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USCC 2015 ANNUAL REPORT

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1

2015
REPORT TO CONGRESSof theU.S.-CHINA ECONOMIC ANDSECURITY REVIEW COMMISSION
ONE HUNDRED FOURTEENTH CONGRESSFIRST SESSIONNOVEMBER 2015

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Printed for the use of the
U.S.-China Economic and Security Review Commission
Available via the World Wide Web: http://www.uscc.gov

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1

2015
REPORT TO CONGRESSof theU.S.-CHINA ECONOMIC ANDSECURITY REVIEW COMMISSION
ONE HUNDRED FOURTEENTH CONGRESSFIRST SESSIONNOVEMBER 2015

U.S. GOVERNMENT PUBLISHING OFFICEWASHINGTON : 2015

For sale by the Superintendent of Documents, U.S. Government Publishing OfficeInternet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800
Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

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Printed for the use of the
U.S.-China Economic and Security Review Commission
Available via the World Wide Web: http://www.uscc.gov

U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
Hon. WILLIAM A. REINSCH, Chairman
Hon. DENNIS C. SHEA, Vice Chairman

COMMISSIONERSCAROLYN BARTHOLOMEWPETER BROOKESROBIN CLEVELANDJEFFREY L. FIEDLER
Hon. CARTE P. GOODWINDANIEL M. SLANE
Hon. JAMES M. TALENT
Hon. KATHERINE C. TOBINMICHAEL R. WESSELLARRY M. WORTZELMICHAEL R. DANIS, Executive Director(II)

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dkrause on DSKHT7XVN1PROD with USCCThe Commission was created on October 30, 2000, by the Floyd D. Spence
National Defense Authorization Act for 2001 § 1238, Pub. L. No. 106–398,(Oct. 30, 2000) (codified at 22 U.S.C. § 7002 (2001)); as amended by theTreasury and General Government Appropriations Act for 2002 § 645 (regarding employment status of staff) & § 648 (regarding changing annual
report due date from March to June), Pub. L. No. 107–67, (Nov. 12, 2001);
as amended by Division P of the ‘‘Consolidated Appropriations Resolution,
2003,’’ Pub. L. No. 108–7 (Feb. 20, 2003) (regarding Commission namechange, terms of Commissioners, and responsibilities of Commission); as
amended by the Science, State, Justice, Commerce, and related agencies
Appropriations Act of 2006, Pub. L. No. 109–108 (Nov. 22, 2005) (regarding
responsibilities of Commission and applicability of FACA); as amended
by Pub. L. No. 110–161 (Dec. 26, 2007) (regarding changes in annual
report due date, submission of financial reports, printing and binding ofCongressional reports, employee compensation and performance reviews,
and applicability of House rules for travel by members and staff); as
amended by the Carl Levin and Howard P. ‘‘Buck’’ McKeon National Defense Authorization Act for Fiscal Year 2015 § 1259b, Pub. L. No. 113–291 (Dec. 19, 2014) (regarding changes to matters for discussion in theannual reports of the Commission).
The Commission’s full charter http://www.uscc.gov/about/uscc-charter andStatutory Mandate http://www.uscc.gov/about/fact_sheet are available via
the World Wide Web.

U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSIONNOVEMBER 18, 2015
The Honorable Orrin Hatch,President Pro Tempore of the U.S. Senate, Washington, DC 20510
The Honorable Paul D. Ryan,
Speaker of the U.S. House of Representatives, Washington, DC 20510
DEAR SENATOR HATCH AND SPEAKER RYAN:
On behalf of the U.S.-China Economic and Security Review Commission, we are pleased to transmit the Commission’s 2015 Annual
Report to the Congress—the thirteenth major Report presented toCongress by the Commission—pursuant to Public Law 106–398(October 30, 2000), as amended by Public Law No. 109–108 (November 22, 2005), as amended by Public Law No. 110–161 (December 26, 2007), as amended by Public Law No. 113–291 (December
19, 2014). This Report responds to the mandate for the Commission‘‘to monitor, investigate, and report to Congress on the national security implications of the bilateral trade and economic relationshipbetween the United States and the People’s Republic of China.’’
The Commission reached a broad and bipartisan consensus, approving the Report by a vote of 11 ayes to 1 nay.
In accordance with our mandate, this Report, which is current asof October 27, includes detailed treatment of many of the areas
identified by Congress for our examination and recommendation.
These areas are:
• The qualitative and quantitative nature of the transfer ofUnited States production activities to the People’s Republic ofChina, including the relocation of manufacturing, advanced
technology and intellectual property, and research and development facilities, the impact of such transfers on the national security of the United States (including the dependence of thenational security industrial base of the United States on imports from China), the economic security of the United States,and employment in the United States, and the adequacy ofUnited States export control laws in relation to the People’s
Republic of China;• The effects of the need for energy and natural resources in the
People’s Republic of China on the foreign and military policiesof the People’s Republic of China, the impact of the large andgrowing economy of the People’s Republic of China on worldenergy and natural resource supplies, prices, and the environment, and the role the United States can play (including
through joint research and development efforts and technological assistance) in influencing the energy and natural resource policies of the People’s Republic of China;

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• Foreign investment by the United States in the People’s Republic of China and by the People’s Republic of China in theiii

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United States, including an assessment of its economic and security implications, the challenges to market access confronting potential United States investment in the People’s Republic of China, and foreign activities by financial institutionsin the People’s Republic of China;• The military plans, strategy and doctrine of the People’s Republic of China, the structure and organization of the People’s
Republic of China military, the decision-making process of thePeople’s Republic of China military, the interaction between
the civilian and military leadership in the People’s Republic ofChina, the development and promotion process for leaders in
the People’s Republic of China military, deployments of thePeople’s Republic of China military, resources available to thePeople’s Republic of China military (including the development
and execution of budgets and the allocation of funds), force
modernization objectives and trends for the People’s Republicof China military, and the implications of such objectives andtrends for the national security of the United States;• The strategic economic and security implications of the cybercapabilities and operations of the People’s Republic of China;• The national budget, fiscal policy, monetary policy, capital controls, and currency management practices of the People’s
Republic of China, their impact on internal stability in the
People’s Republic of China, and their implications for theUnited States;• The drivers, nature, and implications of the growing economic,
technological, political, cultural, people-to-people, and security
relations of the People’s Republic of China’s with other countries, regions, and international and regional entities (including multilateral organizations), including the relationshipamong the United States, Taiwan, and the People’s Republic ofChina;• The compliance of the People’s Republic of China with its commitments to the World Trade Organization, other multilateralcommitments, bilateral agreements signed with the UnitedStates, commitments made to bilateral science and technology
programs, and any other commitments and agreements strategic to the United States (including agreements on intellectual
property rights and prison labor imports), and United States
enforcement policies with respect to such agreements; anddkrause on DSKHT7XVN1PROD with USCC

• The implications of restrictions on speech and access to information in the People’s Republic of China for its relations with
the United States in economic and security policy, as well as
any potential impact of media control by the People’s Republicof China on United States economic interests.
The Commission conducted seven public hearings, taking testimony from 62 witnesses from the executive branch, industry,
academia, think tanks and research institutions, and other organizations. For each of these hearings, the Commission produced atranscript (posted on its website at www.uscc.gov). The Commission

iv

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received a number of briefs by executive branch agencies, the Intelligence Community, and the Department of Defense, including classified briefings on China’s naval modernization, China’s offensive
missile forces, China’s activities in the South China Sea and Indian
Ocean, and cyber counterintelligence issues related to China. The
Commission is preparing a classified report to Congress on theseand other topics. The Commission also received briefs by foreign
diplomatic and military officials as well as U.S. and foreign nongovernmental experts.
Commissioners made official delegation visits to China, Kazakhstan, Uzbekistan, Vietnam, and Hong Kong to hear and discuss
perspectives on China and its global and regional activities. In
these visits, the Commission delegation met with U.S. diplomats,host government officials, business representatives, academics,
journalists, and other experts.
The Commission also relied substantially on the work of our excellent professional staff and supported outside research in accordance with our mandate.
The Report includes 37 recommendations for Congressional action. Our ten most important recommendations appear on page 32
at the conclusion of the Executive Summary.
We offer this Report to Congress in the hope that it will be usefulas an updated baseline for assessing progress and challenges in
U.S.-China relations.
Thank you for the opportunity to serve. We look forward to continuing to work with you in the upcoming year to address issuesof concern in the U.S.-China relationship.
Yours truly,

Dennis C. Shea
Vice Chairmanv

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William A. Reinsch
Chairman

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CONTENTS
Page

TRANSMITTAL LETTER TO THE CONGRESS ...............................................................
COMMISSIONERS APPROVING THE REPORT ..............................................................
EXECUTIVE SUMMARY ...............................................................................................
KEY RECOMMENDATIONS ...................................................................................
INTRODUCTION ..........................................................................................................

iii
vi
1
32
35

2015 REPORT TO CONGRESS OF THE
U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
Chapter 1: U.S.-China Economic and Trade Relations .............................
Section 1: Year in Review: Economics and Trade .............................................
Section 2: Foreign Investment Climate in China ..............................................
Section 3: China’s State-Led Market Reform and Competitiveness Agenda ..
Section 4: Commercial Cyber Espionage and Barriers to Digital Trade in
China .................................................................................................................
Recommendations ..................................................................................................

192
226

Chapter 2: U.S.-China Security Relations ....................................................
Section 1: Year in Review: Security and Foreign Affairs .................................
Section 2: China’s Space and Counterspace Programs .....................................
Section 3: China’s Offensive Missile Forces .......................................................
Recommendations ..................................................................................................

229
229
272
338
389

Chapter 3: China and the World .....................................................................
Section 1: China and Central Asia .....................................................................
Section 2: China and Southeast Asia .................................................................
Section 3: Taiwan .................................................................................................
Section 4: Hong Kong ..........................................................................................
Recommendations ..................................................................................................

391
391
428
491
533
561

Comprehensive List of the Commission’s Recommendations ..................

563

Additional Views of Commissioners ................................................................

569

Appendices:
Appendix I:
Charter ..........................................................................................
Appendix II:
Background of Commissioners .....................................................
Appendix III: Public Hearings of the Commission During 2015 ......................
Appendix IIIA: List of Witnesses Testifying Before the Commission
During 2015 ..........................................................................................................
Appendix IV: List of Interlocutors During Commission Fact-Finding Trips
to Asia During 2015 .............................................................................................
Appendix V:
List of Research Material ............................................................
Appendix VI: Acronyms and Abbreviations .......................................................
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2015 Commission Staff and Acknowledgements ..........................................

39
39
72
140

575
587
597
601
605
609
615
619

(VII)

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EXECUTIVE SUMMARY
Chapter 1: U.S.-China Economic and Trade Relations
Section 1: Year in Review: Economics and Trade
Although China’s gross domestic product (GDP) reportedly grewat 7 percent in the first half of 2015, the year was marked byrecord-setting downturns and mismanaged government interventions in the workings of China’s economy. China has acknowledgedthat its economy, which over the past three decades has been driven by high levels of investment in export-oriented manufacturing
capacity and infrastructure, needs to shift to a consumption-driven
growth model. To address this structural imbalance, newly installed Chinese President and General Secretary of the Chinese
Communist Party (CCP) Xi Jinping laid out a sweeping economic
reform agenda in the 2013 Third Plenary Session of the 18th CCP
Central Committee (hereafter ‘‘Third Plenum’’).* However, responding to signs of economic weakness in 2015, including falling global
exports, China’s government resorted to stimulus measures tochase growth targets by rolling back some reforms, intervening inan effort to control the faltering stock market, and devaluing its
currency, the renminbi (RMB).
Following a rapid climb in the first half of 2015, Chinese stocks
began falling in mid-June, wiping out about $4 trillion in value.
Given the importance of the stock market in propping up sluggish
economic growth, the Chinese government responded to the collapse with a heavy hand: ordering brokerages to buy shares, forbidding large shareholders from selling, sending police to root out‘‘malicious’’ sellers, ordering state-owned companies and pension
funds to invest in equities, and halting trading in many companies.
The government also censored information, punished journalists forfocusing on the bad news, and warned people against spreading‘‘rumors’’ about the stock market rout.
China’s unfair treatment of U.S. companies exporting to or investing in China and Beijing’s failure to uphold its World Trade
Organization commitments continue to trouble the bilateral relationship. Despite China’s manufacturing slowdown, a substantial
Chinese trade surplus continues to sour the U.S. trade relationshipwith China. In 2014, the U.S. goods trade deficit with China increased by 7.5 percent year-on-year to $342.6 billion, a record. In
the first eight months of 2015, the U.S.-China trade deficit in goods
was $237.3 billion, 9.7 percent increase over the same period in
2014. China’s surprise devaluation of the RMB in August also

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* Although President Xi said at the Third Plenum that the market will play a ‘‘decisive’’ rolein all aspects of the economy, the Chinese government’s view of economic reform emphasizes
continued dominance of the state in the economy.

(1)

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raised concerns among some observers and policymakers that
China was once again trying to boost its exports by manipulating
the RMB to make exports cheaper. The devaluation came amid
China’s efforts to promote a greater international role for the RMB,
including making it one of the reserve currencies used by the International Monetary Fund. China’s aspirations for the RMB as aninternational currency conflict with its practice of limiting the currency’s convertibility and exposure to international currency markets.
Conclusions• In 2014, the U.S. goods trade deficit with China increased by
7.5 percent year-on-year to $342.6 billion, a new record. In thefirst eight months of 2015, the U.S. trade deficit in goods with
China totaled $237.3 billion, a 9.7 percent increase year-onyear. Over the same period, U.S. deficit with China in advanced technology products reached $72.7 billion. China stalledon liberalizing key sectors in which the United States is competitive globally, such as services.
• As a consequence of domestic economic weakness, China’s stated rebalancing policies appear to have been put on hold. Instead, fearful of a protracted slowdown, the Chinese government has been intervening in various sectors of the economy,
including the stock market. However, the government’s intervention, which failed to arrest the stock market’s fall and stabilize the economy, undermined public confidence in the abilityof China’s policymakers to successfully manage the economy.
• Although it has been ten years since China moved the renminbi (RMB) to a managed float, the government continues tointervene in foreign exchange markets. For the first half of2015 the government has prevented the RMB from depreciating, seeking its inclusion in the International Monetary
Fund’s Special Drawing Rights basket of reserve currencies.
However, on August 11, the People’s Bank of China unexpectedly devalued the RMB, giving rise to fears among observers
and policymakers that the economic slowdown was becoming
entrenched.
• The U.S. government’s efforts to address tensions in the U.S.China relationship through bilateral dialogue continue to yield
limited results. The latest Strategic and Economic Dialogue
concluded with some progress on environmental and financial
issues, but reached an impasse in addressing fundamental
strategic and economic issues such as cybersecurity, anticorruption cooperation, and investment barriers to foreign
firms in many industries.
• President Xi came to the United States in September on astate visit, and although Presidents Obama and Xi discussed
several issues of concern, including commercial cyber espionage
by Chinese actors, there were few significant breakthroughs.
Among outcomes were the statements by the two presidents
that neither country will engage in cyber espionage (though
China continued to deny any involvement in commercial cyber

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theft) and commitments to enhance cooperation on combatting
climate change.
• China’s adherence to the World Trade Organization principles
and its Protocol of Accession remains spotty. Most recently, theOffice of the U.S. Trade Representative has engaged China
over a program that provides export subsidies considered illegal by the World Trade Organization to businesses in sevencritical industries.
• China launched two new development institutions: the AsianInfrastructure Investment Bank and the New Development
Bank. In addition to boosting China’s economy by creating export opportunities for its companies, the new banks aim to extend China’s role in the international economic order, potentially challenging established multilateral development institutions.

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Section 2: Foreign Investment Climate in China
Although China has been a major destination for global foreign
direct investment (FDI) over the past decade, it maintains the mostrestrictive FDI regime among all Organization for Economic Co-Operation and Development (OECD) and G20 countries, according to
the OECD. The U.S. Department of State estimates that in addition to over 1,000 rules and regulatory documents related to FDI
in China issued by central government ministries, local legislaturesand governments also enact their own restrictive rules and regulations on foreign investments in their jurisdictions. Further, Chinese government administrators seek to ensure inbound FDI supports industrial policy goals—designed to bolster the developmentof domestic industries and the creation of national champions—byidentifying different industries as desirable for or restricted fromforeign investment. Taken together, these laws and policies—anduncertain application thereof—create a complicated, opaque, andunfavorable environment for foreign investment.
As a result of this restrictive legal and regulatory environment,
the foreign investment climate in China is deteriorating. Though
the majority of U.S. firms still consider China a profitable market,
optimism about future operations and profitability there is waning.
Foreign companies felt the least welcome in sectors where China’s
industrial policies favor domestic companies and authorities impose
localization requirements. Some of the problems highlighted by foreign companies are the lack of market access in certain sectors andthe conditioning of market access on the transfer of technology, intellectual property (IP), or know-how to local competitors. China
primarily maintains national-level market access restrictions
through a Foreign Investment Catalogue, though local governments
frequently employ region- or industry-specific Catalogues, further
restricting access. Though Chinese authorities released an updated
version of the Foreign Investment Catalogue in 2015 that reduced
the number of sectors where foreign investment is restricted andprohibited, industries the Chinese government has long sought tonurture as national champions—such as automobiles and healthcare—saw heightened restrictions.

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4
In line with China’s industrial policies, foreign investment intosome sectors has shifted from encouraged to restricted or even prohibited. These fluctuations in China’s foreign investment restrictions reflect a pattern whereby the government welcomes FDI into
sectors designated as strategic for China’s national economic development in order to extract technology and other advantages fromforeign firms. However, after domestic industry is deemed sufficiently developed, policies welcoming investment are gradually
withdrawn and new policies restricting investment are put in place
to free up market space for domestic firms and push out foreign
firms. Within a legal framework subject to convoluted rule-making
procedures and designed to serve the interests of the CCP, U.S. investors seemingly have little or no recourse to protect their rights
or effectively resolve disputes. Moreover, because ‘‘there are no accepted techniques for estimating the impact of [investment barriers] on U.S. investment flows,’’ according to the Office of the U.S.
Trade Representative, it is difficult to quantify the effect of China’s
restrictive investment policies.
In addition to market access limitations, foreign companies also
cite discretionary, unclear legal and regulatory interpretation andweak or inconsistent enforcement as top business challenges in
China. In recent years, a broad range of Chinese regulatory activities seem to have focused disproportionately on foreign investors
across various industries of strategic importance to China’s national economy. In 2013 and 2014, China’s increased enforcementof its Anti-Monopoly Law (AML) in particular against high-profile
foreign companies contributed to this perception. According to the
U.S. Chamber of Commerce, Chinese enforcement agencies haveused the law to pursue industrial policy objectives, and appear touse the threat of investigations against foreign firms to control
price and supply of goods, to the benefit of Chinese market participants.
U.S. companies report that China’s competition policy enforcement activities consider nonmarket factors, including industrial
policy; are lacking in due process and regulatory transparency; andrely on legal language that is ambiguous and therefore open to awide range of discretionary interpretation. For example, as of September 2015, all of the 26 transactions that were either rejected or
conditionally approved by China’s Ministry of Commerce—which
reviews mergers and acquisitions for anticompetitive effects—involved foreign firms. Similarly, China’s price-related AML enforcement agency, the National Development and Reform Commission(NDRC), appears to disproportionately enforce the law against foreign companies to achieve industrial policy goals unrelated to theprotection of competition. The administrative decisions of the
NDRC and local commissions are short on evaluation of the effectof a certain behavior on competition, and lacking in evidence of
why an actor should be exempted from punishment or receive aheavier or reduced fine. The lack of an effective mechanism for controlling the overly broad discretion granted to enforcement agencies
appears to result in inconsistent decisions and unequal treatment,
to the benefit of domestic firms and industries.
U.S. companies are also concerned about the application of thelaw to holders of IP rights. Chinese authorities appear to use the

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5
threat of AML investigations to attempt to lower the licensing fees
charged to would-be Chinese licensees of certain technologies, effectively giving these Chinese firms a competitive advantage in domestic and global markets. Under a 2015 law addressing anticompetitive use of IP, China’s State Administration for Industry
and Commerce can effectively compel foreign holders of certain patents to license under unfavorable or unfair terms, to the benefit ofdomestic licensees. Moreover, the law’s dearth of specific and objective criteria surrounding IP licensing leaves companies unable topredict reliably whether refusing to grant a license in particular
circumstances or on particular terms or conditions would constitutea violation of the AML.
In an attempt to test incremental reform of its foreign investment framework, China has lowered restrictions in four free tradezones by streamlining the approval process and adopting a negative
list approach, which restricts or prohibits investment only in those
sectors listed, and permits investment in all others. Although the
adoption of a negative list will likely be a positive development forforeign firms, foreign investment in restricted sectors will face a
new national security review process. The scope of the new review
has been expanded to include any foreign investment that may
damage the national security of China. In effect, Chinese authorities will have broader discretion to review incoming foreign investments for perceived national security threats. U.S. businessgroups—the U.S. Chamber of Commerce, AmCham China, andAmCham in Shanghai—expressed concern about the review’s broad
definition of national security, which they believe is ‘‘heavily
skewed in favor of protecting national interests that fall outside thewidely accepted scope of essential national security concerns’’ and‘‘likely to have a significant adverse impact on the flow of foreign
investment into China.’’
Chinese foreign investment authorities have also circulated adraft of a new foreign investment law, which will abolish the three
existing laws governing foreign investment in China when it goes
into effect no earlier than January 2016. In its current form, thedraft law would significantly improve the legal and regulatory regime for a majority of foreign investment in China by eliminating
approval requirements in nonrestricted sectors. Other aspects ofthe draft law, however, threaten to expand the scope of foreign investments subject to the increased discretionary power of approvalauthorities. For example, the draft law expands the definition of‘‘foreign investor’’ to include instances where the person or entitywith ultimate ‘‘control’’ over the company making the investment
is foreign. In effect, this practice will allow Chinese authorities totreat variable-interest entities, a prevalent investment structureused by foreign investors to access restricted sectors of China’s
economy, with increased scrutiny and administrative discretion.
To rectify the low levels of bilateral investment, the UnitedStates is negotiating a Bilateral Investment Treaty with China.
Proponents argue a high-standard agreement would present the opportunity to address and ban Chinese investment practices that areout of line with international business and legal standards, including unclear regulatory and legal enforcement, forced technology
transfer, preferential policies for state-owned enterprises (SOEs),

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and long-standing market access barriers. Critics of the agreement
worry even a high-standard agreement will not be meaningfully enforceable as it conflicts with Beijing’s stated development path.
They also argue that the benefits of the agreement would be potentially limited because of China’s continued efforts to restrict the
number of sectors that will be covered.
Conclusions

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• U.S. companies continue to invest in China despite an increasing number of challenges on the ground and declining profitability. Chinese government measures, policies, and practices
contributing to the deteriorating foreign investment climate include inconsistent and unclear legal and regulatory enforcement, increasing Chinese protectionism, and other preferential
policies benefitting domestic companies.
• Across industries, market access barriers continue to top
the list of Chinese government measures that limit the ability
and willingness of U.S. companies to invest in China. As ameans to protect its domestic companies and industries, China
restricts foreign investment in sectors in which the UnitedStates maintains competitive advantage, including researchand development-intensive and value-added information services sectors.
• Fluctuations in China’s foreign investment restrictions reflecta pattern whereby the government welcomes foreign direct investment into sectors deemed strategic for China’s national
economic development in order to extract technology, intellectual property, and know-how from foreign firms. However,after domestic industry is deemed sufficiently developed, policies welcoming investment are gradually withdrawn and new
policies restricting investment are put in place to free up market space for domestic firms and push out foreign firms.
• China’s Anti-Monopoly Law enforcement agencies—the Ministry of Commerce, the National Development and Reform
Commission, and the State Administration of Industry andCommerce—have failed to treat identical or similar violationsof the law equally, resulting in more leniency toward stateowned enterprises, more rigorous enforcement against foreigncompanies, and substantially varied penalties imposed on companies in similar circumstances, regardless of nationality of thecontrolling shareholder. The enforcement practices of the National Development and Reform Commission in particular arelacking in transparency, consistency, and fairness.
• The imbalance in expectations between domestic and foreign
firms for reporting mergers and acquisitions to China’s Ministry of Commerce in accordance with the Anti-Monopoly Law
puts foreign-invested enterprises at a disadvantage by unfairly
and disproportionately exposing them to increased scrutiny,
regulatory uncertainty, approval delays, and associated costs.
• Chinese Anti-Monopoly Law enforcers’ legal interpretations ofmonopolistic abuse of intellectual property by ‘‘dominant’’ firms

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could have a significant impact on the licensing of intellectual
property in China, particularly by firms that account for alarge share of sales in the technology market or hold patents
that are essential to an industry standard—as several prominent U.S. tech firms do.
• China’s commitments to seriously and significantly open up toforeign investment are overshadowed by new measures that reinforce longstanding market access barriers and discriminatory
treatment toward foreign investors.
• Some aspects of China’s proposed foreign investment law—such as streamlined approval processes and the negative list
approach—are encouraging, and signal a move toward fulfilling
economic reform goals set forth in the Third Plenum and converging with international investment practices. Yet, sometroubling provisions remain, including a broadly discretionary
and expanded national security review mechanism and targeting of foreign companies using particular investment structures to access the market.

