investment in OECD and Non-OECD Countries 19 CHINA WORLD ECONOMY 74-91 2011 Ping Deng Why Do Chinese Firms Tend to Acquire Strategic Assets in International Expansion 44 J OF WORLD BUS 74-84 Jan 2009 64 IV Outbound Investment investment Peter J Buckley et al argue for a “special theory of Chinese OFDI ” that takes into account the degree to which China’s outbound investment is shaped by soft budget constraints afforded to outbound investors by state-owned financial institutions pervasive state ownership of outbound investors 339 and the manner in which the Chinese government exerts control over the outbound investment approval process 340 USTR determines that the Chinese government directs and unfairly facilitates the systematic investment in and acquisition of U S companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property IP and generate large-scale technology transfer in industries deemed important by state industrial plans The role of the state in directing and supporting this outbound investment strategy is pervasive and evident at multiple levels of government – central regional and local The government has devoted massive amounts of financing to encourage and facilitate outbound investment in areas it deems strategic In support of this goal China has enlisted a broad range of actors to support this effort including SOEs state-backed funds government policy banks and private companies This section is structured as follows Section IV B provides a review of China’s outbound investment policies and the various state-owned and state-supported actors that participate in outbound investment The section considers the government’s principal initiatives to acquire foreign technology including the “Going Out” strategy and other levers that the government employs to channel and direct investment such as its outbound investment approval system Section IV C examines the ways in which this policy framework and approach have impacted Chinese investment in the United States The section reviews aggregate data on investment flows followed by a detailed analysis of Chinese acquisitions in seven sectors of the U S economy that illustrate China’s acts policies and practices 1 aviation 2 integrated circuits IC 3 information technology IT and electronics 4 biotechnology 5 industrial machinery and robotics 6 renewable energy and 7 automotive The section ends by analyzing Chinese investment activities that target core innovation drivers for the U S economy in technology centers such as Silicon Valley Section IV D provides a summary of findings China has engaged in acts policies and practices that are unreasonable and that burden U S commerce The market-distorting acts policies and 339 Peter J Buckley et al Determinants of Chinese Outward Foreign Direct Investment 38 J OF INT’L BUS STUDIES 501 July 2007 “Market imperfections may be transformed into ownership advantages by emerging economy firms Buckley 2004a This ability may arise from a number of particular and interrelated imperfections 1 state-owned and state-associated firms may have capital made available to them at below- market rates e g in the form of soft budget constraints … 2 inefficient banking systems may make soft loans to potential outward investors either as policy or through inefficiency … 3 conglomerate firms may operate an inefficient internal capital market that effectively subsidizes FDI … There are good grounds for believing that all … of these imperfections exist in China State-sponsored soft budget constraints make acquisition by Chinese enterprises a ‘normal’ mode of entering and penetrating a host economy ” 340 Peter J Buckley et al Determinants of Chinese Outward Foreign Direct Investment 38 J OF INT’L BUS STUDIES 503 July 2007 “Given the extent of state control of the Chinese economy Scott 2002 the institutional environment is likely to have had far-reaching and profound effects on the internationalisation decision of Chinese firms … Because various agencies within the state administration have been required to approve each and every outward FDI project from China pre- dominantly through the control of foreign exchange this evolution is likely to have influenced strongly the development strength and orientation of Chinese MNEs ” 65 IV Outbound Investment practices of the Chinese government in technology-focused sectors impose significant costs and risks on U S industry They undermine the ability of U S technology companies to innovate and adapt and threaten the long-term competitiveness of U S industry B Policy and Regulatory Framework 1 Major Policies to Acquire Foreign Technology a The “Going Out” Strategy A cornerstone of Chinese outbound investment is the “Going Out”341 strategy This strategy encourages Chinese companies to “go out” and invest abroad and calls on the government to guide and facilitate this effort The strategy as originally conceived seeks to remove obstacles to outbound investment342 and provide targeted support for specific enterprises and sectors investing abroad 343 This strategy appears to have been first articulated in a 1997 speech by then President Jiang Zemin 344 and was enshrined in the 10th Five-year National Economic and Social Development Plan Outline 2001-2005 10th Five-year Plan 345 In subsequent statements the government affirmed the linkage between the “Going Out” strategy and technology acquisition For example at the 2004 “International Forum on the Going Out of Chinese Companies ” a highranking official from the Ministry of Commerce MOFCOM explained that as one of seven 341 English translation of Chinese term zou chu qu Peter J Buckley et al Determinants of Chinese Outward Foreign Direct Investment 38 J OF INT’L BUS STUDIES 500 July 2007 “The process of accelerated outward investment liberalisation and growth can be traced from Deng Xiaoping's tour of South China in 1992 through to the government-led 'go global' zou chu qu initiative which was instigated in 1999 This initiative aims to promote the international competitiveness of Chinese firms by further reducing or eliminating foreign-exchange-related fiscal and administrative obstacles to international investment Sauvant 2005 ” 343 Luke Hurst Comparative Analysis of the Determinants of China’s State-owned Outward Direct Investment in OECD and Non-OECD Countries 19 CHINA WORLD ECONOMY 77 2011 “A ‘Go Global’ policy was unveiled in 1999 Its fundamental aim was to encourage ODI to support national exports with the clear objective of pushing domestic firms to internationalize their activities as a means to acquire strategic resources and expand into foreign markets The overarching goal was to increase the competitiveness of 180 corporate champions to facilitate their rise as true multinationals and enter the Fortune 500 Firms that were identified benefited from preferential tax concessions and political backing VanWyk 2009 ” 344 Jiang Zemin Former General Secretary of the Communist Party of China Implement the ‘Drawing In’ and ‘Going Out’ Combined Opening Up Strategy Chinese Dec 24 1997 available at http history mofcom gov cn 345 10th Five-year National Economic and Social Development Plan Outline adopted by the NPC on Mar 15 2001 The 10th Five-year Plan specifically references the “Going Out” strategy in the context of science and technology development Part 1 Chapter 1 ¶ 5 states “Adhere to Reform and Opening Up and progress in science and technology as the driving force … We shall unwaveringly expand Opening Up and while actively ‘drawing in’ implement the ‘Going Out’ strategy Amplify implementing the strategy of scientific education revitalize science and technology and foster talent for a prosperous nation ” In furtherance of this policy the 10th Five-year Plan calls for the expansion of “areas pathways and modes for international economic and technology cooperation” and encourages enterprises to “utilize foreign knowledge resources and establish research and development institutions and design centers overseas ” Likewise the plan calls for a broad array of support measures to help Chinese companies engage in “multinational operations” to “implement internationalization development” including outbound investment The government should assist in several areas including financing insurance foreign exchange fiscal policy laws information services and border entry and exit administration The plan instructs authorities to “improve corporate governance structures of enterprises with outbound investments ” and standardize supervision and administration of outbound investment Part 5 Ch 17 § 4 342 66 IV Outbound Investment aspects of “Going Out ” enterprises should “set up R D centers in regions endowed with intensive science and technology” and “intensify international technical exchange and cooperation and improve their innovative capability and technology ”346 As discussed below several recent policies flow from and support the “Going Out” strategy For example  The State Council’s Notice on Issuing Several Policies on Further Encouraging the Development of the Software and Integrated Circuit Industries calls for supporting the “Going Out” strategy of enterprises in establishing foreign marketing networks and R D centers to promote IC software and IT service exports 347  The Next-Generation Artificial Intelligence Development Plan released in July 2017 calls for a “Going Out” strategy that includes overseas mergers and acquisitions equity investments venture capital VC and establishment of research and development centers abroad 348  The Notice on Issuing “Made in China349 2025” Made in China 2025 Notice 350 outlines a wide-ranging strategy for harnessing and promoting the acquisition of foreign technology through outbound investment including “explor ing the use of industrial funds state-owned capital dividends and other channels to support the ‘Going Out’ of advantageous manufacturing capacity including high-speed rail power generation equipment automobiles and engineering so as to implement overseas investment acquisitions ”351 China has also established the “Going Out” strategy as one element of the Introduce Digest Absorb Re-innovate IDAR approach to technology assimilation see Section I C for further 346 See Karl Sauvant New Sources of FDI The BRICs - Outward FDI from Brazil Russia India and China 6 J OF WORLD INVESTMENT TRADE 676-677 2005 “First gradually increasing outward investment and develop overseas processing trade and overseas assembling trade … Second intensifying overseas cooperation of resource development … Third contracting overseas engineering projects … The fourth aspect is to carry out overseas agricultural cooperation … The fifth aspect is to facilitate overseas science technology and talent cooperation Companies are guided to set up R D centers in regions endowed with intensive science and technology They should intensify international technical exchange and cooperation and improve their innovative capability and technology The sixth aspect is to elevate the level of foreign-related labor service cooperation … The seventh aspect is to promote cooperation in the field of trade in services ” emphasis added 347 Notice on Issuing Several Policies on Further Encouraging the Development of the Software and Integrated Circuit Industries § 4 21 State Council Guo Fa 2011 No 4 issued Jan 28 2011 348 State Council Notice on Issuing the Next-Generation of Artificial Intelligence Development Plan State Council Guo Fa 2017 No 35 issued July 8 2017 For full translation and analysis see Graham Webster et al China’s Plan to ‘Lead in AI Purpose Prospects and Problems NEW AMERICA CYBERSECURITY INITIATIVE Aug 1 2017 available at https www newamerica org cybersecurity-initiative blog chinas-plan-lead-ai-purpose-prospects-andproblems 349 The literal translation is “China manufacturing” but “Made in China” is consistent with usage in Englishlanguage documents published by China’s official state-run news agency Xinhua News and with colloquial usage 350 Notice on Issuing “Made in China 2025” State Council Guo Fa 2015 No 28 issued May 8 2015 For a more detailed discussion on some of the broader policy goals of Made in China 2025 see Section I C 351 Made in China 2025 Notice § 4 “Strategy Support and Guarantees ” § 4 7 “Further Expand Opening Up of Manufacturing Industries ” 67 IV Outbound Investment discussion of IDAR This link is most clearly articulated in a 2006 document issued pursuant to the National Medium- and Long-Term Science and Technology Development Plan Outline 2006-2020 MLP 352 and other policies which call on the government to “ g uide enterprises that possess the conditions to ‘go out ’ Through the establishment of overseas research and development entities fully utilize foreign science and technology resources follow and study global advanced technology and continually enhance the technological development and innovation capacity of Chinese enterprises ”353 b International Cooperation and International Industrial Capacity In support of the “Going Out” strategy China has emphasized the need to promote “international cooperation ” a term that often refers to strategic outbound investments guided by state industrial policy For example the Information and Communications Industry Development Plan 20162020 354 released by the Ministry of Industry and Information Technology MIIT in December 2016 calls for “continually exploring different modes of overseas cooperation including joint ventures acquisitions equity investments and controlling equity investments ”355 The Formal Announcement of Guidelines for the Development and Promotion of the Integrated Circuit Industry IC Guidelines 356 released in 2014 calls for domestic IC companies to expand “international cooperation consolidate international resources and expand international markets ”357 The Robotics Industry Development Plan 2016-2020 Robotics Five-year Plan 358 under the heading “expand international exchange and cooperation ” states that the government should “develop international exchange and cooperation” across governments industry associations and enterprises and “encourage enterprises to actively expand overseas markets and strengthen technology cooperation … ”359 Likewise China recently has called for “international industrial capacity cooperation ”360 which was conceived as part of the “One-Belt One-Road” initiative launched in 2015 361 This policy 352 Notice on Issuing the National Medium- and Long-Term Science and Technology Development Plan Outline 2006-2020 State Council Guo Fa 2005 No 44 issued Dec 26 2005 see also Several Supporting Policies for Implementing the “National Medium- and Long-Term Science and Technology Development Plan Outline 20062020 ” State Council Guo Fa 2006 No 6 issued Feb 7 2006 353 Several Opinions on Encouraging Technology Introduction and Innovation and Promoting the Transformation of the Growth Mode in Foreign Trade hereinafter “IDAR Opinions” § 3 10 MOFCOM NDRC MOST MOF GAC SAT SIPO SAFE Shang Fu Mao Fa 2006 No 13 issued July 14 2006 354 Information and Communications Industry Development Plan 2016-2020 MIIT Gong Xin Bu Gui 2016 No 424 issued Dec 18 2016 355 Information and Communications Industry Development Plan § 3 2 6 “Development Priorities” emphasis added 356 Notice on Issuing Guidelines for the Development and Promotion of the Integrated Circuit Industry State Council issued June 24 2014 357 IC Guidelines § 4 8 emphasis added 358 Notice on Issuing Robotics Industry Development Plan 2016-2020 MIIT NDRC MoF Gong Xin Bu Lian Gui 2016 No 109 issued Mar 21 2016 emphasis added 359 Robotics Five-year Plan § 4 6 360 English translation of Chinese term guoji channeng hezuo 361 Belt and Road Basics HONG KONG TRADE DEVELOPMENT COUNCIL http beltandroad hktdc com en belt-androad-basics last visited Dec 6 2017 “The Belt and Road Initiative refers to the Silk Road Economic Belt and 21st Century Maritime Silk Road a significant development strategy launched by the Chinese government with the intention of promoting economic co-operation among countries along the proposed Belt and Road routes The 68 IV Outbound Investment focuses on encouraging outbound investment in manufacturing industries to expand markets for Chinese goods and technologies In addition “international industrial capacity cooperation” encompasses possible arrangements by which Chinese companies can obtain technology from foreign entities –including acquisitions various forms of equity investments and JVs In May 2015 the State Council issued the Guiding Opinion on Promoting International Industrial Capacity and Equipment Manufacturing Cooperation International Cooperation Opinion 362 which identifies 11 sectors as priorities for international expansion 1 steel and nonferrous metals 2 construction materials 3 rail equipment 4 power generation and infrastructure 5 resource development 6 textiles 7 automotive 8 information technology 9 machinery 10 aviation and 11 shipbuilding 363 With respect to information and communications technology ICT the measure calls for “ p romoting innovation upgrading” and “raising … international competitiveness ”364 To do this authorities are directed to “ e ncourage telecoms operating enterprises and Internet enterprises to use methods including mergers and acquisitions and investments in infrastructure and facilities operations to ‘Go Out’ … ”365 To facilitate this “Going Out” strategy the International Cooperation Opinion calls for government support including preferential financing through 1 equity investment and other new forms of financing 2 international use of the Renminbi hereinafter Chinese Yuan or CNY to facilitate transactions with support from the state-owned policy banks Export-Import Bank of China China Exim and China Development Bank CDB 3 diversified funding sources including low-cost access to funding through domestic fund-raising and preferential access to foreign exchange funds 4 increases in equity investment resources through more use of state-backed funds such as the Silk Road Fund and 5 export credit insurance 366 China appears to be implementing the “international industrial capacity cooperation” strategy on a large scale China Exim has described “international industrial capacity cooperation” as a government policy that has informed its lending for outbound investment projects 367 Likewise on its online “Going Out” Public Service Platform MOFCOM manages a website dedicated to “international industrial capacity cooperation ”368 This website regularly publishes “industrial capacity statistical data ” which quantifies the growth of China’s outbound investment in “manufacturing industries” and within that category the share of outbound investment in Initiative has been designed to enhance the orderly free-flow of economic factors and the efficient allocation of resources It is also intended to further market integration and create a regional economic co-operation framework of benefit to all The National Development and Reform Commission NDRC issued its Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st Century Maritime Silk Road on 28 March 2015 This outlined the framework key areas of co-operation and co-operation mechanisms with regard to the Belt and Road Initiative ” 362 Guiding Opinion on Promoting International Industrial Capacity and Equipment Manufacturing Cooperation State Council Guo Fa 2015 No 30 issued May 13 2015 363 International Cooperation Opinion § 3 7-18 364 International Cooperation Opinion § 3 15 365 International Cooperation Opinion § 3 15 366 International Cooperation Opinion § 6 32-36 367 See EXPORT-IMPORT BANK OF CHINA ANNUAL REPORT 2016 37 2016 “The Bank provided financial services to facilitate China’s major strategic plans including … international industrial capacity cooperation ” 368 “Going Out” Service Platform Chinese available at http fec mofcom gov cn article tjgjcnhz 69 IV Outbound Investment “equipment manufacturing ”369 Moreover Chinese media reports indicate that China has signed over 30 “international industrial capacity cooperation” agreements370 with foreign countries and launched outbound investments in a wide range of industries in pursuit of this policy 371 2 The Chinese Outbound Investment Approvals System The Chinese government also exercises control over outbound investment through an investment approval mechanism As described in more detail below the government retains considerable ability to influence investment decisions through its use of administrative procedures and foreign exchange controls By way of background until the early 2000s Chinese outbound investment was relatively rare The government began to permit inbound FDI only in the 1980s under the aegis of the “Reform and Opening Up Policy ” In the 1980s and 1990s China’s outbound investment regime remained highly restrictive Only a small number of enterprises – mostly SOEs – invested abroad during this period 372 Beginning in 2004 the government relaxed certain restrictions on outbound investment while formalizing its outbound investment approval system in laws and regulations An important foundation for this shift was the Administrative License Law of the People's Republic of China 373 which came into effect on July 1 2004 The law draws a distinction between a set of items that may be and set of items that may not necessarily be subject to government approval 369 January-October 2017 Statistical Data on Industrial Capacity Cooperation Chinese MINISTRY OF COMMERCE Nov 23 2017 http fec mofcom gov cn article tjgjcnhz tjsj 201711 20171102674823 shtml 370 Signatories are primarily developing countries such as Kazakhstan Egypt and Brazil These agreements generally entail cooperation on industrial projects in the foreign country with which China signs the agreement financed primarily or entirely by China For example China and Brazil have established an “industrial capacity cooperation fund” with capital of $20 billion of which $15 billion is provided by China Sectors in which the fund will invest include advanced technology among others China Has Signed Industrial Capacity Cooperation Agreements with 37 Countries Chinese XINHUA NEWS Sept 8 2017 available at http news xinhuanet com politics 2017-09 08 c_129699618 htm Press Release Permanent Secretariat of Form for Economic and Trade Co-operation between China and the Portuguese-Speaking Countries US$20-Billion ChineseBacked Fund to Build Brazilian Industry Starts Next Week May 26 2017 371 China Signs International Industrial Capacity Cooperation Agreements with Over 30 Countries Chinese PHOENIX NEWS May 12 2017 available at http news ifeng com a 20170512 510838270 shtml The report states for example “In the information technology industry several solar PV companies have invested in solar PV station infrastructure and developed engineering procurement and construction full-package services in locations including the United States Japan Europe South America and Southeast Asia ” 372 Thilo Hanneman Daniel H Rosen RHODIUM CHINESE INVESTMENT IN THE UNITED STATES RECENT TRENDS AND THE POLICY AGENDA 66 Dec 2016 “While China embraced inward foreign direct investment FDI to a far greater extent than most developing countries since the 1980s it long prohibited its firms from investing overseas For most of the first two decades of China’s economic reform period Chinese companies were forbidden from investing overseas unless they had direct approval from the government … The approval regime was modified several times but outbound FDI remained largely the domain of state-owned trading and technology companies ” Peter J Buckley et al Determinants of Chinese Outward Foreign Direct Investment 38 J OF INT’L BUS STUDIES 500 July 2007 “Since 1979 when ODI was formally permitted under the 'Open Door' policies the internationalisation of Chinese firms has been tightly controlled by national and provincial government either directly by administrative fiat or indirectly via economic policy and other measures designed to advance the economic development agenda Buckley et al 2006 ” 373 PRC Administrative License Law adopted by the NPC on Aug 27 2003 effective July 1 2004 70 IV Outbound Investment and codifies relevant regulatory procedures 374 In conjunction with this law the State Council released a catalogue of all administrative approval items “absolutely necessary to be retained ”375 Also in July 2004 the State Council released a guiding decision on reforming investment approvals The document recommends an aggregate reduction in approvals but also the formulation of long-term economic development plans and investment guidance catalogues to channel investment into areas favored by the government 376 This legal and normative framework continues to inform China’s outbound investment approval system Several features of the outbound approval system afford Chinese authorities significant influence over outbound investment flows a Formal Approval Authority Individual government agencies have authority to approve important items relating to outbound investment  The National Development and Reform Commission NDRC has authority to “screen and approve”377 outbound investment projects involving overseas resource extraction or large amounts of foreign exchange as well as the amount of foreign exchange used for outbound investment 378  The State Administration of Foreign Exchange SAFE the arm of China’s central bank that administers foreign exchange has authority to “examine and approve”379 the overseas transfer of foreign exchange for capital projects and to “screen and examine”380 the originating source and the overseas transfer of foreign exchange for overseas investment 381  MOFCOM has authority to “examine and approve” the establishment of enterprises overseas and to “examine and approve” participation in foreign contract bidding 382 374 PRC Administrative License Law art 12-14 art 12 authorizes the government to maintain administrative approvals for a variety of reasons including inter alia “special activities that directly bear on national security public security macro-economic adjustment and control” “vocations and trades that provide public services and directly relate to the public interest ” “important equipment facilities products articles that directly concern public security” “the establishment of the enterprises or other institutions for which the subject qualifications need to be determined” “other matters for which administrative licenses may be established in accordance with the laws and regulations” 375 Decision on Establishing Administrative License for the Administrative Screening and Approval Items Absolutely Necessary to Be Retained hereinafter “Approval Items Decision” State Council 2004 Order No 412 issued June 29 2004 effective July 1 2004 amended Jan 29 2009 further amended Aug 25 2016 376 State Council Decision on Investment System Reform §§ 4 2 State Council Guo Fa 2004 No 20 issued July 16 2004 377 English translation of Chinese term shenpi 378 Approval Items Decision Annex items 1 and 2 379 English translation of Chinese term hezhun 380 English translation of Chinese term shenhe 381 Approval Items Decision Annex items 468 487 382 Approval Items Decision Annex items 188 191 71 IV Outbound Investment b The Investment Catalogue In July 2004 the State Council began to publish the Catalogue of Investment Projects for Government Examination and Approval Investment Catalogue which informs both domestic and foreign investment approvals 383 The Investment Catalogue since updated in 2013 2014 and 2016 lists government approval requirements for investments in “high and new technology” and nine other sectors of the Chinese economy 384 It also specifies in a general sense which type and amount of outbound foreign investment is subject to approval or “filing-for-records” requirements with government departments under the State Council The 2016 edition of the Investment Catalogue provides that all outbound investments in “sensitive countries”385 and “sensitive sectors”386 require “examination and approval” by government departments under the State Council and that all outbound investments “administered by the central government ” as well as all investments by “local enterprises” at or above $300 million require “filing-for-records”387 with government departments under the State Council The 2016 edition also refers to government-issued “development plans ” “industrial policies ” and “technology policies”388 as an “important basis”389 for enterprises engaging in investment projects 390 c MOFCOM and NDRC Approval Roles MOFCOM and NDRC maintain separate legal instruments to exercise approval and review authority over outbound investment MOFCOM exercises its authority pursuant to the Measures on Administering Overseas Investment 2014 MOFCOM Approval Measures 391 The measure provides that investments in “sensitive countries” and “sensitive sectors” require “examination and approval” by MOFCOM 392 All other investments are subject to “filing-for-records” requirements 393 which involve the submission of a form and corresponding paperwork Upon 383 The first edition of the Investment Catalogue was appended to the State Council Decision on Investment System Reform State Council Guo Fa 2004 No 20 issued July 16 2004 State Council Decision on Investment System Reform § 3 1 also contains a notable provision that grants broad authority to maintain “government investment” in areas that affect “national security” or “fill gaps left by the market ” to expressly include “promoting science and technology advances and the industrialization of high and new technology ” 384 The 11 sectors are 1 Agriculture and irrigation 2 energy 3 transportation 4 IT industry 5 raw materials 6 machinery manufacturing 7 light industry and tobacco 8 high and new technology 9 urban construction 10 public services 11 finance 12 inbound FDI and 13 OFDI 385 English translation of Chinese term mingan guojia 386 English translation of Chinese term mingan hangye 387 English translation of Chinese term bei’an 388 English translation of Chinese term jishu zhengce 389 English translation of Chinese term zhongyao yiju 390 State Council Notice on Issuing the Investment Projects for Government Examination and Approval 2016 Edition §§ 2 3 State Council Go Fa 2016 No 72 issued Dec 12 2016 391 Measures on Administering Overseas Investment MOFCOM Shang Wu Bu Ling 2014 Order No 3 issued Sept 6 2014 392 2014 MOFCOM Approval Measures art 6 393 2014 MOFCOM Approval Measures art 6 72 IV Outbound Investment MOFCOM review the information submitted is “filed for records ” combined with the issuance of a certificate to the enterprise 394 MOFCOM can choose to reject a “filing-for-records” submission if it deems the information to be “untruthful”395 or “incomplete ”396 These administrative procedures are significant because they allow MOFCOM to collect detailed information on and intervene administratively in individual investment transactions Pursuant to the Measures on the Administration of Examination and Approval and Filing-forRecords of Overseas Investment Projects 2014 NDRC Approval Measures 397 effective through February 2018 NDRC examines and approves investments that 1 exceed $1 billion in value or 2 involve “sensitive countries” or “sensitive sectors ” For investments at or above $2 billion that are also in “sensitive countries” or “sensitive sectors ” State Council approval is required 398 The 2014 NDRC Approval Measures list “conformity with … industrial policies” as one of several “examination and approval” criteria 399 All other investments are “filed-for-records” with NDRC at the central level for all investments by central SOEs and for investments at or above $300 million for all other enterprises or the local level below $300 million 400 Like MOFCOM NDRC performs an administrative evaluation of investments that are “filed for records ” and its criteria include conformity with “industrial policies ”401 Effective March 1 2018 the 2014 NDRC Approval Measures were replaced by the Measures on the Administration of Enterprise Outbound Investment 2018 NDRC Approval Measures which adjust but do not fundamentally alter the existing regulations 402 NDRC will only “examine and approve” investments in “sensitive countries” or “sensitive sectors ” yet in other respects the new rules are more stringent In particular NDRC will now regulate not only outbound investments of People’s Republic of China PRC -registered enterprises but also those overseas investments that are made by foreign entities that are ultimately “controlled” by PRC-registered 394 2014 MOFCOM Approval Measures art 9 English translation of Chinese term bu rushi 396 2014 MOFCOM Approval Measures art 9 English translation of Chinese term bu wanzheng 397 Measures on the Administration of Examination and Approval and Filing-for-Records of Overseas Investment Projects NDRC 2014 Order No 9 issued Apr 8 2014 398 2014 NDRC Approval Measures art 7 399 2014 NDRC Approval Measures art 18 1 400 2014 NDRC Approval Measures art 8 401 In particular art 22 of the 2014 NDRC Approval Measures provides “For outbound investment projects applying for filing for records NDRC performs screening and examination mainly with respect to whether the project belongs within the administrative scope of filing for records conforms with relevant laws and regulations industrial policies and outbound investment policies … harms national sovereignty security or the public interest and whether the investment entity possesses the corresponding investment capacity ” 2014 NDRC Approval Measures art 22 See also arts 20 21 23 402 Measures on the Administration of Enterprise Outbound Investment NDRC Order No 11 issued Dec 26 2017 effective Mar 1 2018 Also in December 2017 NDRC and other government authorities jointly released a notice establishing behavioral norms for “private enterprises” minying qiye investing abroad This measure provides for example that private enterprises are to participate in the “One Belt One Road” initiative promote international industrial capacity and equipment manufacturing cooperation act in the interest of the Chinese government’s supply side structural reform agenda and help “protect China’s sovereignty guojia zhuquan security guojia anquan and public interest shehui gonggong liyi ” Notice on Issuing Behavioral Norms for Private Enterprise Foreign Investment Operations § 1 2 § 3 18 NDRC MOFCOM PBOC Ministry of Foreign Affairs and All-China Federation of Industry and Commerce Fa Gai Wai Zi 2017 No 2050 issued Dec 6 2017 395 73 IV Outbound Investment enterprises 403 Moreover NDRC will evaluate investments based on conformity with the “national interest”404 and “national security”405 see below d “National Security ” “National Interest ” and “Sensitive Sectors” The Chinese government uses expansive definitions of “national security ” “national interest ” and “sensitive sectors” that leaves considerable discretion to government authorities when making outbound investment approval decisions The 2018 NDRC Approval Measures effective March 1 2018 provide that outbound investment “must not threaten or harm our country’s national interest and national security ”406 and instruct NDRC to supervise outbound investment based on “protecting our country’s national interest and national security ”407 NDRC can order the suspension or modification of an outbound investment deemed to “threaten the national interest and national security ”408 Where an outbound investment is deemed to “harm the national interest and national security ” NDRC can terminate or modify the investment take “remedial measures ”409 issue a warning to the investors and where a crime is suspected to have occurred pursue criminal liability 410 In addition “national interest” and “national security” now serve as criteria for both “examination and approval” and “filing for records” reviews 411 The Chinese government also applies an expansive and inconsistent definition of “sensitive sectors ” 403 The 2014 NDRC Approval Measures applied solely to the overseas investments of PRC-registered enterprises art 2 The 2018 NDRC Approval Measures art 2 significantly expand this scope to also cover overseas investments that are made by foreign entities that are ultimately “controlled” by a PRC-registered enterprises “‘Control’ kongzhi in the regulation is broadly defined to mean either holding the majority of voting shares of the overseas enterprise or in lieu of such majority having “decisive power” over the major matters of that enterprise such as its operations or finances This amendment broadens the ability of the NDRC to monitor overseas investments connected to a Chinese investor and subjects them to the same verification and approval or recordation requirements that applies to investments made by PRC-registered enterprises 404 English translation of Chinese term guojia liyi 405 English translation of Chinese term guojia anquan 406 2018 NDRC Approval Measures art 5 407 2018 NDRC Approval Measures art 6 408 2018 NDRC Approval Measures art 56 409 English translation of Chinese term bujiu cuoshi 410 2018 NDRC Approval Measures art 56 411 With respect to investments subject to “examination and approval ” art 19 provides that the application form must include a “national interest and national security impact analysis” art 26 provides that NDRC will apply “not threaten or harm our country’s national interest and national security ” as well as conformity with “macroadjustment and control policies ” as evaluating criteria and art 28 provides that NDRC is now authorized to “directly issue a non-approval decision” without soliciting input or commissioning additional assessments if an investment is deemed to “threaten or harm our country’s national interest and national security ” With respect to investments subject to “filing for records” art 31 authorizes NDRC to reject the filing if the investment is deemed to “threaten or harm our country’s national interest and national security” 74 IV Outbound Investment  The 2016 edition of the Investment Catalogue states that “ r elevant departments under the State Council will examine and approve projects in sensitive countries and regions and sensitive sectors ” yet fails to define the term “sensitive ”412  The 2018 NDRC Approval Measures list specific examples of “sensitive sectors ” but also define such sectors to include those that “require restricting enterprise outbound investment in accordance with our country’s macro-adjustment and control policies ”413  Likewise the 2014 MOFCOM Approval Measures provide that MOFCOM will examine and approve investments in “sensitive sectors ” and explains that “the sectors for which examination and approval administration will be implemented refer to sectors that have a bearing on exports of products and technologies that are restricted for export from the PRC and sectors that affect the interests of more than one country region ”414 The inconsistent vague and open-ended use of this concept gives government agencies wide discretion to deploy their approval authority and thus the ability to influence the shape and direction of outbound investment e Foreign exchange restrictions Control over the use of foreign exchange is a crucial tool for the government to influence outbound investment China operates a closed capital account that restricts currency convertibility as well as monetary inflows and outflows 415 Once enterprises have successfully undergone “examination and approval” or “filing for records” with MOFCOM and NDRC they undergo additional review and approval in order to receive foreign exchange to make outbound investments Prior to 2015 enterprises seeking to invest abroad had to apply for foreign exchange directly with the State Administration of Foreign Exchange SAFE subject to a reform instituted in 2015 enterprises now undergo review and approval from local banks under SAFE supervision and guidance 416 412 Investment Catalogue 2016 edition § 12 2018 NDRC Approval Measures art 13 The sectors listed are weapons equipment trans-border water resource development and use and news media 414 2014 MOFCOM Approval Measures art 7 415 China’s Capital Account – An Open and Shut Case WALL STREET JOURNAL Feb 25 2014 “As part of its push to give markets a “decisive” role in the economy China has pledged to drop controls on the movement of capital and make its currency the yuan fully convertible China for years has maintained a “closed” capital account meaning companies banks and individuals can’t move money in or out of the country except in accordance with strict rules The limit for individuals is currently $50 000 a year while corporate investments need government approval ” 416 Notice of the State Administration of Foreign Exchange on Further Simplifying and Improving Policies on the Administration of Foreign Exchange for Direct Investment §§ 1 1 -1 2 SAFE Hui Fa 2015 No 13 issued Feb 13 2015 See also Thilo Hanneman Daniel H Rosen RHODIUM CHINESE INVESTMENT IN THE UNITED STATES RECENT TRENDS AND THE POLICY AGENDA 67-68 Dec 2016 “ Prior to 2015 t he State Administration of Foreign Exchange SAFE became the third major actor in the outbound FDI approval system SAFE was a hurdle that investors had to take as it controlled access to foreign currency needed for outbound investments … I n 2015 SAFE simplified and shortened the review process for foreign exchange approvals and delegated the verification of foreign exchange needs for outbound investments to local bank branches ” 413 75 IV Outbound Investment Despite this recent change SAFE significantly influences the decisions of local banks regarding the provision of foreign exchange 417 In 2016 the government reportedly introduced various types of restrictions on the use of foreign exchange 418 The restrictions were applied in an informal manner – i e not set forth in official government measures – to several forms of foreign investment disfavored by the government 419 Some observers have suggested that the government’s recent restrictions on certain outbound investments serve to enhance Chinese companies’ incentives to align their investments with government policies and priorities According to the European Union Chamber of Commerce in China While recent restrictions have contributed to uncertainty regarding the ability of Chinese entities to complete investments there is no reason to conclude that outbound investments that are not disguised capital flight or tainted by corruption will be brought to a halt especially in sectors that have been identified as strategic priorities by the government This conclusion is supported by a 26th December statement made at the 2016 National Commerce Work Conference by Minister of Commerce Gao Hucheng that the government “will promote the healthy and orderly development of outbound investment and cooperation” in 2017 During his January 2017 speech at the World Economic Forum in Davos President Xi also stated that he expected outbound Chinese 417 Thilo Hanneman Daniel H Rosen RHODIUM CHINESE INVESTMENT IN THE UNITED STATES RECENT TRENDS Dec 2016 “The degree of scrutiny exerted by banks depends on guidance by SAFE and this guidance often correlates with the macroeconomic situation ” 418 Thilo Hanneman Daniel H Rosen RHODIUM CHINESE INVESTMENT IN THE UNITED STATES RECENT TRENDS AND THE POLICY AGENDA 70 Dec 2016 “In the first half of 2016 banks were asked by SAFE officials to tighten reviews of foreign exchange restrictions for outbound FDI projects following pressure by SAFE to slow down the outflow of foreign exchange Banks were reportedly asked by SAFE to submit outbound FDI transactions of a certain size and type directly to SAFE ” See also ALLEN OVERY CHINA’S NEW RESTRICTIONS ON OUTBOUND INVESTMENTS AND REMITTANCE Dec 30 2016 “1 Banks are now required to report any overseas transfer of $5m or more under any capital account item covering both foreign currency and CNY per transaction to Beijing SAFE Such overseas transfers can only be made after the Chinese regulators have re‑examined the underlying transaction of the requested transfer to verify its authenticity and compliance with relevant regulations 2 SAFE also tightened controls over ODI with a capital outflow of $50m or more Such fund transfers will only be made after reexamination of the underlying transaction for authenticity and compliance with relevant regulations 3 The rules for cross-border CNY lending by Chinese companies which used to be more relaxed than the regime for cross-border lending in foreign currency has also been modified by the PBOC recently The cross-border lending limit which is below 30 percent of the lender’s total equity and shareholding requirement that the lender and the borrower must have a shareholding relationship which previously applied only to foreign currency lending now also applies to cross-border CNY lending In addition the rules now make it clear that such cross-border CNY lending by Chinese companies need to be registered with SAFE ” 419 The Chinese government reportedly placed restrictions on 1 Extra-large outbound investments outbound real property acquisitions or developments by state-owned enterprises with an investment value of $1bn or above outbound investments of more than $1bn outside of the core business of a Chinese buyer and extra-large outbound investments valued at $10bn or more 2 OFDI by limited partnership 3 Minority investments in listed companies OFDI involving the acquisition of 10 percent or less of the shares in an overseas listed company 4 “Small parent big subsidiary” OFDI where the size of the target is substantially larger than the size of the Chinese buyer or where the Chinese buyer makes the investment shortly after its establishment 5 Privatization participation in the delisting of overseas listed companies which are ultimately controlled by Chinese companies or individuals 6 High risk low return transactions OFDI into an overseas target resulting in a high debt-to-asset ratio and low return on equity ALLEN OVERY CHINA’S NEW RESTRICTIONS ON OUTBOUND INVESTMENTS AND REMITTANCE Dec 30 2016 AND THE POLICY AGENDA 70 76 IV Outbound Investment investment to amount to USD 750 billion over the next five years These strengthened controls may actually motivate more Chinese companies to look for ways to align their investment plans with government priorities outlined in Made in China 2025 since presenting investments to the authorities that support their priorities—for example those outlined in Made in China 2025 or the Belt and Road Initiative BRI —can be expected to achieve a higher rate of approval 420 3 Sectors “Encouraged” for Outbound Investment To channel outbound investments towards state priorities China has instituted a system of “encouraged” 421 sectors Although the list of encouraged sectors has evolved over time the general approach is to induce investment in these sectors through preferential treatment and financing China launched this system in 2006 when NDRC MOFCOM and other government authorities jointly issued the Overseas Investment Industrial Guiding Policy 422 The stated objective of this policy was to “accelerate the implementation of the ‘Going Out’ strategy” and to “formulate a guiding policy especially for outbound investment pursuant to China’s five-year plans for national economic and social development and in accordance with requirements of investment system reform and industrial policy ”423 The Overseas Investment Industrial Guiding Policy identifies categories of “encouraged-type overseas investment projects ” 1 investments that enable the acquisition of resources and raw materials that are in short supply domestically and which are “in urgent demand for national economic and social development ” 2 investments that support the export of products equipment technology and labor for which China has a comparative advantage and 3 investments that “are able to clearly enhance China’s technology research and development capacity including an ability to use international leading technology and advanced management experience and professional talent ”424 Thus the acquisition and subsequent use of technology is a central feature of “encouraged” outbound investments In addition the Overseas Investment Industrial Guiding Policy targets specific sectors for preferential treatment The policy includes a catalogue of 40 industries that are “encouraged” and eight industries that are “prohibited” for overseas investment The catalogue appended to the Overseas Investment Industrial Guiding Policy includes several technology-related sectors such as overseas manufacturing investments in chemical product manufacturing advanced technology which China is unable to access and passenger vehicles including engine products with advanced technology as well as overseas services investments relating to high and new technology and product research 425 420 E U CHAMBER CHINA MANUFACTURING 2025 PUTTING INDUSTRIAL POLICY AHEAD OF MARKET FORCES 21 2017 emphasis added 421 English translation of Chinese term guli 422 Overseas Investment Industrial Guiding Policy NDRC MOFCOM Ministry of Foreign Affairs GAC SAFE Fa Gai Wai Zi 2006 No 1312 issued July 5 2006 423 Overseas Investment Industrial Guiding Policy art 1 424 Overseas Investment Industrial Guiding Policy art 6 425 Overseas Investment Industrial Guiding Policy Annex §§ 3 8 3 17 4 5 77 IV Outbound Investment Investments that are “encouraged” receive several forms of government support including subsidies for fees incurred and bank loans at government-subsidized interest rates policy bank loan support priority administrative approval priority support for the use of foreign exchange export tax rebates on exports of equipment and other materials relating to the overseas investment project priority access to services relating to overseas financing investment consultation risk evaluation risk control and investment insurance and coordinated support from several government departments with respect to information exchange diplomatic protections the travel of personnel abroad and registration of import and export rights 426 A recent State Council opinion clarifies and supplements this approach In its Guiding Opinion on Further Guiding and Standardizing the Direction of Overseas Investment 2017 Investment Opinion issued in August 2017 the State Council re-affirmed the importance of “catalyzing the ‘Going Out’ strategy for products technologies and services ”427 It also aims to expand the speed scale and efficacy of China’s outbound investment so as to promote “transformation and upgrading of the domestic economy” and “international industrial capacity cooperation ”428 In addition the 2017 Investment Opinion re-defines the broad categories of “encouraged” investments Technology acquisition and utilization is a key consideration in determining whether a sector is “encouraged ” For instance the 2017 Investment Opinion encourages investments that strengthen “investment cooperation” with “overseas high and new technology and advanced manufacturing industry enterprises ” as well as investments that promote the “sending out” from China to the world of “advantageous manufacturing capacity advantageous equipment and technology standards ”429 Echoing previous state policies the 2017 Investment Opinion also states that “encouraged” investments will receive “a more enhanced level of service with respect to tax collection foreign exchange insurance customs information and other matters so as to create more favorable facilitating conditions for the enterprise ”430 In addition the opinion introduces the “negative list” concept431 with respect to general overseas investment 4 Outbound Investment Policy in Technology and Sectoral Policies As mentioned in Section I C China has issued a series of science and technology S T and sectoral policies that are intended to promote indigenous innovation and technology transfer S T planning documents also reference the role of outbound investment in achieving these objectives For instance the 2010 Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries SEI Decision – which targets strategic emerging industries – 426 Overseas Investment Industrial Guiding Policy art 8 Guiding Opinion on Further Guiding and Standardizing the Direction of Foreign Investment preamble NDRC MOFCOM PBOC Ministry of Foreign Affairs Guo Ban Fa 2017 No 74 issued Aug 4 2017 428 2017 Investment Opinion Preamble § 3 429 2017 Investment Opinion §§ 3 1 -3 6 430 2017 Investment Opinion § 6 1 431 2017 Investment Opinion § 2 ¶2 427 78 IV Outbound Investment contains provisions on “deepening international cooperation and enhancing the level of internationalized development ”432 The document calls on authorities to Pragmatically enhance the quality and level of international investment financing cooperation … Support capable enterprises to engage in overseas investment … Expand the autonomy of enterprises to make overseas investments improve the approval process and further amplify foreign exchange support for enterprises to make overseas investments Actively explore the establishment of science and technology and industrial parks abroad formulate a country-specific industrial guidance catalogue to guide enterprises in development of multinational investments 433 The SEI Decision also calls for “supporting enterprises to use methods including overseas registered trademarks and overseas acquisitions … ”434 Likewise the Made in China 2025 Notice which as discussed in Section I C serves as the basis for the Made in China 2025 policy calls for “supporting enterprises to make acquisitions equity investments and venture investments overseas and to establish R D centers and testing bases and global distribution and services networks overseas ”435 The Made in China 2025 Notice also outlines a wide-ranging strategy for harnessing and promoting the acquisition of foreign technology through outbound investment … Promote a transition from prioritizing introducing investment technology and equipment to the development of joint ventures and cooperation outbound acquisitions and the introduction of leading talent Strengthen legislation governing outbound investment strengthen “Going Out” legal guarantees for manufacturing enterprises and standardize enterprise overseas operating behavior to protect enterprises’ lawful rights Explore the use of industrial funds state-owned capital dividends and other channels to support the “Going Out” of advantageous manufacturing capacity including high-speed rail power generation equipment automobiles and engineering to implement overseas investment acquisitions Accelerate the establishment of entities for and enhance the level of services that support manufacturing industries “Going Out” establish a public service platform for manufacturing industry outbound investment and a services platform for export product technology-type trade and optimize early warning coordinating mechanisms to respond to trade frictions and major incidents in outbound investment 436 Planning documents for the ITC and IC sectors also emphasize the role of outbound investment in promoting technological development For instance the Made in China 2025 Key Area Technology Roadmap Made in China 2025 Roadmap contains a chapter devoted to the IT sector and calls for development in this sector through the “Going Out” strategy 432 Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries § 6 State Council Guo Fa 2010 No 32 issued Oct 10 2010 433 SEI Decision § 6 2 434 SEI Decision § 6 3 435 Made in China 2025 Notice § 3 “Strategic Tasks and Priorities ” § 3 9 “Raise the Level of Internationalized Development of the Manufacturing Industry ” 436 Made in China 2025 Notice § 4 “Strategy Support and Guarantees ” § 4 7 “Further Expand Opening Up of Manufacturing Industries” 79 IV Outbound Investment and overseas investment 437 The 2014 IC Guidelines also call for “encourag ing domestic enterprises to engage in international cooperation integrate international resources and expand international markets ” in conjunction with “making every effort to introduce foreign capital technology and talent” into China and encouraging international IT enterprises to “establish R D manufacturing and operating centers in China ”438 5 State-Backed Actors To implement its outbound investment strategy China relies on an array of actors with ties to the government These actors have traditionally comprised non-financial SOEs and the largest stateowned policy and commercial banks But more recently this set of actors has grown to include nominally private enterprises and financial entities such as funds and investment companies that have connections with or are funded by the government Each group of actors is discussed in more detail below a State-Owned Enterprises and State-owned Banks In the early stages of Chinese outbound investment SOEs played a leading role – particularly national oil companies and state-owned mining and metal processing companies 439 Today SOEs continue to account for a significant share of overall outbound investment and are responsible for many of the largest overseas transactions 440 For example the central SOE ChemChina acquired the Swiss firm Syngenta for $43 billion in 2016 441 State-owned banks in particular the policy banks China Exim and CDB and the four largest state-owned commercial banks have facilitated outbound investments primarily through financing support to SOEs 442 In October 2016 China’s president Xi Jinping who also serves as General Secretary of the CCP described 437 Made in China 2025 Key Area Technology Roadmap § 1 2 5 4 National Strategic Advisory Committee on Building a Powerful Manufacturing Nation issued Oct 2015 438 Formal Announcement of Guidelines for the Development and Promotion of the Integrated Circuit Industry § 4 8 MIIT issued June 24 2014 439 For studies of investments by Chinese SOEs in the mining and energy sectors see e g ROBERT EVAN ELLIS THE EXPANDING CHINESE FOOTPRINT IN LATIN AMERICA NEW CHALLENGES FOR CHINA AND DILEMMAS FOR THE US 2012 Ruben Gonzalez-Vicente Mapping Chinese Mining Investment in Latin America Politics or Market THE CHINA Q 209 35 35–58 2012 BARBARA KOTSCHWAR THEODORE H MORAN JULIA MUIR CHINESE INVESTMENT IN LATIN AMERICAN RESOURCES THE GOOD THE BAD AND THE UGLY PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 2012 Chen Shaofeng Has China’s Foreign Energy Quest Enhanced Its Energy Security ” THE CHINA QUARTERLY 207 600–625 2011 CHRIS ALDEN ET AL ED CHINA RETURNS TO AFRICA A RISING POWER AND A CONTINENT EMBRACE C Hurst Co Publishers Ltd 2008 Erica S Downs The Fact and Fiction of Sino-African Energy Relations 3 3 CHINA SECURITY 42 42–68 2007 440 Thilo Hanneman Daniel H Rosen RHODIUM CHINESE INVESTMENT IN THE UNITED STATES RECENT TRENDS AND THE POLICY AGENDA 7 2016 “ recent Chinese restructuring plans suggest that SOEs will remain an important part of China’s FDI flows in years ahead see also Haiyan Zhang Daniel Van Den Bulcke China’s Direct Investment in the European Union A New Regulatory Challenge 12 ASIA EUROPE J 168 168 2014 “The five Chinese ‘acquirers’ that were investigated within the EU Merger Regulation framework were all large state-owned enterprises that are ranked among Fortune Magazine’s global 500 companies i e China National Bluestar of ChemChina Huaneng Sinochem China National Agrochemical Corporation and PetroChina ” 441 Press Release Syngenta ChemChina Cash Offer to Acquire Syngenta at a Value of Over US$ 43 Billion Mar 2 2016 442 See Kevin P Gallagher Amos Irwin Exporting National Champions China’s Outward Foreign Direct Investment Finance in Comparative Perspective 22 CHINA WORLD ECONOMY 6 1–21 2014 80 IV Outbound Investment the role of SOEs as extensions of the Party-state and clarified that SOEs are “important forces to implement decisions” of the CCP and “major strategies ” such as industrial “Going Out” strategies to “enhance overall national power economic and social development and people’s wellbeing ”443 SOEs remain prevalent throughout the Chinese economy and are market leaders in key sectors deemed strategic by the government such as banking and finance energy telecommunications aviation and automotive 444 The presence of SOEs in the Chinese economy is especially evident with respect to credit allocation The International Monetary Fund IMF for example reports that domestically the “SOE share in credit stock” was 55 6 percent in 2014 445 SOEs are also subject to state direction and control Indeed the Chinese government has a constitutional and legal mandate to maintain a leading role for the state sector 446 The largest central SOEs in China are administered by the State Council’s State-owned Assets Supervision 443 Xi Stresses CPC Leadership of State-owned Enterprises XINHUA NEWS Oct 11 2016 available at http news xinhuanet com english 2016-10 11 c135746608 htm 444 For example  In the banking sector the “Big Five” commercial banks in China – Bank of China BoC Industrial and Commercial Bank of China ICBC China Construction Bank Corporation CCBC Agriculture Bank of China ABC and Bank of Communications BCM – are majority-owned by the central government and account for almost half the total loan market DOUGLAS J ELLIOTT KAI YAN BROOKINGS THE CHINESE FINANCIAL SYSTEM AN INTRODUCTION AND OVERVIEW 3 2013  In the oil and gas sector three enterprises administered by SASAC—China National Offshore Oil Corp China National Petroleum Corp and Sinopec—accounted for 94 percent of domestic oil production and 99 percent of domestic gas production in 2015 See Lei Wang Presentation to the Colorado School of Mines at the Oil Gas Conference slide 13 Aug 17 2016  In the aviation sector Commercial Aircraft Corporation of China Ltd COMAC managed by SASAC is the only major firm dedicated to producing large commercial aircraft See Keith Crane et al RAND THE EFFECTIVENESS OF CHINA’S INDUSTRIAL POLICIES IN COMMERCIAL AVIATION MANUFACTURING 25 2014 See also About Us COMMERCIAL AIRCRAFT CORPORATION OF CHINA LTD http english comac cc aboutus last visited Jan 11 2018 China’s Big Three Airlines Set to Report Biggest Combined Profit Since 2010 BLOOMBERG NEWS Mar 29 2017  In the automotive sector the market leaders in domestic vehicle sales are joint ventures between foreign automakers and the three SIEs Shanghai Automotive Industry Corp First Automotive Works and Dongfeng Motor Corporation See Top 10 Chinese Automotive Firms by Revenue in 2015 CHINA DAILY Jun 6 2016 445 KANG ET AL PEOPLE’S REPUBLIC OF CHINA SELECTED ISSUES INTERNATIONAL MONETARY FUND COUNTRY REPORT NO 16 271 at “Table 1 Rebalancing Score Card” 2016 446 The guiding principles for government ownership and control are set forth in the Constitution of the People’s Republic of China hereinafter “China Constitution” and the CCP Constitution China Constitution art 7 provides that “ t he state-owned economy that is the socialist economy with ownership by the whole people is the leading force in the national economy The state ensures the consolidation and growth of the state-owned economy ” Article 11 also provides that “ t he state permits the private sector of the economy to exist and develop within the limits prescribed by law The private sector of the economy is an important component of the socialist market economy ” Article 11 states that “ t he state encourages supports and guides the development of the nonpublic sectors of the economy … ” emphasis added The state is to take active steps to ensure the growth of the state-owned economy as the core of the economic system and it will also intervene in the private sector a component of the overall economy The CCP Constitution in turn states “ T he Party must uphold and improve the basic economic system with public ownership playing a dominant role and different economic sectors developing side by side … ” emphasis added Accordingly CCP members and the leadership have a mandate to ensure the dominance of the state and SOEs in the economy 81 IV Outbound Investment and Administration Commission SASAC the government’s representative shareholder responsible for the largest central government SOEs Likewise provincial and municipal SOEs are administered by local SASAC entities Other government bodies are also controlling shareholders of certain enterprises SASAC imposes an elaborate system of rules plans and reporting requirements which it uses to monitor and influence the outbound investments of central SOEs SASAC has articulated these requirements in two measures the Provisional Measures on Supervision and Administration of Central State-Owned Enterprise Overseas Investments 2012 SOE Measures 447 and its successor the Measures on Supervision and Administration of Central State-Owned Enterprise Overseas Investments 2017 SOE Measures 448  Conformity with state policies The 2012 SOE Measures stipulated that when undertaking outbound investments SOEs are to act in accordance with basic principles including “conformity with plans for national economic and social development and overseas investment industrial policies ” “conformity with the composition of the stateowned economy and the direction of structural adjustment ” “conformity with enterpriselevel strategies for development and enterprise-level strategies for internationalizing operations focusing on core industries conducive to enhancing the enterprise’s international competitiveness ”449 The updated 2017 SOE Measures simplify these principles but likewise maintain that central SOEs are to act in accordance with “strategic guidance ” including devising plans to internationalize their business and making investments that enhance innovative capacity and international competitiveness 450 Central SOEs are also to abide by the principle of “maintaining and enhancing the value of state-owned assets” when undertaking outbound investments 451  Negative list The 2017 SOE Measures call for establishing an “enterprise overseas investment administration system ” As part of this system central SOEs are to act in accordance with an individualized “negative list”452 formulated by SASAC that outlines types of investments the enterprise should not make If the enterprise nonetheless chooses to make a “negative list” investment it must seek formal approval from SASAC and submit a prescribed set of application materials including internal company decision documents a financing plan and feasibility study 453 447 Provisional Measures on Supervision and Administration of Central State-Owned Enterprise Overseas Investments SASAC 2012 Order No 28 issued Mar 18 2012 448 Measures on Supervision and Administration of Central State-Owned Enterprise Overseas Investments SASAC 2017 Order No 35 issued Jan 7 2017 This measure was formulated expressly pursuant to laws and regulations governing state-owned assets and recent initiative to improve the performance of SOEs The 2017 SOE Measures were issued pursuant to the Guiding Opinion on Deepening Reform of State-owned Enterprises CCP Central Committee and State Council Guo Fa 2015 No 22 issued Aug 24 2015 the Several Opinions on Reforming and Optimizing the State-owned Asset Administration System State Council Guo Fa 2015 No 63 issued Oct 25 2015 449 2012 SOE Measures art 5 450 2017 SOE Measures art 6 1 451 2017 SOE Measures art 6 4 452 English translation of Chinese term fumian qingdan 453 2017 SOE Measures arts 7 12 82 IV Outbound Investment  Overseas investment plans The 2017 SOE Measures state that central SOEs are to formulate “plans for the internationalization of operations”454 that define priority regions sectors and projects for medium- and long-term internationalization of operations in accordance with state-owned enterprise five-year plan outlines and enterprise development strategies and plans formulated by SASAC In turn central SOEs are to formulate a more detailed “annual overseas investment plan455 ”456  Reporting obligations The 2017 SOE Measures also instruct central SOEs to submit quarterly reports on the status of overseas investments to SASAC via an internal IT network and to draft an “annual overseas investment completion status report” to be submitted to SASAC on January 31 of each year which is to detail the overall status and positive results of overseas investment progress on major overseas investment projects and a post-investment evaluation work and the main problems confronted 457  Review and discipline The 2017 SOE Measures provide that SASAC will establish a system of indices to evaluate the internationalization of operations of central SOEs to include among other criteria the “direction of investment ”458 Moreover if central SOE personel take actions in outbound investment that “cause an unfavorable impact ” SASAC will take disciplinary action against those personnel If the actions “cause the loss of state-owned assets ” then the CCP can take disciplinary action and if the actions violate the law the personnel can be handed over to law enforcement 459 In addition to SASAC the Ministry of Finance MOF has recently adopted regulations specific to the outbound investment of SOEs The Measures on the Financial Administration of Stateowned Enterprises Overseas Investment MOF Measures issued in June 2017 call for “enhanc ing the capacity of state-owned capital in the service of national strategies including ‘One-Belt One-Road’ and ‘Going Out ’”460 The MOF Measures provide that an SOE’s CCP Committee is to participate alongside the company’s board chief executives and shareholders in deliberating the financial feasibility of the projects outlined in the enterprise’s “overseas investment plan ”461 Under the MOF Measures SOEs also must submit to MOF annual reports on the financial status of overseas investments 462 Local branches of MOF are in charge of collecting and summarizing these documents 463 SOEs also are required to provide an annual overseas investment evaluation report which will largely determine 1 the degree of government support for that SOE’s overseas investment activities 2 the state shareholders’ treatment of the SOE e g whether to 454 English translation of Chinese term guojihua jingying guihua English translation of Chinese term niandu jingwai touzi jihua 456 2017 SOE Measures art 11 457 2017 SOE Measures arts 19 20 458 2017 SOE Measures arts 22 23 459 2017 SOE Measures art 30 460 Notice on Issuing the “Measures on the Financial Administration of State-owned Enterprises Overseas Investment” cover sheet MOF Cai Zi 2017 No 24 issued Jun 12 2017 461 MOF Measures arts 6 7 462 MOF Measures art 8 463 MOF Measures art 9 455 83 IV Outbound Investment restructure the enterprise’s assets and 3 local government officials’ assessment of how well the SOE is executing its “Going Out” strategy and whether more support should be provided to the SOE for “Going Out” purposes 464 Through the CCP the Chinese government exercises additional control over SOE behavior Top executives of SOEs are generally CCP members cycle between corporate and government positions and are subject to evaluation by the CCP Organization Department 465 SOEs also host CCP committees that actively participate in corporate governance This arrangement is codified in Chinese law according to Article 19 of the Company Law of the People’s Republic of China PRC Company Law 466 an organization of the CCP may be set up in all enterprises regardless of whether it is a state private domestic or foreign-invested enterprise to carry out activities of the CCP There are indications that a coordinated push is now underway to increase Party committee influence on company decisions 467 More than thirty Hong Kong-listed Chinese SOEs reportedly altered their articles of association in 2017 to codify a more explicit operational role for their internal Party committees 468 For instance Sinopec amended its articles of association to call for increased CCP input on major corporate matters and management personnel When making decisions on significant matters such as direction of reform and development key objectives and priority operational arrangements of the Company the board of directors should seek advice from the Party organization When the board of directors appoints the management personnel of the Company the Party organization shall consider and provide comments on the candidates for management positions nominated by the board of directors or the president or recommend candidates to the board of directors and or the president 469 464 MOF Measures arts 39-41 U S DEPARTMENT OF COMMERCE CHINA’S STATUS AS A NON-MARKET ECONOMY 82-94 Oct 26 2017 RICHARD MCGREGOR THE CCP THE SECRET WORLD OF CHINA’S COMMUNIST RULERS 49-50 2010 stating that “the CCP has remained unyielding on a number of fronts Its control over personnel appointments has been inviolate ” see also ZHENG YONGNIAN THE CHINESE COMMUNIST PARTY AS ORGANIZATIONAL EMPEROR CULTURE REPRODUCTION AND TRANSFORMATION 103-104 2010 “The CCP’s most powerful instrument in structuring its domination over the state is a system called the ‘Party management of cadres’ dangguan ganbu or more commonly known in the West as the nomenklatura system The nomenklatura system ‘consists of lists of leading positions over which Party units exercise the power to make appointments and dismissals lists of reserves or candidates for these positions and institutions and processes for making the appropriate personnel changes ’” 466 PRC Company Law adopted by the NPC on Dec 29 1993 amended Dec 25 1999 further amended Aug 28 2004 and Oct 27 2005 and Dec 28 2013 467 These efforts may be traced back to the March 2012 release of a document titled “Opinions on Strengthening and Improving Party Building in Nonstate Enterprises ” issued by the CCP Organization Department More recently the party has issued a directive targeting party-building in entrepreneurial ventures See Opinions on Creating a Healthy Environment for the Development of Entrepreneurs Promoting Entrepreneurship and Allowing Full Play to the Role Played by Entrepreneurs CCP and State Council Sept 8 2017 468 Jennifer Hughes China’s Communist Party Writes Itself into Company Law FINANCIAL TIMES Aug 14 2017 469 SINOPEC PROPOSED AMENDMENTS TO THE ARTICLES OF ASSOCIATION AND THE RULES OF PROCEDURE FOR THE BOARD OF DIRECTORS’ MEETING art 109 available at http www hkexnews hk listedco listconews SEHK 2017 0427 LTN201704272794 pdf 465 84 IV Outbound Investment Given the level of control exerted over SOEs by the state and CCP outbound investment by SOEs is frequently directed at achieving state policies and objectives As one participant in the investigation observed “ m uch Chinese FDI comes from state-owned enterprises that often have different motives than simply maximizing profits Rather their investments often serve strategic state goals ”470 Likewise in its 2017 report on China’s status as a non-market economy the European Commission remarked on “the Chinese government’s determination to further develop the dominant role of the state-owned economy in particular by selectively creating large SOEs shielded from competition domestically and expanding internationally which would serve the Government’s strategic industrial policies rather than focusing on their own economic performance ”471 Tsinghua Unigroup and its parent company Tsinghua Holdings Co Ltd Tsinghua Holdings illustrate the extent to which state policies direct SOE activities including outbound investment The decision to establish Tsinghua Holdings was approved by the State Council 472 Tsinghua Holdings is wholly state-owned 473 via Tsinghua University 474 and controls Tsinghua Unigroup through a 51 percent ownership stake 475 Tsinghua Unigroup is funded in part through an equity investment of CNY 10 billion $1 6 billion 476 from China’s National Integrated Circuit Investment Fund National IC Fund 477 At one point the company’s CCP secretary was Hu Haifeng the son of China’s former president Hu Jintao 478 Reflecting these state ties Tsinghua Holdings notes in its annual report that its development strategy is oriented toward the needs of national strategy 479 and that Tsinghua Unigroup employs an “international acquisition indigenous innovation” development model focused on the IC industry 480 Tsinghua Unigroup’s Chairman Zhao Weiguo is also the Deputy Director General of the “China High-End Chip Alliance ” which is composed of 27 “backbone enterprises” and research institutes and is tasked with creating an IC industry ecosystem in China The alliance was 470 INFORMATION TECHNOLOGY INNOVATION FOUNDATION hereinafter “ITIF” Submission Section 301 Hearing 7 Oct 25 2017 471 EUROPEAN COMMISSION COMMISSION STAFF WORKING DOCUMENT ON SIGNIFICANT DISTORTIONS IN THE ECONOMY OF THE PEOPLE'S REPUBLIC OF CHINA FOR THE PURPOSES OF TRADE DEFENCE INVESTIGATIONS 108-109 SWD 2017 483 final 2 Dec 20 2012 472 Letter Regarding Approval for Beijing University and Tsinghua University to Establish Peking University Asset Management Company Limited and Tsinghua Holdings Company Limited State Council Guo Ban Han 2003 No 30 issued Apr 24 2003 473 TSINGHUA HOLDINGS 2016 BOND PROSPECTUS 13 Chinese 2016 474 Imagination Technologies filing with the U K Financial Conduct Authority TR-1 Notification of Major Interest in Shares notified on May 22 2017 475 TSINGHUA HOLDINGS 2016 BOND PROSPECTUS 44 Chinese 2016 476 Foreign currency values are followed by a parenthetical estimation of the USD value When available USD conversion values are taken from primary or secondary sources In cases where a U S dollar estimate is unavailable the foreign currency value is generally based on the U S Federal Reserve Bank average annual exchange rate for the relevant year The U S Federal Reserve Bank’s average annual currency exchange rates are available at https fred stlouisfed org 477 Press Release Tsinghua Unigroup Tsinghua Unigroup Receives CNY 10 Billion Investment from the National Integrated Circuit Investment Fund Chinese Feb 14 2015 available at http www unigroup com cn newscenter jtxw 2015 0214 138 html 478 Gerry Shih Political Ties Could Prove Double-edged Sword for Chinese Chipmaker REUTERS July 14 2015 479 TSINGHUA HOLDINGS 2016 BOND ANNUAL REPORT 55 Chinese Apr 28 2017 480 TSINGHUA HOLDINGS 2016 BOND ANNUAL REPORT 50 Chinese Apr 28 2017 85 IV Outbound Investment proposed by Chairman Xi and established by the National IC Industry Development Leading Small Group in July 2016 481 On the establishment of the alliance Tsinghua Unigroup’s Chairman stated that We are in the midst of a great country a great era and a great undertaking The establishment of the ‘China High-End Chip Alliance’ expresses the desire of the alliance members and the broader China IC industry to work as one to carry out properly the great undertaking that is China’s IC industry We will work together to consolidate industry resources and advance strategy technology standards the market and other cooperative links to jointly drive the future of China’s chip industry 482 Reflecting its commitment to these objectives Tsinghua Unigroup has attempted to acquire several U S IC companies In July 2015 Unigroup made a $23 billion bid for Micron Technologies the Idaho-based world leader in memory chips but the deal was abandoned reportedly due to concerns about whether the Committee on Foreign Investment in the United States CFIUS would approve the transaction 483 Unigroup through its Unisplendour subsidiary also offered to purchase a 15 percent stake in Western Digital an industry leader in storage solutions but the offer was withdrawn in early 2016 reportedly due to concerns with CFIUS scrutiny of the transaction 484 b Other Enterprises with State Support and Linkages A growing share of China’s outbound investment is undertaken by private enterprises in which the government does not own an observable controlling stake 485 Nonetheless the government may exert substantial influence over the outbound investment behavior of such nominally private 481 Press Release Chipone IC National Team Which Enterprises Participate in the High-end Chip Alliance Chinese Aug 8 2016 available at http www chiponeic com content details1264 html 482 Press Release Tsinghua Unigroup Tsinghua Unigroup Joins Hands with 27 Organizations to Jointly Establish the ‘China High-End Chip Alliance’ Chinese Aug 2 2016 available at http www unigroup com cn newscenter jtxw 2016 0802 238 html The General Manager of the National IC Fund Ding Wenwu is Director General of the Alliance Press Release Chipone IC National Team Which Enterprises Participate in the High-end Chip Alliance Chinese Aug 8 2016 available at http www chiponeic com content details1264 html 483 Liana B Baker Greg Roumeliotis Exclusive Micron does not believe deal with Tsinghua is possible – sources REUTERS July 21 2015 484 Tsinghua Kills $3 8bn Investment Plan in Western Digital FINANCIAL TIMES Feb 23 2016 485 Thilo Hanneman Daniel H Rosen RHODIUM GROUP CHINESE INVESTMENT IN THE UNITED STATES RECENT TRENDS AND THE POLICY AGENDA 7 Dec 2016 “The shift in investment patterns has also informed the mix of Chinese investors in the US economy Previously dominated by trading companies and large state-owned enterprises SOEs investment in recent years was almost entirely driven by private sector firms ” But see also Curtis J Milhaupt Wentong Zheng Beyond Ownership State Capitalism and the Chinese Firm 103 GEO L J 665 701 2015 stating that “ o wnership of the firm as such provides relatively little information about the degree of autonomy the firm enjoys from the state… because the Chinese party state retains relatively undefined residual control rights in firms of all types corporate ‘ownership’ is less central to understanding the attributes of the Chinese firm as compared to firms operating under market-neutral institutions and relatively robust constraints on state intervention ” 86 IV Outbound Investment entities through other means – for instance through the government approvals and financing processes described above and the pervasive influence of the CCP 486 As discussed above the outbound investment approvals system applies to all enterprises not just SOEs This gives the state a decisive role in determining which industry sectors should be targeted or closed for overseas investment As a result any enterprise seeking to receive government support for such acquisitions are incentivized to invest in sectors favored by the government including those classified as “encouraged” in outbound investment measures and those identified in major S T plans such as the Made in China 2025 Notice 487 Senior executives at China’s largest private companies regularly acknowledge the influence of this investment approvals system on their investment decisions For instance the 2017 Investment Opinion of the State Council restricted overseas investments in property sports hotels cinemas and entertainment 488 and encouraged companies to invest in China’s “One-Belt One-Road” initiative 489 Two of China’s largest overseas acquirers publicly announced their intention to comply with the new policy direction Adam Tan CEO of Hainan Airlines HNA noted that the company would “listen to orders” and pledged that HNA “will not invest in anything the government does not support ”490 Wang Jianlin CEO of Wanda Group stated that the company has “actively respond ed to the state’s call and decided to put its main investments within China ” 491 Wang further noted that recent asset sales were based on “state policy and the macro-environment ”492 One U S lawyer commenting on the effect of this policy change on his 486 See e g Bruce J Dickson Integrating Wealth and Power in China The Communist Party’s Embrace of the Private Sector 192 THE CHINA Q 2007 Xiaojun Yan Jie Huang Navigating Unknown Waters The Chinese Communist Party's New Presence in the Private Sector 37 CHINA REV 2017 487 E U CHAMBER CHINA MANUFACTURING 2025 PUTTING INDUSTRIAL POLICY AHEAD OF MARKET FORCES 18-19 2017 488 Guiding Opinion on Further Guiding and Standardizing the Direction of Foreign Investment § 4 NDRC MOFCOM PBOC Ministry of Foreign Affairs Guo Ban Fa 2017 No 74 issued Aug 4 2017 489 2017 Investment Opinion § 2 490 Over the last several years HNA has invested in Deutsche Bank Swissport Carlson Hotels Hilton Worldwide Ingram Micro and logistics firm CWT Frank Tang China’s HNA Says It Will Pull Out of Deals on Beijing’s Investment Blacklist SOUTH CHINA MORNING POST Nov 27 2017 See also HNA Considers Asset Sales Signals Reversal of Buying Spree BLOOMBERG Nov 28 2017 491 Hou Wen Han Wei Wanda Will Keep Major Investments in China CAIXIN July 21 2017 In recent years Wanda has acquired AMC Cinemas Carmike Odeon UCI Legendary Entertainment Infront Sports World Triathlon and yacht maker Sunseeker In 2015 the New York Times noted that Wanda’s increase in overseas media acquisitions “coincided with a policy push by the Chinese leadership to expand the nation’s cultural influence both overseas and at home ” Michael Forsythe Wang Jianlin A Billionaire at the Intersection of Business and Power in China NEW YORK TIMES Apr 28 2015 492 Wang’s comments came before China officially issued its new foreign investment restrictions but after China’s National Reform and Development Commission had issued informal guidance suggesting the rules were forthcoming Michael Forsythe Wang Jianlin A Billionaire at the Intersection of Business and Power in China NEW YORK TIMES Apr 28 2015 Although the asset sales involved properties located on mainland China they were viewed as necessary to free up working capital following the government’s decision to withhold financing for some of the company’s overseas deals Li Xuanmin Wanda in Big Sell-off GLOBAL TIMES Aug 2 2017 “The conglomerate's surprising move comes after the central government began prioritizing financial risk reduction in the second half of this year and warned against ‘irrational investment abroad ’ which the market believe has prompted Wang's knee-jerk decision ” 87 IV Outbound Investment Chinese clients noted that his clients had merely redirected outbound investment from real estate and hotels to industries such as mining and aviation 493 These statements suggest that private companies’ overseas investment decisions are not as claimed by some participants in the investigation wholly based on “market need” and “without intervention by the Chinese government ”494 but rather are strongly influenced by the Chinese government’s decision to encourage or restrict a given overseas investment sector in line with the country’s industrial policy Pervasive state involvement in China’s financial sector is closely tied to China’s outbound investment approvals regime Private enterprises often rely on capital from state-owned policy banks state-owned commercial banks or state-backed funds to make an investment project viable 495 Moreover there is an “abundance of empirical evidence indicating that the political connections of private firms in China are a strong indicator of their access to bank loans ”496 This relationship is reinforced by government policy that directs state-owned financial institutions to support technological development objectives For example the 2014 IC Guidelines and the International Cooperation Opinion expressly direct China Exim and CDB to 493 Sui-Lee Wee Geely Buys Take in Volvo Trucks Despite China Restrictions NEW YORK TIMES Dec 27 2017 See e g Wang Guiqing CHINA CHAMBER OF COMMERCE FOR IMPORT AND EXPORT OF MACHINERY AND ELECTRONIC PRODUCTS hereinafter “CCCME” Testimony Section 301 Hearing 159 Oct 10 2017 explaining that business operations and acquisitions are “market oriented ” and “ t here is no intervention by the Chinese government in companies’ business decisions” John Tang DHH WASHINGTON DC LAW OFFICE P C hereinafter “DHH” Testimony Section 301 Hearing 155 Oct 10 2017 “Chinese companies including our firm have made billions of investments in the U S These investments are purely driven by market need … P olitics does not have an influence on the business decisions ” CCCME Submission Section 301 Hearing 11 Sept 28 2017 “Chinese companies can choose any project independently and there are no government-motivated actions ” DHH Submission Section 301 Hearing 7 Sept 28 2017 “Chinese acquisitions overseas including intellectual property are not driven by the government but instead by market need ” CHINA CHAMBER OF INTERNATIONAL COMMERCE hereinafter “CCOIC” Submission Section 301 Hearing 64-65 Sept 26 2017 “Chinese companies’ investment and acquisition in U S companies is normal commercial behavior with no government direction behind it ” 495 U S -CHINA ECON SEC REV COMM’N 2016 ANNUAL REPORT TO CONGRESS 102 2016 “Private firms often rely heavily on government subsidies to increase profit margins In Professor Zheng’s testimony to the Commission he explained that private companies ‘have to have the help of the state in order to prosper or even survive ’ Huawei for example is a privately held firm but receives major funding from state-owned commercial and policy banks due to its status as a “national champion ” … A private automobile manufacturer BYD Co has also benefitted from state support receiving $108 million in 2013 from local and central government subsidies nearly 130 percent of its net profits for the year ” 496 Curtis J Milhaupt Wentong Zheng Beyond Ownership State Capitalism and the Chinese Firm 103 GEO L J 665 690 2015 citing e g Clement Kong Wing Chow et al Investment Opportunity Set Political Connection and Business Policies of Private Enterprises in China 38 REV QUANTITATIVE FIN ACCT 367 2012 finding that firms with political connections in China are able to borrow more Hongbin Li et al Political Connections Financing and Firm Performance Evidence from Chinese Private Firms 87 J DEV ECON 283 284 2008 finding that Communist Party membership helps private entrepreneurs in China to obtain loans from banks or other state institutions Wubiao Zhou Bank Financing in China’s Private Sector The Payoffs of Political Capital 37 WORLD DEV 787 788 2008 finding that membership in China’s legislative or semi-legislative organs helps private entrepreneurs obtain access to bank loans Robert Cull et al WORLD BANK GOVERNMENT CONNECTIONS AND FINANCIAL CONSTRAINTS EVIDENCE FROM A LARGE REPRESENTATIVE SAMPLE OF CHINESE FIRMS Working Paper No 6352 7 2013 finding that government connections are associated with substantially less severe financial constraints at private firms in China ” 494 88 IV Outbound Investment provide financial support as needed 497 These incentives provide a further opportunity for the state to direct private enterprises’ overseas investment in line with industrial policy The recent expansion of CCP committees in nominally private enterprises also enhances state influence over these enterprises’ decision-making – including outbound investment activities As noted above the Company Law of the People’s Republic of China authorizes the establishment of CCP committees in enterprises that are not state-owned Recent statistics indicate that these Party committees now exist in “70 percent of some 1 86 million privately owned companies ”498 a sharp increase from 2014 when only 53 1 percent of China’s 1 60 million private companies had such committees 499 The increasing influence of the CCP has affected foreign enterprises that are located in China 106 000 firms had set up Party units in 2016 compared to only 47 000 firms in 2011 500 As a result several of these companies report “political pressure” to allow their internal Party committees greater input on business operations and investment decisions 501 Some foreign executives have reported that company investment decisions have already been made to satisfy internal CCP pressure 502 These efforts are so pervasive that at least one foreign industry group – the Delegations of Germany Industry and Commerce – released a public statement in November 2017 pushing back against attempts by the CCP “to strengthen their influence in wholly foreign owned German companies in China ” The statement concluded that German companies may choose to leave China or reconsider investment strategies if such attempts continued 503 Recent CCP documents indicate that these Party-building efforts are affecting all types of enterprises in China not just SOEs and foreign-invested entities FIEs 504 Although there are few public reports concerning Party-building efforts within Chinese companies that lack significant foreign investment or control it is reasonable to suppose that the CCP is making 497 IC Guidelines § 4 3 International Cooperation Opinion § 33 Michael Martina Exclusive In China the Party’s Push for Influence inside Foreign Firms Stirs Fears REUTERS Aug 24 2017 499 Xiaojun Yan Jie Huang Navigating Unknown Waters The Chinese Communist Party's New Presence in the Private Sector 37 CHINA REVIEW 2017 500 He Huifeng German Trade Body Warns Firms May Pull Out of China Over Communist Party Pressure SOUTH CHINA MORNING POST Nov 29 2017 501 Michael Martina Exclusive In China the Party’s Push for Influence Inside Foreign Firms Stirs Fears REUTERS Aug 24 2017 502 Michael Martina Exclusive In China the Party’s Push for Influence Inside Foreign Firms Stirs Fears REUTERS Aug 24 2017 “A sales and marketing head in China for a major U S consumer goods firm said its party cell had recently become more active and had pushed for locating a new facility in a district where the local government was promoting investment a move the company made ” 503 Press Release Delegations of German Industry and Commerce Increasing business challenges – Delegations of German Industry Commerce in China concerned about growing influence of Chinese Communist Party on foreign business operations Nov 24 2017 available at http china ahk de news single-view artikel press-statementincreasing-business-challenges-delegations-of-german-industry-commerce-in-china-concerned-about-growinginfluence-of-chinese-co 504 See e g Lucy Hornby Communist party asserts control over China Inc FINANCIAL TIMES Oct 3 2017 noting CCP’s push to increase influence on SOEs private companies and joint ventures Provisions of the CCP Regarding On-Site Inspections 2017 Revision CCP Central Committee July 1 2017 Calling on central provincial and local CCP committees to increase inspection and supervision of all Party organizations under their jurisdiction including those existing in enterprises 498 89 IV Outbound Investment similar demands on these companies 505 Unlike FIEs Chinese companies likely have far less freedom to push back against such requests or to make them public Company executives often maintain close ties to the Party either through their own membership in the Party or through cultivating political connections with influential Party cadres or organs in their locality 506 Likewise industry associations may influence outbound investment behavior in line with government objectives Industry associations exist for most of the technology-intensive manufacturing sectors of the Chinese economy and most trace their origins to a government body The members of these associations include SOEs as well as nominally private enterprises 507 c State-backed Funds The emergence of state-backed funds and investment companies represents an important new feature of China’s financial sector An early development in this regard was the establishment in 2007 of China’s sovereign wealth fund China Investment Corporation CIC 508 CIC has received periodic capital injections from the foreign exchange reserves managed by SAFE 509 A large portion of its assets are located in its subsidiary Central Huijin Investment Ltd which holds stakes in China’s state-owned commercial banks policy banks securities companies and insurance companies 510 Members of 505 According to a recent report over 35 of China’s largest technology companies have “quietly instituted Party committees in recent years” but declined to give further specifics on the operational role of such committees Emily Feng Chinese Tech Groups Display Closer Ties with the Communist Party FINANCIAL TIMES Oct 10 2017 506 U S -CHINA ECON SEC REV COMM’N 2016 ANNUAL REPORT TO CONGRESS 102 2016 stating that “In their research Professor Zheng and Curtis Milhaupt a professor at Columbia Law School found 95 out of the top 100 private Chinese firms by revenue and eight out of the top ten Internet firms by revenue were founded or are controlled by a current or former member of a central or local political organization such as the People’s Congresses and People’s Political Consultative Conferences These connections are integral to a private firm’s success creating and reinforcing important networks to top banks other leading SOEs and government regulators ” 507 U S -CHINA ECON SEC REV COMM’N 2016 ANNUAL REPORT TO CONGRESS 102 2016 “Private companies are subjected to largely undefined regulations that dilute the rights of corporate owners Take for instance China’s state-run industry associations which were created in the 1990s amid mounting pressure for the government to separate its regulatory power from its business activities State-run industry associations were meant to provide industrial coordination and private regulation but they have become quasi-governmental entities created and staffed by former government officials from defunct ministries they supervise and coordinate the activities of firms whose ministries have been disbanded Compulsory participation in these state-led industrial restructuring efforts along with other forms of pressure from regulators to comply with government-favored policies contribute to the state’s extralegal control over private enterprises ” 508 CIC was established as a wholly state-owned enterprise pursuant to the PRC Company Law Profile Chinese CHINA INVESTMENT CORP available at http www china-inv cn 509 CIC received a $200 billion capital injection at its founding and a $30 billion capital injection in December 2011 CHINA INVESTMENT CORP 2011 ANNUAL REPORT 2011 Lingling Wei China’s CIC Works on Funding Mechanism THE WALL STREET JOURNAL Mar 6 2012 510 Central Huijin Investment Ltd stakes include Agricultural Bank of China Industrial and Commercial Bank of China and CDB Shareholdings Chinese CENTRAL HUIJIN INVESTMENT LTD http www huijininv cn wps portal ut p a1 jZDLDoIwEEW_yMxYsOCygPKQ6oIQsRvSGIEmUoghLvx6q2FrcXY3OSf3ZkBABU LLp2rlpAYt758saH1EiuuwwAw52yPzccdPTkbiYGOAiwHCmCWulyOi6xNMoyCJvC1HTKnN9ws6_jjGP7nW4CF_dkXsPSbAvLgIW9BjHLqVko3A1Td0N_qq4YzCGvDgSwArjMDthcubRz7sqxeeVOkir0BYO0FN g dl5 d5 L2dBISEvZ0FBIS9nQSEh last visited Nov 20 2017 90 IV Outbound Investment CIC’s supervisory committee and executive board include current and former government officials 511 CIC is tasked with “implementing the diversification of investments of national foreign exchange reserves ”512 In fulfilling this role CIC has not only made portfolio investments but also purchased substantial equity shares in U S financial institutions and companies in the energy and resource sectors including the U S energy company AES 513 In recent years CIC has played a more indirect role by contributing capital to other funds Notably CIC contributed $550 million to the Asia-Germany Industrial Promotion Capital AGIC a private Chinese-owned investment fund based in Germany targeting investment in European “Industry 4 0”514 enterprises 515 Since 2007 state-backed funds and investment companies have proliferated to the extent that these entities now constitute a central feature of China’s technology acquisition strategy In a 2016 report the Mercator Institute observes that Sovereign investment funds and governmental investment management companies play an increasing role in high-tech FDI While these funds and their management often present themselves as private enterprises the state’s active role is concealed behind an opaque network of ownership and funding structures The State Council and local governments primarily use these funds and the expertise of private managers to make subsidies to Chinese enterprises more efficient These funds are now becoming increasingly active with regard to investment in overseas markets 516 One of the largest state-backed funds is the National IC Fund This fund was established in September 2014 soon after the June 2014 release of the IC Guidelines The Semiconductor 511 CIC’s supervisory committee consists of representatives from MOF PBOC and other government organs Its executive board is staffed primarily by former government officials Executive Committee Chinese CHINA INVESTMENT CORP http www chinainv cn wps portal ut p a1 jZBNC4JAEIZ_Ucy02mrHVcsP3CJEsr3IEqkLuUpIh359Jl1dndvA8_DOvCCgAKHlW9 VyUJ2Wz98uaHlCils_wwQ5OyJz8cDPVkKYZ43AbR4IbWL0L7u_74cssp0UEW2XYBx4UeDsOWJM1_k4Mwz XQZg4f9kAgz5YwB5cZ_XIHo5NBulqw6Kpmsf5V3DFYQxIbPMwNTwBJgqXLqxb_M8Lz5plcXqCxJDtLo dl5 d 5 L2dBISEvZ0FBIS9nQSEh last visited Nov 20 2017 512 Profile Chinese CHINA INVESTMENT CORP http www chinainv cn wps portal ut p a1 jZHRCoIwGIWfpQeI_U2ddjm1dOKKkMh2IyNSBzklpIuePpVunZ67H77DOfwHCZQjo eVHVbJXrZav8RakOAGBXZBBApwegXpw4GcrwdRxBuA-D0Q2Nvp968PIhrbbgoAtoeBhX4cunsOwMg6P8yIgtF_Weg_AqvyDcDC_5IJMPQfAvCbB7xCopN9vVW6bFFet82zeGh0Q8K YkFlmYFpoAkwTLHU0d-AEdc11UP5Ny4wpRjc_2EaqQw dl5 d5 L2dBISEvZ0FBIS9nQSEh last visited Nov 20 2017 513 See IACOB KOCH-WESER OWEN HAACKE U S -CHINA ECON SEC REV COMM’N CHINA INVESTMENT CORPORATION RECENT DEVELOPMENTS IN PERFORMANCE STRATEGY AND GOVERNANCE 29 June 13 2014 Eiichi Sekine China Investment Corporation Investment Performance in 2010 and Outlook 3 NOMURA J OF CAPITAL MARKETS 6 Winter 2012 514 “Industry 4 0” refers to the “fourth industrial revolution” resulting from the integration of the “internet of things” into the entire industrial value chain See Bill Lydon Industry 4 0 Intelligent and flexible production 63 INTECH 12–17 2016 515 Jost Wübbeke et al MERICS MADE IN CHINA 2025 THE MAKING OF A HIGH-TECH SUPERPOWER AND CONSEQUENCES FOR INDUSTRIAL COUNTRIES 53 Dec 2016 516 Jost Wübbeke et al MERICS MADE IN CHINA 2025 THE MAKING OF A HIGH-TECH SUPERPOWER AND CONSEQUENCES FOR INDUSTRIAL COUNTRIES 53 Dec 2016 91 IV Outbound Investment Industry Association SIA reports that to date the National IC Fund has secured approximately $21 billion in funding 517 The fund has used these resources to support numerous technology-related outbound investments in the United States see Section IV C 2 for further discussion A media article by China’s official state-run news agency Xinhua News reposted on the website of the MOF states that the National IC Fund will adopt a variety of investment forms including equity investment with a focus on the integrated circuit and microchip manufacturing industry in order to “propel enterprises to upgrade their industrial capacity level and implement mergers restructuring and standardized enterprise management ” 518 The article further states that the IC Fund was established “under the guidance” of MIIT and MOF and lists several large SOEs and state-owned financial institutions as key capital contributors including 519  China Development Bank Capital a subsidiary of the state-owned policy bank CDB 520  China National Tobacco Corp a central SOE that administers a quasi-monopoly in China’s tobacco sector 521  China Mobile Communications Corporation a central SOE and market leader in China’s telecommunications sector 522  Beijing E-Town International Investment and Development Co Ltd Beijing ETown an investment company owned by the municipal government of Beijing 523 which has made several technology-related investments in the United States see further discussion below and in Section IV C 2 517 SEMICONDUCTOR INDUSTRY ASSOCIATION hereinafter “SIA” Submission Section 301 Hearing 6 Oct 5 2017 518 National Integrated Circuit Industry Investment Fund Officially Established Chinese XINHUA NEWS Oct 14 2014 available at http www mof gov cn zhengwuxinxi caizhengxinwen 201410 t20141014_1149902 html 519 National Integrated Circuit Industry Investment Fund Officially Established Chinese XINHUA NEWS Oct 14 2014 available at http www mof gov cn zhengwuxinxi caizhengxinwen 201410 t20141014_1149902 html 520 See China Development Bank Capital available at http www cdb-intl com eng about about htm See also Capital Markets – Company Overview of China Development Bank Capital Corporation Ltd BLOOMBERG available at https www bloomberg com research stocks private snapshot asp privcapId 115838167 last visited Nov 20 2017 “China Development Bank Capital Corporation Ltd is an investment arm of China Development Bank specializing in direct mezzanine and fund of fund investments For direct investments the firm specializes in growth capital pre-IPO investments mergers acquisition and restructuring It seeks to make direct investments in new energy healthcare environmental protection technologies oil and gas supply and industrials sectors ” 521 China Tobacco Overview Chinese State Tobacco Monopoly Bureau available at www tobacco gov cn html 10 1004 html 522 China Mobile Communications Corporation is administered by SASAC See SASAC Enterprise List Chinese available at http www sasac gov cn n2588035 n2641579 n2641645 index html 523 Company Introduction Chinese BEIJING E-TOWN http www etowncapital com comcontent_detail columnsId 36 i 2 comContentId 2 html last visited Nov 20 2017 92 IV Outbound Investment  Shanghai Guosheng Group Co Ltd an investment company owned by the municipal government of Shanghai  Tsinghua Unigroup a company owned by Tsinghua University a public university which has attempted to make several technology-related investments in the United States see above for further discussion  China Electronics Technology Group Corporation a state-owned defense enterprise established under the former Ministry of Electronics Industry now part of MIIT which describes itself as an “important state-owned backbone enterprise directly administered by the central government ”524 A 2017 corporate filing relating to the acquisition of a National IC Fund-invested company discloses further information on the National IC Fund’s shareholders The list contains 19 entities the largest of which are the government ministry MOF 25 95 percent China Development Bank Capital 23 07 percent China National Tobacco Corp 14 42 percent and Beijing E-Town 7 21 percent 525 The fund has used part of this capital to collaborate with its founding capital contributors For example in February 2015 the fund provided Tsinghua Unigroup with CNY 10 billion $1 6 billion in equity investment 526 The National IC Fund is part of an “Integrated Circuit Industry Technological Innovation Strategic Alliance” established in March 2017 “in conformity with … the guiding spirit of General Secretary Xi Jinping ” 527 The objective of the alliance is to “implement the ‘Strong Internet Nation’ strategy achieve breakthroughs in cutting-edge core technologies and establish secure and controllable information technology IT systems ”528 The alliance comprises “62 leading enterprises higher-education institutions research academies and social organizations ” and is supported by the Ministry of Science and Technology MOST NDRC and MIIT 529 In the period since September 2014 numerous provinces and municipalities have established their own IC Funds or received capital from the National IC Fund to establish other IC524 See CHINA ELECTRONICS TECHNOLOGY GROUP CORPORATION Chinese http www cetc com cn zgdzkj _300891 _300895 index html last visited Nov 20 2017 525 Zhejiang Wansheng Co Zhejiang Wansheng Co Ltd Public Notice In Response to a Letter from the Shanghai Stock Exchange Requesting Information Disclosure Regarding the Company’s Issuance of Shares to Acquire Assets and Raise Supporting Funds in a Related Party Transaction Chinese Code 603010 Public Notice 2017-042 526 Press Release Tsinghua Unigroup Tsinghua Unigroup Receives CNY 10 Billion Investment from the National Integrated Circuit Investment Fund Chinese Feb 14 2015 available at http www unigroup com cn newscenter jtxw 2015 0214 138 html 527 Press Release China National Science and Technology Major Project Integrated Circuit Industry Technological Innovation Strategic Alliance Officially Established Chinese Mar 22 2017 available at http www nmp gov cn gzxgz jcdl 201703 t20170323_5031 htm 528 Press Release China National Science and Technology Major Project Integrated Circuit Industry Technological Innovation Strategic Alliance Officially Established Chinese Mar 22 2017 available at http www nmp gov cn gzxgz jcdl 201703 t20170323_5031 htm 529 Press Release China National Science and Technology Major Project Integrated Circuit Industry Technological Innovation Strategic Alliance Officially Established Chinese Mar 22 2017 available at http www nmp gov cn gzxgz jcdl 201703 t20170323_5031 htm 93 IV Outbound Investment related funds 530 Reports on the establishment of IC Funds in Hubei 531 Fujian 532 and Anhui provinces533 indicate the high degree of Chinese government involvement in establishing the funds in order to meet national strategic objectives According to the SIA provincial and municipal IC funds have raised a staggering sum – more than $80 billion 534 In addition to funds that specifically target the IC sector China has developed a number of other funds directed to all high-technology industries identified in the Made in China 2025 Notice and Made in China 2025 Roadmap As reported by the U S Chamber of Commerce these funds include 1 Advanced Manufacturing Industry Investment Fund – This fund received initial funding of CNY 20 billion $3 billion and aims to support all industries prioritized under the Made in China 2025 policy 530 The full scope of sub-central IC Funds is difficult to ascertain as there is no single list published a government website A publication by the news website Sohu lists 13 IC Funds located in the following localities in the order they were established 1 Beijing municipality est July 2014 capital CNY 30 billion $4 9 billion 2 Hubei province est August 2015 capital CNY 30 billion $4 8 billion 3 Shenzhen municipality est October 2015 capital CNY 20 billion $3 2 billion 4 Guizhou province est December 2015 capital CNY 1 8 billion $286 million 5 Hunan province est December 2015 CNY 5 billion $795 million 6 Xiamen municipality est March 2016 capital CNY 16 billion $2 4 billion 7 Sichuan province est March 2016 capital CNY 4 billion $604 million 8 Guangdong province est June 2016 capital CNY 15 billion $2 3 billion 9 Shaanxi province est August 2016 capital CNY 30 billion $4 5 billion 10 Shanghai municipality est December 2016 capital CNY 28 5 billion $4 3 billion 11 Nanjing municipality est December 2016 capital CNY 60 billion $9 1 billion 12 Wuxi municipality est January 2017 capital CNY 20 billion $3 billion and 13 Kunshan municipality est February 2017 capital 10 billion $1 5 billion See A Compilation of Domestic Integrated Circuit Industry Funds in Each Locality Chinese SOHU https m sohu com n 481699130 531 Hubei established an IC Fund in August 2015 with initial funding of CNY 30 billion $4 4 billion In March 2016 a “national storage equipment” base was established in Wuhan the capital of Hubei with support from the Hubei IC Fund and the National IC Fund Press Release Wuhan Municipal Government International and IT Office Construction Begins to Establish National Storage Equipment Base in Our Municipality Chinese Mar 31 2016 available at http www whwx gov cn zhgl gzdt 201603 t20160331_68082 html Press Release Hubei Province Science and Technology Office Hubei Establishes CNY 30 billion Integrated Circuit Industry Investment Fund Chinese Aug 24 2015 available at http www most gov cn dfkj hub zxdt 201508 t20150821_121241 htm 532 The Fujian Anxin Capital Fund was established in June 2016 with funding from the National IC Fund with pledged capital of at least CNY 46 8 billion $7 1 billion Among the fund’s goals is to “promote domestic and foreign integrated circuit project acquisitions technological R D and the new construction and expansion of production lines … ” At the unveiling of the new fund National IC Fund Chairman Wang Zhanfu stated “On one hand we can break through monopolies protect national security and implement national strategic objectives On the other hand we can optimize the industrial composition of domestic mobile integrated circuits and promote the healthy development of industries including manufacturing materials and equipment ” Entering the Structure of the National Integrated Circuit ‘13th Five-year’ Strategy Pujiang Recreates New Competitive Advantages Chinese PUJIANG NEWS June 25 2016 available at http www jinjiang gov cn htm 20160625 89981 html 533 The Anhui province IC Fund was established in May 2017 with CNY 30 billion $4 4 billion in initial funding Capital contributors to the fund include the National IC Fund the Chinese Academy of Sciences the Anhui Province Investment Group and the Hefei Industrial Investment Group The fund’s activities will promote IC industry development in Anhui province through various methods including equity infusions into subsidiary funds equity investments and industrial acquisitions Anhui Province Establishes CNY 30 Billion Integrated Circuit Industrial Investment Fund Chinese XINHUA NEWS May 19 2017 available at http www gov cn xinwen 201705 19 content_5195371 htm 534 SIA Submission Section 301 Hearing 6 Oct 5 2017 94 IV Outbound Investment 2 National Strategic Emerging Industries Investment Guiding Fund – This fund received initial funding of CNY 40 billion $6 billion and focuses on strategic emerging industries 3 Made in China 2025 Strategic Cooperation – This fund is a strategic partnership between CDB and the government ministry MIIT with funding valued at CNY 300 billion $44 8 billion It provides financial support to implementing the Made in China 2025 policy There are also province-level Made in China 2025 funds in Shaanxi Gansu and Sichuan provinces 535 Moreover China relies on a web of state-backed investment companies to support outbound technology investments A primary example is Beijing E-Town which is owned by the Beijing municipal government As noted above Beijing E-Town is a capital contributor to the National IC Fund According to a 2015 presentation by its General Manager Wang Xiaobo Beijing E-Town seeks to build a system of funds that includes not only the National IC Industry Fund but also various province- and municipal-level funds as well as smaller VC funds in order to accelerate industrial clustering incubate innovation and cultivate an industrial ecosystem 536 As of the end of 2016 Beijing E-Town on behalf of Beijing municipality had committed CNY 10 billion $1 5 billion and already disbursed CNY 1 6 billion $242 million to the National IC Fund 537 A specific objective of Beijing E-Town is to cluster technology companies in the Beijing Economic-Technological Development Zone 538 A broader objective is to partner with domestic industry leaders to promote international acquisitions to acquire a number of key technologies in the IC industry – including mobile telecom base chips RF chips memory chips insulated-gate bipolar transistors IGBT power electronics LCD driver chips CPU chips and MEMS sensor chips – in order to reduce China’s reliance on IC imports 539 This broader objective aligns closely with government policies outlined in the IC Guidelines and other documents d Military Civil Fusion The Chinese government’s interest in securing advanced technology through outbound investment reflects both economic and national security objectives The close relationship 535 U S CHAMBER MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 63-64 2017 Wang Xiaobo Beijing E-Town General Manager Presentation at TIF China 2015 Establishing an Investment Financing Platform Promoting Development of the Integrated Circuit Industry Chinese Mar 2015 available at http www semi org en sites semi org files data15 docs Wangxiaobo_TIF pdf 537 CCXR 2017 Credit Report on Beijing E-Town International Investment and Development Co Ltd 12 Chinese Credit Committee 2017 No G229-1 See also Wang Xiaobo Beijing E-Town General Manager Presentation at TIF China 2015 Establishing an Investment Financing Platform Promoting Development of the Integrated Circuit Industry Chinese Mar 2015 available at http www semi org en sites semi org files data15 docs Wangxiaobo_TIF pdf 538 Wang Xiaobo Beijing E-Town General Manager Presentation at TIF China 2015 Establishing an Investment Financing Platform Promoting Development of the Integrated Circuit Industry Chinese Mar 2015 available at http www semi org en sites semi org files data15 docs Wangxiaobo_TIF pdf 539 CCXR 2017 Credit Report on Beijing E-Town International Investment and Development Co Ltd 15 Chinese Credit Committee 2017 No G229-1 536 95 IV Outbound Investment between these objectives is reflected in the strategy of “military-civil fusion” MCF which is an important driver of government policy and outbound investment patterns In 2016 China established the country’s first MCF fund which allocated CNY 2 Billion $ 302 million to fund domestic projects and “overseas acquisitions ”540 Elevated as a national strategy by General Secretary Xi Jinping in 2014 MCF embodies China’s national strategic philosophy of coordinating the planning of economic development and national security i e military-defense to fully realize the rejuvenation of the Chinese nation 541 MCF emphasizes indigenous development restriction of inbound FDI and the absorption of foreign technologies and know-how in key sectors 542 The People’s Liberation Army PLA has drawn a direct link between MCF policy and overseas investment 543 In June 2017 General Secretary Xi called for focusing MCF on infrastructure national defense related S T weapon and equipment procurement talent cultivation and implementing MCF in outer space cyberspace biology new energy and maritime space 544 Fundamentally MCF captures China’s efforts to leverage its economic scale to more effectively capture and apply technological innovations in the commercial space in a national defense context As a national strategy MCF cuts across economic and industrial development talent acquisition and military modernization plans It calls for the development of integrated MCF information sharing platforms and MCF industry demonstration bases to facilitate S T resource sharing and collaboration between state laboratories the PLA and enterprises including foreign companies and Sino-foreign joint ventures 545 The State Administration for Science Technology and Industry for National Defense SASTIND oversees implementation of MCF policies within industry and coordinates MCF action across agencies and local governments SASTIND’s 2016 and 2017 MCF Special Action Plans prioritize expanding defense industry collaborations “guiding” social investment in military projects including with private enterprises implementing import substitution plans for key defense-related materials establishing MCF investment funds to promote development of dual-use S T industries and supporting the “Going Out” for China’s defense industry groups including enhancing cooperation with foreign governments and promoting the diffusion of China’s civilian nuclear technologies 546 540 Wang Yuxi First Domestic MCF Transfer Results Fund is Established – Total Scale of 2 Billion RMB Chinese SICHUAN DAILY Sept 22 2016 available at http news china com cn 2016-09 22 content_39347495 htm 541 Xi Urges Efforts to Boost Integrated Military and Civilian Development XINHUA NEWS June 21 2017 available at http news xinhuanet com english 2017-06 21 c_136381507 htm 542 IGCC Report 155 543 Jiang Luming Comprehensively Planning an Overall Strategy for National Security and Development Chinese PLA DAILY June 2 2016 available at http www 81 cn gfbmap content 2016-06 02 content_146372 htm 544 Xi Urges Efforts to Boost Integrated Military and Civilian Development XINHUA NEWS June 21 2017 available at http news xinhuanet com english 2017-06 21 c_136381507 htm 545 See Description of National New Industrial Demonstration Base Chinese MIIT available at http sfjd miit gov cn BaseInfoAction findListIndustry action See also Notice of the MIIT General Office on Organizing the Establishment of the 2015 “National New Industrialization Demonstration Base” MIIT Gong Xin Ting Gui Han 2015 No 319 May 12 2015 546 2017 SASTIND Military-Civilian Fusion Special Action Plan State Administration of Science Industry and Industry for National Defense published June 23 2017 2016 SASTIND Military-Civilian Fusion Special Action 96 IV Outbound Investment The State Council Notice on the Issuance of the Next Generation Artificial Intelligence Development Plan specifically calls for strengthening MCF in the artificial intelligence AI domain and developing “a new generation of AI technology as a support to command and decision-making military deduction defense equipment and other applications ”547 C Impact of Policies and Implementing Measures on Chinese Investment in the United States This section considers how the policies and implementing measures outlined above impact Chinese investment in the United States Certain public hearing participants in the investigation have asserted that all Chinese investment in the United States is driven by market considerations – not government policy 548 According to these participants government policies and measures are essentially irrelevant to outbound investment decisions 549 USTR does not find these statements persuasive Certain evidence in the record suggests that Chinese OFDI often reflects commercial considerations These factors include commercial interest in acquiring technology and R D facilities financial diversification acquisitions of consumer-oriented assets localization of production inside tariff boundaries and the possibility of a CNY devaluation 550 Plan MOST Guo Gong Ji 2016 No 204 issued Mar 16 2016 547 State Council Notice on Issuing the Next-Generation of Artificial Intelligence Development Plan § 3 4 State Council Guo Fa 2017 No 35 issued Aug 20 2017 For full translation and analysis see Graham Webster et al China’s Plan to ‘Lead in AI Purpose Prospects and Problems NEW AMERICA CYBERSECURITY INITIATIVE Aug 1 2017 available at https www newamerica org cybersecurity-initiative blog chinas-plan-lead-ai-purposeprospects-and-problems 548 See e g Wang Guiqing CCCME Testimony Section 301 Hearing 158-9 Oct 10 2017 business operations and acquisitions are “market oriented ” and “ t here is no intervention by the Chinese government in companies’ business decisions” John Tang DHH Testimony Section 301 Hearing 154 Oct 10 2017 “Chinese companies including our firm have made billions of investments in the U S These investments are purely driven by market need … P olitics does not have an influence on the business decisions ” CCCME Submission Section 301 Hearing 11 Sept 28 2017 stating that “Chinese companies can choose any project independently and there are no government-motivated actions ” DHH Submission Section 301 Hearing 7 Sept 28 2017 “Chinese acquisitions overseas including intellectual property are not driven by the government but instead by market need ” CCOIC Submission Section 301 Hearing 64-5 Sept 26 2017 stating that “Chinese companies’ investment and acquisition in U S companies is normal commercial behavior with no government direction behind it ” 549 One witness from the China General Chamber of Commerce testified that “every specific acquisition deal is decided by the companies based on their own business strategy and market opportunities … ” Chen Xu CHINA GENERAL CHAMBER OF COMMERCE hereinafter “CGCC” Testimony Section 301 Hearing 147-48 Oct 10 2017 But this witness also underscored the importance of Chinese government policy in shaping and directing outbound investment See e g id at 176 observing that in the context of increased real estate investment into the United States “China’s central bank and China’s central government of course will maybe redirect or reconcile the direction of China’s investment into the U S market It is very necessary I think ” see also id at 178 550 RHODIUM Submission Section 301 Hearing 3 Sept 28 2017 see also China Investment in Silicon Valley The Rise of Chinese Investment in U S Tech Companies CBINSIGHTS available at https www cbinsights com reports CB-Insights_China-in-US_webinar pdf last visited Nov 20 2017 97 IV Outbound Investment But the record also compels the conclusion that the state plays a vital role in shaping and facilitating outbound investment activity As some participants observe China is a managed economy 551 and the influence of the government is pervasive As discussed above a range of measures – such as control over foreign exchange state-backed financing and outbound investment approvals – give the state considerable ability to channel outbound investment to effect state policy objectives 552 Below aggregate data and trends are examined as well as specific transactions to show how government policies and measures are shaping investment flows USTR has found that at multiple levels of government – central regional and local – the Chinese state has directed and facilitated investment in and acquisition of U S companies and assets in technology-intensive sectors and in U S technology centers such as Silicon Valley 1 Chinese Investment Activity in the United States Analysis of Data China’s OFDI has accelerated over the decade since China began to articulate and implement the policies outlined in Section IV B China’s Ministry of Commerce MOFCOM reports that China’s OFDI flows totaled $145 7 billion in 2015 and $196 1 billion in 2016 – a new record and a substantial increase over the $21 1 billion reported in 2006 553 Likewise data from the United Nations Conference on Trade and Development UNCTAD shows that between 2009 and 2016 enterprises from China transacted 2 715 cross-border merger and acquisition M A deals compared to 1 250 deals in the 1990-2008 period 554 The growth of Chinese investment in the United States is evident in each of the primary sources of data the U S Bureau of Economic Analysis BEA the China Global Investment Tracker AEI and the China Investment Monitor Rhodium Group or “Rhodium” Based on data collected under a balance-of-payments approach BEA estimates that flows of Chinese OFDI into the United States rose by 835 percent from $1 1 billion in 2011 to $10 3 billion in 2016 see Figure 1 555 551 See e g James Lewis CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES hereinafter “CSIS” Submission Section 301 Hearing 1-2 Sept 2017 552 For these reasons the suggestion by certain participants that the Chinese government simply provides “more information to the companies” to help them invest is not credible Liu Chiao CCOIC Testimony Section 301 Hearing 182 Oct 10 2017 553 See MOFCOM NBS and SAFE Jointly Issue Statistical Bulletin of China's Outward Foreign Direct Investment available at http hzs mofcom gov cn article date 201612 20161202103624 shtml and the 2006 Statistical Bulletin of China's Outward Foreign Direct Investment Chinese available at http images mofcom gov cn hzs accessory 200709 1190343657984 pdf 554 Calculations based on UNCTAD Annex Table 12 Number of Cross-border M As by Region Economy of Purchaser 1990-2016 available at http unctad org en Pages DIAE World%20Investment%20Report AnnexTables aspx 555 Foreign Direct Investment in the United States BEA 2017 https www bea gov iTable index_MNC cfm last visited Oct 25 2017 BEA collects data from legally mandated surveys of foreign-owned affiliates operating in the United States BEA data cover all completed FDI transactions based on the value of dollars “crossing the border” in a year per the Balance of Payments Guidelines 98 IV Outbound Investment Although AEI and Rhodium employ different methodologies for collecting investment data they also show an increasing trend over this period 556 AEI data indicate a very large increase i e 2 460 percent with investment rising from $2 2 billion in 2011 to $53 7 billion in 2016 In 2017 Chinese investment in the United States totaled $24 2 billion representing a significant year-on-year decline but still marking the second-highest annual total on record 557 Likewise Rhodium data shows cumulative Chinese OFDI into the United States growing from a mere $4 9 billion in 2011 to $45 2 billion in 2016 – an increase of 843 percent 558 $Billions Figure 1 Chinese OFDI Flows in the United States559 50 45 40 35 30 25 20 15 10 5 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 At the same time Chinese OFDI has shifted away from predominantly “greenfield” investment 560 towards an investment model driven primarily by acquisitions In 2000 while at low levels greenfield investment constituted 99 6 percent of all Chinese OFDI flows by value in 556 AEI compiles data from publicly available or voluntarily submitted information for all announced investment transactions over $100 million in value This data is premised on the entire value of the transaction including U S domestic financing e g bonds and loans for projects China Global Investment Tracker Jan 2018 AMERICAN ENTERPRISE INSTITUTE available at http www aei org china-global-investment-tracker last visited Oct 25 2017 For its part Rhodium collects data through publicly available or voluntarily submitted information for completed direct investment transactions valued at $500 000 or more Transaction values are based on the entire value of transaction including U S domestic financing e g bonds and loans for projects China Investment Monitor 2017 RHODIUM available at http rhg com interactive china-investment-monitor last visited Oct 25 2017 557 China Global Investment Tracker Jan 2018 AEI available at http www aei org china-global-investmenttracker last visited Oct 25 2017 558 China Investment Monitor 2017 RHODIUM http rhg com interactive china-investment-monitor last visited Oct 25 2017 559 China Investment Monitor 2017 RHODIUM http rhg com interactive china-investment-monitor last visited Oct 25 2017 560 For a definition of Greenfield investment see Erik Canton Irune Solera Greenfield Foreign Direct Investment and Structural Reforms in Europe What Factors Determine Investments prepared for the European Commission Directorate-General for Economic and Financial Affairs 033 3 June 2016 “Three main types of FDI can be distinguished namely cross-border mergers and acquisitions greenfield investments and the extension of existing capacity According to the definition in the data source this paper focuses on the last two greenfield investments – the creation of a firm from scratch by one or more nonresident investors – and the extension of capacity – an increase in the capital of already established foreign enterprises … Greenfield FDI thus implies an expansion of the capital stock directly generating new economic activity and jobs It is also a vehicle for international technology spillovers and can thereby contribute to productivity growth ” 99 IV Outbound Investment 2005-2009 greenfield investments accounted for 22 7 percent of OFDI 561 In contrast from 2010 to 2016 greenfield investments made up only 7 6 percent of OFDI whereas acquisitions accounted for 92 4 percent see Figure 2 Figure 2 Chinese OFDI in the United States Greenfield vs Acquisitions562 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Greenfield Acquisitions Chinese SOEs have played an important role in shaping these investment flows From 2000 to 2016 351 of the 1 395 acquisitions 25 percent were carried out by government-owned enterprises which accounted for 29 percent of the monetary value of these deals 563 Chinese OFDI also has grown significantly in technology- and innovation-related sectors targeted by Chinese industrial policies Figure 3 reflects the growth in Chinese OFDI flows into the United States with respect to seven sectors – automobiles aviation electronics energy health and biotechnology industrial machinery including robotics and ICT As this chart reflects aggregate growth for this group of sectors has risen considerably from $1 9 billion in 2005 to $9 8 billion in 2016 Annual investment totals were particularly high for this group during the 2013-2016 period when the average annual OFDI was $6 9 billion Figure 3 Chinese OFDI in the United States Technology-related Sectors564 561 China Investment Monitor 2017 RHODIUM http rhg com interactive china-investment-monitor last visited Oct 25 2017 562 China Investment Monitor 2017 RHODIUM http rhg com interactive china-investment-monitor last visited Oct 25 2017 563 China Investment Monitor 2017 RHODIUM http rhg com interactive china-investment-monitor last visited Oct 25 2017 Rhodium defines “government-owned enterprises” as central SOEs under State-Owned Assets Supervision Administration and Commission local SOEs controlled by provincial or municipal governments sovereign investors and any other entities that have more than 20 percent combined government ownership Sources and Methodology 2017 RHODIUM http rhg com wp-content themes rhodium interactive chinainvestment-monitor sources-and-methodology html last visited Oct 31 2017 See also Thilo Hanneman Daniel H Rosen RHODIUM CHINESE INVESTMENT IN THE UNITED STATES RECENT TRENDS AND THE POLICY AGENDA 66 Dec 2016 564 China Investment Monitor 2017 RHODIUM http rhg com interactive china-investment-monitor last visited Oct 25 2017 The sectors identified in the chart are intended to be a representative basket of technology-related 100 IV Outbound Investment Although trends vary from sector to sector investment has generally risen significantly across each of the seven sectors 565  Automotive Prior to 2014 the largest annual Chinese investment in the U S automotive industry was $474 million in 2010 During the 2009-2013 period the average annual investment inflow was $214 million In 2014 investment flows in this sector increased to $771 million and have risen each subsequent year $915 million in 2015 and $1 0 billion in 2016 566  Aviation According to Rhodium prior to 2010 there was no Chinese investment in the U S aviation industry In 2010 Chinese OFDI was $5 million in this sector growing to $401 million in 2011 The annual average OFDI from 2012 through 2016 was $66 million Chinese worldwide investment patterns are more pronounced in this sector AEI reports that in the 2005-2013 period there were only 7 investment transactions worldwide totaling $2 5 billion since the start of 2014 there have been 17 totaling $19 8 billion of which $10 4 billion resulted from a single investment in the United States 567  Electronics From 2009 through 2014 the annual average Chinese investment in the U S electronics industry was $49 million In 2015 inflows increased nearly six-fold from the prior year to $349 million and then increased twelve-fold over those levels to $4 2 billion in 2016  Energy Before 2010 the largest annual Chinese investment in the U S energy industry was $212 million in 2009 In the first decade of the 21st century the annual average investment industries drawn from Rhodium data and not a comprehensive list Other sectors not identified here also may have a nexus to technology or innovation 565 Unless otherwise indicated data in this paragraph is drawn from China Investment Monitor 2017 RHODIUM http rhg com interactive china-investment-monitor last visited Oct 25 2017 566 China Global Investment Tracker 2018 AEI available at http www aei org china-global-investment-tracker last visited Oct 25 2017 567 China Global Investment Tracker 2018 AEI http www aei org china-global-investment-tracker last visited Oct 25 2017 AEI data includes announced deals as well as completed transactions it is possible that some of these transactions have not closed as of the date of publication of this report 101 IV Outbound Investment inflow was a mere $52 6 million In 2010 investment in this sector rose to $2 8 billion and reached a high of $3 6 billion in 2013 levels declined thereafter Chinese worldwide investment patterns show a clear shift to investment in alternative energy568 since 2013 AEI reports that in the 2005-2013 period China’s average annual worldwide investment in alternative energy was $673 million This average rose to $4 2 billion during the 2014-2017 period As reported by AEI China’s only investments in the U S energy sector in 2016 and 2017 were in alternative energy amounting to $150 million and $230 million respectively 569  Health and Biotechnology During the 2009-2013 period annual Chinese investment in the U S health and biotechnology industry averaged $116 million In 2014 investment in this sector grew rapidly to $1 0 billion and remained at higher levels in 2015 $900 million and 2016 $1 0 billion  Information and Communication Technology ICT Before 2014 the largest annual Chinese investment in the U S ICT industry was $1 9 billion in 2005 In 2009-2013 annual average investment inflow was $312 million In 2014 investment in this sector rose to $5 9 billion and remained at higher levels in 2015 $1 3 billion and 2016 $3 3 billion  Industrial Machinery including Robotics The largest annual inflow of investment in industrial machinery and equipment was in 2010 in which investment totaled $218 million Average annual investment fell to $15-$45 million in 2011-2014 Then in 2015 and 2016 investment in this industry returned to near-record high levels of $214 million and $207 million respectively 2 Effect of State Policies and Implementing Measures on Chinese Acquisitions Growth in Chinese technology investment coincides with an array of policy statements and implementing measures that are geared to promote technology transfer As discussed in Section IV B above over the past 10-15 years the Chinese government has deployed a series of state industrial plans approval mechanisms and support measures designed to direct and facilitate outbound investment in technology-related sectors 570 The edifice of policies and implementing measures has grown more elaborate over time and increasingly tailored to specific sectors Likewise aggregate Chinese OFDI in technology has witnessed a substantial increase over this period particularly since 2009 This apparent temporal relationship is particularly evident in certain sectors and industries such as semiconductors As discussed in Section IV B 4 above the Chinese government announced 568 “Alternative energy” includes non-fossil fuel energy investments including renewable energy such as wind and solar and nuclear energy According to AEI data most of the “alternative energy” investments fall under renewable energy though there are some nuclear transactions mostly in European countries China Global Investment Tracker 2018 AEI http www aei org china-global-investment-tracker last visited Oct 25 2017 569 China Global Investment Tracker 2018 AEI http www aei org china-global-investment-tracker last visited Oct 25 2017 AEI data includes announced deals as well as completed transactions it is possible that some of these transactions have not closed as of the date of this report’s publication 570 As discussed in Section IV B 1 the antecedents of this policy change were present as early as 2000 with the introduction of the “Going Out” strategy 102 IV Outbound Investment in 2014 a policy to accelerate the development of the IC industry including semiconductors Prior to this announcement global outbound Chinese investment in semiconductor manufacturing did not exceed $1 billion in a single year In 2014 the value of announced Chinese acquisitions increased to $3 billion and in 2015 surged to $35 billion 571 Thus the aggregate data suggest a possible causal link between state policies and implementing measures on the one hand and trends in technology-driven OFDI on the other Indeed given the scope and scale of these measures it would be surprising if they had no effect on investment flows To further examine the impact of state measures on OFDI USTR reviewed hundreds of reported transactions in the following technology-intensive sectors 1 aviation 2 integrated circuits 3 information technology 4 biotechnology 5 industrial machinery 6 renewable energy and 7 automotive Several of these transactions are discussed in detail below and are presented as representative examples The analysis is based on publicly available information concerning these transactions and given the difficulty of obtaining information on the precise role of the government and CCP in individual cases there are limits to the information available concerning each transaction Nonetheless the evidence establishes that Chinese government policies and measures have had a significant effect on investment in each of the technology-intensive sectors examined At multiple levels of government – central regional and local – the Chinese state has directed and facilitated the acquisition of U S companies and assets in these sectors In the representative examples provided the transactions align with state objectives and policies and are often undertaken by SOEs that are by definition owned and controlled by the government Even when undertaken by companies in which the government does not own an observable controlling stake the transactions identified are frequently guided and directed by the state CCP members often act as board members and officers of these companies and are responsive to state directives In addition many of these transactions are funded by state-owned entities or banks often in situations where comparable commercial financing would have been unavailable a Aviation Government Policies Chinese investments in the U S general aviation GA industry illustrate the role of Chinese government policies in directing the commercial activities of Chinese companies Obtaining and developing cutting-edge technology in the aviation sector has long been an objective of the Chinese government As discussed above aviation technology has featured in numerous state planning documents such as the MLP and the State Council Opinions on Deepening Reform of the National Defense Science and Technology Industry Investment System the measure which called for development of National Defense Science Technology Social 571 RHODIUM Submission Section 301 Hearing 4 Sept 28 2017 Rhodium finds that there is a “readily apparent” nexus between Chinese industrial policy and outbound investment in the semiconductor industry 103 IV Outbound Investment Investment Guidance Catalogue which specifically targets aviation 572 Several five-year plans for China’s civil aviation industry underscore the government’s objective of developing this technology 573 as do opinions and directives issued by government ministries such as MOST and SASTIND 574 These documents confirm that the pursuit of aviation technology is intended to fulfill both civil and military objectives 575 Reflecting these objectives Chinese firms have acquired at least 11 U S aviation companies established three joint ventures and signed five cooperation agreements since 2005 576 The central state-owned Aviation Industry Corporation of China AVIC 577 leads this investment effort and since 2010 has spent more than $3 billion acquiring U S and European aviation companies to address key gaps in general aviation technologies 578 As the successor to the Ministry of Aviation Industry AVIC has implicit responsibility for China’s state-run aviation sector 579 AVIC is also the sole domestic supplier of military aircraft to the PLA 580 572 Notice on Issuing the National Medium- and Long-Term Science and Technology Development Plan Outline 2006-2020 State Council Guo Fa 2005 No 44 issued Dec 26 2005 State Council Opinions on Deepening Reform of the National Defense Science and Technology Industry Investment System State Council Guo Han 2007 No 9 issued Jan 30 2007 Ministry of Industry and Information Technology Ministry of Science and Technology National Defense Science Technology Social Investment Guidance Catalogue Release of 2010 Edition MIIT MOST issued Dec 1 2012 573 China Civil Aviation Industry 13th Five-year Development Plan CAAC issued Mar 2017 China Civil Aviation Industry 12th Five-year Development Plan CAAC issued Apr 2011 574 Provisional Measures on the Administration and Approval of Social Investment Projects of National Defense Science and Technology Industry MIIT Ke Kong Ji 2009 Document No 1516 issued Dec 30 2009 manages approval of investments in the National Defense Science Technology Social Investment Guidance Catalogue Opinions Encouraging Technology Transfer and Innovation and Promoting the Transformation of the Growth Mode of Foreign Trade MOFCOM NDRC MOST GCA GTA SIPO SAFE Shang Fu Mao Fa 2006 No 13 issued July 14 2006 2016 SASTIND Military-Civilian Fusion Special Action Plan MOST Guo Gong Ji 2016 No 204 issued Mar 16 2016 2017 SASTIND Military-Civil Fusion Special Action Plan SASTIND posted June 23 2017 575 2017 SASTIND Military-Civil Fusion Special Action Plan ¶ 2 the action plan identifies three ways in which aviation technology is to be shared 1 deepening “civil participation in the military” 2 advancing military transfers to civil and 3 promoting military-civil resource sharing 576 See Chad J R Ohlandt et al RAND CHINESE INVESTMENT IN U S AVIATION prepared for the U S -China Economic Security Review Commission 45 54-6 Mar 29 2017 577 AVIC is a state-owned industrial conglomerate that focuses on aerospace manufacturing but offers a wide range of goods and services some of which extend beyond the aerospace sector See About Us AVIC http www avic com en aboutwebsite contactus index shtml last visited Dec 7 2017 “The Aviation Industry Corporation of China AVIC was founded on November 6th 2008 through the restructuring and consolidation of the China Aviation Industry Corporation I AVIC I and the China Aviation Industry Corporation II AVIC II We are centered on aviation and provide complete services to customers in many sectors - from research and development to operation manufacturing and financing Our business units cover defense transport aircrafts helicopters avionics and systems general aviation research and development flight testing trade and logistics assets management finance services engineering and construction automobiles and more We have over 100 subsidiaries nearly 27 listed companies and more than 450 000 employees ” See also Company Overview of AVIC International Holding Corporation BLOOMBERG https www bloomberg com research stocks private snapshot asp privcapId 5480121 last visited Dec 7 2017 578 Greg Levesque Mark Stokes POINTE BELLO BLURRED LINES MILITARY-CIVIL FUSION AND THE ‘GOING-OUT’ OF THE CHINESE DEFENSE INDUSTRY 36 Dec 2016 579 See About Us AVIC http www avic com en aboutwebsite contactus index shtml last visited Dec 7 2017 580 Moody’s Assigns First-time Baa3 Rating to AVIC International MOODY’S INVESTOR SERVICE Aug 30 2013 104 IV Outbound Investment AVIC is the focal point of China’s plans to develop a globally competitive aerospace industry The company holds a 38 18 percent stake581 in Commercial Aircraft Corporation of China Ltd COMAC which was established by the Chinese government in 2008 for the purpose of designing and producing commercial aircraft including the C919 single-aisle large commercial aircraft The C919 project has served as a catalyst for COMAC as well as smaller Chinese enterprises along the aerospace supply chain to work with foreign companies on production tooling and manufacturing processes 582 This has allowed Chinese aerospace companies – including AVIC itself – to acquire foreign know-how and technology an important step toward strengthening China’s domestic aerospace industry AVIC’s acquisitions have facilitated the transfer of engine avionics and production processes to China resulting in so-called “breakthroughs” in domestic piston engine technology solutions to production bottlenecks and the development of advanced Unmanned Aerial Vehicles UAV manufacturing for both Chinese military use and for export to foreign countries 583 Moreover AVIC’s acquisitions have provided China with a fully integrated general aviation aircraft engine business encompassing marketing sales maintenance repair and overhaul MRO manufacturing and R D 584 In addition AVIC acquisitions are supporting its key role in developing China’s general aviation infrastructure network585 in line with China’s civil aviation industry development plans 586 Chinese Investments in the U S General Aviation Sector Since 2010 AVIC has acquired the following U S companies in the GA sector 581 COMMERCIAL AIRCRAFT CORPORATION OF CHINA 2016 ANNUAL REPORT 54 Chinese Mar 2017 See Micah Springut Stephen Schlaikjer David Chen CENTRA Technology Inc China’s Program for Science and Technology Modernization Implications for American Competitiveness prepared for the U S -China Economic Security Review Commission 124-25 2011 “China’s development of the single-aisle civil airliner C919 is one major project involving multiple multinational suppliers from whom Chinese companies will learn advanced production tooling and manufacturing processes Some of the Chinese companies producing subsystems with multinationals will be able to apply their know-how to the J-20 and other military models Despite both government and corporate technology transfer restrictions and intellectual property guarantees China’s experience working with General Electric and the German firm MTU in producing propulsion units for the C919 could help serve the development of more reliable military jet engines AVIC subsidiaries such as Xi’an Aero-engine PLC also have joint ventures with engine manufacturers Pratt Whitney Rolls Royce and Balcke Durr ” See also Chad J R Ohlandt RAND Implications of China’s Aerospace Industrial Policies 76 testimony presented before the U S China Economic and Security Review Commission on Apr 27 2016 583 The Heart of China’s Unmanned Aerial Vehicles Will Be Domestic-Made Precision Shot to Acquire the TopTier Manufacturers in the United States and Germany Chinese PHOENIX MILITARY NEWS Dec 6 2016 available at http news ifeng com a 20161206 50370941_0 shtml Lin Feng China’s ‘Trojan Horse’ has Entered the U S Military Enterprises VOICE OF AMERICA MANDARIN SERVICE Apr 11 2017 584 Press Release Continental Motors AVIC International Announces the Formation of Continental Motors Group and Expansion into China Continental Motors Apr 10 2014 available at http www continentalmotors aero xPublications News%20Releases AVIC%20International%20announces%20the %20Founding%20of%20the%20Continental%20Motors%20Group 585 Cirrus Building China GA Infrastructure AVIATION INTERNATIONAL NEWS Apr 12 2017 586 China Civil Aviation Industry 12th Five-year Development Plan CAAC issued Apr 2011 China Civil Aviation Industry 13th Five-year Development Plan CAAC issued Mar 2017 582 105 IV Outbound Investment  Epic Aircraft—acquired by China Aviation Industry General Aircraft Co CAIGA an AVIC subsidiary for $4 3 million in April 2010 after a bankruptcy judge approved the asset purchase agreement 587 According to the court CAIGA’s bid was the highest and best offer 588 The acquisition included Epic intellectual property and technology 589  Teledyne Technologies Continental Motors and Mattituck Services —acquired by Technify Motors USA Inc a subsidiary of AVIC International Holding Corporation in December 2010 for $186 million 590 Continental Motors591 is a pioneer in the area of full authority digital engine control FADEC technology 592  Cirrus Aircraft—acquired by CAIGA in February 2011 for $210 million 593 At the time of purchase Cirrus was the second largest manufacturer of GA aircraft and the largest manufacturer of piston-engine powered GA aircraft 594  Southern Avionics Communications Inc —acquired by Continental Motors Group in November 2014 595 Southern Avionics is a leader in avionics sales installation and service The company represents most major global avionics manufacturers through distribution or representative agreements 596  United Turbine and UT Aeroparts—acquired by Continental Motors Group in January 2015 597 United Turbine and UT Aeroparts provide turbine aircraft engine and accessory MRO services  Align Aerospace—acquired by AVIC International in April 2015 598 Align provides supply chain services for the aerospace industry and distributes fasteners and other hardware for aerospace original equipment manufacturers 587 Chinese Firm to Buy Epic Assets AVIATION INTERNATIONAL NEWS Apr 30 2010 Chinese Firm to Buy Epic Assets AVIATION INTERNATIONAL NEWS Apr 30 2010 589 Chinese Firm to Buy Epic Assets AVIATION INTERNATIONAL NEWS Apr 30 2010 590 Press Release Teledyne Technologies Inc Teledyne Technologies Agrees to Sell Teledyne Continental Motors to AVIC International Dec 14 2010 591 See Continental Motors Inc BLOOMBERG https www bloomberg com profiles companies 0116585D UScontinental-motors-inc last visited Dec 7 2017 stating that “Continental Motors Inc produces aviation products The Company manufactures fuel injected turbocharged radial and horizontally opposed cylinder aircraft piston engines for the aerospace industry ” 592 Bill Cox FADEC Comes of Age PLANE PILOT Feb 9 2010 593 Norihiko Shirouzu China to Buy Small U S Planemaker WALL STREET JOURNAL Mar 3 2011 594 Chad J R Ohlandt et al RAND CHINESE INVESTMENT IN U S AVIATION prepared for the U S -China Economic and Security Review Commission 49 Mar 29 2017 595 Press Release Continental Motors Continental Motors Group Announces Completed Acquisition of Southern Avionics and Communications Nov 24 2014 596 Press Release Continental Motors Continental Motors Group Announces Completed Acquisition of Southern Avionics and Communications Nov 24 2014 597 Press Release Continental Motors Continental Motors Services Acquires United Turbine and UT Aeroparts Corporations Feb 2 2015 598 Juliet Van Wagenen AVIC Looks to Up Global Push with Align Aerospace Acquisition AVIATION TODAY Apr 2 2015 588 106 IV Outbound Investment  Danbury Aerospace—acquired by Continental Motors Group in April 2015 599 Danbury Aerospace specializes in engine design and certification 600 In October 2016 Danbury operations in San Antonio were closed resulting in layoffs of 57 people 601 AVIC International Holding Corporation subsidiary Technify Motors GmbH acquired Germanbased Thielert Aircraft in July 2013 602 Thielert’s 1 7L engine powered the MQ-10C Gray Eagle UAV a derivative of the General Atomics Predator drone used by the U S Air Force a defense article that is export controlled by the International Traffic in Arms Regulations ITAR 603 This engine also has been used in the military versions of the Diamond Aircraft DA42 604 a largely composite twin-engine aircraft used for both manned and unmanned surveillance 605 AVIC’s GA acquisitions in the United States align with Chinese government aviation S T and industrial development policy directives For example the timing of AVIC’s acquisition of U S piston engine manufacturers follows the December 2009 release of the National Defense Science and Technology Social Investment Guidance Catalogue 606 Promulgated by MIIT which regulates the defense industry the catalogue “guides” domestic investment in defense S T assets including UAV manufacturing and piston engine development and manufacturing 607 The use of the term “social investment608” in Chinese denotes the pursuit of investments which 599 Press Release Continental Motors Continental Motors to Purchase Assets from Danbury Aerospace May 4 2015 600 Press Release Continental Motors Continental Motors to Purchase Assets from Danbury Aerospace May 4 2015 Continental Motors states “Danbury Aerospace is a holding company that has led the industry in parts manufacturing authorization PMA and experimental engine technologies for the certified and experimental piston engine powered segments of the General Aviation market … Its capabilities include PMA design and certification engine design and certification operation of a Part 145 Repair Station for piston aircraft engines and parts manufacturing process design manufacturing system design and production and sales service and support ” 601 Rye Druzin Aircraft Engine Manufacturer Shutters San Antonio Factory Lays Off 56 MY SAN ANTONIO Oct 12 2016 602 Press Release Continental Motors AVIC International Holding Corporation Acquires the Assets of Thielert Aircraft Engines Out of Bankruptcy July 22 2013 603 DEPARTMENT OF DEFENSE SELECTED ACQUISITION REPORT MQ-1C UAS GRAY EAGLE 33 Dec 31 2010 604 Civil Aviation Safety Investigation Authority Ministry of Ecology Sustainable Development and Energy France EVENTS ASSOCIATED WITH AN ENGINE MALFUNCTION THIELERT TAE 125 ENGINES 7 2014 available at https www bea aero etudes thielert tae125 engines thielert tae125 engines pdf 605 Technify Motors GmbH key customers are manufacturers of new piston engine-powered aircraft fleets and owner operators of existing aircraft that would convert from gasoline-fueled engines to diesel-fueled engines owner operators requiring maintenance and spare parts for their diesel-fueled aircraft engines and developers manufacturers users of UAVs AVIC International Holding HK Limited notification to the Hong Kong Stock Exchange Very Substantial Acquisition and Connected Transaction and Application for Whitewash Waiver and Appointment of Independent Financial Adviser and Clawback Offer by AVIC International HK Group Limited Sept 19 2017 606 AVIC’s investment activities in the United States significantly ramped up following the release of the National Defense Science Technology Social Investment Guidance Catalogue as well as other state aviation industrial development policies and the establishment of an aviation industry investment fund see Mao Haifeng China’s First National Level Aviation Industry Fund Administration Lists Operations XINHUA NEWS June 28 2009 available at http www gov cn jrzg 2009-06 28 content_1352458 htm last visited Feb 12 2018 607 The catalogue specifically identifies manufacturing of unmanned combat aircraft parts communications and electronic warfare platforms § 5 1 1 and the development and manufacturing of aviation piston engines § 5 3 1 as targets for social investment See National Defense Science Technology Social Investment Guidance Catalogue 608 English translation of Chinese term shehui touzi 107 IV Outbound Investment create a positive return to society including R D investments that generate a social or public benefit rather than purely profit 609 AVIC’s pursuit of state policies is evident in its public statements  During a February 2009 meeting between officials from AVIC and the Civil Aviation Administration of China CAAC Li Jian then deputy director of CAAC stressed that the development of the GA industry was far from meeting central government requirements of economic and social development 610 In response then AVIC officer Xu Zhanbin replied that the company would promote institutional and technological innovation as soon as possible to achieve breakthroughs in the GA market and effectively promote industry development 611  AVIC president Tan Ruisong has noted that the group’s “coordinated development” of its non-aviation civilian business and military business embodies China’s Military-Civil Fusion MCF strategy as well as aviation industry policies 612 AVIC chairman Lin Zuoming publicly stated that “AVIC always regards civil-military integration as its historical mission ”613  In July 2010 AVIC the Tianjin Municipal Government and China Construction Bank set up a CNY 20 billion $3 billion private equity fund to acquire dual-use technology companies and invest in defense R D projects that support the restructuring and development of China’s aviation industry 614 When announcing the launch of this fund AVIC specifically referenced restructuring in the U S GA market suggesting that one objective of this fund was to further acquisitions in the U S market 615 Reflecting the extent of government support of AVIC’s commercial activities both China Exim and PBC have provided financing for AVIC acquisitions in the United States 616 AVIC International is in the process of transferring ownership of its U S GA subsidiaries i e 609 State Council Guiding Opinions on Innovating Systems for Key Sectors to Encourage Social Investment State Council Guo Fa 2014 No 60 issued Nov 24 2014 effective Nov 14 2014 610 Press Release Civil Aviation Administration of China CAA and AVIC Collaborate on the Future of General Aviation Chinese Feb 18 2009 available at http www caac gov cn XWZX MHYW 200902 t20090218_12250 html 611 Press Release Civil Aviation Administration of China CAA and AVIC Collaborate on the Future of General Aviation Chinese Feb 18 2009 available at http www caac gov cn XWZX MHYW 200902 t20090218_12250 html 612 Convening of AVIC 2016 Non-Aviation Business Equity Investment Work Meeting Chinese AVIC Apr 23 2016 available at http www avic-intl-capital com detail aspx cid 1577 siteid 27568 613 AVIC TOGETHER WITH US SOCIAL RESPONSIBILITY REPORT 2014 8 June 2015 614 China’s First Aviation Industry Support Fund Established Chinese CHINA AVIATION NEWS July 12 2010 available at http www avic com cn xwzx jqyw 390801 shtml 615 China’s First Aviation Industry Support Fund Established Chinese CHINA AVIATION NEWS July 12 2010 available at http www avic com cn xwzx jqyw 390801 shtml 616 AVIC International Holding HK Limited notification to the Hong Kong Stock Exchange Very Substantial Acquisition and Connected Transaction and Application for Whitewash Waiver and Appointment of Independent Financial Adviser and Clawback Offer by AVIC International HK Group Limited Sept 19 2017 108 IV Outbound Investment Continental Motors and Cirrus to a separate AVIC-owned company 617 According to AVIC the “proposed reorganization is being contemplated by the Company as part of a wider restructuring campaign being implemented by SASAC ”618 This announcement underscores the extent to which the Chinese government oversees and directs through SASAC the commercial activities of SOEs operating in the United States AVIC Technology Transfer—Achieving Breakthroughs AVIC’s U S GA acquisitions and its transfer of technology appear to conform to a governmentprescribed policy of introducing digesting absorbing and re-innovating foreign acquired technology see IDAR policy discussed in Section I Research conducted by a Chinese defense industry analyst documents this IDAR process in relation to AVIC’s GA engine acquisitions in the United States and Europe 619 According to this report piston engine technology transferred to China including Chinese universities from several sources – including Continental Motors Thielert Aircraft and Cirrus Aircraft as well as joint development agreements covering single engine turboprops and piston engines with Cessna – has led to “breakthroughs” in piston engine technology and production bottlenecks 620 Key breakthroughs were achieved in gasolinemodified heavy oil technology electric fuel injection technology and turbocharging 621 U S companies acquired by AVIC now provide ongoing R D and fill critical nodes in China’s GA aircraft and piston engine manufacturing industry For example in April 2014 AVIC announced the consolidation of “its aircraft engine businesses under a single corporate structure” — Hong Kong incorporated Continental Motors Group Limited CMG 622 Following the incorporation of CMG AVIC expanded its GA technology portfolio by acquiring Danbury Aerospace United Turbine UT Aeroparts and Southern Avionics and Communications 623 According to a company press release these acquisitions were driven by AVIC’s “special place 617 AVIC International Holding HK Limited notification to the Hong Kong Stock Exchange Potential Continuing Connected Transactions Oct 24 2017 618 AVIC International Holding HK Limited notification to the Hong Kong stock exchange Very Substantial Acquisition and Connected Transaction and Application for Whitewash Waiver and Appointment of Independent Financial Adviser and Clawback Offer by AVIC International HK Group Limited 15 Sept 19 2017 619 The Heart of China’s Unmanned Aerial Vehicles Will Be Domestic-Made Precision Shot to Acquire the TopTier Manufacturers in the United States and Germany Chinese PHOENIX MILITARY NEWS Dec 6 2016 available at http news ifeng com a 20161206 50370941_0 shtml 620 The Heart of China’s Unmanned Aerial Vehicles Will Be Domestic-Made Precision Shot to Acquire the TopTier Manufacturers in the United States and Germany Chinese PHOENIX MILITARY NEWS Dec 6 2016 available at http news ifeng com a 20161206 50370941_0 shtml 621 The Heart of China’s Unmanned Aerial Vehicles Will Be Domestic-Made Precision Shot to Acquire the TopTier Manufacturers in the United States and Germany Chinese PHOENIX MILITARY NEWS Dec 6 2016 available at http news ifeng com a 20161206 50370941_0 shtml 622 Press Release Continental Motors AVIC International Announces the Formation of Continental Motors Group and Expansion into China Apr 10 2014 available at http www continentalmotors aero xPublications News%20Releases AVIC%20International%20announces%20the %20Founding%20of%20the%20Continental%20Motors%20Group 623 Press Release Continental Motors Group Announces Completed Acquisition of Southern Avionics and Communications Nov 24 2014 Press Release Continental Motors Continental Motors Services Acquires United Turbine and UT Aeroparts Corporation Feb 2 2015 Press Release Continental Motors Continental Motors to Purchase Assets from Danbury Aerospace May 4 2015 109 IV Outbound Investment and obligation to bring general aviation products to China ”624 Consolidation of AVIC-acquired GA assets in the United States has provided the company a fully integrated GA aircraft engine marketing sales MRO manufacturing and R D business 625 As AVIC notes “CMG is the only global player capable of designing manufacturing and maintaining both gasoline and diesel piston engines ”626 b Integrated Circuits Government Policies As the SIA has observed “ s emiconductors are the building blocks upon which U S technological leadership rests ”627 Semiconductors play a key role in many sectors of the economy that are at the forefront of U S competitiveness 628 Likewise a strong domestic IC sector is important to U S national security 629 An erosion of U S technological leadership in this sector could have significant and potentially irreversible effects As Robert Atkinson of the Information Technology and Innovation Foundation ITIF has observed I f America’s technology base was substantially lost no adjustment of currency decline could bring it back because national strength in technology industries is based less on cost and more on a complex array of competencies at the firm- and ecosystem-level For example a firm could not simply buy some semiconductor equipment and start cranking out chips To do that would require not just machines but deep and complex tacit knowledge embedded in the firm in workers from the shop floor to research and development R D scientists coupled with an innovation ecosystem universities training the right talent a network of suppliers of materials etc Once those capabilities are lost they are essentially gone and are very difficult to resurrect 630 624 Press Release Continental Motors AVIC International Announces the Formation of Continental Motors Group and Expansion into China Apr 10 2014 available at http www continentalmotors aero xPublications News%20Releases AVIC%20International%20announces%20the %20Founding%20of%20the%20Continental%20Motors%20Group 625 Press Release Continental Motors AVIC International Announces the Formation of Continental Motors Group and Expansion into China Apr 10 2014 available at http www continentalmotors aero xPublications News%20Releases AVIC%20International%20announces%20the %20Founding%20of%20the%20Continental%20Motors%20Group 626 Press Release Continental Motors AVIC International Announces the Formation of Continental Motors Group and Expansion into China Apr 10 2014 available at http www continentalmotors aero xPublications News%20Releases AVIC%20International%20announces%20the %20Founding%20of%20the%20Continental%20Motors%20Group 627 SIA Submission Section 301 Hearing 2 Oct 5 2017 628 SIA Submission Section 301 Hearing 2 Oct 5 2017 629 China’s Technological Rise Challenges to U S Innovation and Security Hearing Before the House Committee on Foreign Affairs Subcommittee on Asia and the Pacific 115th Cong 11 2017 Statement of Robert D Atkinson emphasis added 630 China’s Technological Rise Challenges to U S Innovation and Security Hearing Before the House Committee on Foreign Affairs Subcommittee on Asia and the Pacific 115th Cong 4 2017 Statement of Robert D Atkinson 110 IV Outbound Investment In recent decades the Chinese government has repeatedly underscored the importance of developing an indigenous IC industry and challenging U S leadership in this sector Since 2014 the government has taken concrete steps to realize this objective mobilizing multiple state actors and committing vast sums of money to support the acquisition of foreign IC technology Chinese companies have been close partners in this effort and have embarked on what one participant in the investigation referred to as a “buying spree”631 – acquiring a large number of foreign IC companies and assets primarily in the United States In its five-year plans for the Chinese economy the government has consistently flagged the IC industry as a national priority  In 1991 China’s 8th Five-year National Economic and Social Development Plan Outline 8th Five-year Plan called the development of the domestic integrated circuit industry a “main task”632 of the state 633  In 1996 China’s 9th Five-year National Economic and Social Development Plan Outline and 2010 Long-Term Goals 9th Five-year Plan called for the development of new generation integrated circuits and for China to catch up to global technology levels 634  In 2001 the 10th Five-year National Economic and Social Development Plan Outline 10th Five-year Plan called for the focused development of high-tech industries with localized breakthroughs and development as well as using the IDAR approach to “vigorously develop the IC and software industry ”635  In 2006 China’s 11th Five-year National Economic and Social Development Plan Outline 10th Five-year Plan called for the “vigorous” development of integrated circuits and other industries at the core of the “digitization trend ”636  In 2011 China’s 12th Five-year National Economic and Social Development Plan Outline 12th Five-year Plan once again called for rapid development by cultivating a group of “backbone enterprises”637 and demonstration bases in the strategic emerging industries 638 631 ITIF Submission Section 301 Hearing 9 Oct 25 2017 English translation for Chinese term zhuyao renwu 633 8th Five-year National Economic and Social Development Plan Outline § 1 3 adopted by the NPC on Apr 9 1991 634 9th Five-year National Economic and Social Development Plan Outline and 2010 Long-Term Goals § 2 4 adopted by the NPC on Mar 17 1996 635 10th Five-year National Economic and Social Development Plan Outline Ch 6 § 3 adopted by the NPC on Mar 15 2001 636 11th Five-year National Economic and Social Development Plan Outline Ch 10 § 1 adopted by the NPC on Mar 14 2006 637 English translation for Chinese term gugan qiye 638 12th Five-year National Economic and Social Development Plan Outline Ch 10 § 2 adopted by the NPC on Mar 14 2011 632 111 IV Outbound Investment  In 2016 China’s 13th Five-year National Economic and Social Development Plan Outline 13th Five-year Plan called for the active promotion of advanced semiconductor technology 639 A series of other government policies and planning documents echo the consistent message of the Five-year Plans For instance policies addressing the broad development of science and technology call for the support of a domestic IC industry 640 In addition the government released several policies and plans that are specific to the IC industry and call for its promotion and development 641 MIIT’s issuance of the Guidelines for the Development and Promotion of the Integrated Circuit Industry IC Guidelines in 2014 marked a turning point in the evolution of Chinese policy in the IC sector This measure called for establishing a National IC Industry Development Leading Small Group with responsibility for the overall design and coordination of China’s IC industry development 642 The IC Guidelines also called for substantial funding to support the growth of China’s IC industry The IC Guidelines directed the creation of a National IC Fund to mobilize capital from large enterprises financial organizations and society to invest in the development of China’s IC industry and promote industrial upgrading 643 The IC Guidelines also called for policy banks in particular China Exim and CDB and commercial banks to provide financial support to the IC industry 644 639 13th Five-year National Economic and Social Development Plan Outline Ch 23 § 1 adopted by the NPC on Mar 16 2016 640 These include the Notice on Issuing the National Medium- and Long-Term Science and Technology Development Plan Outline 2006-2020 State Council Guo Fa 2005 No 44 issued Dec 26 2005 see also Several Supporting Policies for Implementing the “National Medium- and Long-Term Science and Technology Development Plan Outline 2006-2020 ” State Council Guo Fa 2006 No 6 issues Feb 7 2006 11th Five-year Science and Technology Development Plan MOST issued Oct 27 2006 Electronic Information Industry Restructuring and Revitalization Plan State Council published Apr 15 2009 Decision on Accelerating and Fostering the Development of Strategic Emerging Industries State Council Guo Fa 2010 No 32 issued Oct 18 2010 Notice on the National 12th Five-year Science and Technology Development Plan MOST issued July 4 2011 Notice on Corporate Income Tax Policies to Further Encourage the Development of the Software and Integrated Circuit Industries State Council Guo Fa 2011 No 4 issued Jan 28 2011 Notice on Issuing the 12th Five-year National Strategic Emerging Industries Development Plan State Council Guo Fa 2012 No 28 issued July 9 2012 Made in China 2025 Notice Made in China 2025 Roadmap Ministry of Industry and Information Technology Notice on Issuing the Industry Technology Innovation Capacity Development Plan 2016-2020 MIIT Gong Xin Bu Gui 2016 No 344 issued Oct 31 2016 Notice on Issuing the National 13th Five-year Science and Technology Innovation Plan State Council Guo Fa 2016 No 43 issued July 28 2016 Notice on the 13th Five-year Strategic Emerging Industries Development Plan State Council Guo Fa 2016 No 67 issued Nov 29 2016 641 12th Five-year Development Plan for the Integrated Circuit Industry hereinafter “IC 12th Five-year Plan” MIIT issued Feb 24 2012 Notice on Issuing Several Policies to Further Encourage the Development of the Software and Integrated Circuit Industries State Council Guo Fa 2011 No 4 issued Jan 28 2011 Notice on Issuing Several Policies to Encourage the Development of the Software and Integrated Circuit Industries State Council Guo Fa 2000 No 18 issued June 24 2000 642 IC Guidelines § 4 1 643 IC Guidelines § 4 2 644 IC Guidelines § 4 3 112 IV Outbound Investment Taken together the series of policies and plans issued by the Chinese governments set out a comprehensive strategy for developing indigenous IC capacity and reducing imports In these documents the Chinese government disapproves of the fact that China relies on imports of IC products and underscores the importance of achieving a self-sufficient IC industry that is capable of meeting domestic demand and contributing to exports 645 Indeed some plans set specific targets for domestic market share to be achieved by Chinese companies 646 and call for a technologically advanced and “secure and reliable” IC industry by 2020 647 China’s strategy calls for creating a closed-loop semiconductor manufacturing ecosystem with self-sufficiency at every stage of the manufacturing process – from IC design and manufacturing to packaging and testing and the production of related materials and equipment 648 A central pillar of this strategy is achieving technology transfer through foreign acquisitions For example the Notice on Issuing the Industrial Technology Innovation Capability Development Plan 2016-2020 expressly encourages foreign acquisitions to increase the international competitiveness of China’s domestic industry through “technology acquisition”649 and “technology transfer650 ”651 The National 13th Five-year Science and Technology Innovation Plan calls for the “capture652 of ‘key core technologies’ electronic components high-end telecom chips foundational software integrated circuit equipment broadband mobile communications … ” 653 State plans also underscore the need to apply the IDAR method to cultivate the domestic IC industry 654 645 See e g Notice on Issuing Several Policies to Encourage the Development of the Software and Integrated Circuit Industries State Council Guo Fa 2000 No 18 issued June 30 2000 which provides at art 2 “Through 5 to 10 years of efforts domestically produced software products are to be able to satisfy a large portion of domestic market demand and achieve a large volume of exports domestically produced integrated circuit products are to be able to satisfy a large portion of domestic market demand and achieve a certain volume of exports At the same time further shrink the gap with advanced countries in developing and manufacturing technology ” See also § 1 1 1 of the Made in China 2025 Roadmap which notes that in 2015 China’s domestic IC production was $48 3 billion which satisfied 41 percent of China’s domestic demand China’s domestic IC production is forecast to reach $85 1 billion by 2020 meeting 49 percent of China’s domestic demand and $183 7 billion by 2030 meeting 75 percent of China’s domestic demand Therefore meeting domestic demand increasing China’s rate of IC self-sufficiency and at the same time satisfying China’s needs for national security is the greatest requirement and motivation of developing China’s IC industry 646 See e g Notice on the 12th Five-year Strategic Emerging Industries Development Plan State Council Guo Fa 2012 No 28 issued July 9 2012 which provides at § 4 1 “By 2015 raise IC industry value-added domestic market share from five percent to 15 percent ” 647 IC Guidelines § 2 3 648 IC Guidelines § 2 3 Notice on the 12th Five-year Strategic Emerging Industries Development Plan Box 5 649 English translation of the Chinese term jishu binggou 650 English translation of the Chinese term jishu zhuanyi 651 Ministry of Industry and Information Technology Notice on Issuing the Industry Technology Innovation Capacity Development Plan 2016-2020 MIIT Gong Xin Bu Gui 2016 No 344 issued Oct 31 2016 emphasis added 652 English translation of the Chinese term gongke 653 Notice on Issuing the National 13th Five-year Science and Technology Innovation Plan Ch 4 § 1 State Council Guo Fa 2016 No 43 issued Aug 8 2016 654 IC 12th Five-year Plan § 3 1 “Guiding Thoughts Basic Principles and Development Targets” “Strengthen introduce digest absorb and re-innovate and tread a path of method innovation and internationalizing development ” 113 IV Outbound Investment State funding plays a key role in this acquisition strategy State policies call on the departments under the State Council and all levels of local governments to develop financing measures including policy funds loan guarantees and new financial instruments to support this effort 655 Ultimately the objective of these policies is to create competitive Chinese enterprises in the IC sector The policies prioritize the cultivation of strong backbone enterprises to upgrade domestic competitiveness and perfect the industrial ecosystem 656 The formation of a favorable industrial ecosystem environment is intended to include clusters of upstream and downstream enterprises achieving breakthroughs and upgrading along the value chain 657 These enterprises – supported by a network of government bodies investment funds research institutions legal organizations and other intermediary organizations – should play a key role in acquiring foreign technology and introducing it to the domestic industrial ecosystem 658 The 13th Five-year Science and Technology Innovation Plan released in 2016 calls specifically for supporting Beijing and Shanghai in building globally influential science and technology innovation centers including internationally competitive high-tech industrial clusters 659 Chinese Investments in the U S Integrated Circuit Sector In recent years these policy directives have prompted a flood of foreign acquisitions Since 2014 when the government issued the Guidelines Chinese companies and investors – often backed by state capital – have undertaken a series of acquisitions to achieve technology breakthrough shrink the technology gap between China and advanced countries cultivate domestic innovation clusters and reduce China’s reliance on IC imports Government leadership in these operations is clear In many cases the Chinese acquirers openly admit the role played by the state in guiding and facilitating these acquisitions Below several Chinese acquisitions of U S companies and assets that illustrate this development are discussed in detail Beijing E-Town Chipone iML On June 1 2016 California-based Exar Corporation agreed to sell its subsidiary Integrated Memory Logic Limited iML to Beijing E-Town Chipone Technology Co Ltd Beijing ETown Chipone for $136 million iML is a leading provider of power management and color calibration solutions for the flat-panel display and LED lighting markets 660 655 Notice on Issuing Several Policies on Further Encouraging the Development of the Software and Integrated Circuit Industries § 4 2 State Council Guo Fa 2011 No 4 issued Jan 28 2011 Electronic Information Industry Restructuring and Revitalization Plan § 2 12 State Council issued Apr 15 2009 656 IC 12th Five-year Plan § 4 1 657 IC Guidelines § 4 6 658 Notice on the 13th Five-year National Strategic Emerging Industries Development Plan § 9 3 State Council Guo Fa 2016 No 67 issued Nov 29 2016 659 Notice on Issuing the National 13th Five-year Science and Technology Innovation Plan Ch 11 § 3 State Council Guo Fa 2016 No 43 issued Aug 8 2016 660 Exar Corporation 8-K filed with the Securities and Exchange Commission on May 31 2015 Commission File No 0-14225 114 IV Outbound Investment Beijing E-Town Chipone was formed by Beijing E-Town and Chipone Technology Co Ltd Chipone Beijing E-Town is both a separate entity and a partner with Chipone in forming Beijing E-Town Chipone the vehicle used to acquire iML Beijing E-Town is an SOE and provided the largest source of capital for the acquisition of iML 661 As discussed in Section IV B 5 above Beijing E-Town was established and approved by the Beijing Municipal Government in February 2009 and is wholly owned and controlled by the Beijing EconomicTechnological Development Zone State Asset Management Office 662 Beijing E-Town’s investment strategy reflects Chinese government policy and strategy According to a 2015 presentation by General Manager Wang Xiaobo Beijing E-Town seeks to integrate government leadership and market operations in building a system of funds that includes the National IC Fund provincial municipal-level funds and smaller VC funds 663 This system of funds seeks to accelerate industrial clustering incubate innovation and cultivate an industrial ecosystem 664 A key aspect of Beijing E-Town’s investment philosophy is the objective of clustering technology companies in the Beijing Economic-Technological Development Zone 665 According to an article on the Beijing Economic-Technological Development Zone website sources familiar with the acquisition say that after Chipone has integrated iML Chipone plans to move iML operations to its headquarters in the Beijing Economic-Technological Development Zone 666 Beijing E-Town’s goal is to partner with domestic industry leaders to promote international acquisitions to acquire a number of key technologies in the IC industry – including mobile telecom base chips RF chips memory chips IGBT power electronics LCD driver chips CPU 661 To finance the acquisition entity Beijing E-Town International Emerging Industries Investment Center which is 92 83 percent owned by Beijing E-Town contributed CNY 500 million $74 million 45 5 percent Chipone contributed CNY 400 million $59 million 36 4 percent and real-estate company named Beijing Yongchang Huanyu contributed CNY 200 million $30 million 18 2 percent for a total of CNY 1 1 billion $163 million See China’s National Enterprise Credit Information Publicity System Chinese available at http www gsxt gov cn Qi Xin Bao database Chinese available at http www qixin com CCXR 2017 Credit Report on Beijing E-Town International Investment and Development Co Ltd 22 Chinese Credit Committee 2017 No G229-1 662 CCXR 2017 Credit Report on Beijing E-Town International Investment and Development Co Ltd Chinese Credit Committee 2017 No G229-1 663 Wang Xiaobo General Manager Beijing E-Town Presentation at TIF China 2015 Establishing an Investment Financing Platform Promoting Development of the Integrated Circuit Industry Chinese Mar 2015 available at http www semi org en sites semi org files data15 docs Wangxiaobo_TIF pdf 664 Wang Xiaobo General Manager Beijing E-Town Presentation at TIF China 2015 Establishing an Investment Financing Platform Promoting Development of the Integrated Circuit Industry Chinese Mar 2015 available at http www semi org en sites semi org files data15 docs Wangxiaobo_TIF pdf 665 Wang Xiaobo General Manager Beijing E-Town Presentation at TIF China 2015 Establishing an Investment Financing Platform Promoting Development of the Integrated Circuit Industry Chinese Mar 2015 available at http www semi org en sites semi org files data15 docs Wangxiaobo_TIF pdf 666 Development Area’s IC Industry Pours a Strong Dose of ‘Chips’ Chinese BDA Nov 11 2016 available at http www bda gov cn cms jryz 136640 htm 115 IV Outbound Investment chips MEMS sensor chips This strategy is intended to effect technology transfer and in so doing achieve the government’s stated objective of reducing China’s reliance on IC imports 667 Consistent with this strategy Beijing E-Town’s partner in the iML acquisition Chipone has publicly stated that the iML acquisition was undertaken to further Chinese national policy goals to limit IC imports According to Chipone’s press release for the iML acquisition domestic Chinese flat-panel display chip producers have an obligation to substitute domestic production for imports and the acquisition of iML would reduce IC imports in the flat-panel display industry 668 The iML acquisition hinged on Beijing E-Town’s financial support which took three forms 1 a loan guarantee of CNY 200 million $30 million to Chipone 669 2 the provision of land and capital to one of Chipone’s largest customers – the liquid crystal display manufacturer BOE 