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Section 3: China’s State-Led Market Reform and Competitiveness Agenda
Smaller returns from fixed asset investment, lower labor productivity gains, slower export growth, and severe environmental degradation are eroding the traditional drivers of China’s economic
growth. China’s senior leadership has recognized the seriousness ofthese challenges and the threat they pose to the CCP’s ability todeliver prosperity—the basis of its legitimacy since Tiananmen. Reform attempts under President Hu Jintao (2002–2012) to shift
away from large-scale infrastructure and export-led growth toward
an economy driven by consumption and high-technology failed toovercome entrenched interests and were largely put aside to spur
economic growth following the global financial crisis. Newly installed President Xi outlined an ambitious economic reform agenda
at the Third Plenum in November 2013 to more aggressively address these challenges and ensure the CCP’s long-term hold on
power. While this agenda claims it will allow the ‘‘market to playa decisive role in allocating resources,’’ the Chinese government intends to retain a central role in the economy.
Announced reforms are seeking to reorient the drivers of China’s
economic growth toward domestic consumption, improve capital allocation and industry efficiency through state-set market incentives, and provide a higher quality of life for its citizens. But seniorleadership’s commitment to reforms is once again wavering in theface of China’s slowest economic growth in 24 years, rising unemployment, and increased market volatility this year.
To boost domestic consumption as a new driver of economic
growth, the Chinese government is expanding the social safety net,increasing urbanization through major infrastructure investments
and the addition of 100 million rural migrants to cities, reforming‘‘hukou,’’ China’s household registration system, and opening theservice sector to competition from private domestic and foreign
firms. The Chinese government has been more successful in retool-

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8
ing its infrastructure investments toward urbanization needs, but
has faced slow progress in opening the service sectors and reforming the hukou system due to strong resistance to reform from vested interests.
The Chinese government is also instituting fiscal and financial
reforms aimed at improving allocation of capital and resources. Fiscal reforms are restructuring local government debt and sources offunding to address the rapid buildup of costly local government
debt since the rollout of China’s $596 billion (RMB 4 trillion) stimulus program in 2009 and local governments’ increasing difficulty
in servicing these debts as economic growth slows. While these reforms have significantly reduced local government financing costs,
the Chinese government backtracked on its efforts to rein in local
government borrowing as it struggled to maintain employment andgrowth. In the financial sector, the Chinese government is attempting to move away from politically driven capital allocation by taking small steps to loosen state controls on interest rates, increase
competition in the banking sector, introduce risk, and enhance capital convertibility. The Chinese government has reduced interest
rate controls and permitted several Chinese Internet companies toenter the state-controlled banking sector, but it has struggled withthe market volatility that defaults and capital flows create. The
Chinese government reasserted state control over the stock market
following major losses and stalled further efforts to introduce risk
to the market. Furthermore, the Chinese government reaffirmed its
intention to maintain control over capital flows, directly undermining its promises to loosen capital controls.
The Chinese government is seeking to enhance China’s industrial
competitiveness by pursuing SOE reform, higher-value-added manufacturing, and indigenous innovation. The government is attempting to improve productivity and global competitiveness of SOEs by
increasing mixed ownership (partial privatization), and consolidating large SOEs in megamergers, while paradoxically reinforcing
the role of the CCP and state over SOEs. The Chinese governmentis also accelerating its efforts to move up the value-added chain
through the establishment of the Made in China 2025 and Internet
Plus initiatives this year, and the continuation of its indigenous innovation policy. But continued state subsidies have created pervasive overcapacity in sectors such as steel, leading producers to floodworld markets with outputs from these sectors. The Chinese government also seeks new demand for this excess production throughurbanization and creation of infrastructure-focused projects via the‘‘One Belt, One Road’’ initiative, Asian Infrastructure Investment
Bank (AIIB), and New Development Bank.
The Chinese government is attempting to improve the quality oflife for its citizens by meeting public demands for greater prosperity and a safe, healthy environment. Urbanization, hukou reform, higher-value-added manufacturing, and innovation initiatives
are increasing wages and employment opportunities for the country’s citizens. China is also pursuing a multipronged approach toaddress severe environmental degradation through government
spending, emissions and water quality targets, stronger regulations
and harsher penalties, environmental targets within the CCP andChinese government promotion structure, public interest lawsuits,

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9and support for the development of the clean technology sector. Despite robust public spending and success in meeting most of its environmental targets, the Chinese government’s efforts overall havefallen short in addressing the severity and fundamental causes ofexisting environmental degradation.
China’s status as the world’s most populous nation, second-largest economy, top trading nation, and largest manufacturer means
its economic reform agenda—even if only partially implemented—
has significant implications for the United States. China’s focus onservices and technology may create one of the world’s largest consumer markets, generating up to $6 trillion of new market opportunities for the service- and technology-centric U.S. economy. However, the enduring high market access barriers for U.S. investors
are preventing fair market access. Furthermore, preferential government policies for domestic Chinese firms, megamergers of China’s SOEs, and the recently announced Made in China 2025 andInternet Plus initiatives are seeking to dislodge established industry leaders and replace them with Chinese brands. Since many
U.S. multinationals are global leaders in targeted sectors such as
biotechnology, e-commerce, and energy, these policies could havenegative implications for the future competitiveness of the UnitedStates.

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Conclusions• President Xi Jinping and Premier Li Keqiang announced an
ambitious reform agenda at the Third Plenary Session of theChinese Communist Party’s (CCP) 18th Central Committee(the Third Plenum) in November 2013 to transition China’s
economy toward consumption-led growth and allow the market
to play a ‘‘decisive role.’’ However, these reforms still reservea dominant role for the Chinese government in the economy.
As the economy slows and markets have shown volatility, theChinese government is once again stalling or rolling back reforms while resuscitating old levers of economic growth—fixed
asset investments and export-led growth—in order to boost
economic growth and maintain employment.
• The Chinese government is calling for greater CCP leadershipwithin state-owned enterprises, while simultaneously subjecting them to market forces such as competition, mixed ownership, and consolidation. These policies merely reinforce stateowned enterprises’ special status and do little to level the playing field for private sector and foreign competitors.
• China’s efforts to upgrade its industries and enhance innovation are largely state driven and target sectors in which theUnited States currently enjoys technological advantage. Recent
policies clearly favor domestic Chinese firms, placing pressures
on U.S. firms to transfer technology and shift production to
China, to the detriment of U.S. businesses and workers.
• China’s growing level of consumption, increasing rate of urbanization, opening of the service sector, and massive spending on
the environment and clean technology are creating one of theworld’s largest markets. However, strict market entry criteria,

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opaque regulations, China-specific technical standards, stateset pricing, and preferential support for domestic firms are increasing the costs to compete in this market.
• While fiscal reforms have made progress in providing new
sources of local government revenue such as bonds and newforms of taxes, the Chinese government abandoned its attempt
to rein in local government debt after sluggish first and second
quarter data in 2015. Instead, the Chinese government restarted local government lending and required financial institutions to continue supporting insolvent infrastructure projects. Central intervention to prop up the debt-for-bonds swap
for local governments ensured the costs of local governments’borrowing were negligible.
• China’s financial sector reforms have made the most headway
with progress in the liberalization of interest rates, opening of
the banking sector, and loosening of capital controls. However,
Chinese policymakers are uncomfortable with the market volatility these reforms create. This year, the Chinese government
reaffirmed its role in managing capital accounts and reasserted
state control over the stock market after it faced volatility beginning in June 2015.
• Public alarm over environmental degradation within China
continues to rise. Robust public spending has contributed toenormous demand for technologies focused on energy efficiency,
emissions reduction and monitoring, and environmental remediation, creating potential opportunities for U.S. environmental
technology firms. China’s environmental reforms could also
benefit the U.S. environment through reduced emissions andpollution.
• China has achieved its enormous economic growth through investment and export-led policies that now must be coupledwith greater domestic consumption to ensure a more balanced
economy. CCP leaders could persevere in structural reforms,
which—assuming the short-term dislocation is not too destabilizing—could confirm China as one of the world’s great markets. If, however, the CCP draws back from such reforms as
it has in the past, there is a possibility China could enter a period of low or stagnant growth, which affects its potential asa market and a producer. In either case, economic pressure on
CCP leaders could lead to greater discrimination against foreign firms and investors or an enhancement of other practices,like technology theft, which will make China less attractive asa market for investment.

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Section 4: Commercial Cyber Espionage and Barriers to Digital Trade in China
China causes increasing harm to the U.S. economy and security
through two deliberate policies targeting the United States: coordinated, government-backed theft of information from a wide varietyof U.S.-based commercial enterprises and widespread restrictions
on content, standards, and commercial opportunities for U.S. busi-

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11
nesses. Hackers working for the Chinese government—or with thegovernment’s support and encouragement—have infiltrated thecomputer networks of U.S. government agencies, contractors, andprivate companies, and stolen personal information and trade secrets. The targets of the Chinese hackers include patented material, manufacturing processes, business and negotiating strategies,
and other proprietary information. The Chinese government has inturn provided that purloined information to Chinese companies, including SOEs.
The United States is ill prepared to defend itself from cyber espionage when its adversary is determined, centrally coordinated, andtechnically sophisticated, as is the CCP and China’s government.
The design of the Internet—developed in the United States to facilitate open communication between academia and government,
and eventually expanded to include commercial opportunities—
leaves it particularly vulnerable to spies and thieves. As the largest
and most web-dependent economy in the world, the United Statesis also the largest target for cyber espionage of commercial IP.
The Chinese government also imposes heavy-handed censorshipon Internet content and social media. These restrictions on free expression and access to information and news have driven from the
Chinese market those U.S. companies unwilling to follow the authoritarian dictates of Beijing. The Chinese government has also
begun to censor material originating outside its borders by directly
attacking U.S.-based information providers.
The Chinese government has infiltrated a wide swath of U.S.
government computer networks; the U.S. government response to
the challenge has been inadequate. Federal agencies are not governed by a uniform system for defense against cyber intrusions.
Other than to acknowledge an unrelenting series of assaults on its
networks, the Federal Government has yet to devise adequate defenses, while top U.S. intelligence officials have grudgingly praised
Chinese hackers for their bold ingenuity.
China’s authoritarian government maintains tight control overthe flow of information across and within its borders with a systemtermed the ‘‘Great Firewall.’’ As part of this effort to control dissent
by restricting speech, news, and social media, the Chinese government has implemented a policy of replacing foreign information
technology and Internet providers with Chinese companies. Thisnot only affects human rights in China and skews the thinking ofChinese citizens about the United States and their own country,
but it also has a profound impact on a large segment of the U.S.
economy. The Chinese government is in the process of passing andimplementing comprehensive new laws and regulations that havethe potential to limit or exclude U.S. technology companies from
key tech-intensive sectors of the Chinese market. New proposals
would impose localization requirements, limit market access, codify
IP rights infringement, and create uncertain legal liability rules.
Among the digitally intensive industries affected are: newspapers,
periodicals, books, directories and mailing lists, motion pictures,sound recordings, video and music production and distribution,broadcasting, news syndicates, banking and insurance, credit cardtransactions, online retail trade, and wholesale trade in businessto-business transactions.

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12Conclusions• China’s government conducts and sponsors a massive cyberespionage operation aimed at stealing personally identifiable
information and trade secrets from U.S. corporations and the
U.S. government. Some of the stolen information is provided toChinese state-owned businesses that compete with U.S. firms
in China and abroad. Other recipients of U.S. trade secrets
include sectors of the Chinese economy that the central government designated as Strategic Emerging Industries, which
China intends to nurture into global competitors.
• The cost to the U.S. economy and to U.S. companies of government-sponsored cyber theft has been on the rise as network intrusions have become more sophisticated and harder to detect.
The financial damage results from the loss of trade secrets
such as copyrights and patents, manufacturing processes, foregone royalties, the costs of cyber defense, the loss of businessand jobs, and the expense of remediating and repairing thedamage to computer networks.
• U.S. cybersecurity companies and the Federal Government
have become more adept at attributing computer network attacks to specific countries and to groups of hackers withinthose countries. Their willingness to release details on the culprits has also increased. U.S. companies have also become
more willing to reveal details of the attacks on their computer
networks.
• The U.S. reaction to the increasing number and sophisticationof foreign cyber espionage and malicious network attacks has
been mostly defensive. U.S. law does not allow retaliatory
cyber attacks by private citizens and corporations, nor does it
appear to allow counterintrusions (or ‘‘hack backs’’) for the purpose of recovering, erasing, or altering stolen data in offending
computer networks. International law has not kept up with developments in cyber warfare, and no international consensus
exists on how to attribute or appropriately respond to cyber attacks. However, a policy discussion on the issue of offensive
and retaliatory cyber operations has begun.
• The Chinese government appears to believe that it has more
to gain than to lose from its cyber espionage and attack campaign. So far, it has acquired valuable technology, trade secrets, and intelligence. The costs imposed have been minimalcompared to the perceived benefit. The campaign is likely tocontinue and may well escalate as the Chinese Communist
Party leadership continues to seek further advantage while
testing the limits of any deterrent response.
• The Chinese government maintains strict censorship controls
over the flow of information across and within its borders, andholds Internet providers, websites, search engines, and online
news media responsible for censoring their content on the basisof vague guidelines and arbitrary rulings. The Chinese government’s obsession with limiting citizen access to information
harms U.S. companies attempting to compete in China. Some

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U.S. companies have faced retaliation, including the filteringor outright blocking of their websites, and all foreign companies risk loss of business licenses for violating the Chinese government’s unpredictable sensitivities.
• The Chinese government is in the process of passing comprehensive new laws and regulations on cybersecurity thatwould affect trade in digital goods and services in a wide range
of industries, including the news media, banking, credit cardtransactions, online retail trade, entertainment media, andtelecommunications. Some of the new rules would have the effect of excluding U.S. companies from participating in theworld’s fastest-growing digital market by requiring, for example, that servers containing information about Chinese citizens
and companies be located exclusively in China, and that companies doing business in China provide encryption keys toallow government entry into their databases.
Chapter 2: Security and Foreign Policy Issues
Involving China

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Section 1: Year in Review: Security and Foreign Affairs
In his third year in office, President Xi continued to consolidate
control over China’s security decision-making processes and gradually increase China’s global diplomatic engagement and military activities. Domestically, the Xi Administration has advanced the expansion and centralization of China’s security state with the enactment of a National Security Law and the introduction of draft
counterterrorism and cybersecurity laws. Abroad, China is pursuing focused and vigorous diplomacy, particularly with neighboring countries. President Xi’s One Belt, One Road initiative is at
the center of this effort.
China’s military, the People’s Liberation Army (PLA), is extending its global reach, particularly through the increased international activities of the PLA Navy. In 2015, the PLA Navy evacuated hundreds of Chinese and foreign citizens from Yemen in what
was China’s first-ever PLA-led noncombatant evacuation operation.
In addition, the PLA Navy has maintained its antipiracy presencein the Gulf of Aden, and has expanded its naval presence in the
Indian Ocean with submarine patrols. Since it first sent a submarine to the Indian Ocean in late 2013, the PLA Navy has conducted at least three more Indian Ocean submarine patrols. In
September 2015, the PLA Navy sailed through Alaska’s AleutianIslands, the closest it has ever sailed to U.S. territory during a farseas deployment without a port call. The PLA Navy’s increasing activities far from China’s shores reflect China’s growing capability
and willingness to use its military to protect its overseas economic
assets and expatriate population. To support these activities, China
appears to be seeking to establish its first overseas military facility
in Djibouti.
These developments are enabled by China’s continued militarymodernization program, which seeks to transform the PLA into atechnologically advanced military capable of projecting power
throughout the Asia Pacific region and beyond. In 2015, China ac-

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14quired or produced an array of advanced naval and air platforms,
many of which would be useful in contingencies in the East andSouth China seas and those involving islands held by Taiwan.
Some of China’s military modernization developments, such as its
continued development and production of advanced submarines andsurface ships, could increase the PLA Navy’s expeditionary capabilities. The PLA’s training missions and exercises are increasingly
sophisticated and reflect China’s goal to build a modern, integrated
fighting force. To support its military modernization campaign,
China’s official annual defense budget rose 10.1 percent to $141.9
billion (RMB 886.9 billion) in 2015, though its actual aggregate defense spending is much higher, as Beijing omits major defense-related expenditures from its official budget. After nominally increasing its defense budget by double digits every year since 1989, China’s defense spending appears sustainable in the short term. Although China’s slowing economic growth will generate opportunity
costs as government spending strains to meet other national priorities, there is no sign this has affected military spending.
U.S.-China security relations suffered from rising tensions andgrowing distrust in 2015, largely due to China’s cyberespionage activities against a range of U.S. government, defense, and commercial entities and its massive island-building campaign in the South
China Sea. In May, as more details of China’s land reclamation in
the South China Sea emerged, the U.S. Navy began to publicize its
air surveillance patrols near China’s reclaimed land features; in
October, a U.S. Navy guided missile destroyer conducted a freedomof navigation patrol within 12 nautical miles of one of the reclaimed features for the first time. Though China’s maritime dispute with Japan over the Senkaku Islands in the East China Sea
was less newsworthy in 2015, China continued to quietly increase
its military and civilian presence in contested waters by conducting
regular air and naval patrols near the islands and erecting 16 energy exploitation structures near disputed waters.
Conclusions

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• Three years after coming to power, Chinese President Xi
Jinping has made significant progress consolidating control
over China’s national security and foreign policy apparatus.
Two areas of particular focus for the Xi Administration arestrengthening the state’s power over national security matters(as exemplified in three new and proposed laws governing national security) and emphasizing ‘‘peripheral diplomacy’’ with
China’s neighbors (as exemplified in the One Belt, One Road
initiative).
• U.S.-China security relations continued to deteriorate in 2015.
China’s aggressive behavior in the South China Sea and its
unremitting cyber espionage against the United States were
the key drivers of growing distrust. Further, the Chinese military’s continued emphasis on developing antiaccess/area denial
capabilities makes clear that China seeks the capability tolimit the U.S. military’s freedom of movement in the Western
Pacific.

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15• China’s military modernization program continues to bear
fruit, particularly as new naval and air force platforms and capabilities come online. In particular, new developments in China’s naval modernization increase its ability to deploy troops
and equipment in contingencies in the East and South China
seas and those involving islands held by Taiwan. Moreover, thecontinued production of surface combatants, along with advances in submarine and aircraft carrier programs, supports
China’s ability to project force in its near seas.
• China in 2015 continued to take steps to bolster its position inits dispute with Japan over islands and adjacent waters in the
East China Sea by constructing 16 structures to facilitate natural gas exploitation near disputed waters; conducting neardaily patrols of contested waters and airspace; and enhancing
the PLA Air Force’s presence in the East China Sea with theestablishment of regular oversea training flights far from China’s coast and a first-ever transit flight through Japan’s
Miyako Strait.
• The rapid growth of China’s arms exports during the last ten
years reflects the maturation of China’s domestic defense industry. In the coming years, Chinese arms, including advanced
systems such as jet fighters, will increasingly compete with
U.S. and Russian arms on the global market.
• China’s noncombatant evacuation operations, far seas submarine deployments, and interest in establishing an overseas
military facility reflect its willingness to use military resources
to defend its growing overseas assets. China’s global security
activities likely will increase as the population of Chinese nationals overseas grows along with Chinese overseas economic
activity.
• As a result of China’s comprehensive and rapid military modernization, the regional balance of power between China, on
the one hand, and the United States and its allies and associates on the other, continues to shift in China’s direction.

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Section 2: China’s Space and Counterspace Programs
Based on decades of high prioritization and sustained investment
from its leadership, China has become one of the world’s preeminent space powers, producing numerous achievements and capabilities that further its national security, economic, and politicalobjectives. China’s space program involves a wide network of entities spanning its political, military, defense industry, and commercial sectors, but unlike the United States it does not have distinctly
separate military and civilian space programs. Rather, top CCP
leaders set long-term strategic plans for science and technology development, coordinate specific space projects, and authorize resource allocations, while organizations within China’s military execute policies and oversee the research, development, and acquisition process for space technologies. China’s military also exercises
control over the majority of China’s space assets and space operations.

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China’s space activities are driven by military, economic, and political objectives. First, China’s military strategists and analysts
recognize that space forces are crucial to China’s military modernization, enhancing functions such as intelligence, surveillance,and reconnaissance (ISR); environmental monitoring; communications; and position, navigation, and timing (PNT). These are particularly relevant to China’s antiaccess/area denial strategy * forpreventing or impeding U.S. intervention in a potential conflict in
the Western Pacific. Second, China’s space programs are expected
to yield economic and commercial benefits, and China has specifically aimed to capture 15 percent of the global launch services market and 10 percent of the global commercial satellite market by2015, although these efforts have produced mixed results. Finally,
space achievements provide CCP leadership with significant domestic political legitimacy and international prestige and influence,and enable China to collaborate on a range of bilateral and multilateral space activities. China has notably engaged in cooperative
efforts with Brazil, Russia, Ukraine, Venezuela, and the EU, andinitiated the Asia-Pacific Space Cooperation Organization.
China is pursuing a broad array of counterspace capabilities andwill be able to hold at risk U.S. national security satellites in every
orbital regime if these capabilities become operational. China’s
2007 test of the SC–19 direct-ascent antisatellite (ASAT) missile
destroyed an aging Chinese satellite and sparked worldwide criticism for creating dangerous orbital debris. The test demonstrated
China’s ability to strike satellites in low Earth orbit where the majority of U.S. satellites reside. China’s 2013 DN–2 rocket test
reached the altitude of geosynchronous Earth orbit satellites,
marking China’s highest known suborbital launch to date and thehighest worldwide since 1976; this indicated China is developing
the capability to target higher orbits which contain U.S. Global Positioning System (GPS) satellites and most U.S. ISR satellites.
Since 2008, China has also conducted increasingly complex tests involving spacecraft in close proximity to one another; these tests
have legitimate applications for China’s manned space program,but are likely also used for the development of co-orbital counterspace technologies. Computer network operations against U.S.
space assets attributed to China have likely been used to demonstrate and test China’s ability to conduct future computer network attacks and perform network surveillance. Finally, China has
acquired ground-based satellite jammers and invested heavily inresearch and development for directed energy technologies such as
lasers and radio frequency weapons.
China’s space program has also progressed in the areas of spacebased command, control, communications, computers, intelligence,
surveillance, and reconnaissance (C4ISR), space-based PNT, spacebased communications, and space launch functions. China now has
approximately 142 operational satellites in orbit, with approximately 95 of these owned and operated by military or defense in* According to the U.S. Department of Defense, ‘‘antiaccess’’ actions are intended to slow the
deployment of an adversary’s forces into a theater, or cause them to operate at distances farther
from the conflict than they would prefer. ‘‘Area denial’’ actions affect maneuvers within a theater, and are intended to impede an adversary’s operations within areas where friendly forces
cannot or will not prevent access. China, however, uses the term ‘‘counterintervention,’’ reflecting its perception that such operations are reactive.

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dustry organizations. China’s current system of C4ISR satellites
likely enables its military to detect and monitor U.S. air and naval
activity out to the second island chain * with sufficient accuracy
and timeliness to assess U.S. military force posture and cue othercollection assets for more precise tracking and targeting. China’s
regional PNT satellite system, known as Beidou, became operational in 2012, with global coverage expected by 2020. When completed, this system will provide PNT functions, essential to the performance of virtually every modern Chinese weapons system, independent from U.S.-run GPS.
Although it lacks a designated civilian space program, China
since the mid-1990s has incrementally developed a series of ambitious space exploration programs, categorized as civilian projects.
China is one of three countries, along with the United States andRussia, to have independently launched a human into space, andhas launched ten Shenzhou spacecraft and the Tiangong space labin recent years as part of its human spaceflight program. In the
program’s next phase, scheduled for completion by 2022, Chinaplans to launch a permanent manned space station into orbit. China’s lunar exploration program has featured several lunar orbiting
missions with multiple Chang’e spacecraft and the landing of a
lunar rover, Jade Rabbit, in 2014. China plans to land and returna lunar rover in 2017 and become the first nation to land a spacecraft on the Moon’s ‘‘dark side’’ in 2020. Beijing is likely also conducting research for a manned mission to the moon and a mission
to Mars, although neither project has yet received official approval.
China’s space activities present important implications and policy questions for the United States. Space capabilities have been
integrated into U.S. military operations to such an extent that U.S.
national security is now dependent on the space domain, and China’s 2007 antisatellite missile test in particular has been describedby General John Hyten, commander of U.S. Air Force Space Command, as a ‘‘wakeup call’’ to the U.S. military regarding the vulnerability of its space assets. In the economic realm, U.S. providers ofcommercial satellites, space launch services, and GPS-based services may face increased competition as China seeks to expand its
foothold in these markets, benefited by the blending of its civilian
and military infrastructures and by government funding and policy
support. U.S. export controls have also prompted many European
countries and their industries to pursue space systems that are
free of U.S. technologies—and therefore restrictions—in order toreach the Chinese market. Finally, China’s achievements in space
will provide Beijing with greater prestige in the international system and expand its growing space presence, concurrent with declining U.S. influence in space; the United States currently depends on
Russian launch vehicles to send humans into space, and the International Space Station is scheduled for deorbiting around 2024.
* The first island chain refers to a line of islands running through the Kurile Islands, Japanand the Ryukyu Islands, Taiwan, the Philippines, Borneo, and Natuna Besar. The second island
chain is farther east, running through the Kurile Islands, Japan, the Bonin Islands, the Mariana Islands, and the Caroline Islands. PLA strategists and academics have long asserted theUnited States relies primarily on the first island chain and the second island chain to strategically ‘‘encircle’’ or ‘‘contain’’ China and prevent the PLA Navy from operating freely in the Western Pacific. Open Source Center, ‘‘PRC Article Surveys China’s Naval Rivals, Challenges,’’ January 6, 2012. ID: CPP20120109671003; Bernard D. Cole, The Great Wall at Sea (Second Edition),
Naval Institute Press, 2010, 174–176.