670 which is also located in the Beijing Economic-Technological Development Zone cluster 671 and 3 a financial commitment of CNY 10 billion $1 5 billion to the National IC Fund by Beijing E-Town on behalf of Beijing municipality 672 which played an indirect role in the acquisition of iML 673 Beijing E-Town Mattson 667 Wang Xiaobo General Manager Beijing E-Town Presentation at TIF China 2015 Establishing an Investment Financing Platform Promoting Development of the Integrated Circuit Industry Chinese Mar 2015 available at http www semi org en sites semi org files data15 docs Wangxiaobo_TIF pdf 668 Press Release Chipone Chipone Announces Acquisition of iML 1 1 2 Strengthen Future Development New Force Chinese Nov 10 2016 available at http www chiponeic com content details11_299 html 669 CCXR 2017 Credit Report on Beijing E-Town International Investment and Development Co Ltd 19 Chinese Credit Committee 2017 No G229-1 670 Chipone’s LCD Driver Chip Mass Produced for BOE’s 32-inch TV Screen Chinese CHIPONE Oct 29 2015 available at http www chiponeic com content details11_267 html Wang Xiaobo General Manager Beijing ETown Presentation at TIF China 2015 Establishing an Investment Financing Platform Promoting Development of the Integrated Circuit Industry Chinese Mar 2015 available at http www semi org en sites semi org files data15 docs Wangxiaobo_TIF pdf 671 Wang Xiaobo General Manager Beijing E-Town Presentation at TIF China 2015 Establishing an Investment Financing Platform Promoting Development of the Integrated Circuit Industry Chinese Mar 2015 available at http www semi org en sites semi org files data15 docs Wangxiaobo_TIF pdf 672 CCXR 2017 Credit Report on Beijing E-Town International Investment and Development Co Ltd 12 Chinese Credit Committee 2017 No G229-1 673 SMIC received an investment of approximately $400 million from the National IC Fund in February 2015 Press Release SMIC Receives Investment from China Integrated Circuit Industry Investment Fund Feb 12 2015 http www smics com eng press press_releases_details php id 264990 SMIC received another investment of approximately $750 million from the Shanghai IC Fund in January 2016 SMIC to Benefit from $3 Billion Investment EE TIMES Jan 26 2016 Beijing E-town also provided CNY 700 million $111 million to finance the B2 300nm fab which is located in the Beijing Economic-Technological Development Area Beijing E-Town Investment Strategy - March 2015 Chinese slide 13 SMIC is both an investor in and a major customer of Chipone In March 2014 SMIC established China Fortune-Tech Capital with an initial size of CNY 500 million $76 million of which 75 percent came from SMIC and 25 percent came from Finehome Holding Group SMIC Establishes Fund to Invest in Integrated Circuits Chinese SINA FINANCE Mar 3 2014 http finance sina com cn stock hkstock ggscyd 20140303 094118384624 shtml Chipone lists investment from China Fortune-Tech Capital in December 2015 as a major milestone Chipone IC Timeline CHIPONE http www chiponeic com auto f-course html Chipone signed the agreement to acquire iML six months after receiving this investment and completed the acquisition 11 months after 116 IV Outbound Investment In December 2015 a wholly-owned subsidiary of Beijing E-Town acquired Mattson Technology Inc Mattson a global semiconductor wafer processing equipment provider 674 Under the terms of the sale Beijing E-Town acquired all of the outstanding shares of Mattson for $3 80 per share in cash The price “represents a 55 percent premium to the 30-trading day average closing price for the period ending December 1 2015 a 23 percent premium to Mattson’s closing stock price on December 1 2015 and values Mattson’s equity at approximately $300 million on a fully diluted basis ”675 According to Beijing E-Town’s 2016 bond prospectus through this acquisition Beijing E-Town acquired the “millisecond anneal rapid thermal processing laser etching and other key technologies in the semiconductor chip processing area ”676 Beijing E-Town explained that along with other IC acquisitions the Mattson acquisition implemented the national strategy of “cultivating strategic emerging industries” and “strengthening smart manufacturing capability ”677 Uphill Investment Co Integrated Silicon Solutions ISSI In June 2015 the shareholders of Integrated Silicon Solutions ISSI approved the company’s acquisition by Uphill Investment Co Uphill a Chinese investment consortium led by SummitView Capital eTown MemTek Hua Capital and Huaqing Jiye Investment Management Co Ltd After several rounds of bidding against U S -based Cypress Semiconductor Corp Cypress Uphill’s winning bid and final purchase price was $23 per share yielding a purchase price of approximately $765 million678 – well in excess of the initial price proposed by ISSI $18 19 per share 679 At the time industry analysts observed that “ISSI was a particularly desirable acquisition for Cypress because of its patents ”680 Nonetheless Cypress was outbid by its Chinese competitor Uphill’s acquisition of ISSI was made possible by state support and financing The Uphill consortium was comprised of a network of investment funds working to achieve Chinese state objectives 674 Beijing E-Town Dragon Semiconductor Industry Investment Center Limited Partnership E-Town Dragon is a wholly owned subsidiary of Beijing E-Town International Investment Development Co Ltd Beijing E-Town See CCXR 2017 CREDIT REPORT ON BEIJING E-TOWN 22 2017 675 Press Release Mattson Technology Mattson Technology Inc Enters into a Definitive Agreement to be Acquired by the Beijing E-Town Dragon Semiconductor Industry Investment Center for $3 80 per Share in Cash Dec 1 2015 676 BEIJING E-TOWN INTERNATIONAL INVESTMENT AND DEVELOPMENT CO LTD 2016 PUBLIC BOND ISSUANCE COLLECTION MANUAL ABSTRACT 1-2-58 Chinese July 14 2016 677 BEIJING E-TOWN INTERNATIONAL INVESTMENT AND DEVELOPMENT CO LTD 2016 PUBLIC BOND ISSUANCE COLLECTION MANUAL ABSTRACT 1-2-50 Chinese July 14 2016 678 BEIJING E-TOWN INTERNATIONAL INVESTMENT AND DEVELOPMENT CO LTD 2016 PUBLIC BOND ISSUANCE COLLECTION MANUAL ABSTRACT 1-2-58 Chinese July 14 2016 679 Integrated Silicon Solutions Inc Schedule 14A filed with the SEC “Uphill Investment Co Merger Proposal Special Meeting of Stockholders June 19 2015” Chinese slides 4 10 680 Gary Hilson ISSI Acquired An Analyst’s Thoughts EE TIMES July 8 2015 117 IV Outbound Investment  SummitView Capital This entity manages the Shanghai Government’s SummitView IC and IT Industry Fund which was jointly established with the Shanghai government-owned Venture Capital Guiding Fund of Shanghai in November 2014 in response to the State Council’s IC Guidelines 681 According to the Shanghai Government’s Provisional Measures on the Administration of the Shanghai Venture Capital Guiding Fund the purpose of the Venture Capital Guiding Fund of Shanghai is to “vigorously advance indigenous innovation ” and “accelerate the cultivation and development of strategic emerging industries ”682 The SummitView Capital website states that “using high-level national strategy and industrial strategy as the starting point we establish a whole-of-industry investment fund and advance the construction and optimization of an industry ecosystem ”683  Hua Capital This fund was established by Tsinghua Holdings and China FortuneTech Capital 684 a fund under the Semiconductor Manufacturing International Corporation SMIC Hua Capital manages the Beijing government’s Integrated Circuit Design and Test Fund 685 According to Hua Capital’s website the ISSI acquisition “has important meaning for filling a void in China’s memory storage industry advancing automotive semiconductors and maintaining the security of domestically produced smart cards ”686  Beijing E-Town The investment funds in the consortium are all connected through investment from Beijing E-Town which is part-owner of one of the consortium members eTown MemTek Beijing E-Town invested CNY 300 million $49 million in SummitView Pujiang on December 15 2014 for a 20 03 percent stake in the CNY 1 5 billion $243 million fund 687 Likewise Beijing E-Town invested CNY 200 million $32 million in the Hua Capital-managed Beijing Integrated Circuit Design and Test Fund on September 25 2014 for an 8 96 percent stake in the CNY 2 232 billion $362 million fund 688 Beijing E-Town gave Huaqing Jiye – the only “private” company in the consortium – a CNY 247 million $39 million 2-year loan on November 20 2015 in relation to the acquisition of ISSI 689 The acquisition was also supported by debt financing from Chinese state-owned commercial banks 681 Shanghai Establishes IC Industry Development Leading Small Group Chinese SUMMITVIEW Aug 18 2015 http www summitviewcapital com plus view php aid 27 682 Provisional Measures on the Administration of the Shanghai Venture Capital Guiding Fund art 1 Shanghai Municipal Government Hu Fu Fa 2010 No 37 issued Oct 26 2010 683 Founding Partners Chinese SUMMITVIEW http www summitviewcapital com plus list php tid 16 last visited Nov 3 2017 684 Company Profile Chinese HUA CAPITAL http www hua-capital com about aspx id 609 last visited Nov 3 2017 685 Integrated Silicon Solutions Inc Schedule 14A filed with the SEC Uphill Investment Co Merger Proposal Special Meeting of Stockholders Chinese June 19 2015 slide 10 686 News Chinese HUA CAPITAL http www hua-capital com ne ws aspx last visited Nov 3 2017 687 BEIJING E-TOWN INTERNATIONAL INVESTMENT AND DEVELOPMENT CO LTD 2016 PUBLIC BOND ISSUANCE COLLECTION MANUAL ABSTRACT 1-2-64 Chinese July 14 2016 688 BEIJING E-TOWN INTERNATIONAL INVESTMENT AND DEVELOPMENT CO LTD 2016 PUBLIC BOND ISSUANCE COLLECTION MANUAL ABSTRACT 1-2-65 Chinese July 14 2016 689 BEIJING E-TOWN INTERNATIONAL INVESTMENT AND DEVELOPMENT CO LTD 2016 PUBLIC BOND ISSUANCE COLLECTION MANUAL ABSTRACT 1-2-101 Chinese July 14 2016 118 IV Outbound Investment Industrial and Commercial Bank of China in conjunction with the Bank of Beijing and Beijing Rural Commercial Bank reportedly provided the consortium with a $480 million loan with a five-year term 690 Seagull Omnivision On January 28 2016 Seagull International Ltd and Seagull Acquisition Corp collectively Seagull announced the completion of the acquisition of OmniVision Technologies Inc OmniVision for approximately $1 9 billion 691 OmniVision is a leading developer of advanced digital imaging solutions The company’s CameraChip™ and CameraCubeChip™ products are highly integrated single-chip complementary metal-oxide semiconductor CMOS image sensors for consumer and commercial applications 692 Seagull is a consortium composed of Hua Capital CITIC Capital Holdings Limited CITIC Capital and Goldstone Investment Co Ltd Goldstone These investment funds are backed by state capital and claim to pursue state objectives CITIC Capital is partly owned by CITIC Group 693 which describes itself as “a large state-owned multinational conglomerate ”694 CITIC Capital’s investment capital comes primarily from China’s sovereign wealth funds and pension funds 695 Goldstone which is a wholly-owned subsidiary of CITIC Securities 696 stated in regulatory filings that the OmniVision investment fulfills Goldstone’s objective of providing both a financial return and advancing the development of China’s national integrated circuit 690 Banks Provide $480 Million Loan Assist Chinese Financial Consortium Acquire ISSI Chinese REUTERS Dec 15 2015 691 Omnivision Hua Capital Management Citic Capital and Goldstone Investment Announce the Completion of the Acquisition of Omnivision by Hua Capital Management Citic Capital and Goldstone Investment OmniVision Exhibit 99 1 filed with the SEC Jan 28 2016 See also Beijing Ingenic Swallows U S ’s OmniVision Chinese CAIXIN Mar 9 2017 http opinion caixin com 2017-03-09 101064177 html last visited Nov 3 2017 692 Omnivision Hua Capital Management Citic Capital and Goldstone Investment Announce the Completion of the Acquisition of Omnivision by Hua Capital Management Citic Capital and Goldstone Investment OmniVision Exhibit 99 1 filed with the SEC Jan 28 2016 See also OmniVision’s camera sensors have been used in Apple's iPhone Hua Capital hires Bank of America for OmniVision deal SOUTH CHINA MORNING POST Sept 19 2014 693 CITIC Group owns a 24 06 percent stake in CITIC Capital CITIC 2015 ANNUAL REPORT 314 2016 694 See Brief Introduction CITIC GROUP CORPORATION http www group citic wps portal ut p b1 04_Sj9CPykssy0xPLMnMz0vMAfGjzOI9w8zcLULdQoM9XV1MDRx NXL283H09DE1cjPQLsh0VAc_K3bQ lctn 1 flag 11 last visited Jan 9 2018 “CITIC Group was established in 1979 by Mr Rong Yiren with the support of late Chinese leader Deng Xiaoping Since its inception CITIC Group has been a pilot for national economic reform and an important window on China’s opening to the outside world It has blazed a new trail of development for China's Reform and Opening-up by raising foreign capital introducing advanced technologies and adopting advanced international practice in operation and management thus building up good reputation both home and abroad” emphasis added CITIC Limited SEHK 00267 is one of the largest constituents of the Hang Seng Index As of December 31 2016 CITIC Limited had total assets of HK$7 238 billion $934 million total revenue of HK$381 billion $49 1 billion and total equity attributable to ordinary shareholders of HK$431 billion $55 6 billion 695 Ingenic Semiconductor Co Stock Issuance and Cash Payment to Purchase Assets and Raise Accompanying Capital as well as Affiliated Transaction Contingency Plan 27 Chinese filed with the Shenzhen Stock Exchange in Nov 2016 696 OmniVision Exhibit 99 1 Omnivision Hua Capital Management Citic Capital and Goldstone Investment Announce The Completion Of The Acquisition Of Omnivision By Hua Capital Management Citic Capital and Goldstone Investment SEC filed Jan 28 2016 119 IV Outbound Investment industry 697 Hua Capital which manages the Beijing government’s Integrated Circuit Design and Test Fund “actively looks for outstanding IC design and test companies to execute acquisitions ”698 Hua Capital states on its website that not only will the OmniVision acquisition provide a return to investors but it will also effectively advance the development of China’s semiconductor industry 699 The investment funds in the consortium provided two-thirds of the $1 9 billion purchase price with state-owned banks providing the remaining one-third of the purchase price A consortium of Chinese finance entities contributed $1 1 billion while the state-owned Bank of China Macao Branch and China Merchants Bank New York branch provided loans of $800 million 700 Bank of America and China’s sovereign wealth fund CIC advised the Chinese consortium on the transaction 701 c Information Technology Government Policies The IT sector has long been a focus of Chinese development policy The 11th Five-year Plan 12th Five-year Plan and 13th Five-year Plan have all emphasized the development of China’s IT sector MIIT issued the IT sector specific plans including the Information Industry 11th Fiveyear Plan702 during the 11th 2006-2010 Five-year Plan period the Telecom Industry 12th Fiveyear Plan703 during the 12th 2011-2015 Five-year Plan period and the Information Industry Development Guidelines IT Development Guidelines 704 during the 13th 2016-2020 Five-year Plan period The 2016 IT Development Guidelines call for “IT industry backbone enterprises to launch overseas acquisitions through acquiring bills acquiring funds acquiring debt etc ”705 The Chinese government has issued other policies plans and decisions that focus on the IT sector For instance in 2009 the State Council’s Electronic Information Industry Restructuring and Revitalization Plan identified information technology as an important driving force of the global economy and pointed to the strategic foundational and guiding role of the IT sector 706 697 Press Release Ingenic Semiconductor Co Stock Issuance and Cash Payment to Purchase Assets and Raise Accompanying Capital as well as Affiliated Transaction Contingency Plan 28 Chinese Nov 2016 filed with the Shenzhen Stock Exchange 698 Press Release Ingenic Semiconductor Co Stock Issuance and Cash Payment to Purchase Assets and Raise Accompanying Capital as well as Affiliated Transaction Contingency Plan 26-7 Chinese Nov 2016 filed with the Shenzhen Stock Exchange 699 News Chinese HUA CAPITAL http www hua-capital com news aspx last visited Nov 3 2017 700 Beijing Ingenic Swallows U S ’s OmniVision Chinese CAIXIN Mar 9 2017 http opinion caixin com 201703-09 101064177 html last visited Nov 3 2017 701 Press Release OmniVision OmniVision To Be Acquired By Hua Capital Management CITIC Capital and Goldstone Investment for $29 75 Per Share in Cash Apr 30 2015 702 Information Industry 11th Five-year Plan MIIT published Oct 30 2008 703 Telecom Industry 12th Five-year Development Plan MIIT published June 27 2013 704 Information Industry Development Guidelines MIIT and NDRC Gong Xin Bu Lian Gui 2016 No 453 issued Jan 16 2017 705 Information Industry Development Guidelines Section 5 3 MIIT and NDRC Gong Xin Bu Lian Gui 2016 No 453 issued Jan 16 2017 706 Electronic Information Industry Restructuring and Revitalization Plan preamble State Council published Apr 15 2009 120 IV Outbound Investment In 2010 the State Council’s SEI Decision identified new-generation information technology as a strategic emerging industry 707 In 2011 the State Council’s Notice on Issuing Several Policies on Further Encouraging the Development of the Software and Integrated Circuit Industries called for supporting the “Going Out” strategy of enterprises in establishing foreign marketing networks and R D centers to promote IC software and IT service exports 708 These government policies and plans call for a particular focus on developing core foundational industries such as new displays high-end software and high-end servers 709 To develop these technologies they call for government-industry collaboration the pursuit of indigenous innovation and “international cooperation ”710 In particular these plans call for support of domestic IC software telecom and new display enterprises that are implementing the “Going Out” strategy in the form of acquisitions or equity investment in foreign information technology companies to strengthen international competitiveness 711 The plans also call for governmentdirected investment in the IT industry 712 and for financial organizations to support outbound investment 713 In 2015 Premier Li Keqiang introduced the “Internet Plus” Action Plan which calls for the integration of the Internet into every aspect of the Chinese economy and society In particular in the section titled “Expanding Foreign Cooperation ” the plan calls for competitive Chinese enterprises to “go out” in groups via foreign acquisitions in order to increase their global competitiveness in this area 714 The NDRC Ministry of Foreign Affairs MIIT MOFCOM and Cyberspace Administration of China are responsible for supporting this effort 715 707 SEI Decision § 3 2 Notice on Issuing Several Policies on Further Encouraging the Development of the Software and Integrated Circuit Industries § 4 21 State Council Guo Fa 2011 No 4 issued Jan 28 2011 709 SEI Decision § 3 2 710 Electronic Information Industry Restructuring and Revitalization Plan § 2 2 State Council published Apr 15 2009 711 Electronic Information Industry Restructuring and Revitalization Plan § 4 5 State Council published Apr 15 2009 712 Electronic Information Industry Restructuring and Revitalization Plan § 4 4 State Council published Apr 15 2009 Notice on Issuing Several Policies on Further Encouraging the Development of the Software and Integrated Circuit Industries § 2 12 State Council Guo Fa 2011 No 4 issued Jan 28 2011 713 Electronic Information Industry Restructuring and Revitalization Plan § 4 5 State Council published Apr 15 2009 714 Guiding Opinions on the Active Promotion of “Internet ” Action § 3 4 1 State Council Guo Fa 2015 40 issued July 04 2015 715 Guiding Opinions on the Active Promotion of “Internet ” Action § 3 4 1 State Council Guo Fa 2015 40 issued July 04 2015 708 121 IV Outbound Investment Likewise in 2016 the Chinese government released a wave of IT-related plans and policies 716 several of which encourage foreign acquisitions as a means of obtaining technology 717 For instance the Software and Information Technology Services Development Plan 2016-2020 encourages the use of the “public-private partnership” model wherein public and private capital cooperate as well as the mobilization of financial services in support of foreign acquisitions 718 Three transactions that reflect and exemplify the impact of these policies are discussed below Chinese Investments in the U S Information Technology Sector Ant Financial EyeVerify In September 2016 Alibaba’s Ant Financial Services Group Ant Financial acquired 100 percent of U S -based EyeVerify Inc EyeVerify for an undisclosed amount719 Bloomberg reported a transaction value of $70 million 720 EyeVerify is a creator of biometric verification technology EyeVerify’s patented authentication solution uses existing cameras on smartphones to image and pattern match the blood vessels in the whites of the eye The application protects data with a high entropy encryption key which is equivalent to a 50-character complex password 721 Government investment and financing was crucial to this transaction Five months before the acquisition in April 2016 China’s sovereign wealth fund CIC and CCB Trust a subsidiary of state-owned China Construction Bank each leading a consortium participated in a $4 5 billion series B investment in Ant Financial as new strategic investors 722 CIC and CCB Trust were joined by existing Ant Financial shareholders including state-owned China Life and other leading Chinese insurance companies state-owned China Post Group China Development Bank Capital a wholly-owned subsidiary of the state-owned policy bank and Primavera Capital Group 723 In addition to the state-funding in the Series B described above China's National 716 Big Data Industry Development Plan 2016-2020 MIIT Gong Xin Bu Gui 2016 No 412 issued Dec 18 2017 Information and Industry Integration Development Plan 2016-2020 MIIT Gong Xin Bu Gui 2016 333 issued Nov 3 2016 Information and Communications Industry Development Plan 2016-2020 MIIT Gong Xin Bu Gui 2016 No 424 issued Dec 18 2016 Software and Information Technology Services Development Plan 2016-2020 MIIT Gong Xin Bu Gui 2016 No 425 issued Dec 18 2016 13th Five-year Transportation and Shipping Informatization Development Plan Ministry of Transportation Jiao Gui Hua Fa 2016 74 issued Apr 19 2016 13th Five-year Transportation Science and Technology Development Plan Ministry of Transportation Jiao Ke Ji Fa 2016 51 issued Mar 16 2016 717 See e g Information and Communications Industry Development Plan 2016-2020 § 3 2 6 MIIT Gong Xin Bu Gui 2016 No 424 issued Dec 18 2016 718 See Software and Information Technology Services Development Plan 2016-2020 § 5 3 MIIT Gong Xin Bu Gui 2016 No 425 issued Dec 18 2016 719 Press Release EyeVerify Ant Financial Acquires EyeVerify to Boost Trust Security and Convenience of Mobile Financial Transaction Sept 13 2016 720 Alibaba Finance Arm Buys Eye-Scan Startup in First U S Foray BLOOMBERG Sept 13 2016 721 Press Release BioConnect and EyeVerify Collaborate to Improve Identity and Authentication in Financial Sector Aug 30 2016 722 Press Release Ant Financial Ant Financial Closes $4 5bn Series B Financing Apr 26 2016 723 Press Release Ant Financial Ant Financial Closes $4 5bn Series B Financing Apr 26 2016 122 IV Outbound Investment Social Security Fund acquired a 5 percent stake in Ant Financial through a previous Series A round 724 According to Ant Financial’s series B press release Ant Financial’s “strategic partnership with China Investment Corp Capital will support its continued push into international markets ” In addition the press release notes that the “capital raised in the Series B round will be invested partly in further development of the company’s cloud computing infrastructure and biometric verification technologies ”725 Apex Lexmark On November 29 2016 Lexmark International Inc Lexmark announced the completion of its acquisition by a consortium of investors led by Apex Technology Co Ltd Apex and PAG Capital for $3 6 billion 726 Lexmark manufactures and sells primarily laser printers and toner cartridges 727 Prior to the acquisition the National IC Fund invested CNY 569 million $86 million in Apex 728 The Chinese consortium paid well over Lexmark’s market capitalization of about $2 2 billion Various other printer companies including Canon Konica Minolta and Ricoh are said to have considered acquiring Lexmark 729 The largest shareholder at nearly 70 percent 730 in Apex is Ninestar also known as Zhuhai Seine Technology Co Ltd a company which a U S court found in 2012 had imported patent-infringing printer cartridges into the United States “deliberately and in bad faith ”731 In its 2015 Annual Report Apex noted the guiding influence of the Electronics Information Manufacturing Industry 12th Five-year Development Plan and the IC Industry 12th Five-year Development Plan 732 Apex also pointed to the encouragement in the State Council’s 2009 724 Alibaba Arm Ant Financial Completes Private Placement of Shares REUTERS July 3 2015 Press Release Ant Financial Ant Financial Closes $4 5bn Series B Financing Apr 26 2016 726 Press Release Lexmark Lexmark Announces Completion of Acquisition by Apex Technology and PAG Asia Capital Nov 29 2016 727 Technology Hardware Storage and Peripherals – Company Overview of Lexmark International Inc BLOOMBERG last visited Nov 20 2017 “Lexmark International Inc together with its subsidiaries operates as a developer manufacturer and supplier of printing imaging device management managed print services MPS document workflow and business process and content management solutions worldwide It operates through two segments Imaging Solutions and Services ISS and Enterprise Software The ISS segment offers a portfolio of color and monochrome laser printers laser multifunction products and dot matrix printers as well as various cartridges service parts and other supplies for use in the installed base of laser inkjet and dot matrix printers It also provides maintenance consulting and systems integration services as well as MPS offerings such as asset lifecycle management implementation and decommissioning services consumables management remote device monitoring and management and business process optimization services ” 728 Zhejiang Wansheng Co Zhejiang Wansheng Co Ltd Public Notice In Response to a Letter from the Shanghai Stock Exchange Requesting Information Disclosure Regarding the Company’s Issuance of Shares to Acquire Assets and Raise Supporting Funds in a Related Party Transaction Chinese Code 603010 Public Notice 2017-042 729 Charles Brewer Apex Closes Lexmark Deal Up Next HP’s Acquisition of Samsung’s Printer Biz ENX MAGAZINE Dec 27 2016 730 ZHUHAI APEX TECHNOLOGY CO LTD 2016 ANNUAL REPORT 72 Chinese 2016 731 Ninestar Tech Co v ITC 667 F 3d 1373 Fed Cir 2012 732 ZHUHAI APEX TECHNOLOGY CO LTD 2015 ANNUAL REPORT SUMMARY 5-6 Chinese 2016 725 123 IV Outbound Investment Electronic Information Industry Restructuring and Revitalization Plan for outstanding enterprises to “go out” and acquire high-tech foreign enterprises to strengthen their international competitiveness 733 Genimous Spigot In May 2016 China-based Genimous Investment Co Ltd Genimous formerly a manufacturer of electronics products acquired 100 percent of Spigot Inc Spigot a U S -based digital marketing company for over $250 million 734 Genimous was able to complete this transaction despite having recorded a net loss after deducting income from any non-recurring gain or loss of CNY 40 million $6 million in 2015 that year it collected only CNY 318 million $51 million in revenue CNY 55 million $9 million less than in 2014 735 Spigot is one of the world’s leading digital performance-based marketing companies 736 According to its website Spigot’s “proprietary technology platform marries the power of big-data with the flexibility of self-training algorithms to produce rapid hyper-optimized results for clients ”737 The fact that the Genimous acquisition of Spigot conformed to Chinese industrial policy appears to have been instrumental in securing regulatory approval for the acquisition In response to a China Securities Regulatory Commission inquiry about the transaction Genimous explained that in accordance with the Henan Province Provisional Measures on the Administration of Foreign Investment Projects foreign investments under $300 million are managed by the Henan Province Development and Reform Commission Henan DRC After it was determined that the acquisition fell within the “encouraged” industries of the Guiding Catalogue of Foreign Investment Industries the Henan DRC issued the Notice Regarding Genimous Investment Ltd Co Acquisition in the U S of Spigot Inc which approved the acquisition 738 From its founding in 1996 Genimous manufactured and sold electronic products 739 Following the Spigot transaction Genimous radically changed its business model shifting its focus from the manufacture of electronic products to the mobile Internet software industry 740 733 ZHUHAI APEX TECHNOLOGY CO LTD 2015 ANNUAL REPORT SUMMARY 5-6 Chinese 2016 GENIMOUS INVESTMENT CO STOCK ISSUANCE AND CASH PAYMENT TO PURCHASE ASSETS AND RAISE THE ACCOMPANYING CAPITAL AND AFFILIATED TRANSACTION REPORT 1-1-5 Chinese Apr 2016 735 GENIMOUS INVESTMENT CO 2016 ANNUAL REPORT 7-8 Chinese 2017 736 GENIMOUS INVESTMENT CO STOCK ISSUANCE AND CASH PAYMENT TO PURCHASE ASSETS AND RAISE THE ACCOMPANYING CAPITAL AND AFFILIATED TRANSACTION REPORT 1-1-855 Chinese Apr 2016 737 SPIGOT Dec 13 2017 https www spigot com 738 Genimous applied for approval from the Zhengzhou High-Tech Industrial Development Park which determined that the acquisition fell within the “encouraged” industries of the Guiding Catalogue of Foreign Investment Industries and subsequently submitted the application materials to the Zhengzhou Development and Reform Commission Zhengzhou DRC on November 6 2015 On November 12 2015 the Zhengzhou DRC consented to the foreign investment project On November 24 2015 the Henan DRC issued the Notice Regarding Genimous Investment Ltd Co Acquisition in the U S of Spigot Inc which approved the acquisition See GENIMOUS INVESTMENT LTD CO RESPONSE TO FEEDBACK FROM “NOTICE ON CHINA SECURITIES REGULATORY COMMISSION’S ADMINISTRATIVE PERMIT PROJECT INVESTIGATION SECOND FEEDBACK OPINIONS” 1-1-54 Chinese 152981 REVISED VERSION Dec 2015 739 GENIMOUS INVESTMENT CO STOCK ISSUANCE AND CASH PAYMENT TO PURCHASE ASSETS AND RAISE THE ACCOMPANYING CAPITAL AND AFFILIATED TRANSACTION REPORT 1-1-151 Chinese Apr 2016 740 GENIMOUS INVESTMENT CO STOCK ISSUANCE AND CASH PAYMENT TO PURCHASE ASSETS AND RAISE THE ACCOMPANYING CAPITAL AND AFFILIATED TRANSACTION REPORT 1-1-156 Chinese Apr 2016 734 124 IV Outbound Investment Genimous cites several Chinese government policies and plans in connection with this strategic shift and its acquisition of Spigot For instance in Genimous’s stock issuance and major transaction disclosure the company points to government policies that support the development of the mobile Internet and encourage leading Chinese internet enterprises to expand into the international market as background for the acquisition 741 Genimous’s acquisition of Spigot closely mirrors this policy directive According to Genimous the purpose of the acquisition of Spigot was to acquire quickly foreign technology human capital brand and revenue channels 742 and help Genimous expand into international markets 743 d Biotechnology Government Policies The Chinese government has actively directed and supported the acquisition of biotechnology which is an important component of advanced agricultural technology and medical technology 744 The emphasis of these policies has shifted over time from enhancing food security and medical services to advanced manufacturing of biotechnology products A series of five-year plans specifically targets biotechnology These include the “12th Fiveyear” Biotechnology Development Plan 745 the “13th Five-year” Biological Industry Development Plan746 which was issued pursuant to the 13th Five-year Plan and the “13th Fiveyear” National Strategic Emerging Industry Development Plan and the “13th Five-year” Biotechnology Innovation Special Plan747 pursuant to the 13th Five-year Plan and the “13th Five-year” Plan for Technology Innovation 741 GENIMOUS INVESTMENT CO STOCK ISSUANCE AND CASH PAYMENT TO PURCHASE ASSETS AND RAISE THE ACCOMPANYING CAPITAL AND AFFILIATED TRANSACTION REPORT 1-1-155 Chinese Apr 2016 The company cites a range of policies including the National Focused Support for High-Tech Areas 2008 the Electronic Information Industry Reorganization and Revitalization Plan 2009 the IT Industry “Five-year” Development Plan 2012 the Guiding Catalogue of Industrial Structure Adjustment 2011 and the Internet Plus Action Plan 2015 which called for the promotion of the mobile internet and big data while instructing leading internet companies to expand into the international market 742 GENIMOUS INVESTMENT CO STOCK ISSUANCE AND CASH PAYMENT TO PURCHASE ASSETS AND RAISE THE ACCOMPANYING CAPITAL AND AFFILIATED TRANSACTION REPORT 1-1-104 Chinese Apr 2016 743 GENIMOUS INVESTMENT CO STOCK ISSUANCE AND CASH PAYMENT TO PURCHASE ASSETS AND RAISE THE ACCOMPANYING CAPITAL AND AFFILIATED TRANSACTION REPORT 1-1-157 Chinese Apr 2016 744 In agriculture genetically modified GM seed varieties can improve food security output and production and increase exports See USAID ABSP II PROGRAM FOR BIOSAFETY SYSTEMS BRIEF #1 WHAT IS AGRICULTURAL BIOTECHNOLOGY 2004 stating that biotechnology in medicine includes biological diagnostics and treatment such as genetic analysis and gene therapy see also Albert Sasson MEDICAL BIOTECHNOLOGY ACHIEVEMENTS PROSPECTS AND PERCEMPTIONS UNITED NATIONS UNIVERSITY Tokyo 2005 745 Notice on the “12th Five-year” Biotechnology Development Plan MOST Guo Ke Fa She 2011 No 588 issued Nov 4 2011 746 National Development and Reform Commission Notice on Issuing the “13th Five-year” Biological Industry Development Plan NDRC Fa Gai Gao Ji 2016 No 2665 issued Dec 20 2016 747 MOST Notice on Issuing the “13th Five-year” Biotechnology Innovation Special Plan MOST Guo Ke Fa She 2017 No 103 issued Apr 24 2017 125 IV Outbound Investment Collectively these “Biotechnology Five-year Plans” direct Chinese enterprises to seek out advanced biotechnology overseas through cooperation in research 748 promoting international biotechnology transfer 749 and promoting the acquisition of new products and “key technology” through mergers and acquisitions 750 aided by government financial support 751 Other state planning documents articulate similar objectives For instance medical Five-year Plans and agricultural Five-year Plans underscore the need for advancing biotechnology752 and promoting the use of foreign cooperation and acquisitions as a means of technology transfer 753 The biopharmaceutical sector is also a major target of the Made in China 2025 policy 754 The effect of these policies is evident in recent acquisitions of U S biotechnology firms As discussed below both Chinese SOEs and private enterprises have undertaken acquisitions in this sector to meet government objectives Government financial support – including direct grants state-backed investment funds and debt financing by state-run policy banks – continues to play a key role in enabling these transactions Chinese Investments in the U S Biotechnology Sector China National Chemical Corp Syngenta AG The acquisition of Swiss-based Syngenta by the China National Chemical Corp ChemChina in May 2017 is the largest acquisition or merger ever completed by a Chinese enterprise with a final price of $43 billion on May 18 2017 755 Through this acquisition ChemChina gained access to a long list of patented genetically modified GM seed agriculture and biotech products cited as targets in Five-year Plans 756 ChemChina also obtained Syngenta’s entire U S 748 Notice on the “12th Five-year” Biotechnology Development Plan § 5 6 MOST Guo Ke Fa She 2011 588 issued on Nov 4 2011 749 MOST Notice on Issuing the “13th Five-year” Biotechnology Innovation Special Plan § 5 6 750 National Development and Reform Commission Notice on Issuing the “13th Five-year” Biological Industry Development Plan § 8 4 751 National Development and Reform Commission Notice on Issuing the “13th Five-year” Biological Industry Development Plan § 7 3 752 “12th Five-year” Agricultural Science and Technology Development Plan § 3 1 2 MOA posted online Dec 26 2011 Notice on Issuing the “13th Five-year” Agricultural and Rural Science and Technology Innovation Special Plan § 4 2 Special Box 7 MOST Ministry of Agriculture Ministry of Education MIIT Ministry of Land and Resources Ministry of Environmental Protection Housing Urban and Rural Construction Department Ministry of Water Resources SASAC AQSIQ State Forestry Administration Chinese Academy of Sciences China Meteorological Administration National Food Administration State Oceanic Administration Supply and marketing cooperatives Guo Ke Fa Nong 2017 No 170 issued June 9 2017 MOA Notice on Issuing the “13th Five-year” Agriculture Science and Technology Development Plan § 1 ¶ 2 MOA Nong Ke Jiao Fa 2017 No 4 issued Jan 25 2017 the accelerating speed of biotechnology development is also cited as a reason for issuing the Ministry of Science and Technology Office Notice on Issuing “13th Five-year” Medical Machinery Science and Technology Innovation Special Plan § 1 2 MOST Guo Ke Ban She 2017 No 44 May 26 2017 753 “12th Five-year” Agricultural Science and Technology Development Plan § 3 1 5 MOA posted online Dec 26 2011 Ministry of Science and Technology Office Notice on Issuing “13th Five-year” Medical Machinery Science and Technology Innovation Special Plan § 1 1 § 5 2 754 Made in China 2025 Roadmap § 10 1 755 Syngenta AG Ex-99 A 13 May 23 2016 on file with the SEC 756 “12th Five-year” Agricultural Science and Technology Development Plan §§ 3 1 2 MOA posted online Dec 26 2011 Notice on Issuing the “12th Five-year” Agricultural and Rural Science and Technology Development 126 IV Outbound Investment business including over 4 000 employees 33 research sites and 31 production and supply sites 757 ChemChina is an SOE and the transaction is directly linked to the “Going Out” strategy as reported by Xinhua News 758 As a result of this transaction two ChemChina executives who are also CCP officials – Ren Jianxin and Chen Hongbo – were appointed to the Syngenta board of directors with Ren Jianxin named as chairman of the board 759 The transaction was financed in large part by loans from a consortium of Chinese state-run policy banks municipal policy banks private banks bonds issued to special purpose vehicles backed by state-owned commercial and policy banks and the China Reform Holdings Corporation 760 This financing was made available even though a 2016 credit report on the ChemChina Group reported a debt-to-capital ratio of 74 78 percent 761 Beijing Genomics Institute Complete Genomics In January 2013 Beijing Genomics Institute BGI acquired Complete Genomics for $117 million 762 Through the acquisition BGI gained access to Complete Genomics’ “gene sequencing equipment intellectual property rights and the development of domestic equipment production”763 – technology that the Chinese government has targeted in related sectoral Fiveyear Plans 764 In fact NDRC featured the BGI acquisition of Complete Genomics in its report on Plan §§ 2 4 3 2 1 MOST Ministry of Agriculture Ministry of Education Ministry of Water Resources Housing and Urban-Rural Development Ministry of Land and Resources AQSIQ State Forestry Administration Chinese Academy of Sciences National Food Administration China Meteorological Administration State Oceanic Administration National Federation of Supply and Marketing Cooperatives issued Mar 15 2012 Notice on Issuing the “13th Five-year” Agricultural and Rural Science and Technology Innovation Special Plan § 4 2 1 In the aforementioned Agriculture Five-year Plans the importance of developing GMO technology is not only for food security but also for agricultural industrialization strategy Gene technology in an agricultural context is also part of the biotechnology Five-year Plans MOST Notice on Issuing the “13th Five-year” Biotechnology Innovation Special Plan § 4 2 5 Notice on the “12th Five-year” Biotechnology Development Plan § 4 3 2 757 SYNGENTA 2016 ANNUAL REVIEW 26 2016 758 Financial Watch Acquisition of Syngenta Obtains Approval Chinese Capital Hugs the Whole World’s Resources for a Win-Win Strategy Chinese XINHUA NEWS 2017 available at http www gov cn xinwen 201704 06 content_5183844 htm 759 Syngenta AG Ex-99 A A-1 May 23 2016 on file with the SEC Ren Jianxin is the chairman of the CCP Committee of ChemChina Chen Hongbo is secretary of the Hubei Province Discipline Inspection Commission which acts as the local version of the central level Commission responsible for implementing President Xi Jinping’s anti-corruption drive Syngenta AG Ex-99 A A-1 May 23 2016 on file with the SEC 760 Syngenta AG Schedule 13D 12 May 18 2017 on file with the SEC 761 Dagong Global Credit Rating Co Ltd Tracking the Rating Announcement 1 22 Chinese Da Gong Bao SD 2016 No 242 762 Shenzhen Beijing Genomics Institute Completes Acquisition of the United States’ Complete Genomics Chinese GENOMICS Mar 19 2013 http www genomics cn news show_news nid 99461 763 Jiang Jiang and Han Qi NDRC INSTITUTE OF INDUSTRIAL ECONOMICS AND TECHNOLOGY ECONOMICS “12TH FIVE-YEAR” PERIOD GENE DETECTION INDUSTRY DEVELOPMENT REVIEW Chinese Aug 8 2017 available at http gjss ndrc gov cn zttp xyqzlxxhg 201708 t20170802_856974 html 764 Notice on Issuing the “13th Five-year” Agricultural and Rural Science and Technology Innovation Special Plan § 4 2 1 MOST Notice on Issuing the “13th Five-year” Biotechnology Innovation Special Plan §§ 4 1 1 4 1 3 4 2 1 127 IV Outbound Investment biopharmaceutical industry development during the 12th Five-year Plan period under the section heading “overseas acquisitions begin to take shape ”765 BGI has even been a major recipient of assistance from the state policy bank CDB 766 The Shenzhen municipal government has singled out BGI as a target of support in multiple government measures including development of both an international and domestic outsourcing industry 767 BGI has received local government grants from the Donghu New Technology Development Zone Management Committee Finance Bureau for its Complete Genomics subsidiary to develop a local Chinese production base of Complete Genomics sequencer machinery 768 Although BGI is privately-owned it has operated at the center of China’s gene research industry since participating in the Human Genome Project and has evident links to the government BGI leadership features multiple officials who held CCP and government positions before joining BGI 769 In a company press release BGI states that “after the acquisition of U S listed company Complete Genomics CG BGI rapidly achieved technology transformation and re-innovation” resulting in the development and production of new gene sequencer machines in 2015 and 765 Wang Xuegong Zhu Jun Zhong Qian Li Qian CHINA BIOPHARMACEUTICAL MANAGEMENT ASSOCIATION REVIEW OF BIOPHARMACEUTICAL INDUSTRY DEVELOPMENT DURING THE 12TH FIVE-YEAR PLAN Chinese Aug 2 2017 available at http gjss ndrc gov cn zttp xyqzlxxhg 201708 t20170802_856972 html 766 CDB officials have held up BGI as an example of a company that CDB supports Zheng Zhijie Servicing Innovation Development with Development Type Finance Chinese ECONOMIC DAILY Dec 16 2016 Zheng Zhijie is the Vice Party Secretary Vice Chairman and President of CDB Leader Profiles – Zheng Zhijie Chinese CDB http www cdb com cn gykh ldbz zzj last visited Oct 26 2017 In 2010 BGI also received CNY 600 million $89 million in loans from CDB to help BGI purchase sequencing machinery from U S -based Illumina The sequencing machines were installed in BGI’s Hong Kong facility putting BGI “on the path to become world’s largest sequencing facility ” Illumina stated that this was the single largest order to date for its technology Press Release Illumina Inc Acquisition Puts Beijing Genomics Institute on Path to Become World’s Largest Sequencing Facility Jan 12 2010 available at https www illumina com company news-center press-releases press-releasedetails html newsid 1374343 CDB Shenzhen Branch referred to BGI as a “ s trategic emerging industry leading enterprise ” See China Development Bank Shenzhen City Branch Injects New Momentum into Upgrading ‘Shenzhen Quality’ Sustainability Chinese SHENZHEN PRESS GROUP Jan 5 2013 available at http www cbrc gov cn shaanxi docPcjgView C4DDC24B06384D3CB47268D0DDDA18AC 600211 html last visited Oct 26 2017 767 Shenzhen City Economic Trade and Informatization Commission Notice on Issuing the Shenzhen City Service Outsourcing Development Plan 2012-2015 § 4 2 2 Shenzhen City Trade and Informatization Commission Jing Ji Mao Xin Xi Fu Wu Zi 2012 No 43 Shenzhen City People’s Government Office Notice on Issuing Several Measures on Strengthening Enterprise Service Support of Strategic Emerging Industry Development 2012-2013 Annual §5 27 Shenzhen City People’s Government Office Shen Fu Ban Han 2012 No 169 issued Nov 19 2012 Notice on Issuing Shenzhen National Innovation City Overall Plan 2008-2015 §4 1 2 Shen Fu 2008 No 201 issued Sept 21 2008 768 SHENZHEN BGI HOLDINGS CO LTD 2017 FIRST HALF ANNUAL REPORT 129 138 Chinese Aug 2017 available at www szse cn 769 At the management level the Executive vice President and Director of Strategic Planning at BGI Yanmei Zhu used to be vice-director of the Yangpu District NDRC and the Chairman and CEO of BGI Agriculture Group Yonghong Mei is currently also the director of the China National GeneBank and previously held the position of Deputy Party Secretary and Mayor of Jining City About BGI Leadership Chinese BGI-Shenzhen http www genomics cn en navigation show_navigation nid 292 last visited Nov 1 2017 128 IV Outbound Investment 2016 770 This achievement is attributed to “focusing on the 18th National Congress of the CCP … internal governance foreign relations and national defense and governance of the Party the nation and the military ”771 e Industrial Machinery and Robotics Government Policies Developing advanced industrial machinery including robotics with industrial applications is an important policy goal of the Chinese government Chinese authorities hope to increase productivity772 at a time of increasing labor costs in China 773 and are attempting to acquire advanced technology so that China can join the ranks of high-tech manufacturing economies by 2025 774 By supporting acquisitions in machinery and robotics Chinese authorities hope to gain access to advanced technology and they see this technology as vital to meeting Made in China 2025 policy objectives with respect to the production of large aircraft 775 auto manufacturing 776 agricultural machinery 777 and medical technology 778 Several state planning documents underscore the importance of obtaining technology for advanced industrial machinery – for instance the Robotics Five-year Plan the Industry Technology Innovation Capacity Development Plan 2016-2020 779 Industry Five-year Plans and the recently released Next-Generation Artificial Intelligence Development Plan780 AI Plan As these documents make clear a key strategy for the “transformation and upgrading” of these sectors is a combination of government support781 and the use of mergers and acquisitions to gain access to foreign technology 782 Authorities have made frequent use of this approach 770 BGI High-Throughput Gene Sequencer Debut to Forge Ahead for Five-years Large-Scale Achievements Exhibition Chinese BGI Oct 11 2017 http www genomics cn news show_news nid 105368 last visited Nov 1 2017 771 BGI High-Throughput Gene Sequencer Debut to Forge Ahead for Five-years Large-Scale Achievements Exhibition Chinese BGI Oct 11 2017 http www genomics cn news show_news nid 105368 last visited Nov 1 2017 772 Made in China 2025 Notice § 2 3 State Council Notice on Issuing the Next-Generation of Artificial Intelligence Development Plan § 3 2 State Council Guo Fa 2017 No 35 issued Aug 20 2017 773 Made in China 2025 Notice Section 1 2 Notice on Issuing Robotics Industry Development Plan 2016-2020 § 1 ¶ 4 MIIT NDRC MoF Gong Xin Bu Lian Gui 2016 No 109 issued Mar 21 2016 774 Made in China 2025 Notice § 1 3 § 2 1 775 Made in China 2025 Notice § 1 3 See also Zhejiang Wanfeng Technology Development Co Ltd Paslin Co 776 Made in China 2025 Notice § 3 6 2 777 Made in China 2025 Notice § 3 6 8 778 Made in China 2025 Notice § 3 6 2 § 3 6 10 779 Ministry of Industry and Information Technology Notice on Issuing the Industry Technology Innovation Capacity Development Plan 2016-2020 MIIT Gong Xin Bu Gui 2016 No 344 issued Oct 31 2016 780 State Council Notice on Issuing the Next-Generation of Artificial Intelligence Development Plan § 3 2 State Council Guo Fa 2017 No 35 issued Aug 20 2017 781 Industry Five-year Plan § 5 3 AI Plan § 4 1 Robotics Five-year Plan § 4 3 782 Industry Five-year Plan § 5 5 AI Plan § 4 3 The Robotics Five-year Plan § 4 6 also suggests government support for “international cooperation ” State Council Guiding Opinion on Promoting International Capacity and Equipment Cooperation § 46 35 State Council Guo Fa 2015 No 30 issued May 13 2015 also § 4 of the same plan is wholly dedicated to improving “Going Out” capacity and § 6 is dedicated to “Expanding Policy Support Intensity ” 129 IV Outbound Investment supporting transactions through grants state-led policy bank debt financing and financing through state-sponsored investment funds Chinese Investments in the U S Industrial Machinery and Robotics Sector Zhejiang Wanfeng Technology Development Co Ltd Paslin Co The acquisition activities of Zhejiang Wanfeng Technology Development Co Wanfeng illustrate the approach outlined above In 2016 Wanfeng wholly acquired Paslin Co Paslin a developer and manufacturer of “complex automated assembly and welding systems ”783 for $302 million 784 Paslin Co produces advanced manufacturing robots used primarily in the assembly of automobiles 785 To support the acquisition Shaoxing City provided CNY 300 million $45 million to the Wanfeng Acquisition Fund which was able to raise a total of CNY 1 billion $151 million from Wanfeng and other public and private companies 786 significantly reducing Wanfeng’s own capital contribution to the acquisition In an interview with a Chinese financial daily Wanfeng Director Zhao Yahong attributed the Paslin acquisition to financial assistance from the Wanfeng Acquisition Fund 787 Wanfeng is also a recipient of government assistance including a total of CNY 73 million $11 million in government grants from a combination of dozens of central and local governments 788 Although a private company Wanfeng cultivates close ties to government authorities The company is part of a family conglomerate and run by Chen Ailian 789 a well-connected CCP member who served as a representative from Zhejiang Province at the 12th National People’s Congress NPC in 2016 790 where she proposed that the government establish a new China High-Tech Development Bank policy bank to provide “low-interest medium- and long-term loans” and “financial assistance” to enterprises in the high-tech manufacturing industry 791 She is also currently a member of the Standing Committee of Shaoxing City’s 8th People’s 783 Our Company PASLIN http www paslin com our-company last visited Oct 23 2017 Liang Zhen Zhejiang Wanfeng Acquires US Robotics Maker Paslin CHINA DAILY Apr 20 2016 785 Milestones History PASLIN http www paslin com milestones-history last visited Oct 23 2017 786 Announcement on the 2016 Zhejiang Shaoxing Transformation and Upgrading Industry Fund Investment into Wan Feng Commercial Industry Merger and Acquisition Fund Project Chinese Shaoxing City Financial Bureau issued Feb 26 2016 787 Xu Ning Foreign Mergers and Acquisitions Adhere to the Industrial Chain and Value Chain High-End Extensions Chinese JINRONG SHIBAO Aug 28 2017 available at http www whjr gov cn sinfo-2-36686-0 html last visited Oct 23 2017 788 WANFENG AUTO WHEEL CO LTD 2016 ANNUAL REPORT 163-173 Chinese Apr 11 2017 available at www szse com 789 WANFENG AUTO WHEEL CO LTD 2016 ANNUAL REPORT 61-2 Chinese Apr 11 2017 available at www szse com Wanfeng is owned jointly by Chen Ailian’s husband Wu Liangding and her son Wu Jie Wu Liangding is the owner of Rifa Group and Wu Jie is the President of Rifa Group another large investment company 790 Representative List ‘92 Zhejiang Representatives Group’ Chinese NPC http www npc gov cn delegate dbmd action id b2 last visited Oct 28 2017 791 NPC Representative Chen Ailian Establish the China High-Tech Development Bank Chinese 2016 CCP and CPPCC Plenary Session Opinions available at http zt ccln gov cn 2016lh tian 39017 shtml last visited Oct 23 2017 784 130 IV Outbound Investment Congress 792 the same municipal government which a year earlier had chosen her company to lead a joint private-public partnership PPP investment fund the Wanfeng Commercial Industry Merger and Acquisition Fund Wanfeng Acquisition Fund 793 By acquiring Paslin Wanfeng not only gained access to advanced robotics technology but also supported the objective of the municipal government of Shaoxing City Zhejiang Province to build a new aircraft manufacturing hub in its jurisdiction This acquisition was supported by substantial government funding Shaoxing City began issuing policy directives as early as 2012 in support of developing the city as a center for developing aircraft and aerospace equipment manufacturing For instance the Shaoxing City Development Strategic Emerging Industry Key Field Guiding Catalogue 2013-2015 identified GA manufacturing as a key “emerging information industry” and aerospace equipment as an “advanced equipment manufacturing industry ” and targeted both for investment and government support 794 Likewise in 2016 the Shaoxing City “13th Five-year” Industry Development Plan stated that developing the city as an aviation hub was an important way of developing an “urban industrial development zone”795 in Shaoxing and that such programs should be supported by government measures including establishing “industrial funds” and other “preferential policies ”796 Shaoxing City found a willing partner in Wanfeng which began construction of the Wanfeng Aviation Special Village in 2016 797 Consistent with government policies this site was designed to become a hub for aircraft and aerospace equipment manufacturing The site was visited by representatives from the NDRC Planning Division in October 2016 and held up as an example of Zhejiang Province’s efforts in “promoting transformation and upgrading of traditional manufacturing ”798 Government authorities viewed Wanfeng’s acquisition of Paslin as pivotal to developing the aviation hub According to the Zhejiang Province Financial Office government support for the acquisition is part of “activating a strategic industry ” and plays a role in a larger Shaoxing CityWanfeng joint strategy to develop the Wanfeng Jingyuan High-End Equipment Park through a jointly administered fund valued at CNY 1 billion 799 Concurrent with financing the Paslin 792 Shaoxing Municipality 8th People’s Congress Standing Committee Member List Chinese SHAOXING MUNICIPALITY available at http sxrd sx gov cn art 2017 4 17 art_14842_1115531 html last visited Oct 28 2017 793 Announcement on the 2016 Zhejiang Shaoxing Transformation and Upgrading Industry Fund Investment into Wan Feng Commercial Industry Merger and Acquisition Fund Project Chinese Shaoxing City Financial Bureau issued Feb 26 2016 794 Shaoxing City Government Office Forwards Economic and Information Commission Notice on Shaoxing City Development Strategic Emerging Industry Key Fields Guiding Catalogue 2013-2015 Shaoxing City Government Office Shao Zheng Ban Fa 2012 No 166 issued Dec 14 2012 795 Shaoxing City “13th Five-year” Industry Development Plan § 4 2 ¶ 8 Shi Jing Xin Wei posted June 30 2016 796 Shaoxing City “13th Five-year” Industry Development Plan § 6 2 797 Development Process Chinese WANFENG AUTO HOLDING GROUP http www wfjt com develop php last visited Oct 30 2017 798 National Development and Reform commission Research Team Visits Wanfeng Auto Chinese WANFENG AUTO HOLDING GROUP http www wfjt com news-detail php id 971 last visited Oct 30 2017 799 Zhejiang Shaoxing Three Ones’ Highly Effectively Deploying Government Industry Funds ‘Energy Storage’ Effectiveness Chinese ZHEJIANG PROVINCE FINANCIAL OFFICE May 10 2017 http m mof gov cn czxw 201705 t20170509_2596548 htm last visited Oct 23 2017 131 IV Outbound Investment acquisition the fund forged plans to establish “three major functional zones for intelligent equipment robotics and R D” inside the Wanfeng Jingyuan High-End Equipment Park designed to form the “core of the Wanfeng Aviation Village ” 800 This transaction exemplifies China’s IDAR approach to transferring foreign technology Within one year of acquiring Paslin Wanfeng has already invested CNY 800 million $118 million in developing high-end robotics manufacturing capacity – based on technology acquired from Paslin – in Shaoxing City 801 The use of Paslin’s robotic manufacturing technology is described in a Shaoxing City government report as an “important force in Shaoxing’s even Zhejiang’s future aviation manufacturing industry ”802 As Chen Ailian stated “by going through overseas mergers and acquisitions we can absorb advanced technology obtain brand value and sales channels enter the high-end market and greatly enhance Shaoxing enterprises’ position in global market competition ”803 In its Report on Development of China’s Outward Investment and Economic Cooperation 2016 MOF explained that through the Paslin acquisition Wanfeng successfully “obtained key technology for the field of robotics ”804 Northern Heavy Industries Group Co Ltd Robbins Co Northern Heavy Industries Group NHI an SOE owned by China’s central government acquired the Robbins Company Robbins through a “three-phase merger ” beginning in 2016 805 NHI first invested heavily in Robbins then increased its stake to 61 percent and intends to acquire a 100 percent stake in the future 806 Through this transaction NHI gained access to Robbins’ manufacturing capacity with respect to “advanced underground construction machinery ”807 As an SOE NHI pursues state policy goals including “the four upgrades technological upgrades market upgrades management upgrades and talent upgrades and major equipment and high-end sets of products ” which the company describes as “the major striking direction ”808 China Exim was the only bank that financed NHI’s acquisition of 800 Zhejiang Shaoxing Three Ones’ Highly Effectively Deploying Government Industry Funds ‘Energy Storage’ Effectiveness Chinese ZHEJIANG PROVINCE FINANCIAL OFFICE May 10 2017 http m mof gov cn czxw 201705 t20170509_2596548 htm last visited Oct 23 2017 801 Zhejiang Zhaoxing Three Ones’ Highly Effectively Deploying Government Industry Funds ‘Energy Storage’ Effectiveness Chinese ZHEJIANG PROVINCE FINANCIAL OFFICE May 10 2017 http m mof gov cn czxw 201705 t20170509_2596548 htm last visited Oct 23 2017 802 Zhejiang Zhaoxing Three Ones’ Highly Effectively Deploying Government Industry Funds ‘Energy Storage’ Effectiveness Chinese ZHEJIANG PROVINCE FINANCIAL OFFICE May 10 2017 http m mof gov cn czxw 201705 t20170509_2596548 htm last visited Oct 23 2017 803 Wang Dandong Our City Introduces Encouraging Privately Operated Enterprise Going Out Three Year Action Plan for 12 Industry Leaders to Enter the List of Cultivated Multinational Companies Chinese SHAOXING DAILY July 25 2017 available at http www sx gov cn art 2017 7 25 art_126_1144927 html last visited Oct 23 2017 804 MOFCOM Report on Development of China’s Outward Investment and Economic Cooperation 2016 148 Dec 2016 805 About Us THE ROBBINS COMPANY http www therobbinscompany com about last visited Oct 20 2017 This is NHI’s second significant acquisition in the high-tech tunnel boring machinery field following on the acquisition of NFM Technologies of France In a similar “three-stage merger” pattern NHI first acquired 70 percent of NFM Technologies in 2007 and increased its ownership stake to 100 percent in 2011 History NFM TECHNOLOGIES http www nfm-technologies com -History- html last visited Nov 1 2017 806 About Us THE ROBBINS COMPANY http www therobbinscompany com about last visited Oct 20 2017 807 About Us THE ROBBINS COMPANY http www therobbinscompany com about last visited Oct 20 2017 808 Group Introduction Chinese NHI http www china-sz com jituanjianjie last visited Oct 20 2017 132 IV Outbound Investment Robbins 809 and China Exim identified the acquisition as an “important project”810 and an “international industrial capacity cooperation” project 811 As such the transaction qualified for China Exim’s “Two Preferential” loan programs which generally provide financing on belowmarket terms 812 Midea Group Co Ltd Kuka AG 2017 In 2017 the Midea Group Co Ltd Midea bought €3 7 billion $4 2 billion worth of shares to expand its original 13 51 percent share in Kuka AG Kuka to 94 55 percent 813 Kuka AG is based in Germany but has substantial assets in the United States 814 Midea explained that the transaction would promote “transformation and upgrading ”815 noting that by “taking KUKA as a platform we will continue the layout of industrial robots commercial robots service robots and artificial intelligence and actively develop key components in the field of industrial automation ”816 Although Midea is privately owned 817 the acquisition relied on financing from a consortium of banks headed by Chinese state-led policy banks In particular China Exim provided €770 809 Exim Bank Liaoning Branch Actively Promotes Supply-side Reform Deploys the Role of Policy-type Finance Functions to Support Liaoning Equipment Manufacturing Industry Transformation and Upgrading Chinese THE EXPORT IMPORT