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Moreover, given current Congressional restrictions on U.S.-China
space cooperation, the United States would not participate in any
space program involving China, which raises concerns that reduced
U.S. investment in its manned space program could result in thecontinued erosion of its technological edge and a shift of influence
within the international space community.
Conclusions• China has become one of the top space powers in the world
after decades of high prioritization and steady investment from
China’s leaders, indigenous research and development, and asignificant effort to buy or otherwise appropriate technologies
from foreign sources, especially the United States. Although
China’s space capabilities still generally lag behind those of theUnited States and Russia, its space program is expanding andaccelerating rapidly as many other nations’ programs proceedwith dwindling resources and limited goals.
• China’s aspirations in space are driven by its judgment thatspace power enables the country’s military modernization,
drives its economic and technological advancements, allows it
to challenge U.S. information superiority during a conflict, andprovides the Chinese Communist Party with significant domestic legitimacy and international prestige.
• China’s space program involves a wide network of entities
spanning its political, military, defense industry, and commercial sectors. Unlike the United States, China does not have distinctly separate military and civilian space programs. Under
this nebulous framework, even ostensibly civilian projects,
such as China’s human spaceflight missions, directly support
the development of People’s Liberation Army (PLA) space,counterspace, and conventional capabilities. Moreover, Chinese
civilian and commercial satellites likely contribute to the PLA’s
command, control, communications, computers, intelligence,
surveillance, and reconnaissance (C4ISR) efforts whenever it istechnically and logistically feasible for them to be so utilized,
and they would probably be directly subordinate to the PLA
during a crisis or conflict. Given the PLA’s central role in allof China’s space activities, U.S. cooperation with China on
space issues could mean supporting the PLA’s space andcounterspace capabilities.
• China likely has capitalized on international cooperation to acquire the bulk of the technology and expertise needed for mostof its space programs. China probably will continue to pursue
close cooperation with international partners to overcome specific technical challenges and to meet its research and development objectives and launch timelines.
• Chinese analysts perceive that China’s advances in space technology have become an important driver for the country’s economic growth. Satellite and launch service sales provide China’s defense industry with a growing source of revenue. Technology spin-offs offer competitive advantages in certain sectors,
such as satellite navigation products. Exports of space technology-based products pose challenges to the United States not

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only due to the non-market-based nature of China’s economy,
but also due to military and security concerns.
• As China’s developmental counterspace capabilities become
operational, China will be able to hold at risk U.S. national security satellites in every orbital regime.
• China is testing increasingly complex co-orbital proximity capabilities. Although it may not develop or operationally deploy
all of these co-orbital technologies for counterspace missions,
China is setting a strong foundation for future co-orbital antisatellite systems that could include jammers, robotic arms, kinetic kill vehicles, and lasers.
• China is in the midst of an extensive space-based C4ISR modernization program that is improving the PLA’s ability to command and control its forces; monitor global events and track
regional military activities; and strike U.S. ships, aircraft, andbases operating as far away as Guam. As China continues tofield additional intelligence, surveillance, and reconnaissance(ISR) satellites, its space-based ISR coverage almost certainly
will become more accurate, responsive, and timely and could
ultimately extend beyond the second island chain into the eastern Pacific Ocean and the Indian Ocean.
• China’s rise as a major space power challenges decades of U.S.
dominance in space—an arena in which the United States has
substantial military, civilian, and commercial interests.
Section 3: China’s Offensive Missile Forces
China’s offensive missile forces are integral to its military modernization objectives and its efforts to become a world-class military capable of projecting power and denying access by adversaries
to China’s periphery. The PLA’s Second Artillery Force—responsible for China’s missile forces initially as a solely nuclear force andsince the 1990s as a conventional force as well—has taken on new
missions and seen its bureaucratic status within the PLA elevated.
The Second Artillery provides China with a decisive operational advantage over other regional militaries competing to defend maritime claims, and its long-range precision-strike capabilities improve
its ability to engage the U.S. military at farther distances in theevent of a conflict. These capabilities provide an increasingly robust
deterrent against other military powers and—in the case of China’s
nuclear arsenal—serve as a guarantor of state survival, ultimately
bolstering the CCP leadership in its quest for legitimacy.
China is making significant qualitative improvements to its nuclear deterrent along with moderate quantitative increases in thecourse of its efforts to build a more modern nuclear force. China’s
nuclear doctrine is premised on the concept of a ‘‘lean and effective’’force guided by a doctrine of ‘‘no-first-use’’ of nuclear weapons (although the exact circumstances under which China would use nuclear weapons, what China would consider ‘‘first use,’’ and whether
the policy may be reconsidered have been subjects of debate).
China specifically has approximately 250 nuclear warheads, according to unofficial sources. It has invested in enhancing its theater
nuclear force and diversifying its nuclear strike capabilities awayfrom liquid-fueled, silo-based systems. China’s DF–5 missiles have

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20
been equipped with multiple independently-targetable reentry vehicles, confirmed by the U.S. Department of Defense (DOD) for the
first time in 2015; newer intercontinental ballistic missiles (ICBMs)
in development could also have this capability, increasing China’s
ability to penetrate adversary missile defenses and enhancing thecredibility of its nuclear forces as a deterrent. China is expected to
conduct its first nuclear deterrence submarine patrols using the
JIN-class nuclear-powered ballistic missile submarine by the end of
2015, marking China’s first credible at-sea second-strike nuclear
capability and presumably requiring changes to its ‘‘de-alerting’’
policy of keeping nuclear warheads stored separately from missiles.
China may also be developing a nuclear-capable air-launchedcruise missile, the CJ–20, potentially introducing an air-delivered
theater nuclear strike capability into its arsenal for the first time.
Importantly, as stated by Dr. Christopher Yeaw, founder and director of the Center for Assurance, Deterrence, Escalation, and Nonproliferation Science & Education, in his testimony to the Commission, China may also perceive its nuclear arsenal to be useful inthe political management of an unsustainable conventional conflict,in which it would punctuate non-nuclear operations with tacticalor theater-level nuclear strikes to seek deescalation on terms favorable to China. A key implication of this approach for the UnitedStates is that China ‘‘may escalate across the nuclear threshold at
a time and manner, and for a purpose, that we do not expect.’’
China has achieved extraordinarily rapid growth in its conventional missile capability, according to DOD, developing a wide
range of conventional ballistic and cruise missiles to hold targets
at risk throughout the region, even as far as the second island
chain. China’s short-range ballistic missile (SRBM) force has grownfrom 30 to 50 missiles in the mid-1990s to at least 1,200 in 2015,
mostly deployed along the Taiwan Strait. China’s development of
medium-range ballistic missiles (MRBMs) and intermediate-range
ballistic missiles (IRBMs) provide the ability to conduct precision
strikes against land and naval targets within the first island chain.
China in 2010 fielded the world’s first antiship ballistic missile, an
MRBM variant known as the DF–21D, and revealed at a September 2015 military parade that the DF–26 IRBM—with a statedrange reaching out to the second island chain, including Guam—also has an antiship variant. China has also continued to modernize its cruise missiles, most notably by developing two supersonic antiship cruise missiles: the surface ship- or submarinelaunched YJ–18 and the air-launched YJ–12, both of which will
provide a significant range extension over previous capabilities.
China has a hypersonic weapons program in developmental stages,
and reportedly conducted its fourth and fifth hypersonic glide vehicle tests in 2015, after conducting three in 2014. Mark Stokes, executive director of the Project 2049 Institute, testified to the Commission that China may be able to field a regional hypersonic glide
vehicle by 2020 and a supersonic combustion ramjet-propelledcruise vehicle with global range before 2025. Whether China arms
its hypersonic weapons with nuclear or conventional payloads—or
both—will provide more information regarding how it intends to incorporate hypersonic weapons into PLA planning and operations.

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The increasing survivability, lethality, and penetrability of China’s missile forces present several implications for the UnitedStates. First, these forces can threaten increasingly greater portions of the Western Pacific, and a spending competition between
additional Chinese missiles and U.S. missile defense systems would
likely be highly unfavorable to the United States based on relative
cost. In response, the United States is working to develop lowercost-per-shot missile defense systems, while other options include
disrupting networks that would support Chinese missile forces orusing long-range stealth bombers to operate beyond the reach ofadvanced Chinese missiles. Second, China’s increasing ability tothreaten U.S. partners and allies with its missile arsenal supports
its regional ambitions, improves its coercive ability, weakens thevalue of deterrence efforts targeted against it, and widens therange of possibilities that might draw the United States into a conflict. Third, China’s missile buildup has contributed to a U.S. policy
debate regarding the modern-day relevance of U.S. treaty obligations to forgo developing ground-launched ballistic and cruise missiles with ranges of between 500 and 5,500 kilometers (311 and
3,418 miles); some experts suggest modifications could allow theUnited States to strengthen its regional deterrence capabilities. Finally, these developments present new challenges for the UnitedStates and China as they consider how to successfully manage anddeescalate potential crises in an environment with new factors of
instability.

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Conclusions• The chief roles of China’s nuclear arsenal are to deter an adversary from undertaking a nuclear first strike and to reduce
the pressure on China to yield to an adversary’s demands, ordesist from aggression, under threat of nuclear attack. China’s
belief that its nuclear arsenal would deter an adversary fromtaking a conventional fight into the nuclear realm could encourage it to be more adventurous in its risk-taking during acrisis because it may not sufficiently fear the prospect of nuclear escalation.
• China is secretive about the details of its official nuclear policy,
leading to uncertainty regarding key principles of its nuclear
weapons doctrine. Key elements of China’s nuclear policy, suchas its ‘‘no-first-use’’ pledge and presumptive de-alerting policy,
may be under reconsideration but are unlikely to change officially.
• China appears to be pursuing a theater nuclear capability inaddition to the strategic nuclear capability it has maintainedsince it became a nuclear state in the 1960s. In a conflict, China’s maturing theater nuclear capability could provide it withthe means to flexibly employ nuclear weapons to deescalate orotherwise shape the direction of conflict.
• China is pursuing a credible second-strike capability with anemphasis on survivability against an adversary’s first strike.
By diversifying its nuclear strike capabilities away from solely
land-based systems in silos, China seeks to ensure its ability

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to absorb a nuclear strike and retaliate in kind. Examples ofthis diversification include road-mobile intercontinental ballistic missiles, submarine-launched ballistic missiles, and potentially air-launched land-attack cruise missiles.
• China’s initial development of its conventional missile forces
focused heavily on expanding its short-range ballistic missile
force for Taiwan contingencies. In the past decade, China’s development of longer-range missiles, pursuit of advanced missile
technologies, and diversification of launch platforms have enabled it to hold at risk a wider range of targets farther fromits shores.
• China is developing cruise missiles that are increasingly difficult for the U.S. military to detect and defend against. The
People’s Liberation Army (PLA) has fielded its first groundlaunched land-attack cruise missile, and also appears to be developing air-, ship-, and submarine-launched cruise missiles
with land-attack and antiship missions. China is in the midstof improving the qualitative aspects of its cruise missile technologies; in the meantime, the quantitative strength of its
cruise missiles poses a formidable challenge to existing U.S.
Navy defenses.
• China recognizes that adversary missile defenses—particularly
the U.S. ballistic missile defense architecture—pose a major
challenge to the success of its missile operations. As a result,
China is developing measures to improve its forces’ ability topenetrate opposing missile defenses, such as multiple independently-targetable reentry vehicles, maneuverable reentry
vehicles, and hypersonic weapons.
• To realize the full potential of its long-range precision strikecapabilities, China requires detailed awareness of a potential
battlespace as well as the ability to obtain targeting data at increasingly farther distances from the Chinese mainland. Effective and timely target selection and information coordination isan area the PLA continues to seek to improve.
Chapter 3: China and the Worlddkrause on DSKHT7XVN1PROD with USCC

Section 1: China and Central Asia
One of the most visible manifestations of China’s expanding global engagement has been its cultivation of close economic, political,
and security ties with countries in Central Asia (Kazakhstan,
Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan). Beijingsees Central Asia as a potential land bridge to markets in the Middle East and Europe, a source of much-needed oil and natural gas
resources, and a dependable bastion of diplomatic support. But
Central Asia is also a source of anxiety for Beijing, which fears
Islamist groups in its economically and politically restive western
province of Xinjiang will find common cause with extremist or terrorist groups operating in the region. As the United States reshapes its own Central Asia policy in the wake of the drawdown

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23
in Afghanistan, it will have to take China’s growing presence there
into careful consideration.
The centerpiece of China’s engagement with Central Asia, the‘‘Silk Road Economic Belt’’ initiative, was announced by President
Xi in 2013, but it is not new. Rather, it is a culmination and a rebranding of several previous policies and projects aimed at linking
China with its trading partners. The land-based Silk Road Economic Belt has a maritime counterpart, the ‘‘21st Century Maritime Silk Road,’’ which will run from China’s coast through Southeast Asia and the Indian Ocean to Africa and the Mediterranean
Sea. Together, they form the One Belt, One Road initiative. To facilitate its engagement with countries that fall within One Belt,
One Road, China’s State Council created the $40 billion Silk Road
Fund, which began operating in February 2015.
Although the primary objective of China’s economic engagementwith Central Asia is to promote the security and development of
Xinjiang, this policy has significant benefits for China’s overall economic growth. First, China intends to diversify its energy portfolio
by gaining access to Central Asian resources. Second, Beijing seeks
to develop new markets for its companies through construction ofroads and railways, with the ultimate goal of reaching Russia,
Iran, and Europe. This has an added corollary of creating outlets
for Chinese industries such as iron, steel, and cement, which areexperiencing overcapacity and slackening domestic demand due toChina’s economic slowdown. Finally, China seeks to engender political goodwill and influence by fostering economically based ‘‘goodneighborly relations.’’ For landlocked Central Asia, China’s economic largesse is an opportunity to upgrade its outdated infrastructure and connect to the global economy. Central Asian states also
welcome China as a counterbalance to Russia, which until recently
tended to economically dominate the former Soviet republics.
While China’s economic engagement with Central Asia appears
most often in imports of natural resources or investment in energy
companies and energy-related infrastructure, China has also become an important source of exports of manufactured goods andloans to non-energy-related projects. The structure of the tradeshows a lack of diversity, with China exporting finished goods andimporting natural resources. Despite the strength of its energy exports, Central Asia as a whole tends to run trade deficits with
China.
China’s security relations with Central Asia focus largely on
counterterrorism and are designed to bolster China’s stability andsecurity objectives in Xinjiang. Most of China’s security cooperation
with the region occurs via the Shanghai Cooperation Organization,
which currently includes four Central Asian countries, Russia, andChina, but which China dominates. The organization has yet totake on some of Central Asia’s biggest security challenges, but Beijing finds it useful because it is a resource for regional intelligenceon terrorist threats and because it provides China with an opportunity to demonstrate regional leadership. The sources of instability that concern China in Central Asia are even more prevalentin Afghanistan, and China is positioning itself to take on greater
responsibility for its neighbor’s security in anticipation of the withdrawal of U.S. and international forces. China’s growing interest in

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the region’s security provides opportunities for cooperation with theUnited States on shared goals. However, the Chinese and Central
Asian governments’ heavy-handed approaches to security threats
can come into conflict with the U.S. values of transparency, openness, and rule of law.
Conclusions• Although engagement with Central Asia has been a longstanding endeavor for the Chinese government, Chinese President Xi Jinping has recently elevated the region in China’s foreign policy in the form of the Silk Road Economic Belt initiative, which envisions a massive network of trade and infrastructure connecting China with Europe by way of Central
Asia.
• China’s overarching objective for engagement with Central
Asia is to encourage economic development and stability in its
westernmost province, Xinjiang, which shares an extensive
border with Kazakhstan, Kyrgyzstan, and Tajikistan. Chinese
leaders perceive ethnic tensions, separatist movements, and related violent activity in Xinjiang to be among the greatest security threats facing China today, and fear patterns of religious extremism and terrorism in Central Asia enable this unstable environment. Therefore, Beijing uses its relations with
Central Asian governments to seek to neutralize and eradicate
these perceived threats.
• China’s security cooperation with Central Asia is designed toaugment domestic security policies in Xinjiang, and therefore
focuses on counterterrorism and information sharing about extremist and terrorist groups and individuals. China’s security
engagement with the region occurs primarily via the Shanghai
Cooperation Organization, which China uses as a tool to influence and demonstrate leadership in the region, but which has
yet to play a significant security-providing role.
• Although the primary objective of China’s economic engagement with Central Asia is to promote the security and development of Xinjiang, this domestic-oriented policy also promotes
China’s overall economic growth by (1) allowing China to diversify its energy portfolio by gaining access to Central Asian resources, (2) developing new markets for its companies in industries experiencing overcapacity at home, and (3) engendering
goodwill toward its policies in the region.
• China’s trade with the region is growing rapidly, but it is very
unbalanced, with China exporting finished goods and importing natural resources. Despite the strength of its energy exports, Central Asia as a whole tends to run trade deficits with
China. For most countries in the region, China is the biggest
trade partner. Kazakhstan, the region’s largest economy, is thebiggest recipient of Chinese trade, investment, and loans.
Through its massive investments in Central Asia’s infrastructure—including roads, railways, hydroelectricity, and telecommunications—China has also become a de facto provider ofdevelopment assistance.

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25• Chinese leaders look to oil- and natural gas-rich Central Asian
countries to diversify China’s energy sources, though the volumes involved will not be sufficient to overcome China’s dependence on traditional sources of hydrocarbon imports, particularly Middle Eastern oil. One notable exception is Turkmenistan, which in recent years has emerged as China’s largest supplier of natural gas, accounting for 44 percent of China’s
imports in 2014.
• As China’s influence in Central Asia grows, it increasingly iscompeting with Russia, which has long dominated the region
in the economic, security, and cultural realms. China now
dominates in the economic realm, though Russia is still the
primary military and cultural power in the region. Beijing,which seeks stable ties with Moscow, avoids creating the perception of overt competition between the two countries.
• After several years of relative disinterest, China has been increasing engagement with Afghanistan since 2012. As with
Central Asia, China fears extremist and terrorist elements in
Afghanistan contribute to instability in Xinjiang. Anticipating
the U.S. withdrawal from Afghanistan, China is starting to realize it will have to involve itself in the country’s reconstruction and stabilization to preserve stability and security in
Xinjiang.
• China and the United States appear to share similar priorities
in Central Asia, such as promoting economic growth andconnectivity and preventing the spread of extremism and terrorism. Yet Beijing and Washington pursue these goals in very
different ways, which could make meaningful cooperation in
the region challenging. In particular, while the United States
seeks to encourage democratization and discourage corruption
in government and business, China supports the region’s authoritarian governments and is more tolerant of the region’s
widespread corruption.

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Section 2: China and Southeast Asia
China’s relationships with Southeast Asian countries are complex. Although economic ties between China and Southeast Asia
have expanded in recent years, China has become more assertivein advancing its territorial claims in the South China Sea at theexpense of its Southeast Asian neighbors.
China’s land reclamation and construction on disputed land features in the South China Sea have cast a shadow over ChinaSoutheast Asia relations since 2014. Over the last two years, China
has expanded seven land features it controls in the Spratly Islands
by more than 2,900 acres—the equivalent size of more than 2,000
football fields. China is also building, expanding, and upgrading
military and civilian infrastructure, including at least one, and up
to three, airstrips, on these artificial islands. The scale and speedof China’s land reclamation has far outpaced those of other claimants. China will be able to use these land features to bolster its
ability to sustain its military and maritime law enforcement presence in the South China Sea.

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Rival claimants Vietnam and the Philippines (a U.S. treaty ally)
are impacted the most, but even neutral parties like Singapore andIndonesia have expressed concern about China’s activities. In 2015,
the Association of Southeast Asian Nations (ASEAN) issued its
strongest statements about the South China Sea yet, including assertions that China’s land reclamation activities ‘‘eroded trust andconfidence and may undermine peace, security and stability in theSouth China Sea,’’ and that these activities have ‘‘increased tensions.’’ Moreover, China’s assertive approach to the South China
Sea disputes in recent years has prompted Southeast Asian countries to enhance their maritime security capabilities and strengthen security cooperation with the United States and other countries
in the Asia Pacific, particularly Japan.
Even as China’s activities in the South China Sea create security
challenges in Southeast Asia, China has enhanced security cooperation with some countries in the region through military aid,
exercises, and cooperation on nontraditional security challenges.
Amid its increasingly strained relations with Southeast Asia,
China has employed economic cooperation as a means to diffuse
tensions and garner diplomatic goodwill. China has done sothrough both increased economic assistance and deeper economic
integration with Southeast Asia. Two key initiatives by China to
expand economic assistance to the region include the 21st Century
Maritime Silk Road and the AIIB. Under the banner of the Maritime Silk Road, China has pledged to extend more loans and investments to ASEAN members, with assistance targeting infrastructure development and poverty alleviation. The AIIB, which isled by China and includes all ten ASEAN nations as members, will
likely serve as another important vehicle for China to channel its
development aid to Southeast Asia in hopes of gaining diplomaticleverage.
However, whatever goodwill China may gain from these initiatives may be tempered by strains in other areas of China-Southeast
Asia economic relations. As a whole, Southeast Asia has grown
more economically integrated with China, with two-way trade andinvestment and use of the RMB in international transactions rising
significantly in recent years. China’s growing economic influence inSoutheast Asia has raised concerns that ASEAN countries may become overly dependent on China and are at risk of economic coercion. For example, since the implementation of an ASEAN-China
Free Trade Area in 2010, ASEAN failed to maintain a long-standing trade surplus with China, and instead has experienced a large
and rapidly increasingly trade deficit, which reached nearly $90
billion in 2014. In addition, China’s construction of hydropowerdams along the Mekong River and plans for large-scale water diversion projects are creating friction with downstream Southeast
Asian countries. These lower Mekong countries, especially Cambodia and Vietnam, are vulnerable to the river’s altered water levels and ecological damage caused by these projects.
Conclusions• China’s approach to Southeast Asia involves both consolidating
its territorial claims in the South China Sea and seeking to improve economic ties with countries in Southeast Asia. China’s

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27
leaders seem to believe that striking a balance between these
two endeavors enables China to protect its perceived sovereignty in the South China Sea and benefit from economic engagement with the region, while ensuring tensions along its
periphery do not become intolerably high for Beijing.
• Since late 2013, China has conducted dramatic land reclamation and construction activities on the land features it controls
in the Spratly Islands. These rapid activities appear to be driven by several factors: China’s desire to unilaterally impose its
claims and avoid arbitration or negotiation with other parties
over the disputes; China’s ambition to enhance its ability to
project power into the South China Sea; and, potentially, China’s intention to establish an air defense identification zone
over part of the South China Sea.
• Southeast Asian countries have reacted with increasing alarm
to China’s activities in the South China Sea. They continue toenhance their military and civilian maritime patrol capabilities
and to strengthen security relations with the United Statesand other countries in the Asia Pacific. However, despite growing worry among Southeast Asian countries about China, andrising assertiveness in expressing these concerns, they stillseek to preserve positive relations with China and appear tostill be balancing their relationships with China and theUnited States.
• Although historical animosities and China’s actions in theSouth China Sea continue to hamper trust of China in Southeast Asian capitals, defense and security cooperation between
China and countries in Southeast Asia has grown over the last
15 years. China’s most prominent defense ties in Southeast
Asia are with countries in mainland Southeast Asia: Burma(Myanmar), Cambodia, Laos, and Thailand, all of which areamong its nearest neighbors. China has also increasingly engaged with Southeast Asian countries in the areas of nontraditional security and humanitarian assistance and disaster
relief.
• China is vastly expanding its foreign assistance and investment programs in Southeast Asia as a means of achieving its
foreign policy goals in the region, including efforts to defuse
tensions surrounding contentious disputes such as those in theSouth China Sea. Chinese foreign assistance to Southeast Asia
comes primarily in the form of infrastructure investment, andprojects are frequently implemented by Chinese firms using
Chinese labor, limiting the benefits for local communities.
• The Association of Southeast Asian Nations’ (ASEAN) tradeliberalization with China from 2004 to 2010 has led to a large
and growing bilateral trade deficit. Economic integration has
also increased the association’s vulnerability to fluctuations in
China’s economy, with China’s recent economic slowdown exacerbating ASEAN’s trade deficit with China.
• Use of the renminbi (RMB) in international transactions is expanding rapidly in Southeast Asia and paving the way toward

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more extensive use of the currency regionally. Limited progressin advancing multilateral monetary cooperation in Southeast
Asia, such as through the Chiang Mai Initiative Multilateralization, may allow for the RMB’s increased circulation in the region.
• China continues to unilaterally construct dams along the
Mekong River without any obligation to share information
about water management with downstream Mekong countries.
China’s actions on the Mekong are causing major fluctuations
in water levels in the Mekong Basin, but China has expressed
little interest in cooperating with its southern neighbors by
joining the Mekong River Commission. Dam construction andresource mismanagement by downstream nations also pose asignificant problem.