BANK OF CHINA http english eximbank gov cn tm nineteen list_1198_30375 html last visited Oct 20 2017 810 EXPORT-IMPORT BANK OF CHINA ANNUAL REPORT2016 57 The two preferential programs are the Concessional Loan and Preferential Export Buyer’s Credit programs 811 First Half Year Liaoning Province Equipment Manufacturing Foreign Investment Grows Three Fold Chinese Policy Office of the NDRC Old Industrial Base Revitalization Division July 28 2017 http dbzxs ndrc gov cn zttp dwkf 201707 t20170728_855981 html last visited Oct 28 2017 Exim Bank Liaoning Branch Actively Promotes Supply-side Reform Deploys the Role of Policy-type Finance Functions to Support Liaoning Equipment Manufacturing Industry Transformation and Upgrading Chinese THE EXPORT IMPORT BANK OF CHINA http english eximbank gov cn tm nineteen list_1198_30375 html last visited Oct 20 2017 812 EXPORT-IMPORT BANK OF CHINA ANNUAL REPORT2016 37 The two preferential programs are the Concessional Loan and Preferential Export Buyer’s Credit programs These loans generally have a subsidized interest rate of 2-3 percent and a term of 15-20 years See THE EXPORT IMPORT BANK OF CHINA TWO PREFERENTIAL” LOAN BUSINESS INTRODUCTION Chinese slide 5 2013 813 MIDEA GROUP CO LTD 2016 ANNUAL REPORT 77 Mar 31 2017 available at www szse cn 814 About Kuka KUKA https www kuka com en-us about-kuka The company’s U S locations comprise KUKA Assembly and Test Corporation Saginaw MI KUKA College USA - Shelby Township Shelby Township MI KUKA ROBOTICS CORPORATION Shelby Township MI KUKA Systems North America LLC Sterling Heights MI KUKA Toledo Production Operations LLC Toledo OH Reis Robotics USA Inc d b a KUKA Industries Carpentersville IL Swisslog Healthcare – Chicago Office Schaumburg IL Swisslog Healthcare – Dallas Office Farmers Branch TX Swisslog Healthcare – North America Headquarters Denver CO Swisslog Healthcare – North Carolina Kannapolis NC Swisslog Healthcare – Philadelphia Office Bensalem PA Swisslog Healthcare – Seattle Office Kirkland WA Swisslog Logistics – Americas Regional Headquarters Newport News VA Swisslog Logistics – Midwest Office Mason OH Swisslog Logistics – West Coast Office Salida CA 815 MIDEA GROUP CO LTD 2016 ANNUAL REPORT 44 Mar 31 2017 available at www szse cn 816 MIDEA GROUP CO LTD 2016 ANNUAL REPORT 44 Mar 31 2017 available at www szse cn 817 Midea Group is 34 75 percent owned by Midea Holding Co Ltd the parent which is 94 55 percent owned by He Xiangjian individual who also owns 1 2 percent of Midea Group directly Other shareholders hold less than 3 percent of shares each MIDEA GROUP CO LTD 2016 ANNUAL REPORT 83 86 Mar 31 2017 available at www szse cn 133 IV Outbound Investment million $870 million in loans 818 and in a press release linked this loan to the “One Belt One Road” and to promoting “international industrial capacity and equipment manufacturing cooperation” strategies both of which are part of the “Going Out” strategy China Exim states that the acquisition will “assist in optimizing the domestic robotics industry layout promote the process of multi-industry production automation and enhance China’s intelligent manufacturing technology level ”819 f Renewable Energy Government Policies In the early 2000s Chinese companies attempted significant oil and shale investments in the United States to improve China’s energy security820 and gain access to advanced technology 821 After the major oil SOE China National Offshore Oil Corp CNOOC one of China’s major state-owned oil companies failed in its bid to acquire Unicol in 2005 822 it signed a series of shale gas “drill and carry”823 agreements with foreign companies in 2010 824 CNOOC’s attempts to invest in such drill and carry deals in the United States fell off after CNOOC acquired Canada’s Nexen in 2013 for $15 billion 825 Nexen is a company with advanced shale gas technology 826 of the kind targeted by Chinese development plans 827 Beginning in 2014 Chinese outbound investments in the U S energy sector declined significantly especially in oil and gas This decline appears to reflect a significant drop in 818 Export-Import Bank of China Guangdong Branch Participates in Signing Ceremony for Bank Conglomerate for Financing Acquisition of Midea’s KUKA Chinese XINHUA NEWS Aug 21 2017 available at http www gd xinhuanet com newscenter 2017-08 21 c_1121516160 htm 819 Export-Import Bank of China Guangdong Branch Participates in Signing Ceremony for Bank Conglomerate for Financing Acquisition of Midea’s KUKA Chinese XINHUA NEWS Aug 21 2017 available at http www gd xinhuanet com newscenter 2017-08 21 c_1121516160 htm 820 For instance in the 12th Five-year Energy Development Plan Part 2 Chapter 2 one of the “basic principles” is to “improve energy security and the level of energy guarantee ” see State Council Notice on Issuing the 12th Fiveyear Energy Development Plan State Council Guo Fa 2013 No 2 issued Jan 1 2013 821 The Notice on Issuing the Shale Gas Development Plan 2011-2015 NDRC MoF MLR NEA Fa Gai Neng Yuan 2012 No 612 issued Mar 23 2012 at § 2 2 1 1 specifically calls for employing the IDAR methodology to gain and re-innovate advanced technology 822 David Barboza Andrew Ross Sorkin Chinese Company Drops Bid to Buy U S Oil Concern THE NEW YORK TIMES Aug 3 2005 available at http www nytimes com 2005 08 03 business worldbusiness chinese-companydrops-bid-to-buy-us-oil-concern html 823 Drill and carry agreements are transactions in which one company invests in another company by covering the costs of ongoing or future development drilling This lowers the capital expenditure of the target company and gives the investing company a share of the resulting asset once it is in operation 824 CNOOC entered into two drill and carry agreements with the Chesapeake Energy Corporation in 2010 See Chesapeake Energy Corporation 2010 Form 10-K 3 113 Mar 1 2011 on file with the SEC see also Jenny Mandel Will U S Shale Technology Make the Leap Across the Pacific E E NEWS July 17 2012 https www eenews net stories 1059967354 825 Press release Nexen Company Nexen Announces Completion of Acquisition by CNOOC Limited Feb 25 2013 Euan Rocha CNOOC Closes $15 1 Billion Acquisition of Canada’s Nexen REUTERS Feb 25 2013 826 Operations - Shale Gas Oil NEXEN COMPANY available at http www nexencnoocltd com en Operations ShaleGasOil aspx last visited Dec 27 2017 827 See e g State Council Notice on Issuing the 12th Five-year Energy Development Plan 2011-2015 State Council Guo Fa 2013 No 2 Jan 1 2013 134 IV Outbound Investment commodity prices 828 restrictions on investment related to an internal corruption crackdown carried out by the CCP and heavily focused on the energy industry 829 and growing attention to pollution and greenhouse gases as reflected in the 2014 revision of the Environmental Protection Law of the People’s Republic of China 830 Nonetheless in recent years Chinese investment appears to have grown in the renewable energy sector see Section IV C 1 above For instance as reported by AEI China’s investments in the U S energy sector in 2016 and 2017 were in alternative energy 831 The Chinese government has issued several policies to support the development of renewable energy technologies Both the 12th Five-year Renewable Energy Development Plan 832 and 13th Five-year Renewable Energy Development Plan 833 touch on the need to develop renewable energy for the sake of “ensuring energy security protecting the ecological environment and responding to climate change ”834 Wind solar and hydroelectric power all play an important role in the development of renewable energy technologies Renewable energy equipment was listed as a “Key Sector” for development in the Made in China 2025 Notice 835 The more detailed Made in China 2025 Roadmap calls for 90 percent of Chinese electricity needs to be met by Chinese electricity producers by 2020 and for 30 percent of energy production to be exported by 2020 836 Likewise the Made in China 2025 Roadmap seeks to have renewable energy equipment containing Chinese IP exceed 80 percent of China’s domestic market by 2025 837 As discussed below these policies have directed and influenced Chinese outbound investment in the renewable energy sector Chinese Investments in the U S Renewable Energy Sector Hanergy Holding Group Ltd 828 Henry Sanderson Aniji Raval David Sheppard Explainer Why Commodities have Crashed FINANCIAL TIMES Aug 24 2015 829 Perspectives on Energy Sector Corruption and Anti-Corruption Chinese CENTRAL COMMISSION FOR DISCIPLINE INSPECTION AND MINISTRY OF SUPERVISION OF THE PEOPLE'S REPUBLIC OF CHINA Jul 30 2014 http www ccdi gov cn lt llsy czfb 201407 t20140730_45795 html 830 Environmental Protection Law of the People’s Republic of China adopted Dec 26 1989 amended Apr 24 2014 831 China Global Investment Tracker Jan 2018 AEI available at http www aei org china-global-investmenttracker last visited Oct 25 2017 AEI data includes announced deals as well as completed transactions it is possible that some of these transactions have not closed as of the date of this report’s publication 832 National Development and Reform Commission Notice on Issuing the 12th Five-year Renewable Energy Development Plan NDRC Fa Gai Neng Yuan 2012 No 1207 issued July 31 2012 833 National Development and Reform Commission Notice on Issuing the 13th Five-year Renewable Energy Development Plan NDRC Fa Gai Neng Yuan 2016 No 2619 issued Dec 2016 834 National Development and Reform Commission Notice on Issuing the 13th Five-year Renewable Energy Development Plan Preamble and § 1 1 835 Made in China 2025 Notice § 3 6 7 836 Made in China 2025 Roadmap § 7 1 2 837 Made in China 2025 Roadmap § 7 1 2 135 IV Outbound Investment Since 2012 Hanergy Holding Group Ltd Hanergy has acquired several U S and European companies specializing in thin-film solar technology Hanergy was founded in 1994 and aims to be the largest thin-film solar technology producer in the world 838 The advanced technology gained from these acquisitions contributed to Hanergy winning the “Made in China Top Ten Outstanding Quality Product Contribution Award” from the Made in China 2025 Summit Forum on November 25 2017 839 In Hanergy’s press release on winning the award Hanergy attributed its success to foreign acquisitions made between 2012 and 2014 and the company’s desire to meet goals set out in the 13th Five-year Energy Development Plan and realize Made in China 2025 goals through its solar film production In 2011 CDB extended a CNY 30 billion $4 7 billion line of credit to Hanergy which provided “various types of financing services including investment loans debt leasing and certification” to support Hanergy’s development 840 According to the official Hanergy press release on the CDB line of credit the funding was intended to “assist Hanergy in introducing digesting and absorbing the world’s advanced solar energy power technology ”841 The CDB line of credit appears to have fueled a buying spree In 2013 Hanergy acquired Solibro a world-leading German CIGS842 thin-film module manufacturer843 for CNY 200 million $33 million Hanergy had already acquired two U S companies by 2014 – Global Solar Energy844 and MiaSolé 845 These acquisitions gave Hanergy access to advanced CIGS technology which enabled the company to achieve potential solar cell efficiency of nearly 20 percent 846 And in 2015 Hanergy acquired U S -based Alta Devices 847 an award-winning thinfilm solar technology producer Alta Devices had been named to MIT’s list of “Most Disruptive Companies” and broke multiple world records for solar cell efficiency 848 Hanergy’s efforts to acquire thin-film solar cell technology align with government policy objectives This fact is evident in the Solar Energy Power Technology Development “12th Five838 Thin-film Solar Power Generation HANERGY http www hanergy com en industry industry_310 html last visited Nov 15 2017 839 Press Release Hanergy Hanergy Wins “Made in China Top Ten Outstanding Quality Product Contribution Award” Chinese Dec 8 2017 available at http www hanergy com content details_37_24993 html 840 Zhao Xiaohui Tao Junjie China Development Bank Will Provide CNY 30 billion to Hanergy Group to Support Development of Clean Energy Chinese XINHUA NEWS Nov 11 2013 http www ccchina gov cn Detail aspx newsId 15735 TId 57 last visited Nov 6 2017 841 Hanergy Holding Group Obtains CNY 30 billion in China Development Bank Financial Support – Accelerating Clean Energy Development – Expanding Overseas Business Chinese HANERGY http www hanergy com mobile content details_37_924 html last visited Nov 6 2017 emphasis added 842 Copper indium gallium selenide CIGS solar cells are one of three types of mainstream thin-film solar cells a technology some analysts predict will be the market leader in thin-film technology due to “advantages on sic cost flexibility weight and manufacturability ” See Thin-Film Photovoltaic PV Cells Market Analysis to 2020 SUN WIND ENERGY http www sunwindenergy com news thin-film-photovoltaic-pv-cells-market-analysis-2020 last visited Nov 6 2017 843 About Us SOLIBRO http solibro-solar com en company about-us last visited Nov 16 2017 844 HANERGY THIN FILM POWER GROUP LTD 2013 ANNUAL REPORT 249 Mar 24 2014 845 HANERGY THIN FILM POWER GROUP LTD 2013 ANNUAL REPORT 6 Mar 24 2014 846 HANERGY THIN FILM POWER GROUP LTD 2013 ANNUAL REPORT 6 Mar 24 2014 847 HANERGY THIN FILM POWER GROUP LTD 2015 ANNUAL REPORT 49 Mar 31 2016 848 Company Highlights ALTA DEVICES https www altadevices com about-overview last visited Nov 6 2017 HANERGY THIN FILM POWER GROUP LTD 2015 ANNUAL REPORT 5 Mar 31 2016 136 IV Outbound Investment year” Special Plan 849 which affirmed the state objective of “break through scaling key equipment design and manufacturing bottlenecks in CIGS thin-film solar cell production lines ”850 Likewise Hanergy’s president and chairman Li Hejun attributed his company’s success in acquiring these companies and becoming a world leader in thin-film solar panels to “the strong support of the local Party committee and government ”851 Li Hejun serves in the Chinese People’s Political Consultative Conference CPPCC and is the vice chairman of the National Federation of Industry and Commerce 852 Chinese authorities have pointed to Hanergy as an example of “unceasingly enlarging the area of investment in developed countries in Europe and America ”853 In an article on Hanergy’s acquisition of MiaSolé the Chinese consulate in San Francisco reportedly stated that the Chinese government has begun to restrict large loans to companies in the solar industry now that the investments “have caused this industry to expand capacity by 17 times ”854 Goldwind Renewable Energy Systems Americas In 2016 Goldwind Americas Goldwind acquired a 160 MW wind project from Renewable Energy Systems Americas in a “balance of plant”855 deal worth $250 million 856 Through the transaction Goldwind obtained the ability to install 64 of its own Permanent-Magnet Direct Drive PMDD 2 5 MW wind turbines in the United States 857 the same technology Goldwind acquired through previous overseas transactions A May 2016 report states that once complete the wind project will become Goldwind’s largest U S wind project to date 858 Goldwind is a subsidiary of Xinjiang Goldwind Technology Holding Co Ltd a company whose three largest shareholders are 1 undisclosed shareholders from the Hong Kong Stock 849 Notice on Issuing Solar Energy Power Technology Development “12th Five-year” Special Plan MOST Guo Ke Fa Ji 2012 No 198 issued Mar 27 2012 850 Notice on Issuing Solar Energy Power Technology Development “12th Five-year” Special Plan § 4 2 2 3 851 Zhang Zhirong Li Xinyuan Agricultural Rate of Investment Promotion Small Group Team Arrives at Hangery Holding Group to Inspect and Present Chinese GUIGANG NEWS NET Aug 31 2017 available at http www gxgg gov cn news 2017-08 140463 htm last visited Nov 6 2017 852 Li Hejun Introduction Chinese HANERGY http www hanergy com about mrLi html last visited Nov 6 2017 853 MOFCOM Report on Development of China’s Outward Investment and Economic Cooperation 2016 132 Dec 2016 854 Hanergy Completes U S Thin Film Solar Energy Firm Acquisition Chinese MOFCOM Jan 17 2013 http dwtztj hzs mofcom gov cn article i jyjl l 201301 20130100005202 shtml last visited Nov 6 2017 855 This “balance of plant” deal is an agreement between RES which supplies and installs the infrastructure for the project as a contractor and Goldwind which installs the wind turbines – here Goldwind’s China-produced 2 5 MW PMDDs See Press Release Goldwind Goldwind Americas Signs 160 MW Texas Deal with RES May 17 2016 Press Release Goldwind Rattlesnake Stirs Texas available at http www goldwindamericas com rattlesnake-stirstexas XINJIANG GOLDWIND SCIENCE TECHNOLOGY CO LTD OVERSEAS SUPERVISION REPORT 7 Chinese Aug 25 2017 856 XINJIANG GOLDWIND SCIENCE TECHNOLOGY CO LTD OVERSEAS SUPERVISION REPORT 6-7 Chinese Aug 25 2017 available at www goldwind com cn Goldwind Americas’ parent company Goldwind Holdings provided bridge financing and “construction and tax equity financing and a long-term ERCOT fixed price hedge for power production ” See Press Release Xinjiang Goldwind Technology Holding Company Goldwind Americas Signs 160 MW Texas Deal with RES May 17 2016 857 XINJIANG GOLDWIND SCIENCE TECH CO LTD 2016 ANNUAL REPORT 18 Chinese Mar 2017 858 Texas Wind-Power Project Acquired CHINA DAILY USA May 23 2016 137 IV Outbound Investment Exchange 18 23 percent 2 the SOE Xinjiang Wind Energy Ltd Co 13 74 percent and 3 the central SOE China Three Gorges New Energy Ltd Co 10 52 percent 859 The PMDD technology that Goldwind now produces and is exporting to the United States is technology that Goldwind gained by acquiring a 70 percent share of German company Vensys in March 2008 860 Goldwind’s acquisition of Vensys was financed through a €4 9 million $7 million equity investment and a €36 34 million $54 million “financing guarantee” loan861 with the China Construction Bank as the guarantor 862 At the time MOFCOM pointed to the acquisition of Vensys as an example of “German Enterprises Actively Undertaking Technology Transfer to China ”863 and as an example of the effectiveness of the “Financing Guarantee” policy bank loan program 864 The Goldwind 2016 Annual Report points to the 13th Five-year Plan’s push to have “three to five equipment manufacturing enterprises fully attain international advanced levels and clearly increase market share” as one of Goldwind’s “policy considerations” for future development planning 865 g Automotive Government Policies Since 2004 the Chinese government has issued a series of plans to encourage technological development in the automotive sector  The NDRC 2004 Policy on Development of the Automotive Industry866 established the basis for China’s automotive industrial policy after WTO accession It includes specific provisions on mandating approvals of foreign investments 867 in addition to long-term 859 XINJIANG GOLDWIND SCIENCE TECH CO LTD 2016 ANNUAL REPORT 53 Chinese Mar 2017 Press Release Xinjiang Goldwind Technology Holding Company Announcement on Acquiring German Vensys Energy Holding Company §4 1 Chinese Jan 25 2008 available at www szse cn 861 The “Financing Guarantee” loan is a special loan program from Chinese policy banks in which a Chinese enterprise can guarantee a loan for a foreign enterprise and by using a Chinese loan gain access to lower interest loan financing to “lower the cost of financing” See Credit Business Chinese CHINA CONSTRUCTION BANK available at http www ccb com tokyo cn service 244780 html last visited Nov 1 2017 862 Press Release Xinjiang Goldwind Technology Holding Company Announcement on Acquiring German Vensys Energy Holding Company §5 2 2 Jan 25 2008 This loan scheme allows a Chinese bank in this case CCB to back Goldwind which otherwise may not have qualified for a loan large enough for the transaction Credit Business Chinese CHINA CONSTRUCTION BANK available at http www ccb com tokyo cn service 244780 html last visited Nov 1 2017 863 Overview of German Wind Industry Current Situation and Prospects of Cooperation with China § 2 1 Chinese MOFCOM’S GERMAN COUNSELLOR’S OFFICE Dec 14 2009 http munich mofcom gov cn article ztdy 201005 20100506926532 shtml last visited Nov 1 2017 864 Overview of German Wind Industry Current Situation and Prospects of Cooperation with China § 2 4 Chinese MOFCOM’S GERMAN COUNSELLOR’S OFFICE Dec 14 2009 available at http munich mofcom gov cn article ztdy 201005 20100506926532 shtml last visited Nov 1 2017 865 XINJIANG GOLDWIND SCIENCE TECH CO LTD 2016 ANNUAL REPORT 12 Mar 2017 866 Policy on Development of the Automotive Industry NDRC Order No 8 issued May 21 2004 867 Policy on Development of the Automotive Industry arts 43 44 860 138 IV Outbound Investment objectives to create global well-known brands868 and indigenously develop electric hybrid and alternative fuel technologies 869  The State Council’s 2009 Plan on Adjusting and Revitalizing the Auto Industry pledges CNY 10 billion $1 4 billion 870 in government financing over three years to promote technological progress part of China’s CNY 4 trillion $586 billion 871 stimulus plan The financing would go toward targeted support for safer fuel-efficient environmentally friendly vehicles filling domestic supply chain gaps and creating collective platforms for technology R D and testing in the auto parts sector 872  The 2009 Opinions on Promoting the Sustainable and Healthy Development of China’s Exports of Automotive Products873 targets a 10 percent share of global auto parts exports for Chinese automakers by 2020 874 The Opinions also call for improvements in the composition of exports to include a higher share of indigenous brands and passenger sedans as well as new energy vehicles 875  The 2013 MIIT Guiding Opinions on Accelerating and Promoting Industry Mergers and Restructuring set a target to establish three to five globally competitive large-scale domestic automakers through mergers and acquisitions among existing players and a consolidation of their respective global assets 876  China identified NEVs as one of the priority research areas in the 2006 MLP 877 and NEVs were selected as one of China’s seven SEIs as set forth in the 2012 12th Five-year Strategic Emerging Industries Development Plan 878 Pursuant to these plans the EnergySaving and New-Energy Automotive Industry Development Plan 2012-2020 879 which 868 Policy on Development of the Automotive Industry art 3 Policy on Development of the Automotive Industry art 8 870 Plan on Adjusting and Revitalizing the Auto Industry § 4 9 State Council Issued Mar 20 2009 871 In 2008 the dollar value of this stimulus plan was reported as $586 billion See China Seeks Stimulation THE ECONOMIST Nov 10 2008 Due to subsequent appreciation of the CNY against the USD the plan would now be worth approximately $600 billion 872 Plan on Adjusting and Revitalizing the Auto Industry § 4 9 State Council Issued Mar 20 2009 873 Opinions on Promoting the Sustainable and Healthy Development of China’s Exports of Automotive Products MOFCOM NDRC MIIT MOF General Administration of Customs and General Administration of Quality Supervision Inspection and Quarantine Shang Chan Fa 2009 No 523 issued Oct 23 2009 874 Opinions on Promoting the Sustainable and Healthy Development of China’s Exports of Automotive Products § 2 2 MOFCOM NDRC MIIT MOF General Administration of Customs and General Administration of Quality Supervision Inspection and Quarantine Shang Chan Fa 2009 No 523 issued Oct 23 2009 875 Opinions on Promoting the Sustainable and Healthy Development of China’s Exports of Automotive Products § 2 2 MOFCOM NDRC MIIT MOF General Administration of Customs and General Administration of Quality Supervision Inspection and Quarantine Shang Chan Fa 2009 No 523 issued Oct 23 2009 876 Guiding Opinions on Accelerating and Promoting Industry Mergers and Restructuring § 2 1 MIIT NDRC MOF and nine other ministries Gong Xin Bu Lian Chan Ye 2013 No 16 published Jan 22 2013 877 Notice on Issuing the National Medium- and Long-Term Science and Technology Development Plan Outline 2006-2020 § 3 36 State Council Guo Fa 2005 No 44 issued Dec 26 2005 878 Notice on Issuing the 12th Five-year National Strategic Emerging Industries Development Plan § 3 7 879 Energy-Saving and New-Energy Automotive Industry Development Plan 2012-2020 § 3 2 State Council Guo Fa 2012 No 22 issued June 28 2012 869 139 IV Outbound Investment was issued in 2012 sets ambitious targets for increasing the production and consumption of NEVs in China see Section II B 2 a above for further discussion The Chinese government has made clear that outbound investment is an important part of this strategy For instance the 2009 Plan on Adjusting and Revitalizing the Automotive Industry states Formulate policies corresponding to aspects including technological development government procurement and financing channels guide automotive manufacturing enterprises in making the development of indigenous brands a priority for enterprise strategy support automotive manufacturing enterprises to use multiple methods including indigenous development coordinate development and domestic and foreign acquisitions to develop indigenous brands 880 State-owned entities have played an important role in China’s automotive sector Two of China’s three largest automakers – First Automotive Works FAW and Dongfeng Motor – are central SOEs administered by SASAC Several other automakers including SAIC are owned by provincial governments 881 The market leaders in China in terms of sales are SOEs and these firms are the principal beneficiaries of government-mandated joint ventures with foreign carmakers 882 State-owned policy banks have provided financial support to Chinese automakers investing overseas For example the provincial state-owned automaker Chery Motors signed a strategic cooperation agreement with China Exim that involved a CNY 10 billion $1 4 billion loan to finance overseas expansion 883 When China Exim in 2012 highlighted its support for China’s outbound investment it listed Chery alongside major steel machinery and petrochemical companies 884 Chinese Investments in the U S Automotive Sector AVIC-Pacific Century Motors Nexteer Automotive AVIC the central SOE tasked with developing China’s aviation industry has been an active investor in the U S automotive sector 880 Plan on Adjusting and Revitalizing the Automotive Industry § 3 6 State Asset Report Independent Interpretation of 48 Central and 18 Local SOEs Enter the 2017 Fortune World 500 List Chinese http www sasac gov cn n2588025 n2588164 n4437287 c7428253 content html The “500 List” includes BAIC Group and GAC Group as local state owned auto manufacturers 882 A June 2015 article lists the leading brands in China as 1 Volkswagen VW -FAW – SAIC joint venture 2 Chang’an 3 Hyundai Hyundai – BAIC joint venture 4 Buick GM – SAIC joint venture 5 Ford Ford – Chang’an joint venture Vehicle Sales Rankings in China Strong Performance for Domestic Brands Changan Ranked Second Behind Market Leader Volkswagen AUTOMOTIVE WORLD June 1 2015 883 Patti Waldmeir Chery Gets $1 5bn Loans from China Exim Bank FINANCIAL TIMES Dec 8 2008 884 Economic Daily Export-Import Bank of China Strategy Transformed into Innovation Development Chinese THE EXPORT IMPORT BANK OF CHINA Oct 30 2012 http www eximbank gov cn tm medialist index_26_16570 html 881 140 IV Outbound Investment In 2010 Pacific Century Motors purchased Nexteer Automotive a maker of steering systems from General Motors 885 in a deal with an estimated value of $450 million 886 At the time Pacific Century Motors was owned by an investment company under the Beijing municipal government In 2011 majority ownership of Pacific Century Motors was transferred to the central SOE AVIC which acquired a 51 percent stake in the firm 887 As a result AVIC is now the majority owner of Nexteer Automotive AVIC Hilite International In May 2014 ACIF Electromechanical Systems Co Ltd AVICEM a subsidiary of AVIC acquired Hilite International a German-headquartered company with operations in the United States and China in a deal valued at €473 million $629 million 888 Hilite International describes itself as “a global supplier of leading automotive system solutions” with “engine transmission and emission control products that are used to improve fuel efficiency and reduce emissions for passenger cars and commercial vehicles ” 889 The company’s U S operations comprise three units 1 a sales and R D center in Orion Michigan 2 a production site for camphasing valves on off PWM solenoids cylinder deactivation valves and integrated solenoid module assemblies in Whitehall Michigan and a 3 production site for machining of rotors and stators for camphasers assembly and testing of camphasers and coil armature assemblies for 4WD and AWD applications in Dallas Texas 890 Hilite’s China operations comprise a Shanghai office that coordinates the firm’s sales purchasing and engineering activities for Asia and a plant in Changshu Jiangsu province which makes DCT components and VVT phasers and valves 891 AVIC Henniges Automotive In June 2015 AVIC purchased 51 percent of the shares of Henniges Automotive a producer of sealing and anti-vibration solutions for high-end automobiles 892 The remaining 49 percent of Henniges was acquired by BHR an investment firm backed by Bank of China one of China’s four large state-owned commercial banks and the Chinese funds Bohai Industrial Investment Funds and Shanghai Ample Harvest a subsidiary of Shanghai Harvest Fund 893 The entire acquisition was valued at around $600 million 894 885 Press Release General Motors GM Finalizes Sale of Nexteer to Pacific Century Motors Nov 29 2010 G M Sells Parts Maker to a Chinese Company NEW YORK TIMES Nov 29 2010 887 State-owned AVIC Buys US-based Nexteer CHINA DAILY Apr 11 2011 888 Press Release Hilite International Hilite International Accelerates Global Growth Prospects with New Owner AVICEM May 29 2014 889 Press Release Hilite International Hilite International Opens New Plant in China Dec 6 2011 890 Locations – USA HILITE INTERNATIONAL http www hilite com corporate locations usa html last visited Nov 20 2017 891 Locations – USA HILITE INTERNATIONAL http www hilite com corporate locations usa html last visited Nov 20 2017 892 AVIC Agrees to Acquire the U S Automotive Parts Manufacturer Henniges Chinese CNSTOCK June 30 2015 http news cnstock com news bwkx-201506-3477281 htm 893 BHR Acquires Henniges Automotive BHR Partners Sept 8 2015 BHR and AVIC Auto Acquire Henniges Automotive PR NEWSWIRE Sept 15 2015 894 BHR and AVIC Auto Acquire Henniges Automotive PR NEWSWIRE Sept 15 2015 886 141 IV Outbound Investment Wanxiang Acquisitions in the NEV Sector In 2013 A123 Systems which produces lithium batteries for electric vehicles was purchased by the U S subsidiary of Wanxiang Group Wanxiang America Corp for $257 million 895 In 2014 Fisker Automotive a plug-in vehicle producer was sold in bankruptcy to Wanxiang America a subsidiary of Wanxiang Group for $149 million 896 Lithium batteries are a focal point of NEV development in China and the Chinese government has restricted market access for foreign battery makers in China’s fast growing NEV industry 897 Lithium-ion batteries are used in the automotive sector for start-stop technology and for use in electric and hybrid vehicles The automotive sector presents a significant growth opportunity for lithium-ion batteries 898 Wanxiang Group has been classified as a nationally important corporation by the State Council and it receives government support in exchange for fulfilling national policy objectives 899 Wanxiang received at least $6 5 million in Chinese government subsidies in 2015 900 and received approximately $8 8 million in government subsidies in 2016 901 Based on the company’s 2015 annual report Wanxiang’s chairman has been a member of the NPC 902 and one board member has received a special salary from the State Council 903 3 Leveraging “International Innovation Resources” Through Engagement with Silicon Valley The Chinese leadership is pursuing an “innovation-driven” strategy for civilian and military development seeking to become a science and technology superpower 904and emerge as a leading innovator by 2030 905 In pursuit of this agenda Chinese investment activities have been particularly prevalent in U S technology centers such as Silicon Valley and Boston 895 Chinese Firm Wins A123 Despite U S Tech Transfer Fears REUTERS Jan 29 2013 J Voelcker Fisker Assets Sold for $149 Million to Wanxiang Chinese Parts Maker GREEN CAR REPORTS Feb 15 2014 China’s Wanxiang Wins U S Bankruptcy Auction for Fisker Automotive REUTERS Feb 14 2014 897 Chinese Battery Manufacturers Increasing Their Ternary Battery Production Volume MEHR NEWS AGENCY Aug 29 2016 898 Lithium-ion Battery Market to Reach $41 Bn INDUSTRIAL MINERALS Sept 2 2013 Insight Electric Car Revolution Brightens Outlook for a Medley of Metals THE PENINSULA Oct 5 2016 A marginal increase in electric vehicle units translates into a large increase in battery demand for example each Tesla electric vehicle contains battery capacity of approximately 85 000 watt-hours Wh compared to just 5 Wh for an average cell phone 899 Joyson Electronics Receives RMB 14 95 Million for a Great and Strong New Energy Vehicle Industry Chinese NINGBO JOYSON ELECTRONICS HOLDING LTD CORP Apr 16 2014 available at http www joyson cn index php a shows catid 84 id 169 900 WANXIANG GROUP 2015 ANNUAL REPORT 131 Chinese 2015 901 WANXIANG GROUP 2016 ANNUAL REPORT 132 Chinese 2015 902 WANXIANG GROUP 2015 ANNUAL REPORT 53 Chinese 2015 903 WANXIANG GROUP 2015 ANNUAL REPORT 53 Chinese 2015 904 English translation of the Chinese term keji chuangxin qiangguo 905 Xi Jinping Comprehensively Advance an Innovation Driven Development Strategy Advance New Leaps in Realizing National Defense and Military Construction Chinese XINHUA NEWS Mar 13 2016 http news xinhuanet com politics 2016lh 2016-03 13 c_1118316426 htm See also the official strategy released on innovation-driven development CCP State Council Releases the “National Innovation-Driven Development 896 142 IV Outbound Investment According to data from CB Insights China-based investors have engaged in technology investments i e corporate VC angel private equity etc amounting to $19 billion in the United States across 641 different deals since 2012 with particular focus on AI robotics and augmented or virtual reality 906 China’s sovereign wealth fund CIC is reportedly taking steps to begin direct investment in U S technology start-ups 907 In recent years Chinese investment activities have accounted for approximately 10 percent of all U S venture deals per year and have started to receive greater attention 908 Chinese investments in U S technology start-ups are part of a multifaceted technology and knowledge transfer strategy This strategy is reflected in several national plans including the Made in China 2025 policy the “Internet Plus” Artificial Intelligence Three-Year Action Implementation Plan the Robot Industry Development Plan 2016-2020 909 and the 13th Fiveyear National Science and Technology Innovation Plan The Next-Generation Artificial Intelligence Development Plan released in July 2017 calls for a “Going Out” strategy that includes overseas mergers and acquisitions equity investments VC and the establishment of research and development centers abroad 910 Reflecting these objectives Chinese entities have established research centers and “talent bases” in Silicon Valley directly funded and partnered e g joint laboratories with academic research institutions and actively recruit top talent through government programs For example iFlytek a prominent Chinese AI start-up focused on intelligent voice recognition and speech-to-text products established an office in Silicon Valley in 2016 911 According to iFlytek’s website it receives 863 program funding912 for speech technology and is recognized as a key software enterprise under the National Planning and Layout of Key Software Companies 913 iFlytek also serves as the leading unit on MIIT’s “Working Group on Technical Strategy Guidelines Chinese XINHUA NEWS May 19 2016 http news xinhuanet com politics 201605 19 c_1118898033 htm 906 From China with Love AI Robotics AR VR Are Hot Areas For Chinese Investment In US CB INSIGHTS Aug 1 2017 907 Theodore Schleifer Chinese investors are making moves to increase their spending in Silicon Valley RECODE Oct 29 2017 To date China Investment Corporation investments in U S tech start-ups have been through investments in VC firms as a limited partner 908 Paul Mozur Jane Perlez Chinese Tech Investment Flying Under the Radar Pentagon Warns NEW YORK TIMES Apr 7 2017 909 Release of the Robot Industry Development Plan Chinese NATIONAL DEVELOPMENT AND REFORM COMMISSION Apr 26 2016 http www ndrc gov cn zcfb zcfbghwb 201604 t20160427_799898 html 910 State Council Notice on the Issuance of the New Generation Artificial Intelligence Development Plan State Council Guo Fa 2017 No 35 issued July 8 2017 http www gov cn zhengce content 201707 20 content_5211996 htm 911 iFlytek – Why is it One of the ‘World’s Most Intelligent Companies’ Chinese ECONOMICS DAILY Aug 17 2017 http www ce cn cysc tech gd2012 201708 17 t20170817_25062923 shtml 912 The 863 program is a National High-Tech R D Program which provides funding to promote advances in technology See National High-tech R D Program 863 Program MOST available at http www most gov cn eng programmes1 last visited Dec 22 2017 913 Administrative Measures for Accreditation of National Planning and Layout Key Software Enterprises SAT MOFCOM and MIIT Fa Gai Gao Ji 2005 No 2669 issued Dec 20 2005 pursuant to the Several Policies on Encouraging the Development of the Software and Integrated Circuit Industry State Council Guo Fa 2000 No 143 IV Outbound Investment Standards for Interactive Chinese Language Technology ”914 In addition iFlytek operates from the Anhui Hefei High-tech Industry Development Zone one of at least 28 MIIT designated national-level MCF bases 915 MCF bases seek to foster development of China’s high-tech industry to support military modernization and economic development 916 A number of major Chinese technology companies have established offices and laboratories in Silicon Valley and there are even a number of new incubators that seek to establish closer engagement with start-ups These same companies in turn are cooperating with the Chinese government to establish technology centers within China often in the form of local government initiatives that focus on emerging and dual-use technologies For instance in 2014 the Hangzhou Hi-Tech Venture Capital Co Ltd a company owned by the municipal government of Hangzhou 917 founded the Hangzhou Silicon Valley Incubator 918 located in Redwood City California 919 As of late 2016 the incubator had supported 30 projects investing a total of $3 4 million and attracting 41 overseas projects to settle or plan to return to Hangzhou which has the official goal of becoming “China’s Silicon Valley ” 920 Projects promoted in the incubator include autonomous driving and smart vehicles robotics and the conversion of exhaust gas into electrical energy 921 In this context it is important to consider that the “Going Out” strategy is part of a dual “Going Out and Drawing In” approach While China incentivizes domestic companies to invest abroad it also encourages innovative enterprises from Silicon Valley and worldwide to establish operations in China under the “Drawing In”922 strategy For example the concept of “Drawing 18 issued June 24 2000 Becoming an accredited “key software enterprise” requires companies to submit corporate records including contracts exports and financial data to the China Software Industry Association for examination Accredited “key software companies” receive preferential tax treatment notably a corporate income tax rate of 10 percent See also Company Profile IFLYTEK http www iflytek com about index html last visited Nov 8 2017 914 Company Profile IFLYTEK http www iflytek com about index html last visited Nov 8 2017 915 Description of National New Industrial Demonstration Base Chinese MIIT Feb 2012 http sfjd miit gov cn BaseInfoAction findListIndustry action Huai Chuai Let the World Hear ‘Anhui’s Voice’—Hefey High Tech Industry Development Zone Smart Language Industry’s Concentrated Development Base Quest Chinese ANHUI DAILY May 4 2016 http www iflytek com content details_135_2092 html 916 Description of National New Industrial Demonstration Base Chinese MIIT Feb 2012 http sfjd miit gov cn BaseInfoAction findListIndustry action 917 Company profile available on Hangzhou municipal government website available at http www hangzhou gov cn art 2015 11 12 art_810110_1100 html last visited Jan 9 2018 918 Hangzhou Silicon Valley Incubator Going Out to Promote 41 Overseas High-tech Projects Chinese HANGZHOU NEWS Dec 6 2016 http hznews hangzhou com cn jingji content 2016-12 06 content_6410731 htm Hangzhou Cross-Border Venture Capital Investment Gradually Improving Chinese HUANQIU NET Dec 21 2016 http finance huanqiu com roll 2016-12 9838718 html 919 The Journey to Knowledge Acquisition Hangzhou Silicon Valley Incubator “Accomplish Great Things with Little Effort Chinese HANGZHOU NET Sept 26 2017 http hznews hangzhou com cn jingji content 201709 26 content_6671062 htm 920 Hangzhou Silicon Valley Incubator Going Out to Promote 41 Overseas High-tech Projects Chinese HANGZHOU NEWS Dec 6 2016 http hznews hangzhou com cn jingji content 2016-12 06 content_6410731 htm 921 Hangzhou Silicon Valley Incubator Going Out to Promote 41 Overseas High-tech Projects Chinese HANGZHOU NEWS Dec 6 2016 http hznews hangzhou com cn jingji content 2016-12 06 content_6410731 htm 922 English translation of Chinese term zou jin lai or yinjin 144 IV Outbound Investment In” regularly appears in the context of MOST initiatives and high-tech parks administered by local governments 923 Below this dual “Going Out and Drawing In” approach is discussed in the context of the activities of Zhongguancun Development Group ZGC Group Zhongguancun and the Zhongguancun Development Group ZGC Group is an SOE established in April 2010 by the Beijing municipal government in order to accelerate development of Zhongguancun 924 a Beijing-based technology park vying with other localities to become China’s next Silicon Valley 925 ZGC Group is actively seeking opportunities to expand its overseas presence particularly in the United States’ Silicon Valley The ZGC Group website states W e are accelerating the expansion of overseas operations with a view toward “One Belt One Road” and the internationalization of Zhongguancun in accordance with the concept of “drawing in going out and localization ” we are establishing a “one office one fund one center” constellation of operations in Silicon Valley and are constructing a platform that links Zhongguancun to Silicon Valley through reciprocal exchanges And by emulating the Silicon Valley model we are undertaking an expansion of our operations toward innovation resource cluster areas and national strategic node areas in North America Europe and elsewhere advancing the global distribution of Zhongguancun enterprises and accelerating the internationalization of Zhongguancun 926 In pursuit of these objectives ZGC Group established the ZGC Group Silicon Valley Incubator Center in December 2012 According to ZGC Group this center is “ZGC Group’s trial base for establishing a branch entity in the United States’ Silicon Valley ”927 It is located inside the Zhongguancun Hanhai Science and Technology Park established by another Chinese company Beijing Hanhai Zhiye Investment Management Co Ltd 928 a subsidiary of Beijing Hanhai Holdings Group 929 The Zhongguancun Hanhai Science and Technology Park is designed to 923 See e g Aligning to the Standards Promote the Close Promotion of Science and Technology—Take Advantage of Strength Build a Science Technology Innovation Center Chinese SHENZHEN MUNICIPAL SCIENCE AND TECHNOLOGY INNOVATION COMMITTEE Nov 18 2016 available at http www szsti gov cn news 2016 11 18 1 924 About Us Chinese ZHONGGUANCUN DEVELOPMENT GROUP http www zgcgroup com cn about index html last visited Jan 11 2018 925 Vying for “China Silicon Valley” Chinese XINHUA NEWS Apr 20 2017 http news xinhuanet com fortune 2017-04 20 c_129557023 htm 926 Group Overview Chinese ZHONGGUANCUN DEVELOPMENT GROUP http www zgcgroup com cn about intro html last visited Jan 11 2018 927 ZGC Group Silicon Valley Incubator Center Established and Open for Business Chinese ZHONGGUANCUN DEVELOPMENT GROUP Dec 6 2012 http www zgcgroup com cn news details_16_927 html 928 Zhongguancun Hanhai Silicon Valley Science and Technology Park Reaches Out Feelers to Silicon Valley to Influence the World Chinese PEOPLE’S DAILY Nov 14 2012 http usa people com cn n 2012 1114 c24137619581508 html 929 Beijing Hanhai Holdings Group manages numerous science and technology parks outside China and in introducing these overseas projects on its website states “In recent years Beijing Hanhai Holdings Group under the resolute guidance of leaders at all levels including the national Ministry of Science and Technology the 145 IV Outbound Investment serve as an incubator for U S and Chinese ventures and to facilitate Chinese investment in the United States promoting the combination of “drawing in930” – i e attracting investment and talent to China – and implementing the “Going Out” strategy 931 In October 2014 ZGC Group established ZGC Capital Corporation a wholly-owned subsidiary based in Santa Clara California 932 Subsequently in May 2016 the ZGC Innovation Center @ Silicon Valley co-founded by ZGC Capital Corporation and the California-based fund C M Capital 933 officially began operations in Silicon Valley 934 The project is described by ZGC Capital Corporation as the “core of the Zhonggguancun overseas strategy ” as a means of “advancing the going out of capital from Zhongguancun and the drawing in of advanced technology and talent ” and as a way to use a “‘fund plus incubator’ model” in order to “guide and support projects to come to Zhongguancun for industrial application ”935 An article by Xinhua News republished on the Chinese government’s principal website characterizes the ZGC Innovation Center @ Silicon Valley as “a strategic step” for Zhongguancun to establish a foreign presence and “leverage innovation resources ”936 ZGC Capital Corporation has been actively engaged in Silicon Valley To date the company’s investments there include Meta an augmented reality platform Everstring a forecasting platform and Optimizely which helps corporate entities improve user conversion and activity 937 ZGC Capital Corporation has also invested in a series of local Silicon Valley funds including Danhua Plug Play and KiloAngel 938 Ministry of Commerce and the Beijing municipal government … has actively developed ‘Drawing In’ and ‘Going Out’ international science and technology exchange platforms … and has actively explored and guided the internationalization development of China’s science and technology incubators ” Overseas Parks Chinese HANHAI HOLDINGS http www hanhaiholding com overseas aspx last visited Jan 11 2018 Hanhai Holdings Chinese HANHAI HOLDINGS http www hanhaiholding com last visited Jan 11 2018 930 English translation of Chinese term yin jin lai 931 Zhongguancun Development Group Leaders Guidance Work Touring Zhongguancun Hanhai Science and Technology Park Chinese HANHAI HOLDINGS Jan 3 2014 http www hanhaiholding com newscon aspx id 80 See also U S Silicon Valley Zhongguancun Hanhai Science and Technology Park Chinese HANHAI HOLDINGS http www hanhaiholding com overseascon aspx id 66 last visited Jan 11 2018 932 About Us ZGC CAPITAL CORPORATION http zgccapital com about-us last visited Jan 11 2018 933 Company Overview of CM Capital Corporation BLOOMBERG https www bloomberg com research stocks private snapshot asp privcapId 3375306 last visited Jan 11 2018 “C M Capital Corporation is a private equity and VC arm of C M Capital De Inc The firm also makes direct and indirect real estate investments It also provides investment advisory services for various Cha Group affiliates C M Capital Corporation was founded in 1969 and is based in Palo Alto California ” 934 About Us Chinese ZGC INNOVATION CENTER @ SILICON VALLEY http zgccapital com cn about-us See also Zhongguancun Silicon Valley Innovation Center to Build a Bridge of innovation and Cooperation for Sino-US Enterprises Chinese PEOPLE’S DAILY May 12 2016 http world people com cn n1 2016 0512 c100228346254 html 935 About Us Chinese ZGC INNOVATION CENTER @ SILICON VALLEY http zgccapital com cn about-us See also Zhongguancun Silicon Valley Innovation Center to Build a Bridge of innovation and Cooperation for Sino-US Enterprises Chinese PEOPLE’S DAILY May 12 2015 http world people com cn n1 2016 0512 c100228346254 html 936 Zhongguancun Development Group Sets Up Innovation Center in Silicon Valley Chinese XINHUA NEWS May 12 2016 http www gov cn xinwen 2016-05 12 content_5072814 htm 937 Structure of Overseas Funds ZHONGGUANCUN CAPITAL http zgccapital com overseafund 938 Structure of Overseas Funds Chinese ZHONGGUANCUN CAPITAL http zgccapital com overseafund 146 IV Outbound Investment In parallel the company has engaged in talent recruitment For example in September 2017 ZGC Innovation Center @ Silicon Valley held a “Beijing-Silicon Valley Talent and Technology Summit” in Santa Clara attended by the Acting Mayor of Beijing Chen Jining and the PRC’s San Francisco Consul General Luo Linquan At the event ZGC Capital Corporation described its ongoing efforts to identify overseas talent and technology that can “make a contribution to Beijing’s science and technology innovation development ”939 Furthermore ZGC Group maintains an active partnership with Stanford University 940 D China’s Acts Policies and Practices are Unreasonable As Sections IV A-IV C confirm China has engaged in a wide-ranging well-funded effort to direct and support the systematic investment in and acquisition of U S companies and assets to obtain cutting-edge technology in service of China’s industrial policy USTR finds these acts policies and practices to be unreasonable under 19 U S C § 2411 b 1 The “unreasonable” conduct of a foreign government is defined as an act practice or policy as one that “while not necessarily in violation of or inconsistent with the international legal rights of the United States is otherwise unfair and inequitable ”941 In determining reasonableness USTR also takes into account to the extent appropriate whether foreign firms in the United States are provided reciprocal opportunities to those denied U S firms 942 China’s acts policies and practices are unreasonable because they are directed and supported by the government and unfairly target critical U S technology with the goal of achieving dominance in strategic sectors As discussed in Section IV B China has directed enterprises to pursue outbound investment with the express objective of acquiring and transferring technology China has articulated this objective in numerous state planning documents and policies in furtherance of both military and economic goals China has also drawn on a range of tools to implement this approach – for instance through the control that it exercises over SOEs statebacked banks and investment funds and through its outbound investment approval regime 943 As a result of these efforts investments are often “politically driven and financially supported by Chinese government funds ”944 In short the Chinese government has the means and authority to prevail and does prevail on Chinese firms on where to invest what to invest and how much to invest 939 Beijing Municipality Silicon Valley Talent and S T Summit Held in the United States Advances Synergies in Chinese and U S Innovation Resources Chinese PEOPLE’S DAILY Sept 21 2017 http world people com cn n1 2017 0921 c1002-29550670 html 940 In May 2013 ZGC Group partnered with Stanford University to establish the Zhongguancun-Stanford New Emerging Technologies Innovation Investment Fund This fund established with Stanford physics professor Shoucheng Zhang has raised $91 25 million to support innovative and disruptive technology projects from Stanford and Silicon Valley and the funds are also to be used in cooperation with the Zhongguancun Development Group Silicon Valley International Incubation Center to guide and support technology projects to settle in Beijing’s Zhongguancun Overseas Investment Platform Chinese ZHONGGUANCUN GROUP http www zgcgroup com cn business overseas_funds html 941 19 U S C § 2411 d 3 A 942 19 U S C § 2411 d 3 D 943 See Section IV B 944 WILEY REIN Submission Section 301 Hearing 4 Sept 28 2017 quoting Ryan Morgan Two Sessions Made in China 2025 APCO Forum Mar 26 2017 147 IV Outbound Investment In market-based transactions economic actors generally look to maximize return on their investment in making foreign investment and acquisition decision Firms looking to acquire and invest in a foreign country generally seek integration synergy and efficiencies from these transactions 945 Likewise investment funds seek financial returns With respect to sovereign wealth funds the “Santiago Principles” set out widely recognized practices and principles developed and supported by members of the International Working Group of Sovereign Wealth Funds including China’s China Investment Corporation CIC As described in the Santiago Principles The sovereign wealth fund’s investment decisions should aim to maximize risk-adjusted financial returns in a manner consistent with its investment policy and based on economic and financial grounds 946 CIC ostensibly aims to “increase the return of China’s currency reserve above that of sovereign debt holding ”947 Market-based considerations however do not appear to be the primary driver of much of China’s outbound investment and acquisition activity in areas targeted by its industrial policies Instead China directs and supports its firms to seek technologies that enhance China’s development goals in each strategic sector Indeed many of the Chinese firms that engage in overseas acquisitions in manufacturing do not appear to possess the firm-specific ownership advantages normally associated with acquiring firms such as core technology management and organizational skills or brand names 948 Instead Chinese firms’ comparative advantages rest with having a large domestic market and the support the government provides to Chinese outbound direct investment 949 The unreasonableness of China’s acts policies and practices is also evident in the non-reciprocal treatment of U S firms and investment in China As discussed in Section II China’s investment 945 Chinese Investments in the United States Impacts and Issues for Policymakers Hearing Before the U S -China Econ Sec Rev Comm’n 115th Cong 113 2017 statement of Robert D Atkinson 946 INT’L WORKING GRP ON SOVEREIGN WEALTH FUNDS SOVEREIGN WEALTH FUNDS GENERALLY ACCEPTED PRINCIPLES AND PRACTICES SANTIAGO PRINCIPLES 8 2008 947 KEITH BLACK CHARTERED ALTERNATIVE INV ANALYST ASS’N INVESTMENT STRATEGIES OF SOVEREIGN WEALTH FUNDS 2016 see also CIC Culture Consensus CIC Dec 8 2017 http www chinainv cn wps portal ut p a1 jZJNb4JAEIZ_DVf2FQmgt60ffIlt0hpxLwYNriTAEtiWv19Ke2mio3ObyfNkJu8uEyxlos 6-CpnpQtVZ-dML57iFg8niHRESvgb3sEpep1EY76wBONwFLN-2SH_l_PkLnwe2uwFgexbC5UuwdGcJEDrPbhTHKQfgLx_BJ7aTwAP8tszQSKxTQPh0sCv28wAlTII0ClSB45rIiYkKU6jV_mwOvT1JNMtPklb_PW_GyH8VXrppsbMND3vSmVkmVunlVl4JZyVZ1m 6X-SNdVuqBRFWLxVe6_7Bm90WyA dl5 d5 L2dBISEvZ0FBIS9nQSEh 948 Bijiun Wang Huiyao Wang Chinese Manufacturing Firms’ Overseas Direct Investment ODI Patterns Motivations and Challenges in RISING CHINA CHALLENGES AND OPPORTUNITIES 100 Jane Golley and Ligang Song ed 2011 available at https ssrn com abstract 1907170 105 949 Bijiun Wang Huiyao Wang Chinese Manufacturing Firms’ Overseas Direct Investment ODI Patterns Motivations and Challenges in RISING CHINA CHALLENGES AND OPPORTUNITIES 107 Jane Golley and Ligang Song ed 2011 148 IV Outbound Investment and administrative approval regime imposes substantially more restrictive requirements than the United States U S firms face numerous barriers such as sectoral restrictions joint venture requirements equity caps and technology transfer requirements when they seek to access to the Chinese market Chinese firms do not face anything remotely approaching these types of restrictions when investing in the United States Indeed China’s state-directed outbound investment regime works in tandem with its nonreciprocal treatment of U S firms A recent study notes the following characteristics regarding China’s strategic foreign acquisitions  To achieve its industrial policy objectives in a sector China uses sovereign wealth funds and other state-backed actors to obtain foreign knowledge and expertise through foreign acquisitions  Foreign companies become more susceptible to Chinese acquisitions because of the difficult investment and market access environment in China and  Chinese firms are willing to bear losses in foreign markets both for their investments and sales as a cost of acquiring foreign proprietary technology in part because the Chinese government will make up a portion of their loss 950 Certain participants in our investigation have asserted that Chinese firms invest in the United States based solely on commercial considerations and that the Chinese government does not intervene in its firms’ daily operations 951 They assert that any technology and other intellectual property transferred during the merger and acquisition process is based on fair valuation and mutual assent of the parties 952 Thus in their view China’s policies and practices are not unreasonable These submissions are not persuasive The above findings – based on a comprehensive assessment of government policies and investment transactions – leave no room for doubt concerning the role of the Chinese government This is not to suggest that the Chinese government directs and supports every Chinese investment in the United States but China’s intervention has been decisive in transactions involving advanced technology in sectors that the government deems strategic The fact that many mergers and acquisition deals result in commercial advantages for the parties as certain participants claim does not negate these findings The existence of possible mutual commercial benefit to the parties does not alter the reality that China directs and supports foreign investment in the United States to achieve industrial policy goals In fact China has begun 950 Chinese Investments in the United States Impacts and Issues for Policymakers Hearing Before the U S -China Econ Sec Rev Comm’n 115th Cong 111 2017 statement of Robert D Atkinson 951 CGCC Submission Section 301 Hearing 15 Sep 28 2017 952 CGCC Submission Section 301 Hearing 15 Sep 28 2017 149 IV Outbound Investment limiting “irrational” overseas investment to encourage outbound investment that “enhances China’s technical standards research and development ”953 In sum as one participant in the investigation has observed No one can object to a country trying to increase its innovative capabilities or research productivity but it is the methods China uses that are a problem… China aggressively pursues illicit technology transfer and intervenes to support Chinese firms against foreign competitors Illicit acquisition of foreign technology has been promoted by the government policy since China opened its economy The greater concern is that long standing Chinese practices on technology acquisition are now married to an aggressive well-funded industrial policy 954 E China’s Acts Policies and Practices Burden U S Commerce To be actionable the unreasonable act policy or practice of a foreign country must burden or restrict U S commerce 955 The acts policies and practices identified above burden U S commerce Under market conditions FDI in the United States including investment from China benefits the U S economy In the high-tech sector FDI plays a critical role in the industry’s growth supports employment and makes a significant contribution to research and development spending exports and value-added activities 956 With respect to employment one commentator notes that Chinese-owned firms in the United States have actually “ramped up local spending and employment because they benefit from abundant U S high-tech talent clustering effects freedom to innovate and the rule of law driving the American innovation environment ”957 However such benefits must be considered in the broader context of U S competitiveness in the global economy As a general matter FDI does not benefit the U S economy to the extent that it is directed to serve the Chinese government’s industrial policy objectives – specifically to acquire technology and build national champions within China – and is fueled by financial support not available in the private market Here the Chinese government has directed and supported the acquisition of key U S companies and assets to promote technology transfer in pursuit of both military and economic objectives These acts policies and practices burden U S commerce in three ways First China’s acts policies and practices threaten the competitiveness of U S industry especially in the sectors deemed important in China’s industrial policy As discussed in Section IV B China seeks to use foreign acquisitions and investments to upgrade its domestic industries 953 WILEY REIN Submission Section 301 Hearing 4 Sep 28 2017 quoting China Codifies Crackdown on ‘Irrational’ Outbound Investment BLOOMBERG Aug 18 2017 954 James Lewis CSIS Submission Section 301 Hearing 5 Sept 27 2017 955 19 U S C §2411 b 1 956 See High-Tech Industries The Role of FDI in Driving Innovation and Growth 2017 SELECTUSA available at https www selectusa gov servlet servlet FileDownload file 015t0000000U1eE 957 RHODIUM Submission Section 301 Hearing 5 Sep 28 2017 150 IV Outbound Investment and ultimately degrade reduce or replace U S competition in key sectors These key sectors include the aviation integrated circuits IC information technology IT biotechnology industrial machinery and robotics renewable energy and automotive industries Subsidies and other government policies and practices supporting Chinese outbound investment give Chinese firms an unfair advantage in acquiring technology assets abroad which undermines U S firms’ ability to compete in the global marketplace on a level playing field As a direct consequence of the Chinese government’s unfair and market-distorting action Chinese firms are expected to gain increased market share in these industries at the expense of U S firms whose market share will decline in both U S and global markets 958 The loss of market share could also force U S firms to shift their research and development programs and other investment programs into areas that may be less profitable and dynamic which further erodes their long-term competitiveness Moreover the unprecedented scale of Chinese OFDI support policies suggest that Chinese firms will be able to gain significant market share at the expense of U S firms threatening U S competitiveness in these high-technology industries In the IC sector for example China’s National IC Fund has been used to support numerous technology-related outbound investments in the United States The President’s Council of Advisors on Science and Technology concluded that the “concerted push by China to reshape the market in its favor using industrial policies backed by over one hundred billion dollars in government-directed funds threatens the competitiveness of U S industry and the national and global benefits it brings ” 959 Furthermore if strategic foreign acquisitions lead to a dominant Chinese domestic semiconductor industry downstream industries may do less business with U S firms making it more difficult for them to survive over time Indeed the Mercator Institute assesses that “if Chinese enterprises prove capable of using this technology effectively a hollowing out the technology leadership of industrial countries in pillar industries is possible ”960 Second China’s acts policies and practices undermine the ability of U S firms to sustain innovation In true market competition foreign firms may often spur innovation and productivity spillovers to local economies when they bring technology and knowledge with them 961 In this case however that does not appear to be happening Unlike companies in prior waves of OFDI to the United States “virtually all Chinese firms are less productive than their U S counterpart ”962 Chinese firms invest in the United States to learn from U S firms not the See Ryan Morgan Two Sessions Made in China 2025 APCO Forum Mar 26 2017 “Businesses in China are not only facing competition from domestic firms that are slowly catching up but also face the risk of Chinese firms acquiring their international competitor A business that becomes Chinese through acquisition can then receive government support and other domestic advantages potentially putting their foreign business competition at an immediate and severe competitive disadvantage both domestically and globally ” 959 Wayne M Morrison CONG RESEARCH SERV RL 33536 CHINA-U S TRADE ISSUES 65 2017 emphasis added 960 Jost Wübbeke et al MERICS MADE IN CHINA 2025 THE MAKING OF A HIGH-TECH SUPERPOWER AND CONSEQUENCES FOR INDUSTRIAL COUNTRIES 54 Dec 2016 961 Chinese Investments in the United States Impacts and Issues for Policymakers Hearing Before the U S -China Econ Sec Rev Comm’n 115th Cong 13 2017 statement of Robert D Atkinson 962 Chinese Investments in the United States Impacts and Issues for Policymakers Hearing Before the U S -China Econ Sec Rev Comm’n 115th Cong 13 2017 statement of Robert D Atkinson 958 151 IV Outbound Investment other way around 963 This policy harms innovation by essentially transferring technologies from efficient and productive firms in the United States to less innovative and less productive firms in China Such a policy combined with government intervention and support in China damages U S companies and harms global welfare 964 Third China’s acts policies and practices distort pricing with respect to investments in the critical market for IP-intensive sectors As outlined above the Chinese government provides extensive support to its firms in connection with foreign acquisitions This support places U S competitors at a disadvantage by artificially inflating the prices of potential acquisition targets 965 In other words critical assets are not being sold and priced under true market conditions – a fact that threatens to distort the entire IP market The result is that China is “exporting” its marketdistorting policies to the United States and the world in critical high-technology industries Unlike China the United States does not have a broad-based industrial policy through which the government directs and supports foreign investment by firms Thus U S technology enterprises are at a distinct competitive disadvantage since they are forced to compete with the extensive support and intervention of the Chinese state 966 963 Chinese Investments in the United States Impacts and Issues for Policymakers Hearing Before the U S -China Econ Sec Rev Comm’n 115th Cong 13 2017 statement of Robert D Atkinson 964 Lee Branstetter Submission Section 301 Hearing 3 Sept 28 2017 965 WILEY REIN Submission Section 301 Hearing 5 Sep 28 2017 966 WILEY REIN Submission Section 301 Hearing 5 Sep 28 2017 152 V Unauthorized Intrusions into U S Commercial Computer Networks and CyberEnabled Theft of Intellectual Property and Sensitive Commercial Information A Introduction For over a decade the Chinese government has conducted and supported cyber intrusions into U S commercial networks targeting confidential business information held by U S firms Through these cyber intrusions China’s government has gained unauthorized access to a wide range of commercially-valuable business information including trade secrets technical data negotiating positions and sensitive and proprietary internal communications These acts policies or practices by the Chinese government are unreasonable or discriminatory and burden or restrict U S commerce Section V B of this report will first detail the cyber actions taken by the Chinese government against U S companies including the theft of confidential business information that would have provided a competitive economic advantage Section V B will then analyze how the Chinese government’s cyber intrusions support its industrial policy goals and how this activity has continued in recent years Section V C concludes that China’s actions are unreasonable and Section V D explains the economic burden on and harm felt by targeted U S companies Experts have acknowledged that China’s cyber activities represent a grave threat to U S competitiveness and the U S economy Starting in 2008 experts expressed concern that China’s cyber intrusions were becoming more frequent more targeted and more sophisticated 967 As one expert has noted “ w hereas before the activities were targeted at government and military networks… the new intrusions went beyond state-on-state espionage to threaten American technological competitiveness and economic prosperity ”968 The Office of the National Counterintelligence Executive added in 2011 that “Chinese actors are the world’s most active and persistent perpetrators of economic espionage ”969 As discussed in more detail below evidence from U S law enforcement and private sources indicates that the Chinese government has used cyber intrusions to serve its strategic economic objectives Documented incidents of China’s cyber intrusions against U S commercial entities align closely with China’s industrial policy objectives As the global economy has increased its dependence on information systems in recent years cyber theft became one of China’s preferred methods of collecting commercial information because of its logistical advantages and plausible deniability 970 967 See e g Shane Harris China’s Cyber Militia NAT’L J May 31 2008 citing remarks of a senior official from the U S Director of National Intelligence 968 HANNAS ET AL CHINESE INDUSTRIAL ESPIONAGE TECHNOLOGY ACQUISITION AND MILITARY MODERNIZATION 217 2013 969 OFFICE OF THE NATIONAL COUNTERINTELLIGENCE EXECUTIVE FOREIGN SPIES STEALING US ECONOMIC SECRETS IN CYBERSPACE REPORT TO CONGRESS ON FOREIGN ECONOMIC COLLECTION AND INDUSTRIAL ESPIONAGE 20092011 i Oct 2011 970 A number of public submissions provided to USTR state that the Chinese government has no reason to conduct cyber intrusions or commit cyber theft for commercial purposes see CHINA GENERAL CHAMBER OF COMMERCE hereinafter “CGCC” Submission Section 301 Hearing 16 Sept 28 2017 that the US has not provided evidence of such actions by China that China is also a target of cyberattacks and that the two countries should work together 153 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information The Chinese and American presidents reached a commitment on refraining from the cyberenabled theft of intellectual property IP and other confidential business information for commercial advantage in September 2015 971 The United States has been closely monitoring China’s cyber activities and the evidence indicates that China continues its policy and practice spanning more than a decade of using cyber intrusions to target U S firms to access their sensitive commercial information and trade secrets For example as described in more detail below in September 2017 the U S Department of Justice filed an indictment against Chinese nationals for intruding into U S commercial networks and stealing commercially sensitive information Cybersecurity firms have linked the firm for which these individuals worked to the Chinese government 972 Because cyber intrusions depend on deception and obfuscation the acts policies and practices at issue by their nature impair the comprehensive collection and analysis of all relevant information Businesses are often unaware that their computer networks have been compromised by an infiltration 973 and those that are aware of such intrusions are often apprehensive about sharing publicly the details of any compromise Accordingly this report has drawn upon information in the public domain from both private parties and U S law enforcement However publicly available information necessarily represents only a fraction of all relevant activity B China’s Acts Policies and Practices Regarding Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information 1 The Chinese Government’s Extensive Cyber Activities The Chinese government’s cyber intrusions into U S firms’ networks have been well documented by private cybersecurity companies For example McAfee’s 2011 Night Dragon report documents advanced persistent threat or APT activity from China against global oil energy and petrochemical companies “targeting and harvesting sensitive competitive proprietary operations and project-financing information with regard to oil and gas field bids and operations ”974 to address cybersecurity issues See CHINA CHAMBER OF INTERNATIONAL COMMERCE hereinafter “CCOIC” Submission Section 301 Hearing 68-70 Sept 39 2017 CHINA CHAMBER OF COMMERCE FOR IMPORT AND EXPORT OF MACHINERY AND ELECTRONIC PRODUCTS hereinafter “CCCME” Submission Section 301 Hearing 12 Sept 27 2017 The discussion and accompanying references that follow establish a record of China’s cyber intrusions and cyber theft That China may also be a target of cyberattack is outside the scope of this investigation 971 Press Release The White House Fact Sheet President Xi Jinping’s State Visit to the United States Sept 25 2015 972 INSIKT GROUP Recorded Future Research Concludes Chinese Ministry of State Security Behind APT3 RECORDED FUTURE May 17 2017 last visited Jan 10 2018 973 See VERIZON 2017 DATA BREACH INVESTIGATIONS REPORT 2017 974 MCAFEE FOUNDSTONE PROFESSIONAL SERVICES MCAFEE LABS GLOBAL ENERGY CYBER ATTACKS “NIGHT DRAGON” 3 Feb 10 2011 154 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information Verizon’s 2013 Data Breach Investigations Report concluded that “State-affiliated actors tied to China are the biggest mover in 2012 Their efforts to steal IP comprise about one-fifth of all breaches in this dataset ” 975 Moreover 95% of the espionage cases976 in the dataset were attributed to threat actors in China which “may mean that other threat groups perform their activities with greater stealth and subterfuge But it could also mean that China is in fact the most active source of national and industrial espionage in the world today ” 977 In 2013 the cybersecurity firm Mandiant released a detailed report connecting the theft of hundreds of terabytes of data by China’s People’s Liberation Army PLA General Staff Department Third Department 3PLA Second Bureau— a signals intelligence component of the PLA known by its Military Unit Cover Designation as Unit 61398978 and referred to by Mandiant as “Advanced Persistent Threat 1” or “APT1 ”979 At the time of the report Mandiant estimated that Unit 61398 was “staffed by hundreds and perhaps thousands of people based on the size of Unit 61398’s physical infrastructure ”980 The report includes details on more than 3 000 indicators associated with APT1 and Mandiant’s attribution of the cyber incidents to the 3PLA 981 975 VERIZON 2013 DATA BREACH INVESTIGATIONS REPORT 5 2013 “State-affiliated actors tied to China are the biggest mover in 2012 Their efforts to steal IP comprise about one-fifth of all breaches in this dataset ” 976 The report defined this as “state-sponsored or affiliated actors seeking classified information trade secrets and intellectual property in order to gain national strategic or competitive advantage” VERIZON 2013 DATA BREACH INVESTIGATIONS REPORT 11 2013 977 VERIZON 2013 DATA BREACH INVESTIGATIONS REPORT 21 2013 978 MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 3 2013 see also Mark Stokes PROJECT 2049 INSTITUTE THE PLA GENERAL STAFF DEPARTMENT THIRD DEPARTMENT SECOND BUREAU AN ORGANIZATIONAL OVERVIEW OF UNIT 61398 3-4 July 27 2015 “Signals intelligence SIGINT or technical reconnaissance in PLA lexicon advances the interests of the Chinese Communist Party CCP and the People’s Republic of China PRC The PLA’s SIGINT community consists of at least 28 technical reconnaissance bureaus TRBs … The Second Bureau Unit 61398 is one of the largest among the 12 operational bureaus that comprise the GSD Third Department ” 979 An “APT” or “Advanced Persistent Threat” uses multiple phases to break into a computer network avoid detection and harvest valuable information over the long term Advanced Persistent Threats How They Work SYMANTEC https www symantec com theme jsp themeid apt-infographic-1 last visited Jan 10 2018 980 MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 3 2013 981 MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 5 2013 155 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information According to Mandiant this unit of the 3PLA stole data from at least 141 organizations 115 of which are based in the United States representing 20 major business sectors The victims of these intrusions match industries that China has identified as strategic priorities including four of the seven “strategic emerging industries” that China identified in its 12th Five-year Plan 982 The table below illustrates the number of 3PLA victims by sector in Mandiant’s data set Source MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 24 2013 Mandiant identified a wide range of commercial sector targets of 3PLA including information technology energy financial services food and agriculture metals and mining electronics and chemicals According to the report 3PLA has stolen a wide range of sensitive commercial information from these victims including      982 product development and use including information on test results system designs product manuals parts lists and simulation technologies manufacturing procedures such as descriptions of proprietary processes standards and waste management processes business plans such as information on contract negotiation positions and product pricing legal events mergers joint ventures and acquisitions policy positions and analysis such as white papers and agendas and minutes from meetings involving high ranking personnel e-mails of high-ranking employees and MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 3 24 2013 156 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information  user credentials and network architecture information 983 The Mandiant report suggests that a reasonable inference from the evidence it has collected is that intrusions conducted by this unit of the 3PLA supported commercial interests in China For example the report points to a company involved in a wholesale industry whose network was compromised by 3PLA for over two and half years During this time 3PLA reportedly stole countless files from the victim 984 According to the report the 3PLA unit repeatedly accessed the e-mail accounts of several executives including the CEO and General Counsel 985 The Mandiant report states that at the same time as these intrusions were occurring M ajor news organizations reported that China had successfully negotiated a doubledigit decrease in price per unit with the victim organization for one of its major commodities This may be coincidental however it would be surprising if APT1 could continue perpetrating such a broad mandate of cyber espionage and data theft if the results of the group’s efforts were not finding their way into the hands of entities able to capitalize on them ”986 2 The United States Department of Justice Indicted Chinese Government Hackers in May 2014 In May 2014 the United States Department of Justice DOJ announced an indictment against five 3PLA officers for cyber intrusions and economic espionage directed against U S firms 987 These five officers were assigned to 3PLA’s Second Bureau Unit 61398 which Mandiant had identified as APT1 the year prior 988 The 3PLA officers were charged with cyber intrusions into the computer networks of six U S victims Westinghouse Electric Company Westinghouse SolarWorld Americas Inc SolarWorld United States Steel Corporation U S Steel Allegheny Technologies Inc ATI Alcoa Inc Alcoa and the United Steel Paper and Forestry Rubber Manufacturing Energy Allied Industrial and Services Workers International Union USW 989 The intrusions by the 3PLA were conducted at times when each of the victims had a significant business relationship or business issue with China 990 In addition each of the victims operate in a sector that the Chinese government has prioritized for development 991 The indictment alleges 983 MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 25 2013 MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 25 2013 985 MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 25 2013 986 MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 25 2013 987 U S v Wang Dong et al W D Pa May 1 2014 Crim No 14-118 W D Pa see also Mark Stokes PROJECT 2049 INSTITUTE THE PLA GENERAL STAFF DEPARTMENT THIRD DEPARTMENT SECOND BUREAU AN ORGANIZATIONAL OVERVIEW OF UNIT 61398 3 July 27 2015 988 See Mark Stokes PROJECT 2049 INSTITUTE THE PLA GENERAL STAFF DEPARTMENT THIRD DEPARTMENT SECOND BUREAU AN ORGANIZATIONAL OVERVIEW OF UNIT 61398 July 27 2015 see also MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 3 2013 989 U S v Wang Dong et al 4-8 W D Pa May 1 2014 990 U S v Wang Dong et al 13-26 W D Pa May 1 2014 991 See e g The Plan for the Adjustment and Revitalization of the Steel Industry State Council published Mar 20 2009 12th Five-year Steel Industry Development Plan MIIT Gong Xin Bu Gui 2011 No 480 issued Oct 24 984 157 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information that “the defendants conspired to hack into American entities to maintain unauthorized access to their computers and to steal information from those entities that would be useful to their competitors in China including state-owned enterprises SOEs ”992 In some cases the indictment alleges that the defendants stole trade secrets that “would have been particularly beneficial to Chinese companies at the time they were stolen ”993 In other cases the indictment alleges that the defendants “stole sensitive internal communications that would provide a competitor or an adversary in litigation with insight into the strategy and vulnerabilities of the American entity ”994 Meanwhile during the period relevant to the cyber intrusions the indictment states Chinese firms hired the same PLA Unit where the defendants worked to provide information technology services For example one SOE involved in trade litigation against some of the American victims mentioned herein hired the Unit and one of the coconspirators charged herein to build a ‘secret’ database designed to hold corporate ‘intelligence’ 995 a SolarWorld The indictment alleges that in 2012 while SolarWorld was litigating a petition it had filed against solar imports from China the 3PLA stole thousands of sensitive files from SolarWorld According to the indictment these files included 1 cash-flow spreadsheets maintained by the Chief Financial Officer that would enable a Chinese competitor to identify the length of time that SolarWorld might survive a financial or market shock 2 detailed manufacturing metrics technological innovations and production line information that would enable a Chinese competitor to mimic SolarWorld’s proprietary production capabilities without the need to invest time or money in research and development 3 specific production costs for all manufacturing inputs that would enable a Chinese competitor to undermine SolarWorld financially through targeted and sustained underpricing of solar products and 4 privileged attorney-client communications related to SolarWorld’s ongoing trade litigation with 2011 12th Five-year Solar Power Development Plan NEA Guo Neng Xin Neng 2012 No 194 issued July 7 2012 Medium-Long Term Nuclear Power Development Plan NDRC issued Oct 2007 992 Press Release Department of Justice U S Charges Five Chinese Military Hackers for Cyber Espionage Against U S Corporations and a Labor Organization for Commercial Advantage May 19 2014 available at https www justice gov opa pr us-charges-five-chinese-military-hackers-cyber-espionage-against-us-corporationsand-labor 993 Press Release Department of Justice U S Charges Five Chinese Military Hackers for Cyber Espionage Against U S Corporations and a Labor Organization for Commercial Advantage May 19 2014 available at https www justice gov opa pr us-charges-five-chinese-military-hackers-cyber-espionage-against-us-corporationsand-labor 994 Press Release Department of Justice U S Charges Five Chinese Military Hackers for Cyber Espionage Against U S Corporations and a Labor Organization for Commercial Advantage May 19 2014 available at https www justice gov opa pr us-charges-five-chinese-military-hackers-cyber-espionage-against-us-corporationsand-labor 995 U S v Wang Dong et al 3 W D Pa May 1 2014 158 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information China including confidential Question and Answer documents submitted to the Department of Commerce that were not discoverable by the Chinese respondents 996 According to DOJ “such information would have enabled a Chinese competitor to target SolarWorld’s business operations aggressively from a variety of angles 997 The indictment alleges that data were stolen from SolarWorld on at least twelve occasions including during the following the incidents  On May 3 and May 9 2012 the 3PLA stole files and e-mails from SolarWorld employees including three senior SolarWorld executives 998 The May 3 cyber intrusion occurred one day after the Coalition for American Solar Manufacturing led by SolarWorld issued a public analysis criticizing China’s new Five-year Plan for Solar Photovoltaic Industry999 and about two weeks before the U S Department of Commerce announced its preliminary determination in a trade complaint SolarWorld had filed against Chinese producers of solar cells 1000  On July 27 2012 the 3PLA stole e-mails and files belonging to five employees 1001 just two days after SolarWorld’s parent company filed a trade complaint with the European Commission against Chinese producers of solar modules and components 1002  Between May 9 and September 26 2012 the 3PLA conducted at least twelve more intrusions into and exfiltrations from SolarWorld’s computers 1003 The intrusion on September 26 2012 occurred on the same day that SolarWorld filed a second trade complaint against Chinese solar products with the European 996 U S v Wang Dong et al 18 W D Pa May 1 2014 Press Release Department of Justice U S Charges Five Chinese Military Hackers for Cyber Espionage Against U S Corporations and a Labor Organization for Commercial Advantage May 19 2014 available at https www justice gov opa pr us-charges-five-chinese-military-hackers-cyber-espionage-against-us-corporationsand-labor 998 U S v Wang Dong et al 17 34 35 W D Pa May 1 2014 999 COALITION FOR AMERICAN SOLAR MANUFACTURING ANALYSIS CHINA'S NEW FIVE-YEAR PLAN FOR SOLAR CALLS FOR ESCALATION IN GOVERNMENT SPONSORSHIP OF EXPORT-INTENSIVE PRICE-SUBSIDIZED TRADE May 2 2012 available at http www americansolarmanufacturing org news-releases 05-02-12-chinas-five-year-plan htm 1000 U S v Wang Dong et al 17 W D Pa May 1 2014 1001 U S v Wang Dong et al 35 W D Pa May 1 2014 1002 EU ProSun filed an anti-dumping complaint against certain photovoltaic products from China on July 25 2012 with the European Commission See European Commission Notice of initiation of an anti-dumping proceeding concerning imports of crystalline silicon photovoltaic modules and key components i e cells and wafers originating in the People’s Republic of China 2012 C 269 04 Sept 9 2012 1003 Fact Sheet International Trade Administration Department of Commerce Commerce Finds Dumping and Subsidization of Crystalline Silicon Photovoltaic Cells Whether or Not Assembled into Modules from the People’s Republic of China 2012 available at http ia ita doc gov download factsheets factsheet_prc-solar-cells-ad-cvdfinals-20121010 pdf 997 159 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information Commission 1004 about one week before SolarWorld testified to the U S International Trade Commission about the harm caused by certain Chinese solar products 1005 and two weeks before the U S Department of Commerce announced its final affirmative determination in its trade complaint against Chinese producers of solar cells 1006 As described more below in Part D SolarWorld testified that these intrusions have resulted in significant harm to its business including the loss of a competitive advantage and a loss of a return on its significant investment in a new solar technology 1007 b U S Steel According to the indictment between February 8 and 23 2010 3PLA actors sent spearphishing e-mails with malware to U S Steel employees to gain unauthorized access to its network 1008 On February 26 2010 a 3PLA actor accessed at least one U S Steel computer and stole computer hostnames and descriptions for more than 1 700 U S Steel computers including servers used for network security applications for U S Steel employees’ mobile devices and physical access to U S Steel's facilities 1009 The 3PLA actor then took steps to identify and exploit vulnerable servers on that list 1010 In February 2010 at the same time as these cyber intrusions were occurring U S Steel was a petitioner in two trade remedy investigations in the United States against imported steel products from China 1011 The Chinese respondents named in these two 1004 EU ProSun filed an anti-subsidies complaint against certain photovoltaic products from China on September 26 2012 with the European Commission See European Commission Notice of initiation of an anti-subsidy proceeding concerning imports of crystalline silicon photovoltaic modules and key components i e cells and wafers originating in the People's Republic of China 2012 C 340 06 Nov 8 2012 1005 On October 3 2012 the U S International Trade Commission held a hearing on the matter of certain photovoltaic products from China See USITC Inv Nos 701-TA-481 and 731-TA-1190 “Key Dates” available at https www usitc gov investigations 701731 2012 crystalline_silicon_photovoltaic_cells_and_modules final htm 1006 On October 10 2012 the U S Department of Commerce announced its affirmative final determinations in the antidumping and countervailing duty investigations of imports of certain photovoltaic cells from China See Fact Sheet INTERNATIONAL TRADE ADMINISTRATION DEPARTMENT OF COMMERCE Commerce Finds Dumping and Subsidization of Crystalline Silicon Photovoltaic Cells Whether or Not Assembled into Modules from the People’s Republic of China 2012 1007 Juergen Stein SOLARWORLD AMERICAS INC hereinafter “SolarWorld” Testimony Section 301 Hearing 76 Oct 10 2017 1008 U S v Wang Dong et al 20 W D Pa May 1 2014 “In a spear-phishing attack a target recipient is lured to either download a seemingly harmless file attachment or to click a link to a malware- or an exploit-laden site The file often a vulnerability exploit installs a malware in a compromised computer The malware then accesses a malicious command-and-control C C server to await instructions from a remote user At the same time it usually drops a decoy document that will open when the malware or exploit runs to hide malicious activity ” TREND MICRO INC SPEAR-PHISHING EMAIL MOST FAVORED APT ATTACK BAIT RESEARCH PAPER 2012 2012 available at http www trendmicro com cloud-content us pdfs security-intelligence white-papers wp-spear-phishing-emailmost-favored-apt-attack-bait pdf 1009 U S v Wang Dong et al 21 W D Pa May 1 2014 1010 U S v Wang Dong et al 21 W D Pa May 1 2014 1011 These two cases involved oil country tubular goods OCTG which are steel piping used by oil and gas companies and seamless standard line pipes SSLP which are steel pipes specifically constructed without a welded seam down the length of the pipes See Department of Commerce ITA Case No A-570-943 A-570-956 and C570-957 160 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information investigations include the operating companies of several Chinese SOEs including the Baosteel Group 1012 In U S Steel’s submission to USTR in connection with this investigation U S Steel explains that the second hack “resulted in the exfiltration of highly sensitive commercial secrets regarding its development of lightweight high-strength steel ”1013 U S Steel responded by filing claims under Section 337 of the Trade Act before the U S International Trade Commission USITC against Baosteel which it claims “was known to be one of the beneficiaries of China’s statesponsored cyber-attacks ”1014 c ATI According to the indictment on April 13 2012 the 3PLA actors stole usernames and passwords for thousands of ATI employees 1015 The stolen network credentials would have provided wideranging access to the company’s computers and sensitive information 1016 In 2012 ATI was engaged in a joint venture with Baosteel in Shanghai which manufactures precision rolled stainless steel strips 1017 On April 12 2012 one day before the 3PLA exfiltrated these credentials ATI officials met with officials from Baosteel in Shanghai for a board meeting1018 related to their joint venture d United Steel Workers USW According to the indictment the 3PLA stole sensitive information from USW computer networks on two separate occasions 1019 The indictment alleges that in January 2012 at the same time that USW was preparing a public campaign to counter what it viewed as a wide array of unfair Chinese government policies 3PLA stole sensitive information from USW computer networks 1020 On January 31 2012 USW issued a statement from its International President calling on the U S Government to take action to protect the U S automobile and auto parts industry from “China’s predatory protectionist and 1012 Baosteel Group now known as Baowu Steel is a state-owned enterprise wholly-owned by China’s State-owned Assets Supervision and Administration of Commission See SASAC website for the full list available at http www sasac gov cn n2588035 n2641579 n2641645 index html last visited Jan 23 2018 1013 U S STEEL CORPORATION Submission Section 301 Hearing Sept 28 2017 1014 U S STEEL CORPORATION Submission Section 301 Hearing Sept 28 2017 1015 U S v Wang Dong et al 22-3 W D Pa May 1 2014 1016 U S v Wang Dong et al 21-3 W D Pa May 1 2014 1017 See Global Joint Ventures – Shanghai STAL Precision Stainless Steel Co Ltd STAL ATI available at https www atimetals com businesses joint-ventures Pages default aspx See also Allegheny Technologies Incorporated 2012 Form 10-K 1018 U S v Wang Dong et al 21-3 W D Pa May 1 2014 Two months prior to this intrusion the joint venture announced it was selling off its loss-making stainless steel assets to the Baosteel Group its parent company for RMB 2 6 billion The sale of assets to the Baosteel Group was the largest M A transaction in China announced that month See BAOSHAN IRON AND STEEL LTD RELATED PARTY TRANSACTIONS REPORT Report No 2012-005 24 Feb 29 2012 See MIIT MERGER AND RESTRUCTURING MONTHLY REPORT VOL 2 available at http merger miit gov cn observation briefing 2012-03-23 381 html 1019 U S v Wang Dong et al 7 W D Pa May 1 2014 1020 U S v Wang Dong et al 23 W D Pa May 1 2014 161 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information illegal trade practices ”1021 USW through its trade counsel also released a report on Chinese auto policies that threaten the U S jobs in the auto industry on January 31 2012 1022 Meanwhile on the same day the 3PLA gained unauthorized access to USW computers and stole e-mails from six senior USW employees including USW’s International President most of whom were personally and publicly involved in formulating USW strategy towards combatting China’s trade practices in this sector 1023 On March 7 2012 3PLA actors again gained unauthorized access to USW employees’ emails1024 at a critical period for USW as it was considering whether to request an extension of tariffs imposed on Chinese tires that would expire in September 2012 1025 USW announced in September 2012 that it would not seek an extension of the tariffs but revealed in its September announcement that it had notified the Administration in March that it would not seek an extension 1026 The 3PLA stole e-mails from the inboxes of six senior employees that included sensitive non-public and deliberative information about USW trade strategy including its decision not to seek an extension of the tariffs which would not be announced publicly for another six months 1027 e Westinghouse Westinghouse was affected by four major cyber intrusions by the 3PLA – one occurring in May 2010 one in late December 2010 and two in early January 2011 1028 According to the indictment the PLA obtained at least 1 4 gigabytes of data the equivalent of roughly 700 000 pages of e-mail messages and attachments from Westinghouse’s computers 1029 including trade secrets technical and design specifications network credentials and sensitive e-mails belonging to senior decision-makers 1030 In 2010 Westinghouse was building four AP1000 power plants in China and negotiating other terms of the construction including technology transfers with State Nuclear Power Technology 1021 U S v Wang Dong et al 24 W D Pa May 1 2014 See Statement of Terence Stewart Jan 31 2012 available at http assets usw org releases china-trade Final-SSPress-Release pdf See also LAW OFFICES OF STEWART STEWART CHINA’S SUPPORT PROGRAMS FOR AUTOMOBILES AND AUTO PARTS UNDER THE 12TH FIVE YEAR PLAN Jan 2012 1023 U S v Wang Dong et al 24-5 W D Pa May 1 2014 1024 U S v Wang Dong et al 25 W D Pa May 1 2014 1025 Imported Chinese tires became subject to a tariff for a period of three years starting on September 26 2009 after the USW successfully petitioned the USITC for relief See Certain Passenger Vehicle and Light Truck Tires from the People’s Republic of China Investigation No TA-421-7 USITC Publication No 4085 1026 USW announced on September 24 2016 that it would not seek an extension of the tariffs USW Acclaim Success of Trade Relief for Tire Sector Extension Not Requested UNITED STEELWORKERS Sept 24 2012 available at http www usw org news media-center releases 2012 usw-acclaim-success-of-trade-relief-for-tire-sector-extensionnot-requested The USW announcement states that it notified the Administration of its decision in March before the renewal request deadline 1027 U S v Wang Dong et al 25-6 W D Pa May 1 2014 1028 U S v Wang Dong et al 4 15-6 W D Pa May 1 2014 1029 U S v Wang Dong et al 16 W D Pa May 1 2014 1030 U S v Wang Dong et al 2 4 15-6 W D Pa May 1 2014 1022 162 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information Corporation SNPTC a Chinese SOE 1031 At the same time a 3PLA actor stole confidential and proprietary technical and design specifications for pipes pipe supports and pipe routing within the AP1000 plant buildings 1032 The stolen trade secrets and technical information would permit a competitor to build a power plant without having to invest in associated research and development costs that had been borne by Westinghouse in the past 1033 Additionally in 2010 and 2011 while Westinghouse was exploring other business ventures with SNPTC a 3PLA actor stole sensitive non-public and deliberative e-mails belonging to senior decision-makers responsible for the Westinghouse business relationship with SNPTC 1034 In January 2011 as the 3PLA were infiltrating Westinghouse’s servers and exfiltrating its information Westinghouse announced the signing of two agreements with SNPTC 1035 f Alcoa The indictment alleges that on February 1 2008 Alcoa announced that it was entering into a partnership with a Chinese SOE Chinalco to acquire an interest in a foreign mining company 1036 After the announcement on February 20 2008 the 3PLA obtained access to nearly 3 000 Alcoa e-mails through a spearphishing message that installed malware into Alcoa’s computer system 1037 The stolen e-mails included internal discussions among Alcoa’s senior managers regarding the acquisition of the foreign mining company 1038 The facts of each of these incidents provides a chilling warning to U S companies that engage or seek to engage in business in China or seek to challenge China’s trade practices through legal means If a company operates in a sector that China deems strategic to its economic interests or particularly if it has business relations with an SOE the company must risk being targeted by Chinese government hackers for cyber intrusions and cyber theft putting sensitive commercial information about its products business strategy and other matters at risk These firms are forced to operate on the assumption that they are under constant surveillance by the Chinese government’s extensive system of corporate surveillance and control which is discussed in greater detail in Section VI of this report 1039 1031 U S v Wang Dong et al 14 W D Pa May 1 2014 see also China signs first engineering contracts for Westinghouse AP1000-derived CAP1400 reactor POWER ENGINEERING Nov 29 2010 Foreign Companies Eyeing Chinese Nuclear Power Market SINOCAST COMTEX NEWS NETWORK Dec 2 2010 First Concrete Pour for Haiyang Unit 2 Completed in Record Time 4 AP1000 Units Now Under Construction in China PR NEWSWIRE June 25 2010 1032 U S v Wang Dong et al 14-5 W D Pa May 1 2014 1033 U S v Wang Dong et al 14-5 W D Pa May 1 2014 1034 U S v Wang Dong et al 16 W D Pa May 1 2014 1035 Westinghouse China extend AP1000 reactor agreement POWER ENGINEERING Jan 20 2011 available at http www power-eng com articles 2011 01 westinghouse--china html 1036 U S v Wang Dong et al 26 W D Pa May 1 2014 see also Eric Onstad Lucy Hornby Chinalco and Alcoa buy stake in Rio Tinto NY TIMES Feb 1 2008 1037 U S v Wang Dong et al 26-7 W D Pa May 1 2014 1038 U S v Wang Dong et al 27 W D Pa May 1 2014 1039 Andrew Browne China's Big Brother Is Watching You Do Business WALL STREET J May 23 2017 163 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information 3 China’s Institutional Framework Supports Cyber Intrusions into U S Commercial Networks As discussed in detail in other sections of this report China relies primarily on a state-led approach to technology development and economic growth 1040 Through an extensive planning system China identifies certain sectors and technologies for development and fosters national champions to achieve dominance in both domestic and global markets 1041 China’s industrial plans and innovation goals such as Made in China 2025 1042 aim to provide support and assistance through the use of state resources to Chinese companies and commercial sectors 1043 At the same time China maintains an extensive state sector and uses state-invested enterprises and other mechanisms as instruments to achieve the government’s economic objectives As noted above in Section IV B 5 China’s policy of “military-civil fusion” calls for the development of integrated information sharing platforms to facilitate science and technology S T resource sharing and collaboration between state laboratories the PLA and enterprises 1044 China’s government-directed cyber capabilities exist alongside an institutional framework that provides state-invested enterprises and national champions with privileged access to various forms of Chinese government support and information Indeed the U S government has evidence that the Chinese government provides competitive intelligence through cyber intrusions to Chinese state-owned enterprises through a process that includes a formal request and feedback loop as well as a mechanism for information exchange via a classified communication system For example according to U S government information China National Offshore Oil Corporation CNOOC a state-owned enterprise submitted formal requests to Chinese intelligence services seeking intelligence information on several U S oil and gas companies and on U S shale gas technology One instance occurred in January 2012 in the context of commercial negotiations between a U S company “U S Company 1” CNOOC and the PRC Ministry of Agriculture regarding oil leaks that had occurred at a facility jointly owned and operated by U S Company 1 and CNOOC in June 2011 1040 See Section I C See Section I C 1042 See Section I C for more information on the Made in China 2025 policy 1043 For example China’s Made in China 2025 policy documents set out targets for developing ten key industries U S CHAMBER OF COMMERCE MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 17-18 2017 stating that the policy “appears to provide preferential access to capital to domestic companies to promote their indigenous research and development capabilities enhance their competitiveness and support their ability to acquire technology from abroad ” U S CHAMBER OF COMMERCE MADE IN CHINA 2025 GLOBAL AMBITIONS BUILT ON LOCAL PROTECTIONS 6 2017 “In concert with the 13th Five-Year Plan Internet Plus Action Plan and other state-led development plans Made in China 2025 constitutes a broader strategy to use state resources to alter and create comparative advantage in these sectors on a global scale ” EUROPEAN CHAMBER OF COMMERCE IN CHINA CHINA MANUFACTURING 2025 PUTTING INDUSTRIAL POLICY AHEAD OF MARKET FORCES 1 2017 stating that the policy’s references to “‘indigenous innovation’—along with mentions of the need to realise ‘selfsufficiency’ suggests that Chinese policies will further skew the competitive landscape in favour of domestic companies ” 1044 See Description of National New Industrial Demonstration Base MIIT http sfjd miit gov cn BaseInfoAction findListIndustry action 1041 164 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information In January 2012 these Chinese intelligence services provided CNOOC information ahead of and during negotiations with U S Company 1 The information that the intelligence services provided to CNOOC included details on U S Company 1’s position in the negotiation CNOOC attributed their ultimate success in the negotiation with U S Company 1 to the information that CNOOC had received from the intelligence services According to information the U S Government has access to senior Chinese Intelligence officials including a PLA director Liu Xiaobei endorsed the use of the intelligence information during CNOOC’s negotiations with U S Company 1 In a second instance in July 2012 CNOOC requested that Chinese Intelligence provide specific information on five named U S oil and natural gas companies Specifically CNOOC sought information on -U S Company 2’s operations asset management and the movements of its senior personnel -U S Company 3’s developments in shale gas technology and -The status of U S Company 4 and U S Company 5’s research in certain areas including lab procedures fracking technology and fracking formulae These examples illustrate how China uses the intelligence resources at its disposal to further the commercial interests of Chinese state-owned enterprises to the detriment of their foreign partners and competitors Available evidence also indicates that China uses its cyber capabilities as an instrument to achieve its industrial policy and S T objectives Indeed based on available information on China’s cyber intrusions experts have concluded that China’s cyber intrusions and cyber theft align with its industrial policy goals 1045 For example As noted above Mandiant observed in its 2013 report that “organizations in all industries related to China’s strategic priorities are potential targets of APT1’s comprehensive cyber espionage campaign ” The victims of the intrusions in Mandiant’s data set match 1045 During the hearing for this investigation Richard Ellings of the Commission on the Theft of American Intellectual Property and the President of the National Bureau of Asian Research was asked whether there is a correlation between China’s industrial plans and reported cyber intrusions directed against U S businesses Mr Ellings testified in response “Absolutely In fact the whole history of cyber intrusions and more broadly industrial espionage from China correlates with all the Five-year Plans the Indigenous Innovation Policy that came out 10 years ago 12 years ago 11 years ago current Five-year Plan 2025 Plans This is as I said kind of a standard that is given out to the country and to accomplish the goals set out in these plans becomes a measure by which cadres and entities throughout the country their performance is measured So they have tremendous incentive So all of our tracking whether they be through the court cases that make it into the public realm whether cyber intrusion surveys and studies Verizon did one the Mandiant one and so on they all show a correlation between the priorities of the Chinese government at any time and the kinds of industrial espionage undertaken ” Richard Ellings COMMISSION ON THE THEFT OF AMERICAN INTELLECTUAL PROPERTY hereinafter “IP Commission” Testimony Section 301 Hearing 51 Oct 10 2017 165 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information industries that China has identified as strategic priorities in its five year plan and S T development plans 1046 In a review of cybertheft by a group associated with China’s intelligence services cybersecurity firm Novetta found the group targeting entities including Fortune 500 companies and firms with innovative information technology 1047 Such targeting converged with China’s strategic interests and the aims of China’s 11th Five Year plan for the 2006-2011 period 1048 In 2015 one cybersecurity expert testified to the U S -China Economic and Security Review Commission that “China’s commercial cyber espionage activity likely supports Communist Party central planning policies designed to provide a competitive advantage for Chinese companies ”1049 SolarWorld in its submission to USTR stated “In our view Chinese hacking and technology theft is pervasive and encouraged by the Chinese Government as demonstrated by the 2014 indictment of the Chinese People’s Liberation Army and as driven by China’s Five Year Plans which target specific high-tech and developing industries ”1050 The 3PLA’s cyber theft of trade secrets from Westinghouse documented in the DOJ indictment is illustrative of how China uses cyber theft as one of multiple instruments to achieve its state-led technology development goals During China’s 12th Five-year planning period 2011-2015 China issued several documents demonstrating its commitment to developing “indigenous” nuclear power technology capabilities For example the 12th Five-year Science and Technology Development Plan expressly states that China should “comprehensively master” Westinghouse’s AP1000 nuclear power design technology and “indigenously” complete standard designs at domestic facilities 1051 The plan also states that China should establish demonstration power plants for CAP1400 technology which is China’s domestic nuclear design technology based on Westinghouse’s AP1000 design with its input 1052 In addition China’s 12th Five-year Energy Technology Development Plan contains specific references to developing the AP1000 and similar technologies through a process of “indigenization with outside support ”1053 1046 MANDIANT APT1 EXPOSING ONE OF CHINA’S CYBER ESPIONAGE UNITS 24 2013 NOVETTA OPERATION SMN AXIOM THREAT ACTOR GROUP REPORT 4 8-9 2014 Such innovative technology includes telecommunications equipment manufacturers infrastructure providers integrated circuit manufacturers software vendors pharmaceutical and cloud computing companies networking equipment manufacturers and energy firms 1048 NOVETTA OPERATION SMN AXIOM THREAT ACTOR GROUP REPORT 9-10 2014 1049 Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China Hearing Before the U S China Econ Sec Rev Comm’n June 15 2015 Statement of Jen Weedon available at https www uscc gov sites default files Weedon%20Testimony pdf see also Richard J Ellings IP COMMISSION Submission Section 301 Hearing 3-4 Sept 28 2017 but see James Lewis CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES hereinafter “CSIS” Submission Section 301 Hearing 4 Sept 2017 1050 SOLARWORLD Submission Section 301 Hearing 2 Oct 20 2017 1051 Notice on Issuing the 12th Five-year Science and Technology Development Plan 2011-2015 § 3 Item 6 MOST Guo Ke Fa Ji 2011 No 270 issued July 4 2011 1052 Notice on Issuing the 12th Five-year Science and Technology Development Plan 2011-2015 § 3 Item 6 MOST Guo Ke Fa Ji 2011 No 270 issued July 4 2011 1053 12th Five-year Plan for Energy Technology 2011-2015 § 2 2 § 4 3 NEA issued Dec 2011 1047 166 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information For Westinghouse to operate in China Westinghouse was required to invest through a joint venture controlled by an SOE 1054 SNPTC and in order to win the bid it had to agree to transfer all relevant technology for the AP1000 to the SOE 1055 This circumstance is hardly unique to Westinghouse Section II of this report details how China uses its restrictive foreign investment regime to put pressure on U S companies to transfer technology to Chinese enterprises often state-owned enterprises As described above according to the DOJ indictment 3PLA actors stole thousands of files from Westinghouse’s computers including trade secrets technical and design specifications network credentials and sensitive e-mails belonging to senior decision-makers while commercial negotiations between Westinghouse and SNPTC were ongoing 1056 In sum China first expressly identified through its industrial policies a U S technology that China sought to indigenize China then required technology transfer to an SOE in order for the U S company holding the technology to be able to access the China market China then used its cyber capabilities to steal commercially sensitive information including trade secrets negotiating positions and technical designs from the U S company that could provide the SOE with an advantage in its business dealings with the U S company 4 China’s Recent Cyber Intrusion Activities Against U S Commercial Networks Beginning in 2014 the United States began stepping up pressure on China for its cyber intrusions into U S firms and the theft of commercial information through a number of mechanisms In September 2015 then-U S President Obama and Chinese President Xi reached a commitment that “neither country’s government will conduct or knowingly support cyberenabled theft of intellectual property including trade secrets or other confidential business information with the intent of providing competitive advantages to companies or commercial sectors ”1057 The United States has been closely monitoring China’s cyber activities since this 1054 See e g Catalogue of Industries for Guiding Foreign Investment 2007 Amendment NDRC MOC Order No 57 issued Oct 31 2007 Part IV para 4 “Catalogue of Restricted Industries for Foreign Investment ” 1055 Westinghouse Wins Nuclear Power Bid CHINA DAILY Dec 27 2006 “According to the chief representative of Westinghouse China the company's success can be mainly attributed to three factors advanced technology competitive pricing and an offering of all-round technology transfer… The CEO of Westinghouse earlier told China Daily that Westinghouse will fully co-operate with its Chinese customers to transfer all technology as requested” See Foreign Companies Eyeing Chinese Nuclear Power Market SINOCAST COMTEX NEWS NETWORK Dec 2 2010 Westinghouse delivered “more than 75 000 pieces of documents to Chinese customers as part of a technology transfer agreement hoping to consolidate its leading status in the world's largest nuclear power market The World Nuclear Association WNA believes that it is just because Westinghouse Electric agrees to transfer technology in its contracts with Chinese customers that it successfully wins the bid to build AP1000 nuclear reactors in China ” 1056 U S v Wang Dong et al at 4 1057 Press Release The White House Fact Sheet President Xi Jinping’s State Visit to the United States Sept 25 2015 https obamawhitehouse archives gov the-press-office 2015 09 25 fact-sheet-president-xi-jinpings-statevisit-united-states DOJ reaffirmed the 2015 joint statement in October 2017 “Both sides will continue their implementation of the consensus reached by the Chinese and American Presidents in 2015 on U S -China cybersecurity cooperation… including 2 that neither country’s government will conduct or knowingly support cyber-enabled theft of intellectual property including trade secrets or other confidential business information with the intent of providing competitive advantage to companies or commercial sectors ” See Press Release First U S China Law Enforcement and Cybersecurity Dialogue Oct 6 2017 available at https www justice gov opa pr first-us-china-law-enforcement-and-cybersecurity-dialogue 167 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information consensus was reached and the evidence indicates that cyber intrusions into U S commercial networks in line with Chinese industrial policy goals continue Beijing’s cyber espionage against U S companies persists and continues to evolve The U S Intelligence Community judges that Chinese state-sponsored cyber operators continue to support Beijing’s strategic development goals including its S T advancement military modernization and economic development In September 2017 the DOJ filed an indictment against three Chinese nationals who “were owners employees and associates of the Guangzhou Bo Yu Information Technology Company Limited1058 Boyusec a company that cybersecurity firms have linked to the Chinese government 1059 Three firms all with operations in the United States are named in the indictment as victims Moody’s Analytics Siemens AG and Trimble Inc The cyber intrusions against Trimble continued until March 2016 and the related conspiracy which continued until “at least May 2017”1060 targeted the three named firms to steal confidential business and commercial information and work product 1061 Specifically in 2015 and 2016 Trimble was working to develop a new global navigation satellite systems product that “combined software with a relatively low cost antenna to significantly improve the positioning accuracy of mobile devices”1062 Commercial GNSS Project “Beginning no later than December 2015 and continuing through March 2016 the coconspirators targeted the servers within Trimble’s network ” and by the middle of January 2016 the hackers had “accessed Trimble’s network and copied packaged and stole computer files containing commercial business documents and data” related to the GNSS project ”1063 In addition to the theft of market research and strategy information the stolen files also included “confidential and proprietary schematic design for the hardware receiver equipment”1064 and “two directory lists … listed files containing the names of a Trimble engineer related to the Commercial GNSS Project ”1065 “In total conspirators stole at least 275 megabytes of data including compressed data which included hundreds of files that would have assisted a Trimble competitor in developing providing and marketing similar software and subscriptions services without incurring millions of dollars in research and development costs ”1066 According to the 1058 U S v Wu Yingzhou et al September 13 2017 Crim No 17-247 W D Pa There have been many public reports linking the firm Boyusec with China’s Ministry of State Security MSS and or the PLA’s cyber unit For example a report from a private cybersecurity firm Recorded Future published on May 17th 2017 links Boyusec to the Chinese Ministry of State Security The report alleges that the known threat actor group “APT3” is in fact Boyusec and is directly linked to the Chinese state Insikt Group Recorded Future Research Concludes Chinese Ministry of State Security Behind APT3 RECORDED FUTURE May 17 2017 linking these attacks to the MSS See also Siemens Trimble Moody’s breached by Chinese Hackers U S Charges REUTERS Nov 27 2017 linking Boyusec hacks to the PLA 1060 U S v Wu Yingzhou et al at 3 1061 U S v Wu Yingzhou et al at 3-9 1062 U S v Wu Yingzhou et al at 7 1063 U S v Wu Yingzhou et al at 8 1064 U S v Wu Yingzhou et al at 8 1065 U S v Wu Yingzhou et al at 9 1066 U S v Wu Yingzhou et al at 9 1059 168 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information indictment intended customers of the Commercial GNSS Project included construction land survey and agricultural sectors and the technology had no military applications 1067 Similarly U S cybersecurity firms have concluded that cyber intrusions against U S firms by Chinese state-sponsored and supported hackers since September 2015 have decreased or become more difficult to detect but none has concluded that the activity has ceased entirely 1068 In June 2016 the cybersecurity firm FireEye1069 stated in a report that while cyber intrusions appear to be less voluminous the attacks appear to now be more focused 1070 According to the report FireEye observed 262 cyber intrusions from late 2015 through mid-2016 conducted by 72 different China-based groups whose identities range from “government and military actors contractors patriotic hackers and even criminal elements ”1071 Of the 262 observed intrusions 182 involved the networks of private and public U S entities 1072 FireEye recorded that in April and May 2016 “three groups compromised the networks of four firms headquartered in the United States Europe and Asia that are involved in the manufacturing of semiconductors and chemical components used in the production of semiconductors ”1073 One of the more notable exceptions to the observed decline comes from APT10 which is believed by several cybersecurity firms to be a Chinese cyber espionage group 1074 In late 2016 BAE Systems and PricewaterhouseCoopers reported that they had been investigating a campaign of intrusions referred to as “Operation Cloud Hopper” by APT10 against several major IT managed service providers including some U S companies 1075 According to BAE APT10’s targeting is consistent with “industries that align with China’s 13th Five-year Plan which would provide valuable information to advance the domestic innovation goals held within China ”1076 FireEye believes that APT10’s activities historically have been “in support of Chinese national security 1067 U S v Wu Yingzhou et al at 7 FIREEYE REDLINE DRAWN CHINA RECALCULATES ITS USE OF CYBER ESPIONAGE 12-14 2016 1069 FireEye is now the parent company of Mandiant 1070 Robert Hackett China's Cyber Spying on the U S Has Drastically Changed FORTUNE June 25 2016 interviewing Laura Galante of FireEye See also FIREEYE REDLINE DRAWN CHINA RECALCULATES ITS USE OF CYBER ESPIONAGE 4 2016 FireEye concludes that Chinese cyberintrusions and cybertheft were decreasing since mid-2014 due to a number of factors including “ongoing Chinese military reforms widespread exposure of Chinese cyber operations and actions taken by the U S government ” Id at 4 see also IP COMMISSION UPDATE TO THE IP COMMISSION REPORT 2017 “cyberattacks may have declined in volume since about 2014 although whether this is a result of a crackdown in China on responsible units in the People’s Liberation Army PLA or other factors is not entirely clear ” Other commenters note the decrease in activity linking it to the September 2015 joint statement as well as ongoing Chinese PLA reorganization see for example James Lewis CSIS Submission Section 301 Hearing 5 Sept 2017 and Erin Ennis U S -CHINA BUSINESS COUNCIL hereinafter “USCBC” Testimony Section 301 Hearing Oct 10 2017 referring to FireEye’s June 2016 report concluding “a notable decrease in reports by American companies of intrusions from suspected Chinese hackers ” 1071 FIREEYE REDLINE DRAWN CHINA RECALCULATES ITS USE OF CYBER ESPIONAGE 15 2016 1072 FIREEYE REDLINE DRAWN CHINA RECALCULATES ITS USE OF CYBER ESPIONAGE 12 2016 1073 FIREEYE REDLINE DRAWN CHINA RECALCULATES ITS USE OF CYBER ESPIONAGE 13 2016 1074 See e g FireEye APT10 MenuPass Group New Tools Global Campaign Latest Manifestation of Longstanding Threat Apr 6 2017 See also BAE Systems APT10 – Operation Cloud Hopper 2017 1075 PWC BAE SYSTEMS APT10 – OPERATION CLOUD HOPPER 2017 available at https www pwc co uk cybersecurity pdf cloud-hopper-report-final-v4 pdf 1076 PWC BAE SYSTEMS APT10 – OPERATION CLOUD HOPPER 15 Apr 2017 