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Section 3: Taiwan
Cross-Strait relations in 2015 were essentially stable, but could
be facing a major shift with Taiwan’s national elections approaching in January 2016 and the Democratic Progressive Party (DPP)—
Taiwan’s opposition and traditionally pro-independence party—
leading in presidential polls. Taiwan citizens’ wariness of China,
spurred by the Mainland’s increasing economic interconnectedness
with Taiwan, appears to be partially responsible for flagging publicconfidence in Taiwan’s Kuomintang (KMT)-led government. Someobservers assess Beijing is worried that if DPP Chairperson Tsai
Ing-wen is elected, she may seek to steer Taiwan toward de jureindependence, even though Chairperson Tsai’s comments on crossStrait matters have seemed pragmatic and favorable of the statusquo. Still, should the DPP win, it is unclear how Beijing would approach relations with Taipei.
Cross-Strait economic ties continued to grow even as progress on
major cross-Strait negotiations slowed and the ratification of signed
cross-Strait agreements stalled since the 2014 Sunflower Movement, during which protestors occupied Taiwan’s legislature in opposition to the Cross-Strait Services Trade Agreement. As of August 2015, China remains Taiwan’s largest trading partner, top
source of imports, and biggest export market. Annual cross-Strait
trade in 2014 reached $130.2 billion, a 32 percent increase from2008. Growth in Taiwan exports to China slowed, in part due tothe rise of Chinese competitors, while Chinese exports to Taiwan
reached an all-time high, exceeding $48 billion. According to official
Taiwan data, Taiwan FDI into China reached $10.3 billion in 2014,
increasing for the first time since 2010 (and far outpacing mainland FDI in Taiwan), but analysts believe this number is significantly undervalued.
Although China pressures other countries through the UN andother international organizations to restrict Taiwan’s full participation in the international community, Taiwan is actively pursuing
greater international space in a number of areas. Taipei has expressed interest in joining regional trade and investment regimes,
such as the U.S.-led Trans Pacific Partnership, to encourage economic growth and new market opportunities. While China has been
increasingly assertive in the East and South China seas, Taiwan

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has proposed diplomatic frameworks and signed fisheries agreements with other claimants to encourage the shelving of territorial
disputes and promotion of joint resource development, and hastaken steps to clarify its own claims in the East and South China
seas according to international law.
U.S.-Taiwan relations in 2015 remained strong, despite the lackof substantive progress on bilateral trade and investment negotiations and the absence of major U.S. arms sales to Taiwan since2011. In 2014, annual bilateral trade reached a record high, increasing by 6 percent to $67.4 billion, while Taiwan became thetenth-largest trading partner of the United States, passing both
India and Saudi Arabia. U.S.-Taiwan military-to-military contacts
also increased in 2014. That year, over 3,000 DOD personnel conducted visits to Taiwan, a 50 percent increase over visits in 2013.
Seven years of cross-Strait rapprochement have been beneficial
to the United States by reducing cross-Strait tensions and allowing
U.S. policymakers to address other priorities in the U.S.-China andU.S.-Taiwan relationships. Nonetheless, China’s military exercises
and military modernization are still largely directed toward its mission to eventually reunify Taiwan with the Mainland. Taiwan’s
focus on indigenous weapons platforms and asymmetric capabilities, along with its expanded defense engagement with the UnitedStates, has served to improve its ability to inflict costs on China
should it decide to use force against Taiwan, but the cross-Strait
military balance continues to shift in Beijing’s favor. With Taipei’sstagnating defense budget and capabilities and China’s improving
antiaccess/area denial capabilities threatening to keep U.S. forces
farther from China’s shores, Beijing has increasing advantages ina Taiwan contingency, raising the cost for the United States totake action in a crisis or conflict.
Conclusions• Taiwan and China have enjoyed seven years of increased economic and trade ties, but fears among Taiwan citizens about
economic coercion and China’s political encroachment over Taiwan are more widespread than in the past.
• The younger generation of Taiwan citizens appears to view
itself increasingly as Taiwanese rather than Chinese, and to bewilling to take visible and substantial steps to assert their national identity. This has the potential to disrupt the diplomatic
narrative that has allowed China and Taiwan to coexist without armed conflict. At the same time, Taiwan may not have thewill or ability to counterbalance the growing Chinese militaryadvantage. In view of China’s growing power in the region asa whole, these trends have the potential to create stress on theability of the United States to meet its obligations to Taiwan
under the Taiwan Relations Act.
• Although China restricts Taiwan’s ability to join multilateral
institutions, Taiwan continues to make some progress on
issues affecting its international space. Were Taiwan to succeed in its efforts to participate in emerging regional economic
mechanisms like the Asian Infrastructure Investment Bank,
Regional Comprehensive Economic Partnership, and Trans-Pa-

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30cific Partnership, its integration in the region and ability tomake a positive contribution to the international community
would increase further.
• In response to China’s increasingly assertive actions in the
East and South China seas, Taiwan has initiated diplomatic
frameworks and signed agreements with claimants to encourage the shelving of territorial disputes and promotion of joint
resource development. Through an updated fisheries agreement with Japan and steps taken to clarify its claims in theSouth China Sea over the past year, Taiwan continues to playa role in helping preserve regional stability.
• The United States and Taiwan share a close relationship basedon common democratic values, strong commercial ties, and a
U.S. commitment to aid in Taiwan’s defense. U.S.-Taiwan trade
is at a record high, underlying Taiwan’s increasing importanceas a close economic partner. Furthermore, the United States
continues to support Taiwan’s defense through increasing military-to-military contact and other discreet defense cooperation.
• China’s military modernization continues to focus on its ability
to conduct military operations against Taiwan and deter theUnited States from defending Taiwan in a potential conflict.
Although Taiwan has improved its defense capabilities througha combination of domestic production and acquisition of arms
from the United States, the cross-Strait military balance ofpower continues to shift strongly in China’s favor.

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Section 4: Hong Kong
Extended periods of public debate and protests in Hong Kong
surrounding how to elect the region’s next top leader, the chief executive, continued into early 2015. In August 2014, the PolitburoStanding Committee of the CCP offered an electoral reform framework featuring a restrictive nomination mechanism that effectively
precluded the nomination of prodemocracy candidates. In response,
prodemocracy activists rejected Beijing’s framework and sought
universal suffrage with a genuine choice of candidates.
On June 18, 2015, several months after the protests dispersed,
electoral reform legislation based on the Standing Committee’s
framework was voted down in Hong Kong’s Legislative Council(LegCo) by all 27 pan-democrat legislators and one pro-establishment lawmaker. Only eight pro-establishment lawmakers voted infavor of the plan, allegedly due to a miscommunication when 31
LegCo members walked out in a botched attempt to delay the vote.
As a result of LegCo’s defeat of the electoral reform plan, the current election framework—whereby the chief executive is chosen by
a 1,200-member election committee representing only 0.02 percent
of eligible voters—will be used for the 2017 chief executive election.
While Hong Kong’s government could expand the voting base byimplementing local legislation to bypass the constitutional amendment process, political divisions in LegCo make it unlikely that themethod for electing the chief executive in 2017 will differ from thecurrent method.

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Hong Kong’s press freedom ranking continued an overall downward trend in 2015, with watchdog organizations noting the enormous economic and political influence Beijing wields to exert indirect pressure on media, resulting in growing self-censorship. Some
media organizations, including television, radio, and print news
outlets, faced accusations of self-censorship over coverage of theprodemocracy movement, raising concerns about credibility. This
trend is highlighted by the shuffling of senior management and editors and controversial editorial practices at several of Hong Kong’s
most prominent news outlets. Academic freedom also came under
scrutiny in 2015 at one of Hong Kong’s top universities. The prolonged delay and ultimate rejection of the appointment of a University of Hong Kong administrator involved in the prodemocracy
movement led many in the academic community to criticize theuniversity governance structure.
In its capacity as an international financial center and offshore
RMB hub, Hong Kong is being used by the Mainland to pushthrough reforms, including development of its domestic financial
market, improvement of the international competitiveness of its
firms, and managed liberalization of its capital account. As of December 2014, a total of 149 authorized banking institutions inHong Kong engaged in RMB business, with RMB deposits worth
more than $161 billion (RMB 1 trillion), accounting for approximately 24 percent of foreign currency deposits among authorized
institutions there.
The Hong Kong and Chinese stock markets are also bringing thetwo economies closer together. In line with China’s ‘‘going global’’strategy, which encourages Chinese firms to both invest abroadand expand overseas operations, mainland firms are increasingly
participating in Hong Kong’s equity market—among the $30 billion
in initial public offering funds raised last year on the Hong Kong
Stock Exchange, Chinese firms contributed approximately 86 percent. As of December 31, 2014, 876 mainland enterprises werelisted on the Hong Kong exchange—50 percent of the total numberof listed companies—accounting for 60 percent of the total market
capitalization. Mainland enterprises benefit from raising capital ina freely convertible currency and taking advantage of the Hong
Kong market’s greater liquidity and its more effective and better
regulated risk management investment instruments.
Meanwhile, several new developments aimed at enhancing market transparency, foreign investor access on the Mainland, andcross-border fund flows have been introduced. The Shanghai-Hong
Kong Stock Connect, launched in November 2014, enables institutional or retail foreign investors for the first time to trade sharesin mainland China-based companies traded on Chinese exchanges.
Though daily trading through the link has been minimal, it has
provided additional liquidity for Hong Kong’s stock market andsupports the region’s offshore RMB business and its role as a financial gateway to China. However, a number of restrictive featuresof the stock link may create operational complexity and introduce
risk, especially given recent volatility in mainland stock markets.
In July 2015, Chinese and Hong Kong financial regulators jointly
announced the introduction of a long-awaited ‘‘Mutual Recognitionof Funds’’ initiative, giving international asset managers a channel

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to access mainland China’s growing and previously untapped retailinvestor market boosted by a growing middle class and a huge poolof domestic savings.
Conclusions• In June 2015, Hong Kong’s Legislative Council voted down
electoral reform legislation based on a framework designed by
China’s central government. This framework would have limited the candidates eligible for chief executive nomination to
those acceptable to Beijing. As a result, election of the chief executive in 2017 will employ the same method as the 2012 chief
executive election, whereby a 1,200 member committee elects
the leader.
• Members of the general public, legislators, students, and othervested parties lack consensus on how to pursue electoral reform in Hong Kong’s future chief executive and Legislative
Council elections.
• Press freedom in Hong Kong is increasingly under pressure
due to recent instances of violence against journalists, increasing political and economic pressure to self-censor, and use of
economic coercion to disrupt independent reporting. The absence of a freedom of information law in Hong Kong also contributes to a lack of transparency with regard to open accessto and preservation of government records.
• Hong Kong’s world-class economy, particularly its capital markets, is playing an increasingly pivotal role in mainland China’s efforts to push through financial reforms, including development of its domestic financial market, improvement of theinternational competitiveness of its firms, and liberalization of
its capital account.
• In an effort to internationalize the renminbi, among other objectives, Hong Kong and mainland China have jointly established a number of pilot programs, including the ShanghaiHong Kong Stock Connect and the Mutual Recognition ofFunds initiative, to boost international participation in China’s
markets. These developments are expected to enhance market
transparency and foreign investor access on the Mainland andenhance cross-border fund flows.
• Deepening integration exposes Hong Kong to the risks inherent in China’s volatile equity markets, presenting operationalrisks for some investors. Moreover, foreign investment into
mainland markets through Hong Kong still faces structuraland quantitative limitations.
THE COMMISSION’S KEY RECOMMENDATIONS

dkrause on DSKHT7XVN1PROD with USCCThe Commission considers 10 of its 37 recommendations to Congress to be of particular significance. The complete list of recommendations appears at the Report’s conclusion on page 563.
The Commission recommends:

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• Congress assess the coverage of U.S. law to determine whether
U.S.-based companies that have been hacked should be allowed
to engage in counterintrusions for the purpose of recovering,erasing, or altering stolen data in offending computer networks. In addition, Congress should study the feasibility of aforeign intelligence cyber court to hear evidence from U.S. victims of cyber attacks and decide whether the U.S. government
might undertake counterintrusions on a victim’s behalf.
• Congress require the Administration to provide a comprehensive, publicly-available assessment of Chinese foreign direct investments in the United States prior to completion of negotiations on a Bilateral Investment Treaty. This assessment
should include an identification of the nature of investments,
whether investments received support of any kind from the
Chinese government and at which level (national, provincial, or
municipal), and the sector in which the investment was made.
• Congress consider legislation conditioning the provision of market access to Chinese investors in the United States on a reciprocal, sector-by-sector basis to provide a level playing field for
U.S. investors in China.
• Congress direct the U.S. Department of Defense, U.S. Air
Force, and relevant agencies within the U.S. Intelligence Community to jointly prepare a classified report that performs a
net assessment of U.S. and Chinese counterspace capabilities.
The report should include a strategic plan for deterring, withactive and passive systems, strikes against U.S. assets in lightof other countries’ rapid advancements in kinetic and non-kinetic counterspace technology.
• Congress assess the ability of, and if necessary amend, existing
U.S. trade laws to address China’s industrial policies, abusive
legal or administrative processes, and discriminatory treatment of foreign investors, and to determine the consistency ofthese practices with China’s World Trade Organization commitments.
• Congress continue to support initiatives to harden U.S. basesin the Asia Pacific, including the Pacific Airpower Resiliency
Initiative, in order to increase the costliness and uncertainty of
conventional ballistic and cruise missile strikes against thesefacilities, and thereby dis-incentivize a first strike and increase
regional stability.
• Congress continue to support the U.S. Department of Defense’s
efforts to reduce the vulnerability of U.S. space assets throughcost-effective solutions, such as the development of smaller andmore distributed satellites, hardened satellite communications,and non-space intelligence, surveillance, and reconnaissanceassets such as unmanned aerial vehicles.
• Congress require the Administration to prepare an annualclassified report on foreign government-sponsored cyber attacks against all Federal Government agencies, including but
not limited to an assessment of the damage and the affectedagencies’ plans to secure their networks against further attacks.

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• Congress direct the U.S. Government Accountability Office toprepare a report assessing the U.S. New Silk Road policy. This
report should evaluate the New Silk Road’s strengths andweaknesses and its current status and future prospects formeeting U.S. policy objectives in Central Asia. This report
should investigate how U.S. policy toward Central Asia intersects and interacts with U.S. policy toward China more broadly, and how the U.S. and Chinese Silk Road initiatives interact
in Central Asia.
• Congress pass legislation to require the Securities and Exchange Commission (SEC) to make clear to publicly traded
companies and their investors the circumstances under which
the theft of intellectual property through a computer network
intrusion may be a material fact that might affect a company’s
revenues and should therefore be required to be disclosed to
the SEC.

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INTRODUCTION

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Chinese Communist Party (CCP) General Secretary and President Xi Jinping’s first state visit to the United States in September
2015 was lauded as a success by Obama Administration officials
and Beijing. The pomp and circumstance and diplomatic niceties,
however, were overshadowed by a long and growing list of grievances the United States has against China’s behavior, and resulted
in a very limited set of deliverables. The grievances include the alleged theft by Chinese hackers of personal records of 22 million
people, including U.S. government employees, their families, andfriends; state-sponsored cyber espionage against U.S. companies tosteal trade secrets and pass them to Chinese competitors; an unprecedented island-building campaign in disputed waters of theSouth China Sea; and a series of new laws restricting access by foreign companies to China’s market or demanding technology transfers in return for such access.
In November 2013 the CCP in its Third Plenum appeared to accept the reality of slower growth, professing a commitment to allow
the market to play a greater role in the economy and to rebalance
its economy away from reliance on fixed investment and exports toone based on greater domestic consumption. However, since grossdomestic product (GDP) growth slipped to, at most, 7 percent in thefirst half of 2015 according to Chinese official statistics and evenlower according to unofficial estimates, the government appears tobe putting on hold or even reversing reforms in order to chasehigher GDP growth. The Chinese government’s heavy intervention
to prop up the stock market after its bubble burst this summer
undermined confidence in China’s commitment to reform and theChinese public’s faith in the government’s ability to manage theeconomy.
The Chinese government’s emphasis on boosting performance in
response to the slowdown this year reinforces the idea that for the
CCP, legitimacy and popular support stem from its ability to deliver high economic growth. It also serves as a reminder that for
China, economic reform does not mean a free market economy;rather, it means that while certain sectors of the economy will be
subject to some market discipline, the government intends to retain
a dominant role.
Meanwhile, the U.S. trade deficit with China continues to increase, and the enthusiasm among some in the West that marked
China’s admission to the World Trade Organization in 2001 is waning. This is partly explained by China’s economic slowdown, but isalso caused by China’s efforts to substitute domestic production forthat of its trade partners. China is a less welcoming place for foreign companies. A series of newly adopted or proposed Chinese
laws favors domestic companies and could seriously undermine theability of U.S. and other foreign companies to do business there.
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36
The most problematic of these is the National Security Law, whose
scope is vague and so broad it covers the economy, environment,Internet, and space exploration. Other areas of concern are thedraft cybersecurity law, which authorizes even broader discretionby the government to control the flow of information online; a draft
counterterrorism law, which could require foreign companies toturn over encryption keys; and a draft law threatening the operations of foreign nongovernmental organizations in China.
Economic struggles at home mean external trade and investment
are again becoming a more important part of the Chinese government’s plan to prop up growth. China’s ‘‘Silk Road’’ initiatives inCentral and Southeast Asia, the Asian Infrastructure Investment
Bank, and the New Development Bank, among other institutions,reflect China’s strategy of extending its diplomatic reach whileboosting Chinese exports by creating demand for Chinese-built infrastructure across Asia. Chinese government officials see these initiatives as outlets for massive overcapacity at home, especially insuch industries as steel and cement.
The economic slowdown may weaken public support for the government, which could encourage nationalist displays and adventurism abroad. Indications of such a trend are already manifesting,most notably in the South China Sea. Although China has pursued
its maritime claims there with increasing assertiveness since 2009,
its island-building campaign begun in late 2013 and continuing in2015 represents an unprecedented level of expansion. With 2,900
acres reclaimed so far, China is rapidly pursuing an unrelenting
strategy of incremental steps which have not thus far been effectively counteracted and which, taken together, present the smaller,
weaker claimants in the region with a fait accompli.
The man-made islands are all the more provocative because they
are being outfitted with a range of military infrastructure—fromairstrips to artillery—which will enable China’s increasingly powerful navy and air force to project power deep into the South China
Sea and beyond. This is just the latest indication, contrary to reassurances from Beijing, that China’s military modernization is challenging decades of U.S.-led peace and stability in the Asia-Pacificregion. Other elements of China’s military modernization are cause
for concern as well. China’s conventional missile forces, having undergone both quantitative and qualitative growth in recent decades, are capable of targeting U.S. ships and bases in the Pacific.
Some nuclear missiles are capable of targeting the continental
United States. Meanwhile, China is pursuing offensive capabilities
in space and cyberspace, which it refers to as ‘‘the new commanding heights in strategic competition.’’ Deployed in a conflict,
China’s counterspace and offensive cyber capabilities could enable
China to neutralize an otherwise militarily superior adversary. In
short, China’s military modernization is designed to counter key aspects of U.S. military power.
These developments would be of lesser concern if China were
demonstrating itself to be a force for democracy, rule of law, andresponsible governance on the world stage. China has taken someaction to contribute to global peace and security through antipiracy
patrols, peacekeeping operations, and humanitarian assistance anddisaster relief efforts. At the same time, though, China’s willing-

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ness to empower corrupt elites in other countries often undermines
good governance and human rights. Meanwhile, Beijing continues
to undermine the autonomy of Hong Kong, and use incentives andintimidation to draw Taiwan closer to the Mainland.
The expectation in the United States of economic reforms when
Xi Jinping came into power has not yet been borne out by his government’s performance. Instead, President Xi has not been able toresist the temptation of resorting to old economic tools—including
government subsidies for favored industries, currency manipulation, overinvestment in fixed assets, and excessive intervention in
the financial system—in order to avoid short term dislocation andretain popular support. At the same time, the government’s military buildup, expansion in the South China Sea, and crackdown on
dissidents and journalists have created significant concern elsewhere in Asia and increased doubts about China’s intentions as it
asserts itself on the world stage.

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CHAPTER 1
U.S.-CHINA ECONOMIC
AND TRADE RELATIONSSECTION 1: YEAR IN REVIEW:ECONOMICS AND TRADE
Introduction
Although China boasted stronger-than-expected growth in 2015,
the year was marked by often record-setting downturns and government intervention in the workings of its economy. China has acknowledged that its growth has been driven by high levels of investment in manufacturing capacity and infrastructure, which is
not sustainable; therefore, the Chinese government announced inpolicy statements that the economy needs to shift to a consumption-driven growth model. To address these structural imbalances,
Chinese President and General Secretary of the Chinese Communist Party (CCP) Xi Jinping laid out a sweeping economic reform agenda in the 2013 Third Plenary Session of the 18th CCP
Central Committee (hereafter ‘‘Third Plenum’’).* However, responding to signs of economic weakness in 2015, in particular falling
global exports and slowing gross domestic product (GDP) growth,
the government resorted to stimulus measures to chase growth targets, rolling back some reforms, intervening to support the faltering stock market, and devaluing its currency, the renminbi(RMB).
On the external side, China is failing to deliver on its rebalancing pledge as well. Despite Chinese leaders’ stated intent to reduce reliance on exports as a source of growth, China continues to
run massive global trade surpluses—an uninterrupted trend since1995. In 2014, China’s global trade surplus in goods and services
reached $382 billion. China’s trade relationship with the UnitedStates is its most unbalanced: In 2014, the U.S. goods trade deficit
with China increased by 7.5 percent year-on-year to $342.6 billion,a record. And in the first eight months of 2015, the U.S. trade deficit in goods with China totaled $237.3 billion, a 9.7 percent increase year-on-year, raising troubling questions for the bilateral relationship.
This section explores China’s external and internal rebalancing
and the evolution of U.S.-China bilateral engagement since thedkrause on DSKHT7XVN1PROD with USCC

* For more on President Xi’s economic reform priorities and pledges (the Third Plenum reforms), see Nargiza Salidjanova and Iacob Koch-Weser, ‘‘Third Plenum Economic Reform Proposals: A Scorecard,’’ U.S.-China Economic and Security Review Commission, November 19,
2013.

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Commission’s 2014 Annual Report. It also serves as an introduction
to a comprehensive assessment of China’s changing economy and
U.S.-China economic interaction that appears in subsequent sections. For an in-depth examination of the regulatory environment,competition policy, and other factors related to treatment of foreign
firms, see Chapter 1, Section 2, ‘‘Foreign Investment Climate in
China.’’ For a full treatment of China’s economic rebalancing andreform priorities, see Chapter 1, Section 3, ‘‘China’s State-Led Market Reform and Competitiveness Agenda.’’ And see Chapter 1, Section 4, ‘‘Commercial Cyber Espionage and Barriers to Digital Trade,’’for analysis of the Chinese government’s efforts to boost its domestic companies by state-sponsored cyber theft of U.S. trade secrets.
China’s Domestic Rebalancing
The Chinese government proclaimed a major realignment of theChinese economy from one driven by fixed investment and exports
to one driven more by domestic consumption. The leadership under
President Xi has acknowledged that a managed slowdown is a necessary component of this rebalancing—the official GDP target has
been reset to ‘‘approximately 7 percent’’ for 2015.1 The government
has said, however, that weakness in key indicators calls for additional measures to prevent growth from falling below the target.
As China registered its slowest economic growth in 24 years, thesenior leadership in 2014 began to promote the ‘‘new normal’’ principle,2 the core tenets of which are to:• Transition from high-speed growth to medium-high-speed
growth;• Optimize and upgrade the economic structure; and• Transition from a factor- and investment-driven economy to an
innovation-driven economy.3
The ‘‘new normal’’ principle reinforces China’s long-held objectives—stated repeatedly since the 11th Five-Year Plan (2006–2010)—to focus on the quality of growth and rebalance the economy
toward consumption, services, and high-tech manufacturing. According to Chinese policymakers, this would also mean abandoning
the low-margin and low-value-added assembly of imported parts,
certain energy-intensive manufacturing, and highly polluting mining operations.
In 2014, China appeared to make progress in its rebalancing
agenda: GDP growth slipped to 7.3 percent, its lowest annual ratesince 1990.4 It was also 0.2 percentage points short of the official
government target, the first time this happened in over a decade(see Figure 1). In allowing the GDP to miss its official target of 7.5
percent, the Chinese government appeared to cross an important
psychological threshold, signaling it would indeed accept slower,
more balanced growth. However, the Chinese government’s commitment to reform began to falter as growth in 2015 fell to theslowest rate since early 2009—7 percent in each of the first twoquarters and 6.9 percent in the third quarter according to official
estimates. The Chinese government started introducing measures
to boost growth, and by the time the mainland stock exchange fell
into turmoil in June 2015, the government was in full rescue mode.