1068 169 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information goals including acquiring valuable military and intelligence information as well as the theft of confidential business data to support Chinese corporations ”1077 BAE notes that APT10’s activities use a strategy that is difficult to trace 1078 By targeting IT managed service providers APT10 is seeking the ability “to move laterally onto the networks of potentially thousands of other victims” and “has been observed to exfiltrate stolen intellectual property” while evading a network’s defenses 1079 BAE concludes that APT10 has increased its sophistication and has “significant staffing and logistical resources which have increased over the last three years with a significant step-change in 2016 ”1080 Another cybersecurity firm Fidelis Cybersecurity concluded that APT10 installed malware on the website of the National Foreign Trade Council NFTC such that when U S member companies registered for NFTC’s board meeting scheduled for March 2017 the malware would be executed on their computers 1081 According to Fidelis Cybersecurity this particular malware would allow APT10 to exploit vulnerabilities known to exist within the user’s applications 1082 NFTC board members that may have sought to register for the meeting include a large group of leading U S companies across a wide range of commercial sectors 1083 The data set since September 2015 is necessarily more limited than the extensive data collected over the last decade on Chinese cyber intrusions and cyber theft Notwithstanding an apparent decline in the observed number of cyber incidents the continued use of cyber intrusions by the Chinese government targeting U S companies remains a serious problem State-sponsored cyber intrusions originating from China into U S commercial networks occur alongside China’s institutional framework for promoting its industrial and technological development through a state-led model in which state-owned enterprises and national champions are the recipients of extensive state support In sum the evidence indicates that China continues its policy and practice spanning more than a decade of conducting and supporting cyber-enabled theft and intrusions into the commercial networks of U S companies This conduct provides the Chinese 1077 APT10 MenuPass Group New Tools Global Campaign Latest Manifestation of Longstanding Threat FIREEYE Apr 6 2017 https www fireeye com blog threat-research 2017 04 apt10_menupass_grou html 1078 PWC BAE SYSTEMS APT10 – OPERATION CLOUD HOPPER Apr 2017 1079 PWC BAE SYSTEMS APT10 – OPERATION CLOUD HOPPER 8 Apr 2017 1080 PWC BAE SYSTEMS APT10 – OPERATION CLOUD HOPPER 5 Apr 2017 FireEye in April of 2017 agreed that APT10 had expanded their operations See APT10 MenuPass Group New Tools Global Campaign Latest Manifestation of Longstanding Threat FIREEYE Apr 6 2017 1081 Operation TradeSecret Cyber Espionage at the Heart of Global Trade FIDELIS CYBERSECURITY Apr 6 2017 https www fidelissecurity com TradeSecret 1082 Operation TradeSecret Cyber Espionage at the Heart of Global Trade FIDELIS CYBERSECURITY Apr 6 2017 1083 According to NFTC’s website board members include ABB Incorporated Amazon Amgen Applied Materials Baxter International British American Tobacco Caterpillar Incorporated Chevron Cisco Systems Inc The CocaCola Company ConocoPhillips Inc Corning Incorporated Deloitte Touche LLP Dentons US LLP DHL Express USA Inc E I du Pont de Nemours Company eBay Inc Ernst Young LLP ExxonMobil Corporation FCA US LLC FedEx Express Fluor Corporation Ford Motor Company General Electric Company Google Inc Halliburton Company Hanesbrands Inc Hewlett Packard Enterprise Company HP Inc IBM Corporation Johnson Controls KPMG LLP Mars Incorporated Mayer Brown LLP McCormick Company Inc Microsoft Corporation Mondelēz International Occidental Petroleum Corporation Oracle Corporation Pernod Ricard USA Pfizer Inc PMI Global Services Inc PricewaterhouseCoopers LLP Procter Gamble Company Qualcomm Incorporated Siemens Corporation TE Connectivity Toyota Motor Sales USA Incorporated United Technologies Corporation UPS Visa Inc and Wal-mart Stores 170 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information government with unauthorized access to intellectual property trade secrets or confidential business information including but not limited to technical data negotiating positions and sensitive and proprietary internal business communications Indeed the U S Chamber of Commerce in its submission states that the “U S industry does not believe there has been a full cessation of cyber enabled IP theft and we urge the Trump Administration to ensure the Chinese government upholds the agreement ”1084 C China’s Acts Policies and Practices Regarding Cybertheft of Intellectual Property Are Unreasonable As described above the statute defines an “unreasonable” act policy or practice as one that “while not necessarily in violation of or inconsistent with the international legal rights of the United States is otherwise unfair and inequitable ”1085 The statute expressly provides that acts policies or practices that are unreasonable includes those that deny fair and equitable provision of “adequate and effective protection of intellectual property rights notwithstanding the fact that the foreign country may be in compliance with the specific obligations of the Agreement on Trade-Related Aspects of Intellectual Property Rights ”1086 It is the longstanding policy of the United States most recently reaffirmed in 2014 in Presidential Policy Directive 28 PPD-28 that “ t he collection of foreign private commercial information or trade secrets is authorized only to protect the national security of the United States or its partners and allies It is not an authorized foreign intelligence or counterintelligence purpose to collect such information to afford a competitive advantage to U S companies or U S business sectors commercially ”1087 In fact China’s activities stand in contrast to domestic and international standards adopted around the world Many countries prohibit and even criminalize the unauthorized intrusions into computer networks in certain circumstances including intrusions that result in misappropriation of trade secrets 1088 Moreover countries around the world have repeatedly condemned activities by government actors to misappropriate trade secrets for commercial purposes For example leaders of the 21-member Asia-Pacific Economic Cooperation APEC which includes China in November 2016 “reaffirm ed that economies should not conduct or support information and communications technology ICT -enabled theft of intellectual property or other confidential business information with the intent of providing 1084 U S CHAMBER OF COMMERCE Submission Section 301 Hearing 38 Oct 3 2017 19 U S C § 2411 d 3 A 1086 19 U S C § 2411 d 3 B i II 1087 Presidential Policy Directive – 2014 Directive on Signals Intelligence Activities Daily Comp Pres Docs Section 1 c Jan 17th 2014 https obamawhitehouse archives gov the-press-office 2014 01 17 presidentialpolicy-directive-signals-intelligence-activities 1088 See e g In the UK Computer Misuse Act 1990 § 1 1 a in Ireland Criminal Damage Act 1991 § 5 1 in Sweden Lag 1990 409 Protection of Business Secrets Act and Brottsbalken BrB Criminal Code 4 9c Swed in Italy C p 615 ter in Germany Strafgesetzbuch STGB Penal Code S 202 2 and 303 b in Japan Unauthorized Computer Access Act Law No 128 of 1999 art 3 2 1085 171 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information competitive advantages to companies or commercial sectors ”1089 Similarly in November 2015 at the Antalya Summit the G20 Leaders’ Communique stated “In the ICT environment just as elsewhere states have a special responsibility to promote security stability and economic ties with other nations In support of that objective we affirm that no country should conduct or support ICT-enabled theft of intellectual property including trade secrets or other confidential business information with the intent of providing competitive advantages to companies or commercial sectors ”1090 The fact that a wide group of countries including China have condemned ICT-enabled theft of intellectual property by foreign governments reinforces the conclusion that government acts policies and practices involving cyber theft of trade secrets for a commercial purpose is unreasonable Claims that there is no meaningful distinction between the Chinese government’s cyber activities and that of other countries including the United States are not valid China’s cyber intrusions are unique from those of Western market economies because the intrusions occur within the framework of China’s extensive state-driven economic development model which has no parallel in Western market economies Not only does the United States not rely on extensive industrial policy tools to identify specific commercial sectors and commercial technologies for development the United States does not have national champions and stateowned enterprises to implement such policies In other words U S companies “do not have the advantage of leveraging government intelligence data for commercial gain ”1091 Moreover China’s troubling track record of using cyber intrusion and cyber theft to target U S companies in sectors prioritized by China’s industrial policies is “hurting the case for free trade” because “ m utually beneficial economic exchange occurs only when there is acceptance of the rule of law If the legal protection of property rights is ignored free exchange makes much less sense One side just takes from the other ”1092 1089 Fact Sheet 24th Annual APEC Economic Leaders’ Meeting¸ White House Office of the Press Secretary Nov 20 2016 available at https obamawhitehouse archives gov the-press-office 2016 11 20 fact-sheet-24th-annualapec-economic-leaders-meeting In addition the APEC leaders adopted a series of best practices on trade secret protection and enforcement against misappropriation that recognizes that APEC economies should consider applying criminal liability for the willful theft of trade secrets that can arise through electronic intrusions for a commercial advantage See https ustr gov sites default files 11202016-US-Best-Practices-Trade-Secrets pdf 1090 G20 LEADERS' COMMUNIQUE ANTALYA SUMMIT ¶26 Nov 2015 available at http g20 org tr g20-leaderscommenced-the-antalya-summit In September 2017 the G7 issued the following G7 ICT and Industry Ministers' Declaration “reaffirm ing that no country should conduct or support ICT-enabled infringement or misappropriation of intellectual property including trade secrets or other confidential business information with the intent of providing competitive advantages to companies or commercial sectors ” G7 ICT and Industry Ministers’ Declaration Making the Next Production Revolution Inclusive Open and Secure Sept 26 2017 1091 Cyber Espionage and the Theft of U S Intellectual Property and Technology Hearing Before the House of Representatives Committee on Energy and Commerce Subcommittee on Oversight and Investigations July 9 2013 statement of Larry M Wortzel 1092 Derek Scissors Chinese Economic Espionage Is Hurting the Case for Free Trade HERITAGE Nov 19 2012 http www heritage org trade report chinese-economic-espionage-hurting-the-case-free-trade 172 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information Based on the foregoing factors China’s acts policies and practices of cyber intrusions into the computer networks of U S business and the theft of firms’ sensitive commercial information are unreasonable D China’s Acts Policies and Practices Regarding Cybertheft of Intellectual Property Burden U S Commerce China’s cyber intrusion and cyber theft activities harm U S business interests in a variety of ways It can be difficult to assess the full burden on U S commerce because of chronic under reporting companies being unaware that their network have been compromised or being unaware of the extent of the damage done Nevertheless a recent survey conducted by the Bureau of Industry and Security BIS contains the responses of more than 8 000 companies in the United States about the impact they face from malicious cyber activity from all sources Respondents noted the following impacts in descending order Major New Investment in Cyber Security 930 IT Downtime 825 Costs From Damage Assessment Remediation 649 Loss of Sales Business Interruption 264 Damage to Company Systems 173 Damage to IT Infrastructure 148 Exfiltration of CSI 140 Revised Approach to International Partnerships 113 Significant Change in R D Strategy 83 Theft of Software Source Code 54 Exit from Product Business Line 32 Exit from Foreign Markets Segments 29 0 200 400 600 800 1000 Number of Respondents Source U S Department of Commerce Bureau of Industry and Security Ongoing Defense Industrial Base Assessment First and foremost cyber intrusions and cyber theft damage company performance and competitiveness and result in lost sales lost revenue disruption of supply chains lost business opportunities and failure to achieve return on investment For example SolarWorld in its submission to USTR in connection with this investigation stated that the Chinese government’s cyber-theft of its proprietary business information “resulted in more than $120 million in damages in the form of lost sales and revenue” because Chinese producers entered the market 173 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information earlier than expected based on the proprietary information taken 1093 SolarWorld’s statement also provided the following The injury to SolarWorld and other solar manufacturers is particularly acute given the Chinese government subsidized Chinese producers of solar cells and panels who appear to have benefited from the stolen trade secrets have been flooding the U S marked with dumped products since 2012 driving nearly 30 U S companies out of business and leaving the U S solar manufacturing industry on the brink of collapse 1094 At the hearing Solar World America’s CEO Jürgen Stein testified SolarWorld’s efforts to stay ahead of the Chinese wave of illegally dumped and subsidized lower power and quality imports were thwarted by the hacking and theft of proprietary information about the passivated emitter rear contact PERC process that we had innovated Between May and September 2012 exactly the time we brought this technology to mass production SolarWorld's IT system was hacked 13 times by Chinese military hackers Now armed with our proprietary data and armed with our cost data we saw our Chinese competitors leap overnight into PERC technology that we had innovated and with economic information that would unfairly enhance their positions in price negotiations By early 2014 a prominent Chinese-based solar rival JA Solar announced it was converting to PERC technology and it began mass production of PERC in May of that year 1095 By early 2015 Chinese-based Trina announced its own PERC conversion and came to the market later that year with a comparable PERC technology While the five Chinese military hackers have never been brought to justice in this country we firmly believe that were it not for their economic espionage and theft from SolarWorld Americas Chinese solar producers like JA Solar and Trina would have taken far longer to make the leap into PERC technology State-sponsored hacking and theft by China greatly weakened SolarWorld's first-mover status and again left SolarWorld vulnerable to China's relentless effort to take over the U S solar industry through the sale of solar cells and panels below the cost of production 1096 In a post-hearing submission to USTR SolarWorld stated Perhaps the greatest loss that SolarWorld has sustained and continues to sustain as a result of the Chinese government's cyberhacking is the unfair loss of its competitive advantage thereby resulting in significant losses in market leadership sales and profitability SolarWorld has invested in significant R D and in the application of new 1093 SOLARWORLD Submission Section 301 Hearing 3-6 Oct 20 2017 “SolarWorld strongly believes that this early entry of Chinese solar competitors was the result of information stolen from SolarWorld’s systems and provided to SolarWorld’s Chinese competitors ” 1094 SOLARWORLD Submission Section 301 Hearing 5-6 Sept 28 2017 1095 In its post-hearing submission SolarWorld provided a correction that JA Solar announced it had launched its PERC product in October 2013 SOLARWORLD Submission Section 301 Hearing 5 Oct 20 2017 1096 Juergen Stein SOLARWORLD Testimony Section 301 Hearing 76 Oct 10 2017 174 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information technologies in its manufacturing process all with the goal of moving solar technology forward and successfully competing with the unfairly-priced solar cell and module imports from manufacturers in Asia These efforts however were lost almost overnight when Chinese state-backed actors infiltrated SolarWorld’s systems and stole its proprietary information This loss has been devastating to SolarWorld As explained in SolarWorld CEO’s testimony SolarWorld worked for eight years on the development of the state-of-the-art Passivated Emitter Rear Contact PERC technology ' After years of R D SolarWorld became the first manufacturer to industrialize PERC cell production an advantage based on the price premium for the state-of-the-art technology and high-quality materials used to produce quality product that we expected to remain for several years Instead SolarWorld's significant investments in this technology estimated at approximately $60 million in R D and $600 million total in setting up all production sites equipment and processes – have been undercut by Chinese competitors 1097 As the SolarWorld example illustrates Chinese cyber theft of commercially sensitive information often takes place in industries that the Chinese government has prioritized for statesupport and the victims often operate in U S industries that are already suffering from the result of China’s other policy tools Moreover U S companies often lack effective recourse under U S or Chinese law after they have been a victim of a Chinese cyber intrusion or cyber theft to recover the damages they incurred from such activity As described above the practical and financial challenges of litigation prevented U S Steel from being able to seek legal relief against its well-funded Chinese SOE adversary in litigation 1098 In addition there are significant remediation costs a company must incur after a cyber intrusion Even if the hackers are ultimately unable to monetize all the information they have stolen the victim must expend significant resources to deal with the potential implications Cyber intrusions and cybertheft can lead to service disruptions that interrupt a firm’s sales or other operations 1099 According to one study it takes on average 191 days to identify that a data breach has occurred and 66 days to contain it 1100 Containing a data breach requires “forensic and investigative activities assessment and audit services crisis team management and communications to executive management and board of directors ”1101 1097 SOLARWORLD Submission Section 301 Hearing 2-4 Oct 20 2017 U S STEEL Submission Section 301 Hearing 2 Sept 28 2017 1099 MCAFEE CSIS THE ECONOMIC IMPACT OF CYBERCRIME AND CYBER ESPIONAGE 10 July 2013 1100 PONEMON INSTITUTE 2017 COST OF DATA BREACH STUDY 3 June 2017 1101 PONEMON INSTITUTE 2017 COST OF DATA BREACH STUDY 3 June 2017 The report details these activities further “Conducting investigations and forensics to determine the root cause of the data breach Determining the probable victims of the data breach Organizing the incident response team Conducting communication and public relations outreach Preparing notice documents and other required disclosures to data breach victims and regulators Implementing call center procedures and specialized training ” Id at 29 1098 175 V Unauthorized Intrusions into U S Commercial Computer Networks and Cyber-Enabled Theft of Intellectual Property and Sensitive Commercial Information Even after a data breach is contained companies bear significant additional burdens including “legal expenditures identity protection services and regulatory interventions ”1102 Reputational damage is also a burden that companies in many instances bear after experiencing cyber intrusion or cyber theft After such breaches experts observe that a company’s valuation may decrease from a drop in stock prices after the company publicly reports that it has been hacked 1103 At the macro-level one study concluded that cyber intrusions and cyber theft have a significant impact on U S employment A report by the Center for Strategic and International Studies CSIS and McAfee found that cybercrime from all sources costs approximately 200 000 jobs annually in the United States 1104 According to CSIS “Cybercrime is a tax on innovation and slows the pace of global innovation by reducing the rate of return to innovators and investors…For developed countries cybercrime has serious implications for employment The effect of cybercrime is to shift employment away from jobs that create the most value Even small changes in GDP can affect employment ”1105 For all of the foregoing reasons China’s cyber activities targeting U S companies poses significant costs on U S companies and burdens U S commerce 1102 PONEMON INSTITUTE 2017 COST OF DATA BREACH STUDY 3 June 2017 MCAFEE CSIS THE ECONOMIC IMPACT OF CYBERCRIME AND CYBER ESPIONAGE at 12-13 The report notes that valuation drops typically do not appear to be permanent however financial transactions and lost expectations occurring during the window of any valuation drop would reasonably have an impact on the firm 1104 Press Release McAfee and CSIS Stopping Cybercrime Can Positively Impact World Economies June 9 2014 https www mcafee com us about news 2014 q2 20140609-01 aspx 1105 Press Release McAfee and CSIS Stopping Cybercrime Can Positively Impact World Economies June 9 2014 https www mcafee com us about news 2014 q2 20140609-01 aspx 1103 176 VI Other Acts Policies and Practices of China A Introduction The Federal Register Notice also invited comments from interested parties on other acts policies and practices of China relating to technology transfer intellectual property IP and innovation that might be included in this investigation and or might be addressed through other applicable mechanisms 1106 The following issues were cited by interested parties as acts policies and practices of China that may warrant investigation While the following actions may well meet the Section 301 standards of unreasonable or discriminatory acts policies and practices that burden or restrict U S commerce this investigation does not make that determination These matters warrant further investigation Going forward USTR will identify the best tools to address them including but not limited to more intensive bilateral engagement WTO dispute settlement and or additional Section 301 investigations 1 Measures Purportedly Related to National Security or Cybersecurity Stakeholders report that China increasingly is incorporating into its commercial regulations protections allegedly needed for “national security” or “cybersecurity” purposes 1107 Many of China’s regulations are new or in draft form and their effect on U S companies is still coming into view Companies have raised particular concerns about the Cybersecurity Law of the People’s Republic of China Cybersecurity Law The Cybersecurity Law which came into effect in June 2017 generally establishes security reviews for a broad range of IT products and services1108 imposes restrictions on the cross-border flow of data requires data localization for certain parties and types of data and authorizes the development of national cybersecurity standards that exceed the burden and scope of international standards 1109 The Cybersecurity Law’s provision requiring the implementation of a cybersecurity-specific multilevel protection scheme for information and communications technology ICT products used in network security appears to reinforce China’s Regulations on Classified Protection of Information Security also known as the Multi-Level Protection Scheme MLPS about which 1106 See Appendix A These cyber-security measures protections include Administrative Measures for New Internet Services Security Assessments Draft Baseline for Cybersecurity Classified Protection Special Security Requirements for Mobile Interconnection Draft Catalogue of Network Cyber Critical Equipment and Cybersecurity Specific Products Controllability Evaluation Index for Security of Information Technology Products Part 1 General Principles Draft Controllability Evaluation Index for Security of Information Technology Products Part 2 Central Processing Unit Draft Controllability Evaluation Index for Security of Information Technology Products Part 5 General Purpose Computer Draft Cryptography Law of the People’s Republic of China Draft Cybersecurity Law National Security Law of the People’s Republic of China Key Network and Specialized Equipment Security Products Catalogue Regulations on Classified Protection of Information Security MLPS and Information Security Technology – Security Controllable Level Evaluation Index of Information Technology Products Part 2 Central Processing Unit Draft 1108 For a discussion of security review processes and requirements for disclosure of sensitive information see Section II C of this report 1109 See e g NAT’L FOREIGN TRADE COUNCIL hereinafter “NFTC” Submission Section 301 Hearing 4 Sept 28 2017 explaining that particularly with respect to cloud service providers China is the only country addressing national security concerns by pressuring the transfer of technology 1107 177 VI Other Acts Policies and Practices of China the United States has expressed concern since adoption in 2007 1110 In general the MLPS is a system that classifies ICT products and components according to their level of national security It is reportedly aimed at promoting indigenous innovation by mandating that products used in Chinese information networks at a certain level of national security importance be developed and produced by entities owned or controlled by the government 1111 With regard to data localization a number of interested parties discussed Chinese policies that require certain “critical information infrastructure providers” to store their data on servers in China 1112 As the U S Chamber of Commerce explained if a foreign company is forced to localize a valuable set of data or information in China whether for R D purposes or simply to conduct their business it will have to assume a significant amount of risk that its data or information may be misappropriated or misused especially given the environment in China where companies face significant legal and other uncertainties when they try to protect their data and information 1113 As noted further “Chinese laws such as the National Security Cybersecurity and recently passed National Intelligence Laws give authorities expansive latitude to gain access to companies’ physical facilities and digital information ”1114 Fears about data misappropriation are also raised by Article 37 of the Cybersecurity Law which prohibits critical information infrastructure operators from exporting “personal information” or “important data” unless they have first gone through a security assessment While some other jurisdictions require companies to ensure an adequate level of protection for personal information transferred abroad typically these rules are strictly limited to personal information An extension to “important data” would therefore appear to sweep in much of the business data that is otherwise routinely and freely transferred cross-border by multinationals operating in other jurisdictions 1115 Moreover as the general scope of these security assessments is still being defined it remains worth monitoring whether China will ultimately impose stricter requirements for “personal information” exports than what is now found in international practice Stakeholders also raised concerns with China’s encryption regulations and the China Compulsory Certification CCC testing regime for information security products While these measures have been in force since 2009 until 2017 they were limited to companies seeking to sell to China’s government However in June 2017 the Cybersecurity Administration of China 1110 INFORMATION TECHNOLOGY INNOVATION FOUNDATION hereinafter “ITIF” Submission Section 301 Hearing Sept 28 2017 1111 U S CHAMBER OF COMMERCE hereinafter “U S Chamber” Submission Section 301 Hearing 32 Oct 3 2017 SEMICONDUCTOR INDUSTRY ASS’N hereinafter “SIA” Submission Section 301 Hearing 11-2 Oct 5 2017 1112 The definition given for “critical information infrastructure operators” in the Cybersecurity Law adopted by the Twentieth Session of the Twelfth NPC on Nov 7 2016 effective June 1 2017 is vague and it is unclear how broadly it will be interpreted See Cybersecurity Law art 31 “The national government on the basis of a network security level protection system will prioritize protection of important industries and fields including public communications and information services energy transport water utilities finance public services and egovernment affairs as well as other critical information infrastructure that may result in serious damage to national security people’s livelihoods and the public interest as soon as it is destroyed loses its functionality or experiences a data breach ” 1113 See e g U S CHAMBER Submission Section 301 Hearing 33-4 Oct 3 2017 1114 See e g U S CHAMBER Submission Section 301 Hearing 10 34 Oct 3 2017 1115 U S CHAMBER Submission Section 301 Hearing 10 34 Oct 3 2017 178 VI Other Acts Policies and Practices of China released the Catalogue of Critical Network Equipment and Network Security Products First Batch 1116 which expanded the restrictions beyond government procurement to 15 categories of commercial products including routers anti-spam software servers and other technology products 1117 These and other final and draft regulations raise substantial concerns for U S stakeholders 2 Inadequate Intellectual Property Protection Inadequate protection of IP has been a top concern for American companies doing business in China for many years 1118 Stakeholders identified numerous IP protection problems including trade secret theft1119 and bad faith trademarking 1120 With regard to patents stakeholders also asserted that Chinese government-owned entities were responsible for substantial infringement 1121 Stakeholders were further concerned about widespread counterfeiting in China and the distribution of counterfeit products over the Internet 1122 Counterfeiting occurs in a wide 1116 Four Department Notice on Announcing the Catalogue of Critical Network Equipment and Network Security Products First Batch National Internet Information Office MIIT Public Security Bureau Certification and Accreditation Administration issued June 1 2017 1117 TELECOMMUNICATIONS INDUSTRY ASS’N hereinafter “TIA” Submission Section 301 Hearing 3 Sept 28 2017 1118 See e g AM BAR ASS’N hereinafter “ABA IPL” Submission Section 301 Hearing 2 Sept 27 2017 ABRO INDUSTRIES hereinafter “ABRO” Submission Section 301 Hearing 1 Sept 28 2017 AM APPAREL FOOTWEAR ASS’N hereinafter “AAFA” Submission Section 301 Hearing 2 4 Sept 28 2017 AM BRIDAL PROM INDUSTRY ASS’N hereinafter “ABPIA” Submission Section 301 Hearing 2-3 Sept 28 2017 AM CHAMBER OF COMMERCE SHANGHAI hereinafter “Am Cham Shanghai” Submission Section 301 Hearing 1 Sept 28 2017 AM CHEMISTRY COUNCIL hereinafter “ACC” Submission Section 301 Hearing 3 Sept 27 2017 AM SUPERCONDUCTOR CORP hereinafter “AMSC” Submission Section 301 Hearing 2-3 Sept 28 2017 BIOTECHNOLOGY INNOVATION ORG hereinafter “BIO” Submission Section 301 Hearing 1-2 Sept 28 2017 BONUMOSE BIOCHEM hereinafter “Bonumose” Submission Section 301 Hearing 3-4 Sept 27 2017 LEE BRANSTETTER Submission Section 301 Hearing 4 Sept 28 2017 Stephen Zirschky Submission Section 301 Hearing 2 Sept 28 2017 BSA THE SOFTWARE ALLIANCE hereinafter “BSA” Submission Section 301 Hearing 2 Sept 28 2017 JACK CHANG Submission Section 301 Hearing 4 Sept 28 2017 COMPTIA Submission Section 301 Hearing 2 Sept 28 2017 CONGRESSMAN PASCRELL Submission Section 301 Hearing 4 Sept 28 2017 CONSUMER TECHNOLOGY ASS’N hereinafter “CTA” Submission Section 301 Hearing 2 Sept 28 2017 James Lewis CENTER FOR STRATEGIC INT’L STUDIES hereinafter “CSIS” Submission Section 301 Hearing 6 Sept 27 2017 DAIS ANALYTIC CORP hereinafter “Dais” Submission Section 301 Hearing 2 Sept 27 2017 COMM’N ON THE THEFT OF INTELLECTUAL PROPERTY hereinafter “IP Commission” Submission Section 301 Hearing 3 Sept 28 2017 MOTOR EQUIPMENT MANUFACTURERS ASS’N hereinafter “MEMA” Submission Section 301 Hearing 2 Sept 28 2017 MICHELMAN Submission Section 301 Hearing 2 Oct 6 2017 NAT’L ASS’N OF MANUFACTURERS hereinafter “NAM” Submission Section 301 Hearing 2 Sept 28 2017 NFTC Submission Section 301 Hearing 2 Sept 28 2017 PHRMA Submission Section 301 Hearing 2 Sept 22 2017 SIA Submission Section 301 Hearing 1 Oct 5 2017 STEWART STEWART Submission Section 301 Hearing 2 Sept 28 2017 U S CHAMBER Submission Section 301 Hearing 5 Oct 3 2017 U S CHINA BUSINESS COUNCIL hereinafter “USCBC” Submission Section 301 Hearing 2 Sept 28 2017 U S COUNCIL FOR INT’L BUSINESS hereinafter “USCIB” Submission Section 301 Hearing 1-2 Sept 28 2017 WILEY REIN Submission Section 301 Hearing 12 14 Sept 28 2017 1119 SIA Submission Section 301 Hearing 15-16 Oct 5 2017 ABA IPL Submission Section 301 Hearing 3-4 Sept 27 2017 1120 CTA Submission Section 301 Hearing 3-4 Sept 28 2017 1121 CATHERINE LIN-HENDEL Submission Section 301 Hearing Aug 28 2017 SKADDEN ARPS SLATE MEAGHER FLOM LLP hereinafter “Skadden” Submission Section 301 Hearing 20 Sept 28 2017 1122 AAFA Submission Section 301 Hearing 2 4 Sept 28 2017 ABPIA Submission Section 301 Hearing 1-2 Sept 28 2017 179 VI Other Acts Policies and Practices of China range of product categories including medicines consumer electronics toys computer accessories clothing and footwear formalwear automobile parts and semiconductors 1123 Stakeholders also raised concerns over inadequate IP enforcement mechanisms available in China Although some stakeholders submit that the legal framework has improved many reported substantial obstacles to civil enforcement and ineffective and inconsistent criminal and administrative enforcement by the government of China 1124 Stakeholders further stated that enforcement problems are exacerbated by insufficient governmental coordination insufficient political will by Chinese officials and inadequate resources and capacity to address IP problems 1125 3 China’s Anti-Monopoly Law A number of submissions asserted that China uses the Anti-Monopoly Law of the People’s Republic of China AML as a means to obtain U S IP citing as examples the AML agencies’ multiple draft guidelines Other submissions raised general concern regarding use of the AML for industrial policy purposes and several complained about poor procedural protections in enforcement of the AML and about certain enforcement actions allegedly addressing abuse of dominance in the exercise of IP rights In regard to the concerns raised on IP guidelines submissions cited the State Administration of Industry Commerce SAIC 2015 Rules on the Prohibition of Conduct Eliminating or Restricting Competition by Abusing Intellectual Property Rights SAIC Rules and the March 2017 draft State Council Anti-Monopoly Commission Guidelines Against Abuse of Intellectual Property Rights Guidelines 1126 For example there were concerns with Article 7 of the SAIC Rules which recognizes IP as an “essential facility ” with one submission noting that this provision could allow SAIC to treat any unilateral refusal to license as an “abuse of IPR ”1127 In regard to enforcement several submissions asserted that Chinese AML authorities use the AML as a tool to advance industrial policy rather than to protect competition 1128 While some submissions noted improvements in AML enforcement they also noted continued concerns with 1123 See e g COMPTIA Submission Section 301 Hearing 7 Sept 28 2017 CHINA CHAMBER OF INTERNATIONAL COMMERCE hereinafter “CCOIC” Submission Section 301 Hearing 24-9 Sept 26 2017 ABPIA Submission Section 301 Hearing 1 Sept 28 2017 U S CHAMBER Submission Section 301 Hearing 36 Oct 3 2017 1124 ABA IPL Submission Section 301 Hearing 2 4 Sept 27 2017 CTA Submission Section 301 Hearing 4 Sept 28 2017 MEMA Submission Section 301 Hearing 3-4 Sept 28 2017 NAM Submission Section 301 Hearing 13-4 Sept 28 2017 USCBC Submission Section 301 Hearing 2 Sept 28 2017 1125 MEMA Submission Section 301 Hearing 3-4 Sept 28 2017 NAM Submission Section 301 Hearing 13-4 Sept 28 2017 1126 See e g Stephen Ezell ITIF Testimony Section 301 Hearing 21 Oct 10 2017 NAM Submission Section 301 Hearing 9 13 Sept 28 2017 1127 SIA Submission Section 301 Hearing 13 Oct 5 2017 1128 See e g USCIB STATEMENT ON CHINA’S COMPLIANCE WITH ITS WTO COMMITMENTS 15 Sept 20 2017 USCIB Submission Section 301 Hearing 1-2 Sept 28 2017 180 VI Other Acts Policies and Practices of China transparency and due process 1129 and alleged discriminatory enforcement against certain foreign companies 1130 4 China’s Standardization Law According to stakeholder submissions China’s recently enacted Amendments to the Standardization Law of the People’s Republic of China Standardization Law Amendments raise concerns related to whether U S companies will be required to transfer valuable IP or license it on non-market terms as a condition of participation in standards setting bodies 1131 Stakeholders assert that the amendments impose unique and potentially damaging requirements on enterprises to publicly disclose functional indicators and performance indicators of their products or services which may result in unnecessary costs and risks 1132 Furthermore the Amendments reportedly endorse a preference for indigenous innovation in Chinese standards to the detriment of U S and other non-Chinese companies 1133 5 Talent Acquisition Certain participants in the investigation emphasized the challenges posed by China’s acquisition of U S engineers and other professional employees in technology-related companies For instance the Semiconductor Industry Association SIA has observed a “notable shift from M A to a more sophisticated process of acquiring hundreds of talented engineers and managers from foreign companies ”1134 As SIA explains It has been reported that Chinese state-owned firms have been highly successful in recruiting this high-tech engineering talent which is enabled by massive Chinese government subsidies that allow for salaries to be offered at high non-market rates Often high-level managers are lured away from target companies with compensation packages four or five times the market rates These managers then target key former employees in technology development manufacturing and facilities promising outsized compensation 1135 The Chinese government has issued a number of medium- and long-term plans for talent development 1136 while pursuing initiatives that actively encourage the recruitment of foreign 1129 AM CHAMBER OF COMMERCE CHINA 2017 AMCHAM CHINA WHITE PAPER 38 2017 See e g USCIB Submission Section 301 Hearing 2 Sept 28 2017 WILEY REIN Submission Section 301 Hearing 6-8 Sept 28 2017 IP COMM’N Submission Section 301 Hearing 8 Sept 28 2017 1131 U S CHAMBER Submission Section 301 Hearing 26 Oct 3 2017 WILEYREIN Submission Section 301 Hearing 6-7 Sept 28 2017 1132 U S CHAMBER Submission Section 301 Hearing 26 Oct 3 2017 1133 PRC Standardization Law Amendments art 20 promulgated by the Fifth Session of the Twelfth NPC on Dec 29 1988 amended by the Thirtieth Session of the Twelfth NPC on Nov 4 2017 1134 SIA Submission Section 301 Hearing 15 Oct 5 2017 1135 SIA Submission Section 301 Hearing 15-6 Oct 5 2017 1136 For instance to improve the quality of high-skilled labor in the economy the CCP Central Committee and the State Council issued the Outline of the National Medium- and Long-Term Talent Development Plan in 2010 See Outline of the National Medium- and Long-Term Talent Development Plan CCP Central Committee and State Council Zhong Fa 2010 No 6 issued Apr 1 2010 Wang Huiyao CHINA’S NATIONAL TALENT PLAN KEY MEASURES AND OBJECTIVES BROOKINGS INSTITUTE 23 Nov 2010 1130 181 VI Other Acts Policies and Practices of China talent and Chinese persons overseas to boost national competitiveness These plans establish specific targets for attracting “talented” individuals and cut across technical specializations finance and high-technology domains 1137 China’s talent acquisition activities are global in their scope and scale but reportedly have been particularly concentrated in top U S universities and Silicon Valley With support from various government programs and entities notably the China Association of Science and Technology Chinese enterprises reportedly have begun establishing “talent bases” in China and the United States to support cutting-edge R D and the active recruitment of top talent For instance Chinese government plans prioritize the pursuit of human capital in artificial intelligence AI 1138 And as the SIA submission indicates Chinese companies have reportedly lured top talent from foreign companies by paying well above market compensation—enabled by government financing direction and support 1139 These activities may provide a key conduit for technology transfer from the United States to China B Conclusion USTR acknowledges the importance of these issues and agrees with stakeholders that the matters warrant further investigation A number of concerns of this nature have previously been raised in USTR’s annual proceedings under Special 301 and the annual review of China’s WTO accession compliance A range of tools may be appropriate to address these serious matters including more intensive bilateral engagement WTO dispute settlement and or additional Section 301 investigations 1137 See e g Notice on Issuing the “Medium- and Long-Term Financial Sector Talent Development Plan” People’s Bank of China China Banking Regulatory Commission China Securities Regulatory Commission China Insurance Regulatory Commission Yin Fa 2011 No 18 promulgated Jan 24 2011 Notice on Launching Stage-Wise Evaluation Work for the “Medium- and Long-Term Plan to Establish Technical Specialization Talent Teams 20102020 Ministry of Human Resources and Social Security promulgated on May 27 2013 Medium- and Long-Term Plan to Establish High-Skilled Talent Teams Ministry of Human Resources and Social Security promulgated in 2011 1138 State Council Notice on the Issuance of the New Generation Artificial Intelligence Development Plan State Council Guo Fa 2017 No 35 promulgated on July 8 2017 available at http www gov cn zhengce content 2017-07 20 content_5211996 htm see also An Overview of Overseas Offshore Talent Innovation Base CAST http www cast org cn n200675 n202200 n202372 c400650 content html 1139 SIA Submission Section 301 Hearing 15-6 Oct 5 2017 Huang Yijun Chen Liangrong He Yunting Interview with Ziguang Group Chairman Zhao Weiguo TIANXIA NEWS Nov 1 2015 Taiwan Semiconductor Leader Jumps to the Mainland INITIUM MEDIA Oct 7 2015 David Manners Micron Sues Ex-Employees Working for China DRAM Companies ELECTRONICS WEEKLY Apr 7 2017 182 APPENDIX A Federal Register Vol 82 No 163 Thursday August 24 2017 Notices Submit completed loan applications to U S Small Business Administration Processing And Disbursement Center 14925 Kingsport Road Fort Worth TX 76155 FOR FURTHER INFORMATION CONTACT A Escobar Office of Disaster Assistance U S Small Business Administration 409 3rd Street SW Suite 6050 Washington DC 20416 202 205–6734 SUPPLEMENTARY INFORMATION The notice of an Administrative declaration for the State of CALIFORNIA dated 07 31 2017 is hereby amended to establish the incident closing date as 08 01 2017 Incident Detwiler Fire Incident Period 07 16 2017 through 08 01 2017 All other information in the original declaration remains unchanged ADDRESSES Catalog of Federal Domestic Assistance Number 59008 Linda E McMahon Administrator FR Doc 2017–17915 Filed 8–23–17 8 45 am BILLING CODE 8025–01–P OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE Docket No USTR–2017–0016 Initiation of Section 301 Investigation Hearing and Request for Public Comments China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation Office of the United States Trade Representative ACTION Notice of initiation of investigation hearing and request for comments AGENCY The United States Trade Representative has initiated an investigation pursuant to the Trade Act of 1974 as amended the Trade Act to determine whether acts policies and practices of the Government of China related to technology transfer intellectual property and innovation are actionable under the Trade Act The inter-agency Section 301 Committee is holding a public hearing and seeking comments in connection with this investigation rmajette on DSKBCKNHB2PROD with NOTICES SUMMARY The United States Trade Representative initiated the investigation on August 18 2017 The schedule and due dates are as follows To be assured of consideration written comments and requests to appear at the hearing must be submitted by Thursday September 28 2017 at DATES VerDate Sep 11 2014 15 29 Aug 23 2017 Jkt 241001 11 59 p m The request to appear must include a summary of testimony Tuesday October 10 2017 The Section 301 Committee will convene a public hearing in the main hearing room of the U S International Trade Commission 500 E Street SW Washington DC 20436 beginning at 9 30 a m If necessary the hearing may continue on the next business day To be assured of consideration posthearing rebuttal comments must be submitted by Friday October 20 2017 at 11 59 p m ADDRESSES You should submit written comments through the Federal eRulemaking Portal http www regulations gov Follow the instructions for submitting comments in section II below For alternatives to online submissions please contact Gwendolyn Diggs at 202 395–3150 before transmitting a comment and in advance of the relevant deadline FOR FURTHER INFORMATION CONTACT For procedural questions concerning written comments or participating in the public hearing contact Gwendolyn Diggs at 202 395–3150 Direct all other questions regarding this notice to William Busis Deputy Assistant U S Trade Representative for Monitoring and Enforcement and Chair of the Section 301 Committee or Katherine Linton and Arthur Tsao Assistant General Counsels at 202 395–3150 SUPPLEMENTARY INFORMATION A The President’s Memorandum On August 14 2017 the President issued a Memorandum 82 FR 39007 to the United States Trade Representative stating inter alia China has implemented laws policies and practices and has taken actions related to intellectual property innovation and technology that may encourage or require the transfer of American technology and intellectual property to enterprises in China or that may otherwise negatively affect American economic interests These laws policies practices and actions may inhibit United States exports deprive United States citizens of fair remuneration for their innovations divert American jobs to workers in China contribute to our trade deficit with China and otherwise undermine American manufacturing services and innovation The Memorandum included the following instruction The United States Trade Representative shall determine consistent with section 302 b of the Trade Act of 1974 19 U S C 2412 b whether to investigate any of China’s laws policies practices or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights innovation or technology development PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 40213 Pursuant to the President’s Memorandum on August 18 2017 the United States Trade Representative initiated an investigation under section 302 b of the Trade Act 19 U S C 2412 b to determine whether acts policies and practices of the Government of China related to technology transfer intellectual property and innovation are unreasonable or discriminatory and burden or restrict U S commerce B The Chinese Government’s Acts Policies and Practices The acts policies and practices of the Government of China directed at the transfer of U S and other foreign technologies and intellectual property are an important element of China’s strategy to become a leader in a number of industries including advancedtechnology industries as reflected in China’s ‘‘Made in China 2025’’ industrial plan and other similar industrial policy initiatives The Chinese government’s acts policies and practices take many forms The investigation initially will consider the following specific types of conduct First the Chinese government reportedly uses a variety of tools including opaque and discretionary administrative approval processes joint venture requirements foreign equity limitations procurements and other mechanisms to regulate or intervene in U S companies’ operations in China in order to require or pressure the transfer of technologies and intellectual property to Chinese companies Moreover many U S companies report facing vague and unwritten rules as well as local rules that diverge from national ones which are applied in a selective and nontransparent manner by Chinese government officials to pressure technology transfer Second the Chinese government’s acts policies and practices reportedly deprive U S companies of the ability to set market-based terms in licensing and other technology-related negotiations with Chinese companies and undermine U S companies’ control over their technology in China For example the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology and other measures also impose non-market terms in licensing and technology contracts Third the Chinese government reportedly directs and or unfairly facilitates the systematic investment in and or acquisition of U S companies and assets by Chinese companies to obtain cutting-edge technologies and E FR FM 24AUN1 SGM 24AUN1 40214 Federal Register Vol 82 No 163 Thursday August 24 2017 Notices intellectual property and generate largescale technology transfer in industries deemed important by Chinese government industrial plans Fourth the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U S commercial computer networks or cyber-enabled theft of intellectual property trade secrets or confidential business information and whether this conduct harms U S companies or provides competitive advantages to Chinese companies or commercial sectors In addition to these four types of conduct interested parties may submit for consideration information on other acts policies and practices of China relating to technology transfer intellectual property and innovation described in the President’s Memorandum that might be included in this investigation and or might be addressed through other applicable mechanisms rmajette on DSKBCKNHB2PROD with NOTICES C Relevant Provisions of the Trade Act Section 302 b 1 A of the Trade Act authorizes the United States Trade Representative to initiate an investigation to determine whether conduct is actionable under section 301 of the Trade Act Actionable conduct under section 301 b 1 includes inter alia acts policies and practices of a foreign country that are unreasonable or discriminatory and burden or restrict U S commerce Unreasonable actions are those that while not necessarily in violation of or inconsistent with the international legal rights of the United States are otherwise unfair and inequitable Pursuant to section 302 b 1 B the United States Trade Representative has consulted with appropriate advisory committees The United States Trade Representative also has consulted with members of the inter-agency Section 301 Committee On the date of initiation the United States Trade Representative requested consultations with the Government of China concerning the issues under investigation pursuant to section 303 a 1 of the Trade Act 19 U S C 2413 a 1 Pursuant to section 304 a 2 B of the Trade Act 19 U S C 2414 a 2 B the United States Trade Representative must determine within 12 months from the date of initiation of the investigation whether any act policy or practice described in section 301 of the Trade Acts exists and if that determination is affirmative what action if any to take VerDate Sep 11 2014 15 29 Aug 23 2017 Jkt 241001 II Request for Comments and To Testify at the Hearing A Topics and Schedule The Office of the U S Trade Representative USTR invites written comments on 1 The acts policies and practices of the Chinese government described in Section I B above 2 Information on other acts policies and practices of China relating to technology transfer intellectual property and innovation as described in the President’s Memorandum which might be included in this investigation and or might be addressed through other applicable mechanisms 3 The nature and level of burden or restriction on U S commerce caused by the applicable acts policies and practices of the Government of China and or any economic assessment of that burden or restriction 4 The determinations required under section 304 of the Trade Act that is whether actionable conduct exists under section 301 b and what action if any should be taken To be assured of consideration USTR must receive initial written comments by 11 59 p m on September 28 2017 in accordance with the instructions in section II B below The Section 301 Committee will convene a public hearing in the main hearing room of the U S International Trade Commission 500 E Street SW Washington DC 20436 beginning at 9 30 a m on October 10 2017 Persons wishing to appear at the hearing must provide written notification of their intention and a summary of the proposed testimony by 11 59 p m on September 28 2017 in accordance with the instructions in section II B below Remarks at the hearing may be no longer than five minutes to allow for possible questions from the Section 301 Committee The deadline for submission of post-hearing rebuttal comments is 11 59 p m on October 20 2017 Indicate in the ‘‘Type Comment’’ field if you are submitting a request to appear at the hearing and include the name address and telephone number of the person presenting the testimony A summary of the testimony should be attached by using the ‘‘Upload File’’ field The file name should include the name of the person who will be presenting the testimony B Requirements for Submissions Persons submitting a notification of intent to testify a summary of testimony or written comments must do so in English and must identify this matter on the reference line of the first PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 page of the submission as ‘‘Section 301 Investigation China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation ’’ To be assured of consideration you must submit written comments requests to testify and summaries of testimony by 11 59 p m on September 28 2017 The deadline for submitting rebuttal comments is 11 59 p m on October 20 2017 All submissions must be in English and sent electronically via www regulations gov using docket number USTR–2017–0016 You must make any alternative arrangements in advance of the relevant deadline and before transmitting a comment by contacting Gwendolyn Diggs at 202 395–3150 To make a submission via www regulations gov enter Docket Number USTR–2017–0016 on the home page and click ‘‘Search ’’ The site will provide a search-results page listing all documents associated with this docket Find the reference to this notice and click on the button labeled ‘‘Comment Now ’’ For further information on using the www regulations gov Web site please consult the resources provided on the Web site by clicking on ‘‘How to Use Regulations gov’’ on the bottom of the home page The www regulations gov Web site allows users to provide comments by filling in a ‘‘Type Comment’’ field or by attaching a document using an ‘‘Upload File’’ field USTR prefers that you provide submissions as an attached document If a document is attached it is sufficient to type ‘‘see attached’’ in the ‘‘Type Comment’’ field USTR prefers submissions in Microsoft Word doc or Adobe Acrobat pdf format If the submission is in another file format please indicate the name of the software application in the ‘‘Type Comment’’ field File names should reflect the name of the person or entity submitting the comments Indicate in the ‘‘Type Comment’’ field if you are submitting a request to appear at the hearing and include the name address and telephone number of the person presenting the testimony The file name should include who will be presenting the testimony Please do not attach separate cover letters to electronic submissions rather include any information that might appear in a cover letter in the comments themselves Similarly to the extent possible please include any exhibits annexes or other attachments in the same file as the comment itself rather than submitting them as separate files E FR FM 24AUN1 SGM 24AUN1 Federal Register Vol 82 No 163 Thursday August 24 2017 Notices For any comments submitted electronically containing business confidential information the file name of the business confidential version should begin with the characters ‘‘BC’’ Any page containing business confidential information must be clearly marked ‘‘BUSINESS CONFIDENTIAL’’ on the top of that page and the submission should clearly indicate via brackets highlighting or other means the specific information that is business confidential If you request business confidential treatment you must certify that the information is business confidential and would not customarily be released to the public Filers of submissions containing business confidential information also must submit a public version of their comments The file name of the public version should begin with the character ‘‘P’’ The ‘‘BC’’ and ‘‘P’’ should be followed by the name of the person or entity submitting the comments or rebuttal comments If these procedures are not sufficient to protect business confidential information or otherwise protect business interests please contact Katherine Linton at 202–395–3150 to discuss whether alternative arrangements are possible We will post comments in the docket for public inspection except business confidential information You can view comments on the https www regulations gov Web site by entering docket number USTR–2017– 0016 in the search field on the home page William L Busis Chair Section 301 Committee Office of the United States Trade Representative FR Doc 2017–17931 Filed 8–23–17 8 45 am BILLING CODE 3290–F7–P DEPARTMENT OF TRANSPORTATION Federal Motor Carrier Safety Administration Docket No FMCSA–2017–0042 Qualification of Drivers Exemption Applications Diabetes Mellitus Federal Motor Carrier Safety Administration FMCSA DOT ACTION Notice of applications for exemption request for comments rmajette on DSKBCKNHB2PROD with NOTICES AGENCY FMCSA announces receipt of applications from 43 individuals for an exemption from the prohibition in the Federal Motor Carrier Safety Regulations FMCSRs against persons with insulin-treated diabetes mellitus ITDM operating a commercial motor SUMMARY VerDate Sep 11 2014 15 29 Aug 23 2017 Jkt 241001 vehicle CMV in interstate commerce If granted the exemptions would enable these individuals with ITDM to operate CMVs in interstate commerce DATES Comments must be received on or before September 25 2017 ADDRESSES You may submit comments bearing the Federal Docket Management System FDMS Docket No FMCSA– 2017–0042 using any of the following methods • Federal eRulemaking Portal Go to http www regulations gov Follow the online instructions for submitting comments • Mail Docket Management Facility U S Department of Transportation 1200 New Jersey Avenue SE West Building Ground Floor Room W12–140 Washington DC 20590–0001 • Hand Delivery West Building Ground Floor Room W12–140 1200 New Jersey Avenue SE Washington DC between 9 a m and 5 p m e t Monday through Friday except Federal holidays • Fax 1–202–493–2251 Instructions Each submission must include the Agency name and the docket number s for this notice Note that all comments received will be posted without change to http www regulations gov including any personal information provided Please see the Privacy Act heading below for further information Docket For access to the docket to read background documents or comments go to http www regulations gov at any time or Room W12–140 on the ground level of the West Building 1200 New Jersey Avenue SE Washington DC between 9 a m and 5 p m e t Monday through Friday except Federal holidays The FDMS is available 24 hours each day e t 365 days each year If you want acknowledgment that we received your comments please include a selfaddressed stamped envelope or postcard or print the acknowledgement page that appears after submitting comments online Privacy Act In accordance with 5 U S C 553 c DOT solicits comments from the public to better inform its rulemaking process DOT posts these comments without edit including any personal information the commenter provides to http www regulations gov as described in the system of records notice DOT ALL–14 FDMS which can be reviewed at http www dot gov privacy FOR FURTHER INFORMATION CONTACT Ms Christine A Hydock Chief Medical Programs Division 202 366–4001 fmcsamedical@dot gov FMCSA PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 40215 Department of Transportation 1200 New Jersey Avenue SE Room W64– 224 Washington DC 20590–0001 Office hours are 8 30 a m to 5 p m e t Monday through Friday except Federal holidays If you have questions regarding viewing or submitting material to the docket contact Docket Services telephone 202 366–9826 SUPPLEMENTARY INFORMATION I Background Under 49 U S C 31136 e and 31315 FMCSA may grant an exemption from the FMCSRs for a two-year period if it finds ‘‘such exemption would likely achieve a level of safety that is equivalent to or greater than the level that would be achieved absent such exemption ’’ The statute also allows the Agency to renew exemptions