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The People’s Bank of China (PBOC) has attempted to stimulate theeconomy by lowering interest rates six times since November 2014
to encourage borrowers; it has also reduced banks’ reserve requirement ratios (RRR) four times in 2015 to loosen lending.5
Figure 1: China’s Actual and Targeted Real GDP Growth(year-on-year)

Source: World Bank; International Monetary Fund (IMF); China’s National Bureau of Statistics.

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Defying Forecasts: The Reliability of China’s GDP Data
China’s official statistics showed better-than-expected GDP
growth in the first half of 2015—7 percent—giving rise to speculation that the data were flawed and exaggerated. China’s National Bureau of Statistics stepped in to dispel the rumors, saying the data were accurate,6 but analysis of private estimatesand synthetic measures of growth shows something is indeed
amiss in China’s reporting, especially the politically sensitive
GDP growth rate.
Unofficial estimates of China’s growth in the first half of 2015
vary, but all agree the GDP was well below the reported 7 percent. For example, according to Lombard Street Research, a London-based consultancy, in the second quarter of 2015, China’s
GDP grew only 3.7 percent year-on-year, while Fathom Consulting, another research firm, estimates GDP growth in 2015
will reach only 2.8 percent.7 Rail volume, an important economic
indicator, was down 10.1 percent in the first half of the year.8
Electricity production, meanwhile, grew by just 0.7 percent—which Gary Hufbauer, senior fellow at the Peterson Institute forInternational Economics, indicates is incompatible with 7 percent GDP growth, saying that ‘‘it’s consistent with maybe 4 percent at best.’’ 942
Anemic factory utilization, a drop in fixed asset investment, andweaker consumption growth contributed to the slowdown in 2015.
Expansion of fixed asset investment, a key pillar of China’s traditional growth model, slowed to just 8.5 percent year-on-year in thethird quarter (see Figure 2). In addition, China’s disposable income
per capita increased just 7.7 percent year-on-year in the third quarter, barely up from 7.6 percent in the second quarter.10
Figure 2: Growth in Fixed Asset Investment(quarterly, year-on-year)

Source: China’s National Bureau of Statistics via CEIC database.

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The stronger-than-anticipated third quarter was supported inlarge part by a small recovery in consumption and a resilient service sector, which grew 8.6 percent, up from 8.5 percent in the second quarter.11 Retail sales of domestic goods and services, a proxy
figure for overall consumption, grew at 10.8 percent year-on-year in
September 2015, up from just 9.9 percent in April 2015 and 10.4
percent in August 2015 (see Figure 3).

43
Figure 3: China Retail Sales of Consumer Goods(monthly, year-on-year)

Source: China’s National Bureau of Statistics via CEIC database.

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Like investment, manufacturing activity has been sluggish. The
Caixin/Markit unofficial estimate shows China’s manufacturing
Purchasing Managers’ Index (PMI) at 47.2 in September 2015,
down fractionally from 47.3 in August (a reading above 50 points
distinguishes growth from contraction).12 This is the lowest PMI
reading since March 2009 and, together with ongoing fall in factory
employment, raises fears that China’s slowdown might be worsening.13
A stronger currency and low demand caused Chinese global exports to contract 5.9 percent year-on-year in the third quarter of2015 (see Figure 4). Coupled with a contraction of nearly 14.5 percent for imports compared to the third quarter of last year, China’s
production rate is unlikely to increase in the short term; typically,
declining import growth suggests a lack of demand from factories.

44
Figure 4: Growth in China’s Exports and Imports(quarterly, year-on-year)

Source: China’s Administration of Customs via CEIC database.

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Other traditional growth drivers are also showing signs of weakness. Profits at state-owned enterprises (SOEs) fell 8.2 percent
year-on-year in the first three quarters of 2015, despite government’s efforts to boost economic growth.14 Though the state sector
has declined in importance, SOEs still contribute about half of all
profits generated by Chinese companies, and SOEs in strategic sectors (such as energy) enjoy monopoly privileges. The central government, long unhappy with poor performance by SOEs, has aggressive plans to increase their efficiency. State media reported inlate April that Beijing plans to consolidate central state-owned conglomerates from 112 to 40.15 By forcing major SOEs to merge, thecentral government wants to create industrial giants or ‘‘national
champions’’ capable of competing globally.
Increasing SOE efficiency is a critical component of President
Xi’s agenda. In addition, President Xi has included SOE leadershipin his stepped-up efforts to fight corruption. The Communist Party’s top anticorruption agency, the Central Commission for Discipline Inspection, is in the midst of a two-year investigation of
SOEs in strategic sectors.16 At the time of publication of this Report, the latest target of the campaign is Wang Tianpu, the powerful head of state-owned oil company Sinopec Group.17 Several executives at another state-owned energy major, China National Petroleum Corp., are also under investigation. In fact, according toChinese media reports, 25 percent of the 124 senior SOE officials
under investigation for corruption are from SOEs in the energy sector.18 (For more on China’s efforts to restructure its SOEs, see
Chapter 1, Section 3, ‘‘China’s State-Led Market Reform and Competitiveness Agenda.’’)45
China’s Stock Market Collapse

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Following a rapid climb in the first half of 2015, Chinese stocks
began experiencing an extraordinary fall in mid-June.* On August
26, 2015, its lowest point, China’s main exchange, the Shanghai
Composite, was down 38 percent from its peak in June (see Figure5), while Shenzhen, the smaller, tech-dominated exchange, wasdown 40 percent.19 Since the two exchanges started their slide, investors have lost about $4 trillion, roughly equal to China’s total
market capitalization in 2012.20
Given the importance of the stock market in propping up sluggish economic growth, the Chinese government responded to thecollapse with heavy interference: ordering brokerages to buy, forbidding large shareholders to sell, sending police to root out ‘‘malicious’’ sellers, and dedicating significant government resources tostabilize prices (see Table 1 for a timeline of government intervention). As the market sell-off continued unabated into August, thegovernment also resorted to outright censorship of information:state-run media outlets stopped reporting about the crash except asprescribed by government guidelines to keep coverage ‘‘strictly inline with official rules intended to deter pessimism or panic’’; 21 at
the same time, nearly 200 people were punished for ‘‘spreading rumors’’ online, including discussion of the stock market.22
Analysis by Reuters shows China has spent nearly $800 billion(RMB 5 trillion) † of public and private funds to stabilize the stock
market.23 This interference represents a dramatic reversal of President Xi’s pledge at the 2013 Third Plenum that the market willplay a ‘‘decisive’’ role in all aspects of the economy.24
Even as the government put forth new policies to intervene in
the market and prevent further collapse, shares continued to tumble after a brief recovery in early July (see Figure 5). Despite thefall, as of September 30 the Shanghai and Shenzhen exchanges
were up, respectively, 31 percent and 29 percent year-on-year.25
Policies pursued by the government in search of new sources ofgrowth (beyond the traditional emphasis on fixed asset investment)
are at least partly to blame for the creation of the bubble before
stocks collapsed. Investment in the stock market was viewed as away to generate capital for SOEs, boost funding for private companies, and provide households with means of realizing returns.
State-run media outlets, including People’s Daily, ran laudatory
editorials describing the stock market growth as a sign of economic
strength.26 At the same time, regulators were reluctant or unable
to step in because of interagency infighting and the political pressure to allow stock growth.27* For a brief analysis of China’s stock market before the collapse, see Nargiza Salidjanova,‘‘China’s Stock Market Collapse and Government’s Response,’’ U.S.-China Economic and Security Review Commission, July 13, 2015.
† Unless otherwise specified, this Report uses the following exchange rate throughout: 1 RMB= 0.16 U.S. dollar.

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46
Figure 5: Shanghai Composite Index, April–September 2015

Source: Bloomberg. http://www.bloomberg.com/quote/SHCOMP:IND.
Note: The shaded area represents the period of active government intervention highlighted inTable 1.

VerDate Sep 11 2014

Government Measures to Resuscitate the Stock Market, 2015

Date

Description

June 27

The PBOC stepped in to stop a selloff in Chinese stock markets, cutting
benchmark interest and deposit rates by 25 basis points each (to 4.85
percent and 2 percent, respectively), and the RRR for some banks by 50
basis points. In a statement, the PBOC said the measures were aimed
at reducing borrowing costs and ‘‘stabilizing growth,’’ but did not provide implementation details.28 This is the fourth time the PBOC has
cut lending and deposit interest rates since November 2014; it is also
the first time since October 2008 the central bank cut both interest
rates and the RRR.29

June 29

The Ministry of Human Resources and Social Security and the Ministry of Finance published draft regulations allowing pension funds
managed by local governments to invest in stocks, funds, private equities, and other stock-related products. The proportion of investment instocks will be capped at 30 percent of the pension fund’s net value.30
The funds have combined assets worth more than $320 billion (RMB 2
trillion), of which up to $97 billion could flow into the stock market.31

July 1The China Securities Regulatory Commission (CSRC) allowed investors
to use homes and other real assets as collateral to borrow money topurchase stocks.32

July 421 brokerages set up a fund worth about $19 billion (RMB 120 billion)
to buy shares.33
The CSRC suspended all new initial public offerings to reduce volatility.34

July 5The CSRC said the PBOC will ‘‘uphold market stability’’ by providing
funds (about $42 billion, or RMB 260 billion) to a state-run margintrader, China Securities Finance Corporation (CSFC), to lend money tobrokerage firms for purchases of shares.35 The PBOC also announced
the CSFC will receive liquidity to ‘‘hold the line’’ against systemic risks,
in essence using PBOC money to directly buy shares—a radical departure from its traditional role as a lender to brokerages.36

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Table 1:

47
Table 1:Government Measures to Resuscitate the Stock Market, 2015—
Continued

Date

Description

July 8The CSRC banned shareholders with stakes above 5 percent from selling shares for six months.37

July 17

The CSRC announced it will have access to up to $480 billion (RMB 3
trillion) from the PBOC and state-owned commercial banks to stabilize
the market.38

July 27

The CSRC announced the CSFC will step up its buying of stocks, andlaunched an investigation into two major margin-lending platforms’ involvement in a coordinated selloff.39

Concerns over China’s slowing growth and falling stocks roiled
global markets.40 However, the isolation of Chinese stock markets,
where foreign investors own only about 1.5 percent of Chinese
shares, means global markets are unlikely to suffer long-term negative consequences.41 The effect on China’s domestic consumption
will likewise be contained, since stocks account for less than 15
percent of household financial assets.42 Nevertheless, this market
rout is a major source of domestic concern in China. Beyond thestock markets, commodities and emerging market currencies fell on
fears of China’s instability.43
The Chinese government’s heavy-handed response to the stock
market collapse prompted the International Monetary Fund (IMF)
in July to urge China to return to its economic reform agenda, arguing that it was ‘‘increasingly urgent’’ because the stimulus was‘‘not sustainable and is raising vulnerabilities.’’ 44 (For a full treatment of China’s reform priorities and rebalancing progress, see
Chapter 1, Section 3, ‘‘China’s State-Led Market Reform and Competitiveness Agenda.’’)U.S.-China Bilateral Trade and Investment Issues

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Despite slowing economic growth, China’s trade surplus with theUnited States continues to rise. And though U.S. exports to China
continue to increase, imports from China have grown even faster,
leading to a trade relationship that is progressively more unbalanced. In 2014, the U.S. goods trade deficit with China increasedby 7.5 percent year-on-year to $342.6 billion, a record (see Figure
6). U.S. exports to China grew 1.9 percent year-on-year, while imports increased 6 percent. This stood in contrast to 2013, when U.S.
exports to China rose by 10.2 percent, outpacing imports by 6.7
percentage points. In effect, after some progress in 2013, efforts toachieve a closer balance in bilateral trade are faltering. In the second half of 2014, U.S. exports to China actually declined by 2.1 percent year-on-year, compared to 15.9 percent growth during thesame period a year earlier.

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48
Figure 6: U.S.-China Goods Trade, 2006–2014

Source: U.S. Department of Commerce, U.S. Census Bureau, Foreign Trade Division, North
American Industry Classification System (NAICS) database, May 2015.

China’s share of the U.S. goods deficit with the world also set a
new record in 2014, reaching 47 percent (see Figure 7). The overall
goods deficit for 2014 was $722.5 billion. U.S. exports to China also
grew at a slower rate than U.S. exports to the rest of the world,counter to the prevailing trend of the past five years.
Figure 7: China’s Share of U.S. Goods Exports, Imports, and Deficit

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In the first eight months of 2015, the U.S.-China trade deficit ingoods was $237.3 billion, a $21 billion (or 9.7 percent) increase overthe same period in 2014 (see Table 2). U.S. exports to China declined 3.9 percent in the first eight months of 2015, while importsrose 6.1 percent year-on-year.

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Source: U.S. Census Bureau.

49
Table 2:

U.S. Goods Trade with China, January–August 2015
(US$ billions)
Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Exports
Imports
Balance

9.6
38.2(28.6)

8.7
31.2(22.5)

9.9
41.1(31.2)

9.3
35.8(26.5)

8.8
39.2(30.5)

9.7
41.1(31.5)

9.5
41.1(31.6)

9.2
44.1(34.9)

Balance YTD
2014
2015

(27.8)(28.6)(48.7)(51.1)(69.1)(82.4)(96.4) (125.2) (155.2) (186.1) (216.3)(108.9) (139.3) (170.8) (202.3) (237.3)

Source: U.S. Census Bureau.

The United States continues to register a surplus in services
with China; however, the amount is dwarfed by the U.S. deficit ingoods. In 2014, the U.S. trade surplus in services with China totaled $26.8 billion, a 14.5 percent increase from 2013.45 Total bilateral trade in services rose approximately 8 percent in 2014, with
U.S. service exports growing 10 percent, the same rate as in 2013,
and Chinese service imports growing 2.6 percent.46 Travel (including for business and education) is the top U.S. service export toChina, followed by charges for use of intellectual property.47
The United States continued to maintain a deficit in advanced
technology products (ATP) trade with China in 2015, a longstanding trend (see Figure 8). In the eight months of 2015, theUnited States imported $95.3 billion of ATP from China, and exported $22.6 billion, for a deficit of $72.7 billion. China now accounts for 10 percent of total U.S. ATP exports and 34 percent of
U.S. ATP imports.48

Source: U.S. Census Bureau.

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Figure 8: U.S. Deficit with China in ATP

50
Currency and Foreign Exchange Reserves
In July 2005, China moved the RMB from a tight peg to the U.S.
dollar to a managed float.* A decade later, the government retains
a firm grip on the currency: the PBOC sets a new value for the
RMB-dollar exchange rate each trading day, even while permitting
fluctuations in intra-day trading within a 2 percent trading band.
In the intervening years, the government has allowed the RMB to
slowly appreciate against the dollar—though the government reinstated the peg during the financial crisis—ultimately rising 30 percent (see Figure 9).
Figure 9: RMB to U.S. Dollar Exchange Rate, 2007–September 2015

Source: Oanda, ‘‘Historical Exchange Rates.’’ http://www.oanda.com/currency/historical-rates/.

* According to the PBOC, the RMB’s value is managed against a basket of currencies. The
composition of this basket has not been revealed.

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dkrause on DSKHT7XVN1PROD with USCCAs China’s economic growth weakened in the first half of 2015,
the Chinese government stepped in to act. On August 11, the
PBOC unexpectedly devalued the RMB by 1.9 percent, followed byanother 1.6 percent cut on August 12, and a 1.1 cut on August 13,
bringing the total devaluation over three days to 4.4 percent, thebiggest drop in decades (see Figure 10). Rather than using its traditional method of devaluing the currency—buying dollars and selling the RMB—the PBOC set the RMB daily trading rate according
to the market-determined closing price within its trading bandfrom the previous day. This change in policy does not mean the
RMB will now have a free-floating exchange rate, since the PBOC
reserves the right to reset the exchange rate to any value.

51
Figure 10: RMB to U.S. Dollar Exchange Rate, May–September 2015

After the three-day devaluation under the new trading systemprompted worries that the RMB would have a prolonged fall, the
PBOC intervened on August 15, stopping the devaluation and setting the daily RMB-dollar exchange rate marginally higher (seeFigure 10). By the end of August, the central bank spent as muchas $200 billion of China’s foreign exchange reserves to keep the
RMB from falling too much.49
The government’s decision to turn to a weaker currency raises
concerns among observers that the economy is slowing down much
faster than previously thought. This was a significant departure,since in the first half of 2015, the government has been intervening
in the foreign exchange markets to keep the RMB from depreciating against the dollar. Since May 2015—and until the August
11 devaluation—the RMB had barely moved against the dollar (seeFigure 10). Many China watchers welcomed the move to weaken
the currency because it better corresponds to the overall state of
China’s economy. According to Nicholas Lardy, senior fellow at thePeterson Institute for International Economics, if the RMB werepermitted to move based on a market-determined exchange rate, it
likely would have depreciated on its own in response to China’s
slowdown.50 Others, however, warned that China’s government devalued the RMB to help China’s battered export sector.51 China
has a history of manipulating its exchange rate for mercantilist
purposes; therefore, the burden is high on China to prove that thisdevaluation of the RMB is indeed a step toward a more market-determined rate and not an opportunistic way to boost competitiveness of its exports.
The RMB’s devaluation comes at a time when China is seeking
a broader international role for its currency. In May 2015, the IMF
announced that, in its view, China’s currency was ‘‘no longer undervalued,’’ citing the RMB’s appreciation over the previous 12
months.52 This announcement marked an important reversal by

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Source: Oanda, ‘‘Historical Exchange Rates.’’ http://www.oanda.com/currency/historical-rates/.

52

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the IMF after more than a decade of criticizing China for tightly
managing the RMB’s value.
While acknowledging that the RMB ‘‘had appreciated in real effective terms,’’ the U.S. government believes that China’s currency‘‘remains below its appropriate medium-term valuation.’’ 53 This isa change from its previous assessment that the RMB is ‘‘significantly undervalued.’’ In its October 2015 semiannual report to Congress, the U.S. Department of the Treasury pointed to China’s highcurrent account surplus and lack of sufficient domestic rebalancing
toward consumption over investment as indicators that ‘‘core factors that have driven RMB appreciation remain in place.’’ 54 The report also highlighted that China’s central bank, the PBOC, continues to intervene in the value of the RMB.55 Following China’s
move to a new exchange rate mechanism, Treasury said it would
carefully monitor its implementation—specifically, whether China
allows the RMB to respond to market forces—and called for further
exchange rate policy transparency.56 The only way of determining
the actual value of the RMB against the dollar would be to allow
the Chinese currency to be freely traded on international currency
markets without government interference—something Beijing has
steadfastly refused to do.
The IMF’s May 2015 announcement comes amid China’s efforts
to promote the RMB for inclusion as a reserve currency in the Special Drawing Rights (SDR) basket at the IMF.* Chinese authorities
have stated publicly their interest in including the RMB in the
SDR basket. IMF First Deputy Managing Director David Lipton
said, ‘‘RMB inclusion [in the SDR basket] is not a matter of ‘if’ but‘when.’ ’’ 57 The IMF’s decision on the SDR basket is expected in November 2015; in August, however, the IMF indicated that following
the decision, the new basket will become effective starting October
2016 rather than January 2016 as is customary.58 A currency mustbe ‘‘freely usable’’ to be eligible for inclusion—a criterion China
does not meet because it maintains strict controls over movementof capital over its borders and the amount the RMB can moveagainst the dollar.59 The IMF reviews composition of the SDR basket every five years; therefore, if the RMB were not included in2015, then it would not be up for reconsideration until 2020.
The Chinese government’s intervention to keep the RMB steady
before the August 11 devaluation and after partly explains why
China’s foreign exchange reserves declined † from $4 trillion lastyear to $3.51 trillion in September 2015.60 China’s official holdingsof U.S. Treasuries ‡ recovered in August to reach $1.27 trillion,
after falling more than $30 billion in July 2015 (Japan is in second
place, with $1.20 trillion).61* The SDR is an international reserve asset created by the IMF. Currently, the SDR basket
is composed of the U.S. dollar, euro, pound, and yen. See International Monetary Fund, ‘‘Special
Drawing Rights (SDRs),’’ April 9, 2015.
† Other causes of the decline in China’s foreign reserves are capital flight (estimates put theamount at $250 billion to $300 billion in the six months to March 2015) and China’s contribution to the two multilateral development institutions it has spearheaded, the Asian Infrastructure Investment Bank and the New Development Bank, though the amounts in both cases are
relatively small.
‡ Because the Chinese government also buys unregistered Treasuries on the secondary market—purchases that do not show up in official tallies—China’s actual holdings of U.S. government securities are higher than officially reported.

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53
Chinese Investment in the United States
Chinese investment in the United States continued to rise in2015.* According to data from Rhodium Group, the stock of Chinese foreign direct investment (FDI) in the United States grewfrom $2.5 billion in 2005 to $47.6 billion in 2014, with $11.9 billion
worth of deals completed in 2014 alone.62 In the first six monthsof 2015, Chinese investors spent $6.4 billion in the United States,
nearly double the amount for the same period last year (see Figure 11).
Figure 11: Chinese FDI in the United States, 2000–2015H1

Note: Data for 2015 are for the first six months.
Source: Rhodium Group, ‘‘China Investment Monitor.’’ http://rhg.com/interactive/china-investment-monitor.

* This section relies on private, rather than official, estimates of Chinese FDI in the UnitedStates. Official statistics (both U.S. and Chinese) underestimate the true volume of Chinese investment because they do not fully account for flows of FDI, including through Hong Kong andother offshore financial centers. Official data are also provided after a significant delay, whichhinders analysis. For example, as the International Trade Administration (ITA), a bureau within the U.S. Department of Commerce, stated in a 2013 report on Chinese FDI in the UnitedStates, estimates from the Rhodium Group showed $6.5 billion of FDI flows from China to theUnited States in 2012, while U.S. government estimates showed only $219 million for the same
year. In the same report, ITA said it is ‘‘important to be aware of different estimates’’ of Chinese
investment. ITA noted that private sector valuations employ different definitions of FDI, datagathering mechanisms, and accounting methods that lead to differences in reported value of investments. See International Trade Administration, Report: Foreign Direct Investment (FDI) in
the United States from China and Hong Kong SAR, July 17, 2013.

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The biggest transaction so far this year is the $1.95 billion acquisition of the Waldorf Astoria hotel in New York City by Anbang,a Chinese insurance company (see textbox below). This continues
the trend of sizable investments by Chinese companies in U.S. realestate, including residential and commercial properties.63 The information and communications technology sector is also a major recipient of Chinese investment. Chinese computer company Lenovo’s
acquisitions of Motorola Mobility (for $2.9 billion) and IBM’s x86
server business (for $2.1 billion) were the two biggest deals by Chi-

54
nese investors in the United States in 2014. This year, Tsinghua
Unigroup, the investment arm of one of China’s top universities,
reportedly wanted to acquire U.S. chip maker Micron for $23 billion.64 News of the rumored deal prompted concern from observers
and policymakers about the potential national security implicationsof selling the last U.S.-based chipmaker to a Chinese SOE at thetime when cyber attacks against U.S. companies by China-based
groups are on the rise (for more on Chinese state-sponsored cybertheft, see Chapter 1, Section 4, ‘‘Commercial Cyber Espionage andBarriers to Digital Trade in China’’). Another Tsinghua subsidiary,
Unisplendour, also announced a planned acquisition: $3.78 billion
for a 15 percent stake in Western Digital, a U.S. data storage company; the deal is expected to close in early 2016.65

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U.S. Government Officials Avoid Waldorf Astoria
after the Sale
The Waldorf Astoria in New York City has historically served
as the residence for U.S. ambassadors to the UN, and for decades has been used as accommodation for U.S. diplomats during
the UN General Assembly.66 The acquisition of the Waldorf by aChinese company created a minor controversy when it was revealed that the president, White House officials, and U.S. Department of State personnel will not stay in the hotel following
the purchase. The spokesman for the U.S. Department of State
said the residency at the Waldorf of the current U.S. envoy to
the UN, Samantha Power, was under review, but would not comment on the decision.67 While U.S. government officials declined
to comment, it is widely believed the decision was prompted byfears of Chinese espionage and the announcement of an upcoming ‘‘major renovation,’’ which could be used to install surveillance equipment in the hotel.68
The Chinese government significantly liberalized regulations onoutbound investment by abolishing the requirement for: (1) Ministry of Commerce approval for nonsensitive outbound FDI, (2) National Development and Reform Commission approval for projectsof $1 billion or less, and (3) State Administration of Foreign Exchange approval of foreign exchange transactions related to FDI.69
These changes are likely to encourage more Chinese firms to invest
abroad, including in the United States.
At the same time, FDI flows into China continue to decelerate as
the investment climate for foreign firms seeking to invest in China
deteriorates. According to the U.S. Bureau of Economic Analysis, in
2014, annual U.S. FDI in China reached $6.3 billion, a 4.9 percent
decrease year-on-year. In the first half of 2015, according to Chinese statistics, investment from the United States declined 37.6
percent year-on-year, and investment from Japan, another big investor, decreased 16.3 percent.70 Alongside rising costs, increased
competition, and inadequate protection of intellectual property,
hostile and discriminatory treatment by Chinese regulators has
emerged as a key obstacle for U.S. and other foreign investors.

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55(China’s regulatory environment, competition policy issues, andother factors related to treatment of foreign firms are covered in
depth in Chapter 1, Section 2, ‘‘Foreign Investment Climate in
China.’’)A U.S.-China Bilateral Investment Treaty (BIT) currently undernegotiation has the potential to alter the bilateral investment relationship. BIT negotiations entered a new phase with China’s formal
submission of its negative list * on June 12. China made a revised
negative list offer in advance of the September summit between
President Barack Obama and President Xi. U.S. Trade Representative Michael Froman said the revised negative list, while an improvement, fell short of ‘‘the kind of high-standard agreement necessary to achieve our mutual objectives.’’ 71
U.S.-China Bilateral Engagement
World Trade Organization-Related Issues

dkrause on DSKHT7XVN1PROD with USCCThe U.S.-China relationship continues to be marked by tensions
over China’s violation of key World Trade Organization (WTO) provisions and failure to make a sufficient offer to join the WTO’s
Agreement on Government Procurement, which China agreed to do
in 2001 as part of its accession to the WTO. In December 2014,
China submitted its latest accession offer to join the Agreement on
Government Procurement, making incremental improvements inthe scope of coverage, though other parties to the Agreement—including the United States—still deemed it insufficient. The primary
improvement in the new offer is the minor addition of five provinces and new service sectors to the deal.† China has refused to include most SOEs as parties to the deal—a key demand from theUnited States.
The United States also continued to urge China to report its subsidies to the WTO. Although China agreed to do so when it accededto the WTO in 2001, it has never submitted a ‘‘complete notification of subsidies maintained by central and sub-central governments.’’ 72 In response to China’s failure to carry out its obligations,the United States has been conducting its own research and analysis, and filing with the WTO so-called ‘‘counter notifications’’ of
Chinese subsidy measures. The United States made its first such
submission in 2011, listing nearly 200 subsidies; it followed with asecond notification in October 2014, identifying over 100 subsidies.73 In their 2015 Subsidies Enforcement Annual Report to theCongress, the Office of the U.S. Trade Representative (USTR) andthe U.S. Department of Commerce noted that to date ‘‘China has
not provided a complete, substantive response to these counter notifications,’’ instead claiming that the United States has ‘‘misunderstood’’ China’s subsidy programs.74 China also refuses to discuss
this matter with the United States or to notify any of the subsidies
in question to the WTO.75* Under a negative list, only items in the list are excluded from the agreement; all other items
are included. In other words, foreign investment is prohibited or restricted in the sectors included in the negative list, but permitted in all other sectors.
† For details of China’s latest accession offer, see U.S.-China Economic and Security Review
Commission, Monthly Analysis of U.S.-China Trade Data, January 7, 2015.

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New and pending WTO cases between the United States andChina are summarized in Addendum I. Other key developments in
U.S.-China engagement at the WTO are discussed in the following
subsections.
China Ends Rare Earths Quotas, Introduces Licensing System
In January 2015, the Chinese government announced the end ofrestrictive quotas on exports of rare earth minerals, tungsten, andmolybdenum, all of which are crucial for many advanced technology
industries, including clean energy and weapons guidance systems.
The move was widely expected following the WTO dispute settlement body’s ruling (upheld on appeal) finding China’s exports restrictions on rare earths to be in violation of China’s WTO obligations.* In May, China announced it had complied with the WTO
ruling and eliminated export duties on rare earths; however, theUnited States did not agree that China was in full compliance.76
The two sides agreed to resolve the dispute in accordance with
WTO procedures; the outcome is pending.
The ending of the quotas will likely have limited impact on the
global rare earths market. One reason is that China’s exports ofrare earths—and therefore the importance of the quotas—started
to decline slightly before the WTO’s ruling when other nations,pressed by price shocks and limited supply, ramped up their own
production or sought alternatives. According to the latest estimates, as other sources of supply became available, China’s exportsof rare earths started falling below levels permitted by the quota.77
Molycorp, the only U.S. miner and producer of rare earth elements,
came online after China initially restricted exports. However, as
global prices for rare earths plunged in response to the rise of alternative sources of production or substitutes, Molycorp struggled
to turn a profit, ultimately filing for bankruptcy protection in June
2015.78
Still, the Chinese government does not plan to relinquish control
over the rare earths industry following the ending of the quotas.
The announcement from China’s Ministry of Commerce ending thequotas also introduced a licensing system for enterprises wishing
to export rare earths. Enterprises that seek to export rare earths
will need to apply for a license, with approvals decided on a caseby-case basis.79

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United States Challenges Chinese Export Subsidies at the WTO
In 2015, the USTR announced new action at the WTO over China’s ‘‘Demonstration Bases-Common Service Platform’’ program,which provides WTO-illegal export subsidies † to businesses inindustrial clusters—known as ‘‘Demonstration Bases’’—locatedthroughout China. The program targets seven critical industries:(1) textiles, apparel, and footwear; (2) advanced materials and metals (including specialty steel, titanium, and aluminum products);(3) the light industry; (4) specialty chemicals; (5) medical products;* For background on the case, see U.S.-China Economic and Security Review Commission,Monthly Analysis of U.S.-China Trade Data, April 4, 2014.
† While the WTO permits some subsidies, those that are ‘‘contingent, in law or in fact, whether
wholly or as one of several conditions, on export performance,’’ are among those deemed prohibited. See World Trade Organization, ‘‘Agreement on Subsidies and Countervailing Measures.’’

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57(6) hardware and building materials; and (7) agriculture.80 The request for consultations is a first step in the dispute settlement
process. In the meantime, the EU, Brazil, and Japan requested tojoin the consultations.
The United States alleges that under the program, ‘‘enterprisesthat meet export performance criteria and are located in 179 Demonstration Bases throughout China’’ receive cash grants and lowcost or no-cost services (such as information technology [IT], product design, and worker training).81 According to USTR estimates,
China has given almost $1 billion over a three-year period to Common Service Platform suppliers. In addition, certain Demonstration
Base enterprises have received at least $635,000 worth of benefits
annually.82 According to the USTR, exports from Demonstration
Bases comprise a significant portion of China’s exports. For example, 16 of the approximately 40 Demonstration Bases in the textiles
sector accounted for 14 percent of China’s textile exports in 2012.83
The United States has a history of challenging China’s export
subsidy programs at the WTO. The USTR brought a 2007 caseagainst subsidy programs supporting a wide range of industries, including steel, computers, and other manufactured goods,84 and a2008 case against China’s ‘‘Famous Brands’’ program, which offered
grants, loans, and other incentives to Chinese enterprises to promote their global presence.85 Both cases were ultimately settled bymutual agreements, with China agreeing to eliminate the prohibited subsidies.86 The new Demonstration Bases-Common Service
Platform program itself was discovered during consultations with
China over export subsidies to the auto industry under China’s‘‘National Auto and Auto Parts Export Base’’ program.87 Although
the consultations on the auto subsidy program began in September
2012,88 three years later they have yet to reach a resolution, andUSTR officials said they are still ‘‘actively engaged’’ with China.89

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Information Technology Agreement
On July 28, 2015, the WTO announced that negotiations to revise the Information Technology Agreement (ITA) have concluded.90 The agreement covers 201 tariff lines, including new-generation semiconductors, global positioning system (GPS) navigation
systems, tools for manufacturing printed circuits, telecommunications satellites, and touch screens.91
By the end of October 2015, each participant agreed to submit
a draft implementation schedule, with the goal of finalizing theagreement in time for the December ministerial conference in
Nairobi. The participants agreed to reduce tariffs on the covered
goods in four equal annual reductions of customs duties, beginningon July 1, 2016, and concluding on July 1, 2019.92
The original ITA went into effect in 1997 among the UnitedStates and 28 other WTO members, not including China (which did
not join the WTO until 2001).* Negotiations for a revised ITA were
begun in 2012 and slated for conclusion at the WTO Bali Summit
in December 2013. However, the process stalled because Beijing de* The ITA currently includes 81 participants, including the United States, China, South
Korea, and the EU member states. For a full list, see World Trade Organization, ‘‘Information
Technology: Schedule of Concessions.’’

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vised a long list of items it wanted to either exclude completely or
subject to tariff phaseout periods longer than those permitted
under the original ITA framework.93 The talks were suspended in
November 2013. In November 2014, the U.S. Administration announced it convinced China to table a more acceptable offer. Specifically, China agreed to: (1) revise its ITA list to include disputed
tariff lines, notably advanced semiconductors known as MCOs,
magnetic resonance imaging (MRI) machines, and high-tech testing
equipment; and (2) ensure its tariff phaseout periods comply with
the ITA framework’s three staging categories of immediate, three
years, and five years.94 Based on the U.S.-China agreement, theother ITA participants reopened the talks.
Since 1997, information technologies have proliferated, IT product trade has risen threefold, and China has become a dominant
producer and consumer of technology goods. As Table 3 demonstrates, the United States currently runs trade deficits with
China in several key technology product lines (for example, staticconverters, video game consoles, and semiconductors). In somecases, China accounts for the largest share of U.S. imports of thesegoods.
Table 3:

U.S.-China Trade in Select Technology Products(US$ millions; share %)U.S. Imports
U.S. global imports

Static converters
Video game consoles
Diodes, transistors, and semiconductors
CT scanners
MRI machines

China’s share

2002

2008

2014

2002

2008

2014

3,594
5,893

6,517
12,849

9,060
6,106

30.7%
45.0%

45.0%
90.2%

49.5%
87.9%

3,289
387
514

5,549
455
530

9,447
526
444

8.5%
1.0%
0.7%

17.2%
20.8%
4.0%

31.3%
20.6%
7.5%

U.S. Exports
U.S. global exports

Static converters
Video game consoles
Diodes, transistors, and semiconductors
CT scanners
MRI machines

China’s share

2002

2008

2014

2002

2008

2014

1,505
1,161

2,815
4,567

4,004
2,939

3.3%
0.4%

6.3%
0.4%

6.6%
0.7%

4,020
240
478

8,555
656
441

7,466
430
722

5.4%
8.0%
4.1%

5.1%
6.0%
7.4%

4.8%
17.9%
20.8%

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Source: U.S. International Trade Commission.
Note: HS Codes used for this table are static converters (850440); video game consoles(9504); diodes, transistors, and semiconductors (8541); CT scanners (9022120000); and MRI
machines (9018130000).

While the conclusion of the WTO negotiations is important, it
does not guarantee success. China has not consented to including
tariff elimination on several key products, including liquid crystal
displays (LCDs). More important, phaseout periods for the covered
items remain subject to negotiation.95 Although China may not go

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beyond the maximum phaseout period, ITA members meeting forthe first round of negotiations for the phaseouts reported China
was demanding it be allowed to phase out tariffs over the longest
period (five or seven years, depending on the product) for around
80 IT products (40 percent of the total) being considered.96 If China
succeeds in securing these phaseouts, it could use those years to establish nontariff barriers that protect sensitive products from foreign competition. Examples of such barriers include discriminatory
value-added taxes on imports, hidden subsidies for domestic producers, standards that favor indigenous products, and control overprocurement of key technologies by state-owned entities. (China is
still not a signatory to the WTO’s Agreement on Government Procurement, which generally bans discrimination against foreign
goods in government purchases.)
Minimal Progress at Seventh Strategic and Economic Dialogue
At the seventh round of the Strategic and Economic Dialogue(S&ED) talks, held in Washington on June 23–24, 2015, participants discussed over 100 issues but accomplished little. Several of
the outcomes announced at the conclusion of the S&ED merely repackaged China’s existing reforms as new commitments. Overall,the S&ED yielded slight progress on environmental and financial
issues but reached an impasse in addressing fundamental strategicand economic issues such as China’s activities in the South China
Sea, cybersecurity, anticorruption cooperation, and investment barriers. Among the limited outcomes of the S&ED are:dkrause on DSKHT7XVN1PROD with USCC

• China’s commitment to reduce intervention in the RMB exchange rate: China promised to intervene in its exchange rate
only when ‘‘disorderly market conditions’’ make it necessary.97
This commitment serves the Chinese government’s purpose of
portraying the RMB as a liberalized currency, and allows Beijing to promote the RMB for inclusion as a reserve currency in
the SDR basket at the IMF.98 As U.S. Treasury Secretary
Jacob J. Lew cautioned early on in the S&ED, ‘‘the real test
will come when the market again pushes for RMB appreciation
against the dollar.’’ 99• China’s pledge to expand foreign investors’ access to its capital
markets: The Chinese government repackaged its financial reforms as an S&ED commitment. The reforms were previously
outlined at the Third Plenum in December 2013. At the S&ED,
China once again promised to loosen restrictions on access to
its capital markets for foreign financial firms and investors,
particularly in its pilot Shanghai Free Trade Zone (FTZ).100
These promises outlined in more detail than previous commitments greater freedom for foreign firms to issue ratings on
local government bonds; set up futures, private security fundmanagement, and joint venture securities companies; and participate in interbank and listed bond markets.101 If implemented, these policies could open market access to the world’s
third-largest bond market after the United States and Japan,
though strong state controls will remain in place.102

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60• Enhanced cooperation on climate change and environment protection: The United States and China bolstered their environmental cooperation, with nearly half of the strategic outcomeslisted related to climate change and environmental protection.103 The United States and China established a formal
U.S.-China fisheries dialogue and announced the creation of
six new collaborations under the ‘‘EcoPartnerships’’ program,which brings together nonprofit, public, and private organizations to address air pollution, carbon dioxide sequestration,iron and steel slag waste, aircraft biofuel, solar thermal power,
and sea turtle migration.* 104 The two sides also highlighted
exchanges or past agreements such as the extension of the
Clean Energy Research Center in November 2014, overstating
the accomplishments of the seventh S&ED.105
President Xi Visits the United States

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President Xi Jinping made his first state visit to the UnitedStates in September 2015. Given the daunting list of U.S. complaints against China’s conduct—including commercial cyber espionage and a worsening foreign investment climate in China—expectations for substantive breakthroughs were low.
President Xi started the visit in Seattle, delivering a speech to650 business leaders and other guests which sought to dispel concerns about China’s slowing growth and reassure the U.S. government and companies that China remains committed to its reform
agenda. President Xi said China will not manipulate its currency,
discriminate against foreign businesses, or engage in cyber theft.106
For all its rhetorical flourish, the speech was light on substance,with few firm statements or concessions on the direction of Chinese
government policies in key areas of friction.
After Seattle, President Xi traveled to Washington for a meetingwith President Obama. The two countries announced several cooperative efforts, including on commercial cyber espionage and climate change. On commercial cyber espionage, the joint factsheet
issued by the United States and China said that ‘‘neither country’s
government will conduct or knowingly support cyber-enabled theftof intellectual property, including trade secrets or other confidential business information, with the intent of providing competitive
advantages to companies or commercial sectors,’’ though President
Xi continued to deny that China ever engaged in cyber espionage
for economic purposes (for an in-depth assessment of President Xi’s
Seattle visit and the cyber agreement, see Chapter 1, Section 4,‘‘Commercial Cyber Espionage and Barriers to Digital Trade’’).107
The announcement on cooperation to combat climate change wasmore substantial. China confirmed that it plans to launch in 2017a national emissions trading system (known as cap-and-trade),which will cover power generation, steel, cement, and other industrial sectors.108 China has seven pilot emissions trading systems,
and originally planned a nationwide system for 2015 and then2016, but the deadline kept getting delayed due to difficulties of* For additional analysis on China’s clean energy policy and U.S.-China clean energy cooperation, see U.S.-China Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 183–226.

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scaling up local projects nationally and lack of transparency inpricing and quota allocations.109 The delay prompted some skepticism over the summit announcement, with some observers saying
the 2017 start date refers only to the initial stages of the nationwide implementation.110
Presidents Obama and Xi also expressed a ‘‘common vision’’ for
UN climate talks in Paris in December 2015.111 China, one of theworld’s biggest suppliers of public infrastructure, promised to provide $3.1 billion (RMB 20 billion) to a bilateral fund designed tohelp developing countries combat climate change.112
No substantial progress was announced on the BIT. A statement
released by the White House said both presidents ‘‘reaffirm as a
top economic priority the negotiation of a high standard BIT’’ andpromised to ‘‘intensify the negotiations.’’ 113 The statement went on
to commit both governments to ‘‘limit the scope of their respective
national security reviews of foreign investments (for the UnitedStates, the CFIUS process) solely to issues that constitute national
security concerns, and not to generalize the scope of such reviews
to include other broader public interest or economic issues.’’ 114 The
statement is directed at Chinese concerns over U.S. review of Chinese acquisitions, and U.S. concerns over unfair treatment of foreign companies in China, but lacks firm commitments, raisingquestions about its practical significance.
China’s Financial Statecraft
This year China launched several initiatives that will extend its
global reach and boost Chinese exports by creating demand for Chinese-built infrastructure across Asia. Together with China’s ‘‘Silk
Road’’ initiatives in Central and Southeast Asia, the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank
(NDB), among other institutions, reflect China’s strategy of ‘‘targeting gaps within established intergovernmental organizations’’ topush ‘‘towards a realignment of the international order.’’ 115 (For an
in-depth discussion of the Silk Road policies in Central Asia, see
Chapter 3, Section 1, ‘‘China and Central Asia’’; for Chinese activities in Southeast Asia, including the role of China-led development
institutions, see Chapter 3, Section 2, ‘‘China and Southeast Asia.’’)dkrause on DSKHT7XVN1PROD with USCC

Asian Infrastructure Investment Bank
In June 2015, almost two years after President Xi first proposed
the idea, China launched the AIIB to provide loans for construction
projects in Asia.116 Though no Western nation signed the 2014
Memorandum of Understanding (MOU) to become a founding AIIB
member,* by the time the bank launched in 2015, it received backing from 50 countries, including many U.S. allies, despite allegedpressure from the United States not to join. The United Kingdom
became the first Western nation to announce its intention to join
the AIIB, followed days later by France, Germany, Italy, Switzerland, and Australia.117* The founding AIIB members are Bangladesh, Brunei, Cambodia, China, India, Kazakhstan,
Kuwait, Laos, Malaysia, Mongolia, Burma (Myanmar), Nepal, Oman, Pakistan, the Philippines,
Qatar, Singapore, Sri Lanka, Thailand, Uzbekistan, and Vietnam. Xinhua (English edition), ‘‘21
Asian Countries Sign MOU on Establishing Asian Infrastructure Investment Bank,’’ October 24,
2014.

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62
The AIIB will be headquartered in Beijing, with initial capital of$50 billion and an authorized capital of $100 billion.118 Share allocation will be based on GDP, with China as the largest shareholder. According to the announcement from China’s Ministry of
Finance, China supplied about 30 percent of the $100 billion initial
operating capital and has 26.1 percent of the voting power. India
and Russia, the second- and third-largest shareholders, will have
7.5 percent and 5.9 percent voting power, respectively.119 Since
major decisions require 75 percent agreement, China will have defacto veto power.
Proponents argue the AIIB provides long overdue competition tointernational financial institutions and promises to address theunmet demand for infrastructure investment. The AIIB’s creation
can be attributed in part to China’s frustration ‘‘with the lack ofgovernance reform, slow pace of project implementation, and reluctance to expand lending on the part of the existing developmentbanks.’’ 120 Despite promises sought by China to restructure thegovernance procedures at the IMF and World Bank, increases inthe voting shares for China and other emerging economies have notmaterialized due to Congressional inaction.121 According to David
Dollar, senior fellow at the Brookings Institution (and formerly theTreasury emissary to China and the World Bank country director
for China and Mongolia), the AIIB ‘‘will provide some healthy competition’’ for the IMF and World Bank.122 Dr. Dollar hopes thispressure will lead to needed IMF and World Bank reform, so China
will ‘‘buy fully into the existing institutions.’’ 123
The Asian Development Bank (ADB), World Bank, and IMF all
publicly announced support for the AIIB, and expressed interest in
partnering with the bank.124 Jim Yong Kim, president of the World
Bank, stated the AIIB ‘‘should be a very welcome addition to thecurrent situation, which is a woeful lack of financing for infrastructure.’’ 125 In 2010, the ADB estimated that infrastructure investment in Asia will require roughly $800 billion per year in financing
to meet demand between 2010 and 2020.126 Multilateral development banks and private investors have contributed $205 billion,
representing just a fraction of the demand.127
Critics argue the AIIB lacks fair governance arrangements, risks
weakening international lending requirements such as environmental and social standards, and challenges the existing international and regional lenders, namely the World Bank and theADB.128 While the White House has not publicly criticized theAIIB, it reportedly pressured U.S. allies to abstain from joining the
new bank.129 The U.S. Treasury and Japan’s Ministry of Financeraised transparency and governance objections to the AIIB’s proposed lending practices.130 China continues to rank as the leasttransparent donor nation or institution.131 As one U.S. official
asked, ‘‘How would the Asian Infrastructure Investment Bank be
structured so that it doesn’t undercut the standards with a race tothe bottom?’’ 132 Consequently, the ADB urged the AIIB to ‘‘adopt
international best practices in procurement and environmental andsocial safeguard standards on its projects and programs.’’ 133 If thebank complies, the stricter rules may attract additional AIIB members.

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New Development Bank
Launched less than a month after the AIIB—and attracting significantly less fanfare and controversy—the NDB is another Chinaled institution aiming to challenge the established global development finance order. Brazil, Russia, India, China, and South Africa(BRICS) announced the creation of the NDB at the July 2014
BRICS summit in Brazil. The bank will be headquartered in
Shanghai with initial subscribed capital of $50 billion, which will
later be increased to $100 billion. The five members will have‘‘equal shares’’ in the bank, according to the state-run news agency
Xinhua.134 The NDB will also set up a $100 billion emergency
swap fund, to which China has pledged to contribute $41 billion.135
The bank’s first leader, K.V. Kamath, is Indian, and will be followed by a Brazilian and then a Russian.
The NDB funds are to be directed toward ‘‘infrastructure andsustainable development projects in BRICS and other emerging
and developing countries’’; as such, they could fill an estimated $1
trillion infrastructure gap in low- and middle-income countries.136
However, reactions from international observers have been mixed.
Bhaskar Chakravorti, senior associate dean at The Fletcher Schoolof Law and Diplomacy at Tufts University, questioned the credibility of the new bank as a globally responsible lender, and criticized the structural inequity of its members’ contributions, roles,
and economic weight.137 In contrast, Raj M. Desai and James
Vreeland, associate professors at Georgetown University, welcomed
the bank’s creation, arguing it will exert much-needed pressure on
the World Bank and IMF to reform their quota system and accorda larger role to emerging economies.138
Implications for the United States
China’s weak growth this year and the government’s heavyhanded and haphazard intervention to stop the stock market collapse have shaken global confidence in China’s commitment to economic reform. At least in the short term, the U.S. economy remains
somewhat insulated from China’s economic difficulties. Exports to
China account for about 1 percent of U.S. GDP, while China’s relatively closed capital account means few U.S. investors will be affected by the stock market decline.
However, the slowdown—and possible deferral—of China’s rebalancing will have negative repercussions not only for the prospects
of China’s future growth, but also for the continued economic
health of its trade partners. The U.S. trade deficit with China, already the world’s largest bilateral deficit, has continued to increase
despite global economic weakness, with negative consequences for
U.S. businesses and workers. Meanwhile, China’s reliance on investment-driven growth and policies that support SOEs at the expense of the private sector and foreign competitors continues tofrustrate U.S. efforts to create a level playing field for U.S. firms.
In the international arena, the launch of the AIIB—and support
from many U.S. allies despite U.S. opposition—was seen as a major
diplomatic victory for President Xi. U.S. dominance in international
institutions such as the World Bank has provided the UnitedStates significant political and economic influence in shaping lending practices and developing international lending norms. There-

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fore, the creation of the AIIB and other similar organizations could
erode U.S. leadership and its established international economic institutions and policies.
Conclusions• In 2014, the U.S. goods trade deficit with China increased by 7.5
percent year-on-year to $342.6 billion, a new record. In the firsteight months of 2015, the U.S. trade deficit in goods with China
totaled $237.3 billion, a 9.7 percent increase year-on-year. Overthe same period, U.S. deficit with China in advanced technology
products reached $72.7 billion. China stalled on liberalizing key
sectors in which the United States is competitive globally, suchas services.
• As a consequence of domestic economic weakness, China’s statedrebalancing policies appear to have been put on hold. Instead,fearful of a protracted slowdown, the Chinese government has
been intervening in various sectors of the economy, including thestock market. However, the government’s intervention, which
failed to arrest the stock market’s fall and stabilize the economy,
undermined public confidence in the ability of China’s policymakers to successfully manage the economy.
• Although it has been ten years since China moved the RMB toa managed float, the government continues to intervene in foreign exchange markets. For the first half of 2015 the government
has prevented the RMB from depreciating, seeking its inclusionin the International Monetary Fund’s Special Drawing Rights
basket of reserve currencies. However, on August 11, the People’s
Bank of China unexpectedly devalued the RMB, giving rise tofears among observers and policymakers that the economic slowdown was becoming entrenched.
• The U.S. government’s efforts to address tensions in the U.S.China relationship through bilateral dialogue continue to yield
limited results. The latest Strategic and Economic Dialogue concluded with some progress on environmental and financial
issues, but reached an impasse in addressing fundamental strategic and economic issues such as cybersecurity, anticorruption
cooperation, and investment barriers to foreign firms in many industries.
• President Xi came to the United States in September on a state
visit, and although Presidents Obama and Xi discussed several
issues of concern, including commercial cyber espionage by Chinese actors, there were few significant breakthroughs. Among
outcomes were the statements by the two presidents that neither
country will engage in cyber espionage (though China continued
to deny any involvement in commercial cyber theft) and commitments to enhance cooperation on combatting climate change.
• China’s adherence to the World Trade Organization principles
and its Protocol of Accession remains spotty. Most recently, theOffice of the U.S. Trade Representative has engaged China overa program that provides export subsidies considered illegal by
the World Trade Organization to businesses in seven critical industries.