at the end of the two-year period The 43 individuals listed in this notice have requested an exemption from the diabetes prohibition in 49 CFR 391 41 b 3 Accordingly the Agency will evaluate the qualifications of each applicant to determine whether granting the exemption will achieve the required level of safety mandated by statute The physical qualification standard for drivers regarding diabetes found in 49 CFR 391 41 b 3 states that a person is physically qualified to drive a CMV if that person Has no established medical history or clinical diagnosis of diabetes mellitus currently requiring insulin for control The Agency established the current requirement for diabetes in 1970 because several risk studies indicated that drivers with diabetes had a higher rate of crash involvement than the general population FMCSA established its diabetes exemption program based on the Agency’s July 2000 study entitled ‘‘A Report to Congress on the Feasibility of a Program to Qualify Individuals with Insulin-Treated Diabetes Mellitus to Operate in Interstate Commerce as Directed by the Transportation Act for the 21st Century ’’ The report concluded that a safe and practicable protocol to allow some drivers with ITDM to operate CMVs is feasible The September 3 2003 68 FR 52441 Federal Register notice in conjunction with the November 8 2005 70 FR 67777 Federal Register notice provides the current protocol for allowing such drivers to operate CMVs in interstate commerce FMCSA notes that section 4129 of the Safe Accountable Flexible and Efficient Transportation Equity Act A Legacy for Users requires the Secretary to revise its diabetes exemption program established on September 3 2003 68 FR E FR FM 24AUN1 SGM 24AUN1 APPENDIX Section 301 Investigation China’s Acts Policies and Practices Related to Technology Transfer Intellectual Property and Innovation Off-Camera Hearing to be held at the U S International Trade Commission 500 E Street SW Washington DC 20436 October 10 2017 9 30 a m Panel One 1 2 3 4 Richard Ellings Commission on the Theft of American Intellectual Property Stephen Ezell Information Technology and Innovation Foundation Erin Ennis U S China Business Council Owen Herrnstadt International Association of Machinists and Aerospace Workers Panel Two 1 Juergen Stein SolarWorld Americas 2 Daniel Patrick McGahn American Superconductor Corporation 3 William Mansfield ABRO Industries Panel Three 1 Scott Partridge American Bar Association Intellectual Property Law Section 2 Scott Kennedy Center for Strategic International Studies 3 JIN Haijun China Intellectual Property Law Society Panel Four 1 2 3 4 CHEN Zhou and LIU Chao China Chamber of International Commerce XU Chen and LIU Xinze China General Chamber of Commerce John Tang Esq and JIANG Qi DHH Law Office WANG Guiqing Chamber of Commerce Import and Export of Machinery APPENDIX Section 301 Investigation of China’s Technology Transfer Intellectual Property and Innovation-Related Acts Practices and Policies Summary of Public Submissions American Apparel and Footwear Association AAFA AAFA is a national trade association that represents companies and suppliers in the apparel footwear and other sewn products industries competing in the global market AAFA indicates that the Section 301 investigation should identify areas where China has fallen short of its IPR commitments and it underscores that the sale of counterfeit products on Chinese ecommerce sites is widespread AAFA draws attention to parasite brands which it describes as “counterfeit variants” and which imitate brands and sell counterfeit versions of products in China AAFA states that China’s first-to-file trademark system leads to inadequate protections that exacerbate the problem AAFA submits that Chinese laws and policies largely ignore the rights of patent owners by allowing or even requiring them to transfer knowledge to competitors SOEs or other parties American Bar Association Intellectual Property Law APA IPL Section The ABA IPL Section provided comments in writing and at the hearing indicating that IPR protections in China had improved in recent years but that widespread deficiencies remain A major concern is that the Chinese government effectively forces technology transfer via the imposition of mandatory licensing terms which may include terms on ownership in improvements indemnifications and others The ABA IPL Section adds that a lack of trade secret protections in China is a longstanding concern of U S companies citing instances in which U S companies brought trade secret actions in Chinese courts and at the U S International Trade Commission based on allegations of trade secret misappropriations occurring in China Furthermore the IPL section also identifies a range of issues with respect to trademark copyright and patent protections According to the IPL section these issues have received inadequate attention and resources from the Chinese government and are exacerbated by Chinese copyright laws that fall short of international norms Although several important laws and regulations have been passed by the Chinese government to enhance patent protection additional improvements must be made to meaningfully protect the rights of patent holders The IPL Section identifies various obstacles to U S patent holders attempting to pursue patent infringement actions in China American Bridal Prom Industry Association Inc ABPIA ABPIA is a non-profit nationwide trade-association that represents members of the formalwear industry including designers manufacturers retailers and trade publications ABPIA submits that its members are seriously harmed by the sale of counterfeit goods on “thousands” of e-commerce websites largely based in China which target U S customers including by using U S manufacturers’ trademarks and original and proprietary marketing 1 images ABPIA also states that counterfeit goods circumvent customs duties by being falsely designed as “gifts ” ABPIA recommends that USTR widen the scope of its 301 review to examine new legislation more effective border controls and restricting flows to the Chinese bank accounts of counterfeiters ABRO Industries ABRO provided comments in writing and at the hearing and is a small American company affected by counterfeits emanating from China The company manufactures nonelectronic consumer goods in the United States and China and sells third country markets ABRO submits that China has received insufficient acknowledgment for its anti-counterfeiting efforts adding that ABRO was ultimately successful in combatting the theft of its IP by adapting to the Chinese system and working closely with regional and provincial governments in China American Foundry Society AFS AFS is a trade and technical association for the North American metal-casting industry with more than 8 000 members representing nearly 2 000 metal-casting firms suppliers and customers Many AFS members have been harmed by Chinese governmental practices in the broader metal-casting industry China is the largest producer of all types of metal-castings and many Chinese foundries are SOEs which receive significant levels of both direct and indirect financial support from the Chinese government Furthermore the Chinese government both directly and indirectly influences commercial decisions by SOEs Collectively these government actions have enabled Chinese foundries to produce metal-castings at significantly lower prices than can be produced by AFS members AFS members are additionally concerned by the implementation and localization targets published in the Made In China 2025 industrial plan AFS submits that Chinese policies and financial supports to MIC 2025 target industries will benefit Chinese manufacturers over foreign firms making it increasingly difficult for AFS firms to compete Finally AFS states that its members have suffered from investment caps in China pursuant to the Catalogue Guiding Foreign Investment which forces U S companies to engage in joint ventures with Chinese companies in the agricultural processing automotive and telecom industries These requirements create opportunities for both the Chinese government and Chinese stakeholders to request concessions like technology transfer from foreign companies during negotiations American Chamber of Commerce in Shanghai AmCham AmCham is an independent business chamber with more than 3 000 members from over 1 500 companies including 75 percent of American Fortune 500 companies with operations in China along with hundreds of smaller companies AmCham reports that its members face a difficult policy environment in China with forced technology transfer limited market access and basic fairness issues increasingly shifting the local market in favor of Chinese companies AmCham states that the Chinese government uses both implicit and explicit actions to create an unequal playing field for U S companies Member companies have complained of insufficient IP protections and tech transfer pressures in the form of product approval regulations and joint venture requirements as well as pressure to demonstrate “Good Corporate Citizenship” by 2 transferring new business models and technologies to Chinese entities AmCham submits that China uses its considerable resources and influence to create an unfair advantage for its domestic companies and these practices have made it more difficult to both operate in China and grow American companies American Chemistry Council ACC ACC is an organization that represents the leading companies engaged in the business of chemistry Many of ACCs members have complained of significant difficulties in bringing their products to the Chinese markets When exporting chemicals to China companies have been required to disclose an amount of proprietary information sufficient for product duplication As a result ACC members’ IP has been stolen by Chinese companies who then recreate the products and sell them at lower prices Additionally ACC submits that the Chinese government has engaged in both unreasonable and discriminatory practices These include discriminatory patenting laws and the failure to pursue criminal prosecution of Chinese companies that steal IP American Superconductor Corporation AMSC AMSC submitted comments in writing and testified at the hearing and is an American energy technologies company that provides wind turbine designs systems and engineering services to reduce the cost of wind energy AMSC experienced the theft of its intellectual property by a Chinese SOE Sinovel Wind Group AMSC explains that in 2007 it began supplying core electrical components and software to Sinovel Over the course of their relationship AMSC discovered that Sinovel had bribed an AMSC employee to steal technology from a U S server AMSC submits that the theft is substantiated by emails and Skype messages that demonstrate the actual IP transfer and involvement in the cyber-theft by senior-level Sinovel officials As a result AMSC believes that over 8 000 wind turbines amounting to 20 percent of China’s turbines are running on stolen AMSC software and importantly most of the wind turbines operating on stolen software are owned by large state-owned enterprises In response to the theft the U S Department of Justice brought still-pending criminal actions in the United States while AMSC has pursued various civil legal actions in China AMSC expresses concern that it has received fair and equitable consideration in China as Chinese courts dismissed several of its actions for an asserted lack of evidence AMSC states that it has lost over $1 6 billion in company value along with 70 percent of its workforce since March 2011 as a direct consequence of the stolen technology Biotechnology Innovation Organization BIO BIO is a non-profit organization comprised of 1 000 biotechnology companies academic institutions state biotechnology centers and related organizations in almost all 50 states and a number of foreign countries BIO members have suffered from IP theft by Chinese companies resulting in the production of copycat products sold in China BIO members generally share concerns in China over IPR protection and enforcement market access challenges innovation policies that discriminate against foreign companies lack of transparency in rule administration lack of meaningful industry engagement in the rules-making process regulatory requirements 3 and technical standards that are more trade restrictive than necessary and restrictive pharmaceutical pricing policies that blunt innovation in the global bioscience industry Bonumose Biochem LLC Bonumose Biochem is a small start-up business in the biochemical industry Bonumose describes an instance of IP theft it experienced after it purchased 100 percent of the IP rights to the production of a chemical compound According to Bonumose an individual with ties to the Chinese government illegally revealed confidential information to the Tianjin Institute of Industrial Biotechnology TIIB a division of the Chinese government-owned Chinese Academy of Sciences Bonumose submits that it is now unable to obtain a patent in China for its lawfully acquired intellectual property Lee Branstetter Lee Branstetter is a Professor of Economics and Public Policy at Carnegie Mellon University According to Prof Branstetter the Chinese government and its state-owned enterprises have over the past few decades extracted technology from foreign companies in a premeditated and systematic fashion with the aim of displacing leading multinational firms with Chinese firms in global markets He adds that technology transfer in China is neither voluntary nor market driven but occurs under duress Prof Branstetter posits that foreign firms must transfer technology or be excluded from the world’s largest market and multinationals that complain likely retribution He adds that China is adept at playing foreign companies against one another as a firm’s refusal to transfer technology may lead to a market opportunity for a foreign competitor He states further that numerous studies demonstrate that China’s enforcement of its intellectual property laws is uneven and biased against foreign firms To combat these problems Branstetter proposes a number of legal and policy initiatives to discourage the Chinese government from engaging in these practices BSA The Software Alliance BSA BSA is the leading trade association representing the global software industry before governments and in the international marketplace Both BSA and its members have significant concerns about Chinese policies and practices that limit Chinese market access and reduce the competitiveness of BSA members operating in China Four primary areas of concern are foreign direct investment restrictions including policies relating to Value-Added Telecommunications Services VATS restrictions on cross-border data transfers disclosure requirements for source code and enterprise standards and the development and imposition of China-specific technical standards BSA additionally states that market access barriers work in tandem with pressures to transfer technology or intellectual property As a result many companies may only access the Chinese market in exchange for putting their intellectual property at risk This amounts to U S businesses being forced to choose between protecting their IP or being closed out of the world’s largest market for technology products Jack Chang 4 Jack Chang is an attorney with years of professional experience working in China He serves as the Chairman of the Quality Brands Protection Committee and is presently Special Counsel to L Brands International Previously he served as Senior IP Counsel for Asia for General Electric from 2006 to 2014 and prior to that was in the in-house legal department of Johnson Johnson where he helped set up the company’s Asia Shanghai Office In his submission Mr Chang indicates that trademark counterfeiting bad faith trademark registrations copyright piracy and the theft of trade secrets remain challenging for some businesses in China but outlines ways in which the Chinese government has attempted to improve the IP landscape Furthermore Chang asserts that he has not encountered laws policies or practices that force technology transfer and that such transfer occur based on business considerations China Chamber of Commerce for Import and Export of Machinery and Electronic Products CCCME CCCME submitted comments in writing and at the hearing and is an independent nonprofit membership-based industry association based in China CCCME and its members believe that Chinese and U S companies have experienced improved IP protections in China in recent years CCCME characterizes assertions of Chinese government-driven tech transfer forced licensing arrangements and acquisitions as unfounded CCCME contends that any joint ventures and transfers of technology are done free of government interference and based on market conditions CCCME asserts that Chinese laws are not unreasonable or discriminatory because they apply equally to U S and Chinese companies CCCME adds that because Chinese firms are also targeted by cyber-attacks it is improper to blame the Chinese government for those attacks CCCME encourages the USTR to avoid undertaking unilateral action against China and to discontinue the Section 301 investigation China Chamber of International Commerce CCOIC CCOIC submitted comments in writing and at the hearing and is a national chamber of commerce representing enterprises associations and organizations that engage in international commercial activities in China CCOIC expresses concern that the Section 301 investigation is unilateral in nature and cautions that action pursuant to the investigation may trigger a trade war harming businesses and individuals in both countries CCOIC contends that there is no evidence that Chinese acts policies or practices are discriminatory or unreasonable as IP protections and the overall business environment in China have substantially improved and the Chinese government treats Chinese and foreign firms equally CCOIC states there is no evidence that the Chinese government pressures foreign companies to transfer their technology to Chinese companies The Chinese central government has specifically prohibited local governments from forcing technology transfer and CCOIC therefore believes that any decision to transfer or license technologies to Chinese parties is done freely pursuant to market considerations CCOIC submits that there is no evidence that a Chinese measure governing inbound technology licensing conflicts with market-oriented principles CCOIC contends that Chinese investment and acquisition in U S companies is done pursuant to normal commercial behavior without government directives CCOIC maintains that there is no evidence that either the Chinese government or Chinese military deployed hackers to invade U S commercial networks for commercial interests 5 China Enterprise Confederation CEC CEC is a national Chinese economic organization that functions as a link between the Chinese government and Chinese businesses with membership that consists of enterprises entrepreneurs and business associations CEC maintains that China’s acts practices and policies are neither unreasonable nor discriminatory CEC indicates that U S companies are not forced to transfer technologies to Chinese companies and that even when faced with investment restrictions they can instead license their technologies to Chinese companies CEC adds that China’s policies and practices are consistent with international standards and that China has significantly improved the broader business climate through better IP protections and increased market access China General Chamber of Commerce CGCC CGCC submitted comments both in writing and at the hearing CGCC is a U S nonprofit organization that represents Chinese enterprises operating within the United States CGCC contends that the Section 301 investigation is misguided because the acts policies and practices of the Chinese government are neither unreasonable nor discriminatory CGCC outlines legal and policy reforms that strengthen IP protections in China and adds that the government has undertaken additional measures for IP protection including the establishment of specialized IP courts and an action plan joined by 12 governmental bodies titled “The Action Plan for Protecting Foreign Companies’ Intellectual Property Rights” This plan is the first of its kind and chief amongst its goals is the implementation of harsh punishments for violations of IP rights and piracy laws CGCC states that U S companies are overwhelmingly treated as equals to Chinese domestic companies CGCC contends that China’s preferential procurement standards are not uncommon at the international level and it adds that any technology transfers or joint ventures are undertaken in good faith and free of Chinese government pressure CGCC adds that Chinese firms operate independently of government influence and make decisions—including those relating to acquisitions—consistent with management structures comparable to those found in U S firms CGCC concludes that it is unable to comment about cyber-theft and the role that the Chinese government may play because none of CGCC’s member companies have been affected China Intellectual Property Law Society CIPL CIPL commented in writing and at the hearing submitting that there is no basis for a determination that Chinese laws or regulations are either unreasonable or discriminatory for purposes of the Section 301 investigations CIPL emphasizes that China’s legal system is profoundly transformed accompanied by strengthened IPR protections for both Chinese and foreign firms CIPL provides a detailed outline of the evolution of China’s IP laws and reforms beginning in the 1980s CIPL acknowledges that further steps to strengthen IPR enforcement should be taken and it addresses a number of U S concerns reflected in the Section 301 investigation CIPL also submits that there is no direct evidence of adverse impacts caused by 6 TIER on cross border technology transactions and that Article 24 of TIER is consistent with free market standards of fairness Computing Technology Industry Association CompTIA CompTIA is a non-profit trade association that represents the information technology industry CompTIA submits that U S companies confront significant challenges when trying to sell IT products in China China is implementing a number of high-level programs in an opaque fashion which in some cases amount to discriminatory import substitution plans CompTIA identifies a number of other protectionist policies that harm U S IT companies including the forced transfer of technology and IP to Chinese joint venture partners weak enforcement against widespread IP theft discrimination against foreign IP under the guise of national security barriers imposed via China-specific standards cloud computing and telecommunications market access barriers and massive funding and subsidy programs for the development and acquisition of information and communications technologies Coalition of Service Industries CSI CSI is the leading industry association devoted exclusively to helping a broad spectrum of America’s service businesses and workers compete in world markets CSI submits that U S firms face increasingly difficult competitive circumstances in China which uses opaque rules licensing requirements discriminatory practices selective regulatory enforcement and other barriers to support Chinese firms at the expense of foreign competition CSI adds that in spite of various commitments by China’s government the Chinese business environment continues to present significant challenges for U S services suppliers including in the form of localization requirements equity caps that trigger technology transfer and the forced submission of proprietary source code and encryption measures to Chinese officials Affected sectors include data and technology telecommunications banking and securities insurance and express delivery Consumer Technology Association CTA CTA represents entrepreneurs technologists and innovators operating within the consumer technology industry Their membership includes companies from every facet of the consumer technology industry including manufacturers distributors developers retailers and integrators CTA states that its members have encountered a range of market barriers that have negatively impacted business operations in China CTA members suffer from inadequate IPR protections in China which contribute to rampant trademark counterfeiting and copyright piracy Additionally members have reported that technology transfer or IP transfer to Chinese parties is necessary in exchange for market access CTA acknowledges that it is unaware of official laws “on the books” that require technology transfer it reports that officials pressure foreign companies to transfer technology through oral communications to limit the creation of written evidence CTA adds that “secure and controllable” standards discriminate against foreign technology and although CTA acknowledges that some “secure and controllable” laws have been repealed it submits that others still are simply re-named or re-implemented at the provincial or local levels CTA states that it has received “numerous” reports of individuals 7 with ties to the Chinese government who have hacked U S companies’ computer networks to steal proprietary data and IP with the intent of assisting Chinese industry Dais Analytic Corporation Dais Dais creates nanotechnology-based applications for heating and cooling water treatment and energy storage It commends China for improvements in IPR protections and enforcement but identifies key areas for improvement including IPR protections embodied in employment agreements and the need for public disclosure of all rules and regulations governing joint ventures Dais explains that a potential Chinese joint venture partner cited the requirements JV rules and regulations that were not clearly and publicly outlined to pressure Dais to disclose its sensitive IP which the Chinese company used improperly DHH Washington DC Law Office DHH DHH provided comments in writing and at the hearing and is the Washington D C branch of the Beijing DHH law firm which focuses primarily on servicing U S and Chinese clients on international trade matters and cross-border investment DHH provides background on provision of China’s patent copyright and trademark laws and notes the creation of specialized intellectual property courts in China DHH asserts that Chinese practices related to tech transfer IP protections and innovation are not unreasonable or discriminatory and do not burden or restrict U S commerce DHH submits that IP protections have significantly improved over the last few decades DHH also contends that Chinese acquisitions of U S companies are market driven and are not directed by the Chinese government International Association of Machinists and Aerospace Workers IAM AFL-CIO IAM which provided comments in writing and at the hearing represents several hundred thousand active and retired workers throughout North America IAM contends that the U S transfer of technology to China has negatively affected U S aerospace workers China has relied on transferred production and other technology from Western companies to develop its domestic aerospace industry and in the process China has pitted Western competitors against one another for access to China’s growing aviation market This dynamic negatively impacts the U S industrial base in different but related ways including the loss of jobs and skills associated with the transferred technology and production additional job losses occurring as China uses transferred technologies to develop its own aerospace companies that will compete directly with U S aerospace firms and their suppliers and job losses in technological production Commission on the Theft of Intellectual Property IP Commission The IP Commission provided comments in writing and at the hearing and is an independent and bipartisan initiative of American leaders in both the private and public sectors formed in 2012 to document and assess the causes scale and dimensions of international intellectual property theft The IP Commission finds China to be the worst infringer of American IP stemming primarily from Chinese policies and laws While the IP Commission identifies recent improvements including specialized IP courts and a new IP enforcement “Action Plan ” IP 8 Commission data and other studies show a strong link between China’s stated industrial priorities and IP theft Additionally the Commission cites examples of “brazen” Chinese attempts to steal American intellectual property including the targeting of American industrial tradeshows to elicit sensitive information from firm representatives the systematic tracking of the National Science Foundation grantees and research of scientists at universities across the nation the attempted theft of Medrobotics intellectual property the theft and attempted sale of IBM’s source code by a former IBM software engineer to China’s National Health and Family Planning Commission the attempted acquisition of U S nuclear secrets from the Tennessee Valley Authority by a Chinese national and China Nuclear Power an SOE and the hacking of the computer networks of major U S defense contractors resulting in the theft of sensitive military and export controlled data by a Chinese national In the view of the IP Commission these examples collectively suggest rampant Chinese theft of American IP and sensitive information The Commission indicates that China effectuates forced technology transfer and theft including via industrial espionage conditioning market access on technology transfer tactical employment of vague regulations and laws to pressure U S firms into transferring their IP to avoid litigation and localization requirements that force U S firms to house sensitive data on the Chinese mainland According to the IP Commission these practices inflict significant damage to every sector of the U S economy While precise quantification of these damages is difficult the Commission draws on a variety of data sources proxies and economic models to estimate that Chinese theft of American IP currently costs between $225 billion and $600 billion annually Information Technology Industry Council ITI ITI is a policy and advocacy organization for innovation companies ITI submits that China is a crucial yet difficult market for companies in the technology sector ITI points to restrictions on cross-border data flows requirements for disclosure of IP and discrimination against U S cloud services providers as creating significant negative impacts on U S technology companies ITI adds that the Cybersecurity Law along with subsequent guidance and regulations is particularly problematic for U S technology companies In particular ITI states that firms in the cloud services industry may be forced to transfer valuable IP surrender use of their brand names and hand over operation and control of their businesses to Chinese companies in order to participate in the Chinese market ITI provides that initiation of a JV may be valuable under certain circumstances but that JV requirements in China are problematic when required and when the Chinese partner’s control over the JV is non-negotiable ITI raises concerns over Chinese standard setting that is inconsistent with pre-established international standards along with “secure and controllable” standards that discriminate against foreign technologies Information Technology Innovation Foundation ITIF ITIF provided comments in writing and at the hearing and submits that China has systematically ignored the spirit—and often the letter—of its commitments under its WTO obligations According to ITIF in China’s quest to become a global innovation leader it assimilates foreign technologies through tech transfer inducements mandates joint ventures and 9 conditions market access in exchange for transfer of important IP ITIF further submits that the Chinese state directs M A and FDI activity to target and acquire foreign enterprises with leading technologies in key industrial sectors ranging from semiconductors to manufacturing ITIF adds that these acquisitions and investment in foreign companies are often orchestrated by SOEs to serve strategic state goals ITIF states that Chinese acquisitions are complemented by aggressive cyber-theft programs to steal key foreign technologies and knowledge ITIF provides that together these mercantilist policies pose a direct and existential threat to the U S advanced technology industry as a whole and have caused an estimated 3 4 million American job losses from 2001 to 2015 Scott Kennedy Center for Strategic International Studies Scott Kennedy commented in writing and at the hearing and is the Deputy Director Freeman Chair in China Studies and the Director for the Project on Chinese Business and Political Economy at CSIS In his submission Kennedy stresses the widespread impact that Chinese IP policies and practices have on the structure of supply chains and the health of business models China’s broad industrial policy is to drive its economy up the value-added chain and toward advanced technologies To effectuate these industrial goals China has developed policies that foster technological creation and innovation and encourage foreign acquisitions through both cooperative and coercive means While Mr Kennedy acknowledges that unilateral penalties may be appropriate he maintains that any action undertaken by the United States should be accompanied by 1 long-term engagement with stakeholders in China 2 support for international fora like the WTO that develop IP standards and adjudicate disputes 3 collaboration with U S allies and other nations harmed by Chinese practices and 4 strengthening of the legal educational and commercial environment for IP protection and development within the United States Dr Catherine Lin-Hendel Dr Lin-Hendel is a small business owner who has experienced patent infringement by Chinese SOEs Dr Lin-Hendel submits that the value of her intellectual property which has been stolen is upwards of hundreds of millions of dollars She further states that all of the infringing entities’ websites—which utilize her intellectual property—are accessible from the United States Dr Lin-Hendel also states that she has attempted to resolve the dispute with the infringing entities but has been unable to do so in China In addition to her written submission Dr Lin-Hendel provides a number of letters emails and tables outlining her various patents which have been infringed The Los Angeles Area Chamber of Commerce LACC LACC is a business association representing companies in the greater Los Angeles area LACC recommends that the USTR drop the 301 investigation and instead address IP concerns in a “more precise and effective” manner that will not negatively affect the positive aspects of the U S relationship with China James Lewis Center for Strategic and International Studies 10 CSIS is a bipartisan non-profit policy research organization James Lewis submits on behalf of CSIS that the central issue with respect to the 301 investigation is not IP theft but the unfair treatment of U S companies in China Mr Lewis outlines the range of policy tools utilized by the Chinese government to build “national champions” and drive economic growth These include the licit and illicit acquisition of foreign technologies generous subsidies and nontariff barriers abuse of power by the Chinese government to extract concessions or block foreign competition in the Chinese market forcible coproduction policies and IP theft and cyber espionage According to Mr Lewis IP theft and cyber-espionage are of particular concern because they play an important role in the acquisition of technologies necessary to drive the broader Chinese industrial policy Additionally Mr Lewis provides that many companies have been complacent in pushing back against illicit Chinese activity for fear of retribution and many do not believe the U S will take action to support them against Chinese retaliation Motor Equipment Manufacturers Association MEMA MEMA represents 1 000 vehicle suppliers that manufacture and remanufacture new original equipment and aftermarket components and systems for use in passenger cars and heavy trucks MEMA submits that China is a large and important trading partner for its member companies but that the China market remains a challenge for motor vehicle suppliers MEMA states that policies and practices that place IPR at risk include technology localization requirements stemming from with government industrial planning a pending ban on the use of Virtual Private Networks China’s cybersecurity laws its system of duties and value added taxes that is increase usage of counterfeit products and the inadequate enforcement of IP laws Michelman Michelman is a family-owned small business that develops and manufactures materials for coatings used in printing food and medical packaging advanced composite materials and industrial manufacturing Michelman states that the IPR landscape in China has improved and that violations of IP laws in China no longer take place with impunity Michelman adds that a number of challenges remain in IP protection in China In 2016 Michelman discovered that four Chinese companies were selling primer for digital printers with strikingly similar profiles to the primer that Michelman had sold in China for several years After conducting an analysis of the primers Michelman suspects that the products sold by the Chinese companies are in fact relabeled Michelman primers At this stage Michelman has only consulted with outside legal counsel but believes that to take even low-level action e g a cease and desist letter against the suspected companies could result in crippling retaliatory legal action National Association of Manufacturers NAM NAM is the largest manufacturing association in the United States representing more than 14 000 businesses of all sizes in every industrial sector and in all 50 states NAM submits that the Chinese market is a consistent trouble spot for U S manufacturers as they face a range of market-distorting and harmful industrial policies These including investment restrictions licensing and approval processes localization requirements measures that encourage technology 11 transfer and restrict cross-border data flows weaknesses in trade secrets protections and policies and enforcement practices in IP-related areas such as standards-setting and competition law National Foreign Trade Council NFTC NFTC represents more than 200 companies with membership spanning the U S economy NFTC states that overall IP landscape in China is improved but that foreign firms and investors continue to face innovation-related difficulties in China NFTC outlines challenges that disadvantage foreign firms including the indigenous innovation product accreditation system measures that preclude U S companies from offering cloud services in China except by transferring valuable IP and control of operations to Chinese companies poor trade secrets protections disclosure requirements in standards creating processes technology licensing measures and others Congressman Bill Pascrell Congressman Pascrell is the Ranking Member of the House of Representatives Ways and Means Subcommittee on Trade He expresses the concern that a number of Chinese policies and practices diminish IP rights in China including burdensome approval requirements for the import and export of clinical investigational materials and discrimination against innovators lacking localized manufacturing capacities Congressman Pascrell calls on the Chinese Food and Drug Administration to establish an a patent dispute resolution mechanism prior to the marketing of generic competition and spotlights increasing sales of falsified and counterfeit medicines in China that not only violate intellectual property rights but pose health and safety risks Pharmaceutical Research and Manufacturers of America PhRMA PhRMA represents companies that invent manufacture and distribute valuable medicines globally In its submission PhRMA states that the pharmaceuticals industry holds longstanding concerns over lack of regulatory data protection ineffective patent enforcement and inconsistent patent examination guidelines PhRMA outlines a series of proposed Chinese policies and reforms in regulatory data protection patent enforcement and patent examination that may address its member companies’ longstanding concerns It contends that continued engagement by the U S and other stakeholders will help ensure the full implementation of these necessary reforms Rhodium Group Rhodium is an economic research firm that combines policy experience quantitative economic tools and on-the-ground research to analyze disruptive global trends Rhodium outlines key findings from its long-term study of Chinese FDI in the United States Rhodium notes that Chinese investment has significantly increased in the U S and has spread to all sectors of the U S economy and it adds that while data do not support any definitive conclusions about causality between industrial policy and Chinese investment patterns in general the relationship between industrial policy and targeted investment in individual sectors is readily apparent Rhodium cites the example of the semiconductor industry where both 12 private investors and Chinese government funds have embarked on an unprecedented buying spree of assets along the semiconductor production chain in Asia Europe and North America Rhodium also states that further analysis of drivers of Chinese FDI must be undertaken to better understand the relationship between the recent and extraordinary deployment of state financing with “traditional” FDI transactions Semiconductor Industry Association SIA SIA represents the U S semiconductor industry which is one of America’s top export industries SIA asserts that China pressures U S semiconductor companies to develop their IP within China or transfer their IP to Chinese entities This practice has long concerned U S firms across sectors and has continued to plague the semiconductor industry in spite of a decade of dialogue on this issue SIA provides that China has made progress in conforming to the rulesbased trading system since its WTO accession however SIA’s member companies continue to experience challenges in China SIA states that Chinese state directed subsidies in the form of investment funds credit lines and grants target companies and technologies at all levels of the semiconductor development and fabrication lifecycle SIA adds that semiconductor companies face pressure to disclose or transfer their IP This pressure is exhibited in a variety of laws rules and policies that may induce or force the localization of semiconductor design or manufacturing processes to achieve compliance and induce technology transfer as a condition of market access SIA points to further challenges semiconductor firms have experienced including secure and controllable requirements the imposition of non-market terms in licensing and technology contracts widespread counterfeiting and the theft or misappropriation of trade secrets and other IP Skadden Arps Slate Meagher Flom LLP Skadden Skadden’s submission is on behalf of a client that has operated in China and has suffered from intellectual property theft The theft caused a loss of millions of dollars of sales market share good will and reputation The submission contains extensive business confidential information and thus has received confidential treatment SolarWorld SolarWorld submitted comments in writing and at the hearing SolarWorld is one of a group of U S entities targeted by five Chinese military hackers in May 2014 SolarWorld submits that the Chinese government-backed theft of its intellectual property inflicted a particularly acute injury to the company along with other U S solar manufacturers SolarWorld provides that government-subsidized Chinese solar cells and panels that benefitted from the stolen trade secrets have flooded the U S market since 2012 According to SolarWorld this has driven nearly 30 U S manufacturing firms out of business and has left the U S solar manufacturing industry on the brink of collapse SolarWorld adds that the DOJ indictment against Chinese military hackers outlines the scope of the hack along with the degree of involvement of Chinese SOEs and the orchestrated timing of the hack with the dumping of solar panels into the U S market 13 Stewart and Stewart Terence P Stewart is the managing partner of Stewart and Stewart a firm that has represented various U S manufacturing and agricultural industries in trade proceedings and negotiations Stewart submits that the United States should be deeply concerned about China’s laws regulations and practices that distort trade flows and restrict foreign technology leaders leading to unsustainable trade imbalances Stewart describes industries that have been subject to technology transfer requirements including in the automotive semiconductor and high speed rail sectors Technology transfer requirements are imposed on firms in these industries through forced joint venture requirements and the imposition of technology licensing terms Stewart notes the elimination of explicit technology transfer requirements in the Chinese automotive sector but submits that subsequently enacted policies achieve technology transfer using less explicit means Stewart provides a detailed outline of China’s WTO accession obligations and reiterates concerns laid out in previous USTR reports on China Telecommunications Industry Association TIA TIA represents approximately 250 manufacturers and suppliers of high-tech telecommunications networks and services in the U S and around the world TIA members are concerned over China’s growing slate of security rules that disadvantage U S exporters In its submission TIA outlines specific policies and their attendant authorizing legislation that are harmful to its members These include security testing of ICT products by the Chinese government as a requirement for market entry equity caps and operational restrictions on cloud computing restrictions on cross-border data flows standards-setting approaches that depart from global norms and the implementation of its competition policy TIA adds that China is increasingly excluding foreign ICT equipment from many Chinese information networks in a variety of industries US-China Business Council USCBC USCBC which testified at the hearing represents 200 American companies engaged in business across all industries and sectors in China In its submission USCBC references a number of surveys it conducted with its member companies that demonstrate significant concerns over technology transfer and IP protections in China USBC firms report slow improvement in Chinese IP protections and many also face acute tech transfer pressure USCBC firms view China’s IP protections as slowly improving To effectuate tech transfer USCBC firms cited the use of opaque and discretionary administrative approval processes mandatory joint venture requirements foreign equity limitations discriminatory government procurement programs and preferences for localization and domestic IP USCBC adds that U S companies seeking to operate in China face an unbalanced negotiating environment Although negotiations involving tech transfer or other equity restrictions are generally part of normal business negotiations USCBC states that Chinese companies have an inherently stronger position relative to their foreign negotiating partners USCBC recommends that the U S should pursue improved IP protections for American firms through reforms of harmful Chinese policies but urges the USTR to avoid protectionism and seek reforms consistent with market-driven principles 14 U S Chamber of Commerce The U S Chamber is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes in all sectors and regions as well as state and local chambers and industry associations The Chamber submits that insufficient IP protections is consistently one of the top regulatory challenges facing Chamber members The Chamber outlines a number of core elements of China’s regulatory regime that are both restrictive and burden U S companies These include equity caps that create investment barriers state sponsored acquisitions of R D intensive products administrative licensing procedures which enables the state to influence negotiations between Chinese and foreign companies resulting in non-market based terms discriminatory technology licensing policies discriminatory standardssetting practices forced security reviews that expose source code and other sensitive IP and localization requirements that discriminate against foreign companies and make IP vulnerable to exposure The Chamber further emphasizes that there is a fundamentally asymmetric playing field where foreign companies face immensely restrictive policies and barriers when trying to operate in China while Chinese companies face few to no reciprocal barriers when operating in global markets United States Council for International Business USCIB USCIB members include top U S based global companies and professional services firms from every sector of the economy with operations in every region of the world USCIB identifies a range of Chinese government policies and practices that disadvantage U S firms relative to their Chinese competitors Specifically USCIB submits that China is utilizing its Anti-Monopoly Law in a discriminatory manner to target foreign companies’ intellectual property and as a policy tool to support its national industrial policy objectives The discriminatory application of this law is aided by procedural inadequacies that make it difficult for companies to mount an effective defense USCIB additionally points to FDI limitations and joint venture requirements in a number of sectors which limit competition and encourage the transfer of technology to Chinese companies USCIB also describes how the Cybersecurity Law and related measures disadvantage U S companies in the Chinese market United States Steel Corporation U S Steel U S Steel asserts that the Chinese government has been conducting cyber-theft operations in the United States against American companies for years and that U S Steel was the subject of Chinese cyber-hacking attacks on the company’s network and another attack involving phishing that resulted in the exfiltration and exploitation of its confidential business information While U S Steel notes that the United States indicted five Chinese military officials for computer hacking and economic espionage in connection with the hacks of U S Steel and others it states that no further action was taken on behalf of the victims U S Steel recommends that the scope of the investigation include how to improve procedures and perhaps trade laws such that victims of cyber-theft can obtain redress 15 Wiley Rein LLP Wiley Rein is a law firm based in Washington D C Wiley submits that a web of industrial policies is designed to absorb assimilate and re-innovate foreign technology and IP to help Chinese firms gain a global advantage across a broad spectrum of industries Wiley outlines a variety of Chinese policies designed to provide competitive advantages to Chinese firms including via industrial policy and state support for technology acquisitions overbroad national security laws and regulations state-supported theft of trade secrets and other IP and biased enforcement of the competition law Wiley concludes that the Chinese government engages in a wide variety of unreasonable and discriminatory policies and practices that significantly burden U S commerce by causing U S companies to suffer direct harm Wiley submits that these policies and practices ultimately inhibit companies’ ability to invest in future growth and innovation YANG Gouhua Yang Gouhua is a Professor of Law at Tsinghua University in Beijing China Prof Yang submits that the transfer of technology to a Chinese enterprise and the terms of those transfers are a product of voluntary agreements undertaken by the parties He further asserts that there is no external intervention which forcibly pressures firms to transfer technology Prof Yang also states that non-market based licensing schemes merely safeguard the legitimate rights and interests of licensees who he asserts hold a weak position in international technology transfer negotiations Prof Yang also submits that Chinese acquisitions in the United States are normal commercial activities not subject to the central government’s direction and that both the United States and China should work to strengthen cooperation to combat cybercrime Stephen Zirschky Stephen Zirschky is an attorney with over 30 years of experience working in-house in multinational corporations and has been engaged in extensive business transactions with Chinese companies since 1994 He states that there is a clear system of discretionary administrative approval processes along with other restrictions adopted by China that pressure transfer of IP to Chinese companies and or SOEs Mr Zirschky states that often the language in Chinese licensing and business registration forms are unclear on technology transfer requirements but officials within regional Chinese centers clarify in person that transfer of technology is expected Subsequent to the induced technology transfer governmental agencies or SOEs obtain the technology “for review” and U S companies then discover their product has been copied and sold by different Chinese companies Mr Zirschky explains that many companies do not come forward to comment on this practice out of fear that they will lose access to the Chinese market 16 APPENDIX 2017 Catalogue Guiding Foreign Investment “Restricted” Category Industries Sector 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Chinese co-investor req Chinese investor control req Specific foreign ownership caps if specified and other restrictions Agriculture Forestry Animal Husbandry Fishery and Related Industries Selection and breeding of new types of agricultural goods and X X production of seeds Mining Exploration and development of oil and natural gas including coalbed X methane oil shale oil sands and shale gas CJVs EJVs only Surveying and mining of special and rare coal X X Surveying and mining of graphite Manufacturing Publications printing X X Rare earth smelting separation and tungsten smelting X CJVs EJVs only Manufacture of whole vehicles and special vehicles Chinese parties shall hold no less than 50% of shares Each foreign party can have max 2 JVs manufacturing the same type of X vehicles passenger commercial motorcycle If foreign co ’s Chinese partner merges with another domestic auto manufacturer foreign company not bound by the “2 JV” limit Design manufacture and repair of ships including subparts X X Trunk regional aircraft design manufacturing and maintenance 3-ton and above helicopter design and manufacturing ground surface effect of aircraft manufacturing and unmanned aerial vehicles manufacture X X of aircraft for ground or water surface effects design and manufacture of unmanned aerial vehicle and aerostatics General aircraft design manufacture and maintenance X CJVs EJVs only Production of satellite television receiving and broadcasting equipment and key parts Electricity Gas and Water Production and Supplies Construction and operation of nuclear power plants X X Construction and operation of electricity grids X X Construction and operation of gas heat supply and water drainage X X networks in cities with a population of more than 500 000 Transportation Shipping Storage and Postal Industries Construction and operation of main line railroad networks X X Passenger train transportation companies X X Domestic water transport companies international maritime transport X X companies Int’l maritime transport Domestic water cos are CJVs EJVs transport cos only Construction and operation of civil airports X X Public air transport company Foreign and affiliated enterprise investment not to exceed 25% X X and the legal representative shall have Chinese nationality General aviation companies – agricultural forestry and fisheriesX Ag forestry Company’s legal representative must have Chinese nationality related general aviation companies fisheries-related general X Other general aviation cos must be aviation cos JVs Information Transmission Software and IT Services 21 Telecommunications companies X X Value-added telecom services foreign investment ratio no more than 50% except e-commerce basic telecom business Chinese majority control Wholesale and Retail Trade 22 23 24 Procurement and wholesale of rice wheat and corn Shipping agents Construction and operation of gas stations X X X X Retail operations over 30 chain stores established by the same foreign investor that sell different types and brands from multiple suppliers must have majority Chinese control Finance and Insurance 25 Banks X 26 27 28 Insurance companies Securities companies Future trading companies 29 Market research 30 31 32 33 34 35 X X X Leasing and Business Services X Individual Chinese commercial banks no one foreign financial institution or the affiliates it controls or jointly controls as a founder or a strategic investor shall own more than 20% no combination of foreign financial institutions or the affiliates they control or jointly control as a founder or strategic investor shall own more than 25% Foreign stake in life insurance companies must not exceed 50% X X X Radio TV X listener viewership Generally CJVs EJVs market research only must be Chinese majority controlled Scientific Research Technology Services and Geological Survey Industries Survey and mapping companies X X Education Pre-school general high school and higher education institutions – X CJVs only X Pre-schools ordinary senior high schools and higher learning institutions are limited to Chinese parties playing the leading role Healthcare and Social Work Services Medical institutions X CJVs EJVs only Cultural Sports and Entertainment Companies Radio and television program production and film production X CJVs only Construction and management of movie theaters X X Performance agency companies X X Source Catalogue of Industries for Guiding Foreign Investment 2017Amendment NDRC and MOFCOM Order No 4 issued June 28 2017 Note that the above list reflects all the industries in the “restricted” category Not all of “restricted” industries are subject to JV requirements Some “restricted” industries are also included in the “encouraged” list APPENDIX Appendix E Statement of the Office of IP and Industry Research Alliances IPIRA at the University of California Berkeley The Office of IP and Industry Research Alliances IPIRA at the University of California Berkeley licenses its inventions and other IP rights around the world for various purposes including humanitarian purposes Companies in China sometimes inform IPIRA that TIER imposes mandatory terms to all entities licensing or importing technologies into China For the following three reasons the Regents of the University of California through UC Berkeley is unable to accept the following terms 1 TIER requires the University the licensor to guarantee that the University’s IP rights do not infringe other IP rights including those that are owned by third parties It is not feasible for the University to make this determination It is the company’s own due diligence to perform Even if the University were to perform a relevant search and analysis in an attempt to meet the requirement the search and analysis result would immediately become obsolete due to the issuance of patents and or creation of new IP rights anywhere around the world In a typical license the search and analysis i e a “freedom to operate analysis” and or an “infringement analysis” is a duty that falls to the licensee based on the products it intends to commercialize not the licensor The University’s license states that it makes no representation that practice of the licensed rights do not infringe other IP rights 2 TIER requires the University to guarantee or warrant that a given IP right is suitable for or must work for a particular commercial purpose This requirement goes beyond what the University can accept or state in an IP license Instead the University in all of its licensing transactions states the opposite that the IP rights are provided without warranty or guarantee or suitability for a particular commercial purpose That is put simply the provided rights are merely IP rights that were invented in the course of performing research not a product 3 TIER’s mandatory provision on improvements is similarly unacceptable to the University The University always reserves the right to practice the licensed invention for its own educational and research purposes It also extends that right to others in the nonprofit sector The University needs the freedom to continue to practice the invention and to make improvements for and on its own behalf and for the global nonprofit research community If the University were to agree on the future disposition of yet-to-be invented improvements that agreement could stifle research academic freedom and could sweep in the rights of future inventors or authors of copyrights without their knowledge or consent Typical university IP licenses limit the scope to a stated priority patent application and claims in continuing and or corresponding foreign patents that are entitled to the priority filing date of that application Since the University is unable to accept the TIER terms stated above in order to mitigate and minimize risks the University has to identify a licensee that can accept standard terms in these areas – for example a U S affiliate of a Chinese company The University has been informed that Chinese IP law is in a state of flux and that the former demands may not be required in every license in every situation The University is submitting the items above with the hope that changes to Chinese IP law will give Chinese licensees more latitude in obtaining IP rights that arise from academic research