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• China launched two new development institutions: the Asian Infrastructure Investment Bank and the New Development Bank.
In addition to boosting China’s economy by creating export opportunities for its companies, the new banks aim to extend China’s role in the international economic order, potentially challenging established multilateral development institutions.

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Certain Measures Affecting the Automobile andAutomobile-Parts Industries

Measures Related to
Demonstration Bases
and Common Service
Platforms Programs

DS450

DS489

Sfmt 6601

February 11, 2015

September 17, 2012

Request for
Consultations

Antidumping Methodologies

DS471

In consultations;panel established

In consultations;panel not yet
formedPanel ReportAppellate
Body Report

December 3, 2013

Request for
Consultations
Panel establishedMarch 26, 2014;
report pending

Panel ReportAppellate
Body Report

StatusChina requested consultations with theUnited States regarding the use of certain methodologies in antidumping investigations involving Chinese products.

StatusThe United States requested consultations with China with regard to certain
measures providing subsidies contingent
upon export performance to enterprises
in several industries in China.

The United States requested consultations with China concerning export-contingent provisions of certain subsidies
and other incentives to automobile andautomobile-parts enterprises in China.

Pending WTO Cases Brought by China against the United States

Source: World Trade Organization; compiled by Commission staff.

Title

No.

Pending WTO Cases

Pending WTO Cases Brought by the United States against China

Addendum I:

Source: World Trade Organization; compiled by Commission staff.

Title

No.

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 1
1. Li Keqiang, Report on the Work of the Government (Third Session of the 12th
National People’s Congress, Beijing, China, March 5, 2015).
2. Yang Yao, ‘‘A New ‘New Normal,’ but with Robust Growth: China’s Growth
Prospects in the Next 10 Years,’’ in Growth, Convergence and Income Distribution:
The Road from the Brisbane G–20 Summit, Brookings Institution, November 2014,
77–82; Megha Rajagopalan, ‘‘China’s Shanghai Eliminates 2015 Economic GrowthTarget,’’ Reuters, January 25, 2015.
3. Xinhua, ‘‘Full Text of Xi Jinping’s Speech at APEC Business Leaders’ Summit Opening Ceremony,’’ November 9, 2014. Open Source Center translation. ID:
CHR2014110925583780; Li Keqiang, ‘‘Chinese Premier Li Keqiang’s Speech at
Davos 2015’’ (World Economic Forum, Davos, Switzerland, January 23, 2015).
4. Mark Wagnier, ‘‘China Cuts 2014 Economic Growth Estimate to 7.3% from
7.4%,’’ Wall Street Journal, September 7, 2015.
5. Lingling Wei, ‘‘China’s Central Bank Moves to Spur Economic Growth,’’ WallStreet Journal, October 23, 2015.
6. Tom Mitchell, ‘‘Favorable GDP Data Reflect Reality, Says China,’’ Financial
Times, July 15, 2015.
7. Greg Ip and Bob Davis, ‘‘For All Its Heft, China’s Economy Is a Black Box,’’Wall Street Journal, August 24, 2015; Ross Finley, ‘‘China Growth Probably Half
Reported Rate or Less, Say Skeptics,’’ Reuters, August 6, 2015.
8. Xinhua (English edition), ‘‘China’s Rail Freight Remains Weak,’’ China Daily,
July 25, 2015.
9. Michael Lelyveld, ‘‘China’s Economic Data Seen as Overstated,’’ Radio Free
Asia, August 10, 2015.
10. China’s National Bureau of Statistics via CEIC.
11. ‘‘China’s Economy in 3Q: Everything You Need to Know,’’ Bloomberg Intelligence (Bloomberg blog), October 19, 2015.
12. ‘‘Caixin China General Manufacturing PMI,’’ Markit Economics, October 1,
2015.
13. ‘‘Caixin China General Manufacturing PMI,’’ Markit Economics, October 1,
2015.
14. Xinhua (English edition), ‘‘China SOE Profits Tumble in Jan.–Sept.,’’ October
21, 2015.
15. Reuters, ‘‘China Plans Mergers to Cut Number of Big State Firms to 40:
State Media,’’ April 27, 2015.
16. Reuters, ‘‘China Plans Mergers to Cut Number of Big State Firms to 40:
State Media,’’ April 27, 2015.
17. Brian Spegele, ‘‘China’s Antigraft Authority Takes Aim at Sinopec,’’ WallStreet Journal, April 27, 2015.
18. Angela Meng, ‘‘A Quarter of Chinese SOE Executives Investigated for Corruption Work in Energy Sector,’’ South China Morning Post, April 28, 2015.
19. Chao Deng and Anjani Trivedi, ‘‘China Shares Wipe Out All Gains This
Year,’’ Wall Street Journal, August 24, 2015.
20. Economist, ‘‘China Embraces the Markets,’’ July 11, 2015; Saibal Dasgupta,‘‘Experts Question China’s Economic Policy,’’ Voice of America, July 15, 2015.
21. Chris Buckley, ‘‘China’s News Media Largely Silent amid Market Losses,’’
New York Times, August 25, 2015.
22. Edward Wong, ‘‘China Punishes Nearly 200 over ‘Rumors’ about Stocks,
Blasts and Parade,’’ New York Times, August 31, 2015.
23. Pete Sweeney, ‘‘Beijing’s Stock Rescue Has $800 Billion Bark, Small Market
Bite,’’ Reuters, July 23, 2015.
24. Nargiza Salidjanova and Iacob Koch-Weser, ‘‘Third Plenum Economic Reform
Proposals: A Scorecard,’’ U.S.-China Economic and Security Review Commission,
November 19, 2013.
25. Bloomberg. http://www.bloomberg.com/quote/SHCOMP:IND and http://www.
bloomberg.com/quote/SZCOMP:IND.
26. Edward Wong and Chris Buckley, ‘‘Credibility of China’s Leaders Takes a
Hit along with Markets,’’ New York Times, July 9, 2015; Charles Riley and Agnes
Chan, ‘‘How China’s Media and Risky Trading Fueled Stock Market Crash,’’ CNN
Money, July 7, 2015.
27. Edward Wong and Chris Buckley, ‘‘Credibility of China’s Leaders Takes a
Hit along with Markets,’’ New York Times, July 9, 2015; Jamil Anderlini, ‘‘China
Bank Regulators Caught in Turf War,’’ Financial Times, April 9, 2014.
28. Lingling Wei, ‘‘People’s Bank of China Cuts Interest Rates,’’ Wall Street
Journal, June 27, 2015.

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68
29. Lingling Wei, ‘‘People’s Bank of China Cuts Interest Rates,’’ Wall Street
Journal, June 27, 2015.
30. Bloomberg, ‘‘China Plans to Allow Pension Fund to Invest in Stock Market,’’June 29, 2015.
31. Reuters, ‘‘UPDATE 1—China Drafts Rules to Give Pension Funds Access to
Stock Market,’’ June 29, 2015.
32. Keith Bradsher and Chris Buckley, ‘‘China’s Market Rout Is a Double
Threat,’’ New York Times, July 5, 2015.
33. Tom Mitchell and Gabriel Wildau, ‘‘China Injects Liquidity in Attempt to Reassure Markets,’’ Financial Times, July 6, 2015.
34. Josh Horwitz, ‘‘Chinese Firms Trying to Leave U.S. Markets Are Now Stuckin Limbo,’’ Quartz, July 8, 2015.
35. Tom Mitchell and Gabriel Wildau, ‘‘China Injects Liquidity in Attempt to Reassure Markets,’’ Financial Times, July 6, 2015; Josh Noble and Gabriel Wildau,‘‘China Bans Big Share Sales in Drastic Effort to Steady Markets,’’ Financial Times,
July 9, 2015.
36. Josh Noble and Gabriel Wildau, ‘‘China Bans Big Share Sales in Drastic Effort to Steady Markets,’’ Financial Times, July 9, 2015.
37. Josh Noble and Gabriel Wildau, ‘‘China Bans Big Share Sales in Drastic Effort to Steady Markets,’’ Financial Times, July 9, 2015.
38. Bloomberg, ‘‘China Unleashes $483 Billion to Stem the Market Rout,’’ July17, 2015.
39. Chao Deng, ‘‘Three-Day Selloff Knocks 11% from China Shares,’’ Wall Street
Journal, July 28, 2015.
40. Chiara Albanese and Saumya Vaishampayan, ‘‘Global Markets Show Signsof Stabilizing amid China Fears,’’ Wall Street Journal, August 26, 2015.
41. Sophia Yan, ‘‘Foreign Investors Can’t Ignore China’s Crazy Stock Market,’’
CNN Money, July 6, 2015.
42. Free Exchange (Economist blog), ‘‘A Red Flag,’’ July 7, 2015.
43. Economist, ‘‘The Great Fall of China,’’ August 29, 2015.
44. Simon Rabinovitch, ‘‘IMF Urges China to Implement Critical Economic Reforms,’’ Financial Times, July 17, 2014.
45. U.S. Department of Commerce, Bureau of Economic Analysis, Table 9. U.S.
International Trade by Selected Countries and Areas, Balance on Services, updated
March 6, 2015.
46. U.S.-China Economic and Security Review Commission, Monthly Analysis of
U.S.-China Trade Data, June 4, 2014.
47. U.S. Department of Commerce, Bureau of Economic Analysis, U.S. Trade inServices, by Country or Affiliation and by Type of Service, October 24, 2014.
48. U.S. Department of Commerce, U.S. Census Bureau, Foreign Trade Division,
Advanced Technology Product Data—Imports and Exports—Country by ATP Group,
October 2015.
49. Robin Wigglesworth, Patrick McGee, and Jamil Anderlini, ‘‘Global Stocks Selloff as China’s ‘Black Monday’ Darkens Markets,’’ Financial Times, August 25, 2015.
50. Nicholas R. Lardy, ‘‘China’s Latest Currency Actions Are Market Driven,’’China Economic Watch (Peterson Institute for International Economics blog), August 11, 2015.
51. Inside U.S. Trade—World Trade Online, ‘‘China Currency Critics Blast New
Devaluation, but Others See Market Shift,’’ August 11, 2012; William Mauldin andMark Wagnier, ‘‘U.S. Strains Mount after China Devalues Yuan,’’ Wall Street Journal, August 11, 2015.
52. International Monetary Fund, ‘‘IMF Staff Completes the 2015 Article IV
Consultation Mission to China,’’ May 26, 2015.
53. U.S. Department of the Treasury, Report to Congress on International Economic and Exchange Rate Policies, October 19, 2015, 4.
54. U.S. Department of the Treasury, Report to Congress on International Economic and Exchange Rate Policies, October 19, 2015, 4.
55. U.S. Department of the Treasury, Report to Congress on International Economic and Exchange Rate Policies, October 19, 2015, 17.
56. U.S. Department of the Treasury, Report to Congress on International Economic and Exchange Rate Policies, October 19, 2015, 17.
57. International Monetary Fund, ‘‘IMF Staff Completes the 2015 Article IV
Consultation Mission to China,’’ May 26, 2015.
58. International Monetary Fund, ‘‘IMF Executive Board Approves Extension of
Current SDR Currency Basket until September 30, 2016,’’ August 19, 2015.
59. William Mauldin, ‘‘IMF Signals Yuan Won’t Become Reserve Currency for at
Least a Year,’’ Wall Street Journal, August 18, 2015.

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69
60. Fion Li, ‘‘Yuan Gains as China Foreign Reserves Decline Less Than Forecast,’’ Bloomberg, October 7, 2015.
61. U.S. Department of the Treasury, Major Foreign Holders of U.S. Treasury
Securities, October 16, 2015.
62. Rhodium Group, ‘‘China Investment Monitor.’’ http://rhg.com/interactive/china-investment-monitor.
63. Thilo Hanemann and Cassie Gao, ‘‘Chinese FDI in the United States: 1H
2015 Update,’’ Rhodium Group, July 15, 2015.
64. Bloomberg, ‘‘China’s Tsinghua Unigroup Plans $23 Billion Offer for Micron,’’July 14, 2015.
65. Ankit Ajmera and Lehar Maan, ‘‘China’s Tsinghua to Buy Western Digital
Stake in U.S. Tech Push,’’ Reuters, September 30, 2015.
66. Indira Lakshmanan and Terry Atlas, ‘‘Waldorf Astoria Loses U.S. Diplomats
after China Purchase,’’ Bloomberg, June 18, 2015.
67. Sophie Pilgrim, ‘‘Obama Breaks Tradition, Ditches Chinese-Bought Waldorf
Astoria,’’ France 24, September 14, 2015.
68. Olivier Knox, ‘‘Obama Looking to Avoid Waldorf Hotel in New York after
Chinese Purchase,’’ Yahoo! Politics, June 24, 2015.
69. Thilo Hanemann and Cassie Gao, ‘‘Chinese FDI in the United States: Q4
and Full Year 2014 Update,’’ Rhodium Group, January 15, 2015; Thilo Hanemannand Cassie Gao, ‘‘Chinese FDI in the United States: 1H 2015 Update,’’ RhodiumGroup, July 15, 2015.
70. Deutsche Welle, ‘‘Foreign Investments into China Slowing Down,’’ July 21,
2015.
71. Inside U.S. Trade—China Trade Extra, ‘‘Froman Says China’s Latest BIT
Offer Insufficient; Seeks Progress at Xi Visit,’’ September 22, 2015.
72. Office of the U.S. Trade Representative, 2014 Report to Congress on China’s
WTO Compliance, December 2014, 11.
73. World Trade Organization, ‘‘Request from the United States to China Pursuant to Article 25.10 of the Agreement,’’ October 6, 2011; World Trade Organization,‘‘Request from the United States to China Pursuant to Article 25.10 of the Agreement,’’ October 15, 2014.
74. Office of the U.S. Trade Representative and United States Department ofCommerce, Subsidies Enforcement Annual Report to the Congress, February 2015,12.
75. Office of the U.S. Trade Representative and United States Department ofCommerce, Subsidies Enforcement Annual Report to the Congress, February 2015,
12.
76. World Trade Organization, China—Measures Related to the Exportation ofRare Earths, Tungsten and Molybdenum, Dispute Settlement DS 431.
77. Chuin-Wei Yap, ‘‘China Ends Rare-Earth Minerals Export Quotas,’’ WallStreet Journal, January 5, 2015.
78. John W. Miller and Anjie Zheng, ‘‘Molycorp Files for Bankruptcy Protection,’’Wall Street Journal, June 25, 2015.
79. Gareth Hatch, ‘‘China Has Not Relinquished Control of Its Rare-Earth Exports,’’ Technology Metals Research, January 6, 2015.
80. Office of the U.S. Trade Representative, United States Launches Challenge
to Extensive Chinese Export Subsidy Program, February 11, 2015.
81. Office of the U.S. Trade Representative, United States Launches Challenge
to Extensive Chinese Export Subsidy Program, February 11, 2015; Jonathan Weisman and Keith Bradsher, ‘‘White House to File Case against China at the WTO overSubsidies for Exports,’’ New York Times, February 11, 2015.
82. Office of the U.S. Trade Representative, United States Launches Challenge
to Extensive Chinese Export Subsidy Program, February 11, 2015.
83. Office of the U.S. Trade Representative, United States Launches Challenge
to Extensive Chinese Export Subsidy Program, February 11, 2015.
84. See World Trade Organization, China—Certain Measures Granting Refunds,
Reductions or Exemptions from Taxes and Other Payments, Dispute Settlement
DS358.
85. See World Trade Organization, China—Grants, Loans and Other Incentives,
Dispute Settlement DS384.
86. Office of the U.S. Trade Representative, United States Wins End to China’s‘Famous Brand’ Subsidies after Challenge at WTO; Agreement Levels Playing Field
for American Workers in Every Manufacturing Sector, December 2009.
87. Office of the U.S. Trade Representative, United States Launches Challenge
to Extensive Chinese Export Subsidy Program, February 11, 2015.
88. See World Trade Organization, China—Certain Measures Affecting the Automobile and Automobile-Parts Industries, Dispute Settlement DS450.

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70
89. Inside U.S. Trade—China Trade Extra, ‘‘U.S. Seeks WTO Consultations with
China over Alleged Prohibited Export Subsidies,’’ February 11, 2015.
90. World Trade Organization, ‘‘Chinese Taipei, Thailand Confirm Acceptance ofLandmark IT Deal,’’ July 28, 2015.
91. For the full list, see Office of the U.S. Trade Representative, ITA-Expansion
Product List, July 2015.
92. World Trade Organization, ‘‘Chinese Taipei, Thailand Confirm Acceptance ofLandmark IT Deal,’’ July 28, 2015.
93. Inside U.S. Trade—China Trade Extra, ‘‘Hopes for ITA Breakthrough Fall
Flat as China Tells Others to Compromise,’’ June 26, 2014; Inside U.S. Trade—
China Trade Extra, ‘‘Froman Reports ‘Progress’ in ITA Talks with China, but No
Breakthrough,’’ May 23, 2014.
94. Inside U.S. Trade—China Trade Extra, ‘‘U.S., China Reach ITA ‘Breakthrough’; Tariff Phaseouts to Reflect 1996 Framework,’’ November 11, 2014.
95. Inside U.S. Trade—China Trade Extra, ‘‘South Korea Backs Down in ITA
Talks; Ambassadors to Meet Saturday,’’ July 17, 2015.
96. Inside U.S. Trade—China Trade Extra, ‘‘China Faces Pushback at ITA
Rounds for Seeking Long Phaseout Periods,’’ September 30, 2015.
97. U.S. Department of the Treasury, 2015 U.S.-China Strategic and Economic
Dialogue Joint U.S.-China Fact Sheet—Economic Track, June 25, 2015.
98. Ian Talley, ‘‘China Agrees to Limit Currency Interventions, Jacob Lew Says,’’
Wall Street Journal, June 24, 2015.
99. Jacob J. Lew, ‘‘Remarks by Treasury Secretary Jacob J. Lew at the Economic
Track Opening Session of U.S.-China Strategic and Economic Dialogue’’ (U.S.-China
Strategic and Economic Dialogue, Washington, DC, June 23, 2015).
100. U.S. Department of the Treasury, 2015 U.S.-China Strategic and Economic
Dialogue U.S. Factbook—Economic Track, June 25, 2015.
101. U.S. Department of the Treasury, 2015 U.S.-China Strategic and Economic
Dialogue U.S. Factbook—Economic Track, June 25, 2015.
102. Bank for International Settlements data. http://stats.bis.org/bis-stats-tool/org.
bis.stats.ui.StatsApplication/StatsApplication.html; Goldman Sachs Asset Management, ‘‘FAQ: China’s Bond Markets—First Half of 2015,’’ March 10, 2015.
103. U.S. Department of State, Office of the Spokesperson, U.S.-China Strategy& Economic Dialogue Outcomes of the Strategic Track, June 24, 2015.
104. U.S. Department of State, Office of the Spokesperson, U.S.-China Strategy& Economic Dialogue Outcomes of the Strategic Track, June 24, 2015; U.S. Department of State, Office of the Spokesperson, U.S.-China EcoPartnerships Program,
June 23, 2015; and EcoPartnerships, About Us. https://ecopartnerships.lbl.gov/about/
mission-and-leadership#12.
105. U.S. Department of State, Office of the Spokesperson, U.S.-China Strategy& Economic Dialogue Outcomes of the Strategic Track, June 24, 2015.
106. ‘‘Full Text: President Xi’s Speech on China-U.S. Ties,’’ China Daily, September 24, 2015.
107. White House Office of the Press Secretary, ‘‘Fact Sheet: President Xi Jinping’s
State Visit to the United States,’’ September 25, 2015.
108. White House Office of the Pres Secretary, ‘‘Fact Sheet: The United States andChina Issue Joint Presidential Statement on Climate Change with New Domestic
Policy Commitments and a Common Vision for an Ambitious Global Climate Agreement in Paris,’’ September 25, 2015.
109. Barney Jopson and Lucy Hornby, ‘‘China to Announce Carbon Trading
Plans,’’ Financial Times, September 25, 2015.
110. Lucy Hornby, ‘‘Doubt Cast Over Start of China Emissions Trading Scheme,’’Financial Times, September 28, 2015
111. White House Office of the Press Secretary, ‘‘Fact Sheet: The United States
and China Issue Joint Presidential Statement on Climate Change with New Domestic Policy Commitments and a Common Vision for an Ambitious Global Climate
Agreement in Paris,’’ September 25, 2015.
112. White House Office of the Press Secretary, ‘‘Fact Sheet: The United States
and China Issue Joint Presidential Statement on Climate Change with New Domestic Policy Commitments and a Common Vision for an Ambitious Global Climate
Agreement in Paris,’’ September 25, 2015.
113. White House Office of the Press Secretary, ‘‘Fact Sheet: U.S.-China Economic
Relations.’’ September 25, 2015.
114. White House Office of the Press Secretary, ‘‘Fact Sheet: U.S.-China Economic
Relations.’’ September 25, 2015.
115. Sebastian Heilmann, Moritz Rudolf, and Mikko Huotari, ‘‘China’s Shadow
Foreign Policy: Parallel Structures Challenge the Established International Order,’’
China Monitor, October 28, 2014.

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116. Simon Denyer, ‘‘China Launches Development Bank for Asia, Calls It First
Step in ‘Epic Journey,’ ’’ Washington Post, June 29, 2015.
117. Her Majesty’s (HM) Treasury and Rt. Hon. George Osborne Member of Parliament (MP), UK Intends to Become a Prospective Founding Member of the AsianInfrastructure Investment Bank, March 12, 2015; RT (Russia), ‘‘Switzerland, Luxembourg Apply for China-Led Infrastructure Bank,’’ March 21, 2015; and Ross Buckley,‘‘AIIB: Australia Does the Smart Thing, Finally,’’ Sydney Morning Herald, March
23, 2015.
118. Xinhua (English edition), ‘‘21 Asian Countries Sign MOU on Establishing
Asian Infrastructure Investment Bank,’’ October 24, 2014.
119. State Council of the People’s Republic of China, Key Legal Framework Laidfor China-Initiated AIIB, June 29, 2015.
120. David Dollar, ‘‘The Creation of the Asian Infrastructure Investment Bank Is
the Right Move for the Global Economy,’’ New York Times, October 22, 2014.
121. David Dollar, ‘‘The Creation of the Asian Infrastructure Investment Bank Is
the Right Move for the Global Economy,’’ New York Times, October 22, 2014.
122. David Dollar, ‘‘The Creation of the Asian Infrastructure Investment Bank Is
the Right Move for the Global Economy,’’ New York Times, October 22, 2014.
123. David Dollar, ‘‘The Creation of the Asian Infrastructure Investment Bank Is
the Right Move for the Global Economy,’’ New York Times, October 22, 2014.
124. Asian Development Bank, ‘‘ADB Press Release: Statement by Asian Development Bank President Takehiko Nakao,’’ October 24, 2014; World Bank, ‘‘Transcriptof World Bank Group President Jim Yong Kim’s Opening Press Conference, World
Bank/IMF Annual Meetings 2014,’’ October 9, 2014; International Monetary Fund,‘‘Transcript of a Press Briefing by Gerry Rice, Director, Communications Department, International Monetary Fund,’’ October 30, 2014.
125. Guy Taylor, ‘‘World Bank President, Obama at Odds over China Global Lending Project,’’ Washington Times, October 26, 2014.
126. Biswa Nath Bhattacharyay, ‘‘Estimating Demand for Infrastructure in Energy, Transport, Telecommunications, Water and Sanitation in Asia and the Pacific:
2010–2010,’’ Asian Development Bank, September 2010, 11–15.
127. Guy Taylor, ‘‘World Bank President, Obama at Odds over China Global Lending Project,’’ Washington Times, October 26, 2014.
128. Hugh White, ‘‘AIIB: America’s Influence in the Balance,’’ Straits Times(Singapore), October 29, 2014.
129. Jane Perlez, ‘‘U.S. Opposing China’s Answer to World Bank,’’ New York Times,
October 9, 2014.
130. Bob Davis and Prasanta Sahu, ‘‘China’s Plans for Development Bank Fall
Short,’’ Wall Street Journal, October 23, 2014.
131. Kieran Guilbert, ‘‘China Last Again in Global Aid Transparency Index,’’ Reuters, October 8, 2014.
132. Jane Perlez, ‘‘U.S. Opposing China’s Answer to World Bank,’’ New York Times,
October 9, 2014.
133. Asian Development Bank, ‘‘ADB Press Release: Statement by Asian Development Bank President Takehiko Nakao,’’ October 24, 2014.
134. Xinhua (English edition), ‘‘China Headlines: BRICS New Development Bank
Launched in Shanghai,’’ July 21, 2015.
135. Reuters, ‘‘CORRECTED—UPDATE 1—China Parliament Ratifies BRICS
Bank Agreement,’’ July 22, 2015.
136. Government of India—Prime Minister’s Office, Sixth BRICS Summit—
Fortaleza Declaration, July 16, 2014; World Bank, ‘‘Infrastructure: Overview.’’
137. Bhaskar Chakravorti, ‘‘A New Club for India,’’ Indian Express, August 4,
2014.
138. Raj M. Desai and James Vreeland, ‘‘What the New Bank of BRICS Is All
About,’’ Monkey Cage (Washington Post blog), July 17, 2014.

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SECTION 2: FOREIGN INVESTMENT CLIMATEIN CHINA
Introduction
In addition to China’s economic slowdown, foreign companies
doing business in China continue to face challenges related to China’s preferential treatment of domestic firms, including foreign investment restrictions, unequal and sometimes targeted law enforcement and implementation, weak enforcement of intellectual property (IP) rights, and lack of transparency. To explore these issues,
the Commission held a hearing in January 2015 on the foreign
investment climate in China, China’s Anti-Monopoly Law (AML)
enforcement, and continuing reform of the foreign investment
framework. This section draws on expert testimony, findings fromthe Commission’s July trip to China, and a substantial body of staff
research into China’s application and enforcement of the AML andother investment-related laws.
Trends in U.S. Direct Investment in China
Bilateral foreign direct investment (FDI) between the UnitedStates and China remains relatively low, considering the two countries have been the top recipients of global FDI since 2009 and areamong the top ten largest sources of annual outbound FDI in thelast decade.1 For the first time, Chinese FDI flows to the UnitedStates now exceed U.S. FDI flows to China by most measures due
to rapid growth in Chinese annual FDI to the United States overthe past five years, according to U.S.-based advisory firm RhodiumGroup.* 2 In contrast, growth in U.S. FDI in China over the last
five years appears to have slowed and even decreased. According
to the U.S. Bureau of Economic Analysis (BEA), in 2014, annual
U.S. FDI in China reached $6.3 billion—a 4.9 percent decreaseyear-on-year—bringing the share of U.S. FDI flowing to China
in 2014 to 2 percent of total outbound U.S. FDI.3 As seen in Figure 1, official U.S. data show accumulated U.S. FDI into China
measured $65.76 billion in 2014, representing approximately 9 percent of the stock of U.S. direct investment in the Asia Pacific regionand only 1.3 percent of the total stock of U.S. investment abroad.4
China’s Ministry of Commerce (MOFCOM) estimates the U.S. FDIstock in China is higher—reaching around $70 billion in 2012—illuminating discrepancies in official data, which are lagging significantly and often fail to capture major trends.†

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* For a more detailed analysis of U.S.-China bilateral investment, see Chapter 1, Section 1,‘‘Year in Review: Economics and Trade,’’ of this Report.
† International Trade Administration, Report: Foreign Direct Investment (FDI) in the UnitedStates from China and Hong Kong SAR, July 17, 2013; Thilo Hanemann, ‘‘China Investment
Monitor: Methodology Update,’’ Rhodium Group, July 15, 2015.

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Figure 1: U.S. FDI Stock in China, 2001–2014(cumulative, historical-cost basis)

Note: Latest data available (as of August 2015).
Source: U.S. Department of Commerce, Bureau of Economic Analysis; China’s Ministry ofCommerce via UNCTADstat database.

Across industries, official U.S. data show the top destination by
far for U.S. direct investment into China is manufacturing (52.5
percent), followed by wholesale trade (8.8 percent), depository institutions (6.1 percent), nonbank holding companies (5.3 percent), andfinance and insurance excluding depository institutions (5.2 percent) (see Table 1).5 U.S. investment in manufacturing in China
fell into several main categories, including chemicals, transportation equipment, computers and electronic products, and food (seeFigure 2). As seen in Table 1, the overall sectoral distribution of
investment has for the most part remained constant since 2007;
data for intervening years were not comprehensive.

2007

2009

2014

Mining

1,772

3,148

3,323

Manufacturing

18,461

23,972

34,552Wholesale Trade

2,015

2,645

5,834

Information

546

2,487

1,792

Depository Institutions

850

(D)

4,045

1,798

(D)

3,417

777

1,732

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Finance
Professional, Scientific, and Technical Services

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Table 1: U.S. FDI Stock in China by Sector(US$ millions)74
Table 1: U.S. FDI Stock in China by Sector—Continued(US$ millions)
2007

2009

2014

Nonbank Holding Companies

1,644

(D)

3,494

Other

2,397

(D)

7,577

Note: (D) indicates that the data in the cell have been suppressed to avoid disclosure of dataof individual companies.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

Figure 2: Total U.S. FDI in China’s Manufacturing Sector by Product, 2014

Note: For U.S. FDI, industry classifications for estimates after 1997 are based on the North
American Industry Classification System (NAICS).
Source: U.S. Department of Commerce, Bureau of Economic Analysis, China Factsheet, July
31, 2015.

* Among OECD economies and non-OECD member economies. The OECD FDI Regulatory Restrictiveness Index is based on four main indicators: ‘‘equity restrictions, screening and approvalrequirements, restrictions on foreign key personnel, and other operational restrictions (such as
limits on purchase of land or on repatriation of profits and capital). The discriminatory natureof measures is the central criterion to decide whether a measure should be scored.’’ Blanka
Kalinova, Angel Palerm, and Stephen Thomsen, ‘‘OECD’s FDI Restrictiveness Index: 2010 Update,’’ OECD Working Papers on International Investment 03 (2010): 6.

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China’s Foreign Investment Regime
Legal and Regulatory Framework
Compared to other large economies, China maintains a restrictive FDI regime. China’s discriminatory restrictions on foreign equity and onerous screening and approval requirements have placed
it at the top of the Organization for Economic Co-Operation andDevelopment’s (OECD) FDI Regulatory Restrictiveness Index *every year since its inception in 2010.6 The U.S. Department ofState estimates that in addition to over 1,000 rules and regulatory
documents related to FDI in China issued by central government

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ministries, local legislatures and governments also enact their own
rules and regulations on foreign investments in their jurisdictions.7
Taken together, these laws and policies—and the uncertain application thereof—create a complicated, opaque, and unfavorable environment for foreign investment.
In an effort to push through a series of open market reforms announced during the November 2013 Third Plenum, China’s
MOFCOM and the National Development and Reform Commission(NDRC) published a draft of a new, unified foreign investment law(FIL) on January 19, 2015.8 When it comes into effect, this new law
will apply to all forms of foreign investment and replace the three
existing laws, potentially streamlining and clarifying foreign investment procedures.* (For details on the draft FIL, see ‘‘Reformsof China’s Foreign Investment Framework’’ in this section.) Until
the unified FIL is implemented, FDI in China will continue to be
governed by three main laws: the Sino-Foreign Equity Joint Venture (JV) Law, the Sino-Foreign Cooperative JV Law, and theWholly Foreign-Owned Enterprise Law. In addition to the theselaws, the Chinese government maintains a series of policies that directly and indirectly affect foreign investors and the overall foreign
investment climate in China, including additional government approval policies, industrial policies, and processes for reviewing andappealing administrative decisions.
Foreign Investment Approval Policies

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Before a foreign-invested entity (FIE) is established in China, it
must undergo a lengthy approval process. Under the authority of
China’s State Council, MOFCOM and the NDRC maintain theCatalogue for the Guidance of Foreign Investment Industries(Catalogue), which categorizes industries as either ‘‘encouraged,’’‘‘restricted,’’ or ‘‘prohibited’’ to foreign investment.† 9 In principle,
any sector not included in the Catalogue is permitted, and foreign
investors in such sectors need only file with the local government.
In encouraged industries, foreign investors may enjoy preferential
policies such as tax incentives. In restricted industries, however,foreign investment is often subject to higher levels of government
scrutiny, stricter review, and burdensome application requirements.10 The Catalogue also outlines other structural guidelines forforeign investment in specific sectors. For example, in certain industries, foreign investment may be limited to Sino-foreign JVs, or
may require that a Chinese partner is the ‘‘controlling shareholder’’of the investment.11* MOFCOM will revise the draft FIL on the basis of comments gathered from the public, andsubmit the revised draft to the standing meeting of the State Council for deliberation and thencirculate an updated draft for the Standing Committee of the National People’s Congress to review. The FIL is not expected to be promulgated before 2018. Anna Elshafei, ‘‘China’s Draft Foreign Investment Law Could Be a Game Changer?’’ Miller Canfield, June 8, 2015.
† ‘‘Encouraged’’ sectors include high technology, green technology, energy conservation, andpollution control; ‘‘restricted’’ sectors include rare earth smelting and passenger rail transportation companies; ‘‘prohibited’’ sectors include those that fall under national security (such as
manufacturing of weapons), or are sectors where the government seeks to preserve state monopolies (such as postal companies) or protect Chinese firms from competition (such as mining ofrare earth elements). Wayne M. Morrison, ‘‘China-U.S. Trade Issues,’’ Congressional ResearchService, March 17, 2015, 24.

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Even if a foreign investment is permissible in accordance with
the Catalogue, it must undergo a lengthy series of additional approvals to be established. These approvals and the processes for obtaining them typically vary depending on the structure of the investment, the specific industry, and local regulations.12 Generally,a foreign investment must undergo the following approval processes: AML review, national security review, preapproval of enterprise name and corporate registration with the State Administration of Industry and Commerce (SAIC) or its local branches, approval of use of local land from various government authorities,
project approval from the NDRC and local development and reform
commissions (DRCs), foreign investment approval from MOFCOM,
regulatory approval, and other administrative registrations (seeFigure 3).13
Figure 3: General Approval Process for FDI in China

Note: WFOE is wholly foreign-owned enterprise. AIC is Administration for Industry and Commerce. SASAC is State-Owned Assets Supervision and Administration Commission.
Source: U.S. Chamber of Commerce, ‘‘China’s Approval Process for Inbound Foreign Direct Investment: Impact on Market Access, National Treatment and Transparency,’’ 2012, 10.

China’s national economic goals are bolstered by industrial policies, which are designed to support the development of domestic industries and the creation of national champions.14 To ensure inbound FDI supports these goals, the Chinese government identifies
different industries as desirable for or restricted to foreign investment in the Catalogue. In addition to the Catalogue, other laws
and regulations allow industrial policies to dictate treatment of foreign investors in certain industries. For example, while China’s
AML enforcement decisions reference competition law and cite alleged threats to competition, in reality these decisions do not always promote competition, and in some cases actually hinder it, infurtherance of Chinese industrial policy objectives.15 (For more de-

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Industrial Policies

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tails on China’s industrial policies, see Chapter 1, Section 3, ‘‘China’s State-Led Market Reform and Competitiveness Agenda,’’ inthis Report.)
Review and Appeal Processes
Foreign investors who fail to gain approval face a daunting appeals process that, in the end, frequently reverts to a decision infavor of domestic competitors regardless of the merits of the case.
If a foreign investor feels an application has been unreasonably denied by Chinese authorities, the investor may appeal.* In practice,
however, the appeal process has severe limitations, and foreign investors seldom use it.16 For one, the grounds for denying investment applications are very broadly defined, and approval authorities are not required to approve applications submitted to themeven if all requirements are clearly met. Another factor that discourages foreign investors from pursuing administrative appeal isthe difficulty in producing solid evidence of inappropriate conduct
on the part of reviewing agencies, given such misconduct is often
informally or orally executed. A third factor is that the decisionsof approval authorities and the People’s Courts are all subject tothe supervision of the Chinese Communist Party (CCP), and are
expected to align with the Party’s underlying policies.17
Challenges for Foreign-Invested Enterprises in China

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Overall, China remains a profitable market for U.S. companies,
though profitability levels are decreasing.18 According to a survey
conducted by the US-China Business Council (USCBC), 85 percent
of respondents † described their operations in China as profitable,
but at lower profit margins than in previous years due to risingcosts.19 Similarly, 73 percent of companies ‡ surveyed by the American Chamber of Commerce in China (AmCham China) described
their China operations in 2014 as profitable.20 In both surveys,
roughly two-thirds of respondents reported profit margins in China
comparable to or higher than margins for their company operationsin other markets.21* In theory, a rejected foreign investor may apply for administrative reconsideration within 60
days of the contested decision; the reviewing agency may affirm or nullify the original administrative decision within 60 to 90 days. If the applicant is not satisfied with the reviewing agency’s
decision, or if the reviewing agency has failed to act, the applicant may bring an administrative
lawsuit within 15 days of the reconsideration decision. U.S. Chamber of Commerce, ‘‘China’s Approval Process for Inbound Foreign Direct Investment: Impact on Market Access, National
Treatment and Transparency,’’ 2012, 20.
† The USCBC’s 2015 China business environment survey analyzed responses from 106 companies, representing roughly half of its member companies. Fifty-eight percent of respondents operate in the manufacturing sector, 47 percent in the services sector, and 13 percent in primaryindustries such as agriculture. The majority of respondents have been operating in China for
more than 20 years. US-China Business Council, ‘‘USCBC 2015 China Business Environment
Survey Results: Growth Continues amidst Economic Slowdown, Rising Competition, Policy Uncertainty,’’ 2015, 33.
‡ AmCham China’s 2015 business climate survey analyzed responses from 477 companies, representing 47 percent of the organization’s 1,012 member companies. Respondent companies werefairly evenly distributed across four lines of business, with approximately 30 percent in the resources and industrial sector, approximately 25 percent in the services (excluding information
services) sector, approximately 25 percent in the information/knowledge-based services sector,
and approximately 15 percent in research and development (R&D)-intensive industries. Nearly
40 percent of respondents forecasted a revenue of $100 million or more for 2014. American
Chamber of Commerce in the People’s Republic of China, ‘‘2015 China Business Climate Survey
Report,’’ February 2015, 7.

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Though the majority of U.S. firms still consider China a profitable market, optimism is waning (see Figure 4). According to
AmCham China’s 2015 member survey, 29 percent of respondents
described the foreign investment environment in China as deteriorating—an increase of 11 percentage points from the previous
year—with 2 percent fewer companies reporting improvements inthe environment (see Figure 5).22 Nearly half of companies surveyed—a 3 percent increase from the previous year—reported foreign enterprises are less welcome in China than in previous
years.23 Members of the EU Chamber of Commerce in China (European Chamber) are similarly concerned: only 58 percent of survey
respondents * in 2015 were optimistic about the growth outlook in
China—a 10-point drop from 2014, and an all-time low—while only
28 percent of respondents were optimistic about profitability in thenext two years.24
Figure 4: Five-Year Outlook for Business in China, 2011–2015(surveyed U.S. companies)* The European Chamber’s 2015 member survey analyzed responses from 541 respondents, or
37 percent of 1,474 member companies. The various industries were represented almost equally,
with 37 percent of respondents in the industrial goods and services sector, 35 percent in the
consumer goods and services sector, and 27 percent in the professional services sector. The majority of respondents are small- and medium-sized enterprises that employ fewer than 250 employees, and 54 percent of those surveyed have been operating in mainland China for more thanten years. EU Chamber of Commerce in China, ‘‘Business Confidence Survey,’’ June 2015, 57–
59.

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Source: US-China Business Council, ‘‘USCBC 2015 China Business Environment Survey Results: Growth Continues amidst Economic Slowdown, Rising Competition, Policy Uncertainty,’’
2015, 5.

79
Figure 5: Quality of China’s Foreign Investment Environment, 2012–2015(surveyed U.S. companies)

Source: American Chamber of Commerce in the People’s Republic of China, ‘‘2015 China Business Climate Survey Report,’’ February 2015, 19.

* The AmCham China survey categorizes the following industries as part of the resources andindustrial sector: agriculture; metals (mining and production); oil, energy, and power; chemicals;
construction, architecture, and interior design; electronics; automotive; cosmetics; other manufacturing and sourcing; and other consumer goods.
† The AmCham China survey categorizes the following as R&D-intensive industries: information, communications, and technology; clean technology; aerospace; pharmaceuticals; and environmental protection.
‡ The AmCham China survey categorizes the following industries as part of the services (excluding information services) sector: hospitality; food and beverage; healthcare services; real estate and development; banking and financial services (other than insurance); insurance; retailand distribution; transportation and logistics; and travel and leisure.

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While some of the challenges—including rising labor costs andhuman resources constraints—cited by foreign investors in China
stem from the country’s economic slowdown, investors also attribute the worsening business climate in China to the restrictive
legal and regulatory framework for foreign investment and the government’s discretionary, uneven enforcement thereof (see Table 2).
These challenges are exacerbated by the Chinese government’s industrial policies, which serve to support domestic companies in sectors deemed strategic to the development of the national economy
by extracting advantages from foreign competitors. For example, 53
percent of companies in both the resources and industrial sector *and research and development (R&D)-intensive industries †—sectors where China’s industrial policies favor domestic companies
and authorities impose localization requirements on foreign companies—felt the least welcome.25 In contrast, investors in the services(excluding information services) sector ‡ largely reported improvements in the investment environment, likely due to the recent relaxing of foreign investment restrictions in that sector to boost domestic consumption.26 Optimism among European companies surveyed reflected a similar division: those in industrial goods andservices were least optimistic about future growth and profitability,

80
while those in professional services and consumer goods and services were more optimistic.27
Table 2:Top Business Challenges for Foreign Firms in China, 2015
(surveyed U.S. and European companies)

USCBC, 2015

AmCham China, 2015

European Chamber, 2015

1

Competition with
Chinese companies in China

Labor costs

Chinese economic slowdown2

Foreign investment restrictions

Inconsistent regulatory interpretation/Unclear laws

Rising labor costs

3

Cost increases

Shortages of qualified employees

Global economic slowdown

4Intellectual property rights (IPR)
enforcement

Shortage of qualified management

Market access barriers andinvestment restrictions

5

Transparency

Increasing Chinese protectionism

Competition from Chinese
privately owned enterprises

6

LicensingRenminbi (RMB) volatility

7

Human resources

Ambiguous rules and regulations

8

Data flows

Talent attraction and retention

9

Uneven enforcement

Discretionary enforcementof regulations

10

Overcapacity in
the China market

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Note: Derived from latest information available. AmCham China only releases the top fivebusiness challenges in its survey.
Source: US-China Business Council, ‘‘USCBC 2015 China Business Environment Survey Results: Growth Continues amidst Economic Slowdown, Rising Competition, Policy Uncertainty,’’
2015, 1; American Chamber of Commerce in the People’s Republic of China, ‘‘2015 China Business Climate Survey Report,’’ February 2015, 20; EU Chamber of Commerce in China, ‘‘Business Confidence Survey,’’ June 2015, 17.

During the Commission’s trip to Beijing and Hong Kong in July,
U.S. business representatives expressed grave concern about the‘‘chilling effect’’ of a new series of Chinese laws on the prospects offoreign companies, saying they could seriously harm foreign firms’
ability to do business there, especially in IP-intensive sectors.28
The laws identified as most problematic are the National Security
Law, adopted July 1, which requires onshoring of R&D, among
other requirements; the draft Cybersecurity Law, which authorizes
broad discretion to control the flow of information online; a draft
counterterrorism law, revised in February, which could require foreign companies to turn over encryption keys; and a draft law
threatening the operations of foreign nongovernmental organizations (NGOs) in China.29 One U.S. business representative in thefinancial services industry, for example, reports these laws prevent
stakeholders from attending meetings in mainland China, result intransfer of data due to onshoring requirements, and have a detrimental impact on cross-border trade due to controls on the flow of
information.30 In effect, these laws counteract China’s efforts to liberalize aspects of the foreign investment framework. While China’s

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market and investment barriers have been discussed in nearly
every meeting of the U.S.-China Strategic and Economic Dialogue(S&ED), some U.S. business representatives argue S&ED outcomes
have not been sufficiently implemented.31
Market Access Restrictions
In general, according to World Bank calculations, starting a business in China is getting easier: globally, China ranked 128th outof 189 economies * in the ease of starting a business in 2015, a 23position improvement in ranking since 2014.32 However, continuing
or expanding operations in China in certain sectors is getting increasingly difficult. Across industries, market access limitations are
the primary inhibitors of U.S. companies’ ability and willingness toinvest in China (see Table 3).33 China primarily maintains national-level market access restrictions through the Foreign Investment Catalogue, though local governments frequently employ
region- or industry-specific Catalogues, further restricting access.
Contradictions between the Catalogue and other measures serve to
confuse investors, contributing to the perception among foreign-invested firms that investment guidelines do not provide a securebasis for business planning and undermine confidence in the stability and predictability of the investment climate.34 Chinese authorities sometimes condition provision of market access on forced
technology transfer or price suppression.35 For example, during theCommission’s July trip to Asia, U.S. business representatives in
the information technology sector said foreign tech firms were required to form JVs with local partners in order to be allowed toprovide cloud-based services.36 The broad and potentially intrusive
national security review mechanism as proposed in the new draft
foreign investment law could also be used to hinder market access(see ‘‘National Security Review’’ later in this section).37 U.S. business representatives who met with the Commission during its factfinding trip to China this year said these measures reflect the Chinese government’s concerns about protecting local competitors, resulting in unequal treatment toward foreign investors.38

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Table 3:Chinese Government Measures Limiting U.S. Investment, 2015

Services (excl.
Information
Services)

Information/
KnowledgeBased Services

R&D-Intensive
Industries

Resources andIndustrial

1

Market accesslimitations

Market accesslimitations

Market accesslimitations

Market accesslimitations

2

Local partner/
equity requirements

Local partner/equity requirements

Targeted enforcement for foreign
firms

Chinese government funding provided solely for domestic competitors

3

Unequal approval process
for investments

Targeted enforcement for foreign
firms

Chinese government funding provided solely for domestic competitors

Targeted enforcement for foreign
firms* A ranking of 1 denotes the easiest place to do business, and 189 is the most difficult. Data
collected by the World Bank estimates starting a business in China on average requires 11 procedures, takes 31.4 days, costs 0.9 percent of income per capita, and requires no paid-in minimum capital.

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Table 3:Chinese Government Measures Limiting U.S. Investment, 2015
Continued

Services (excl.
Information
Services)

Information/
KnowledgeBased Services

R&D-Intensive
Industries

Resources andIndustrial

4

Targeted enforcement forforeign firms

Unequal approval process forinvestments

De facto technology requirement for market
accessLocal partner/equity requirements

5

Chinese government funding
provided solely
for domestic
competitors

Investment approvals

Local partner/equity requirements

Investment approvals

Source: American Chamber of Commerce in the People’s Republic of China, ‘‘2015 China
Business Climate Survey Report,’’ February 2015, 25.

Foreign Investment Catalogue

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In early 2015, MOFCOM and the NDRC jointly released an updated version of the Catalogue, the sixth amended version since it
was first implemented in 1995.39 Restrictions were eased, particularly for foreign-invested enterprises entering the service sector.
Compared with its predecessor, the 2011 Catalogue, the 2015
version reduces the number of restricted sectors from 79 to 38; thenumber of sectors in which Sino-foreign JVs are required decreased
from 43 to 15; and the number of sectors requiring Chinese majority shareholding fell from 44 to 35.40 But industries the Chinese
government has long sought to nurture as national champions—such as automobiles and healthcare—saw heightened restrictions.
Industries no longer categorized as restricted include many manufacturing industries; e-commerce (excluding any value-added telecommunications services such as Internet access services); * landdevelopment, construction, and operation of high-end hotels and office buildings; investment in real estate secondary market and realestate brokerages; operation of golf courses and other entertainment venues; and nonbank financial institutions, trust companies,and currency brokerage companies.41 In addition, the 2015 Catalogue uses tax incentives and subsidies to encourage wholly foreign-owned enterprises to establish and operate nursing homes.42
Despite these positive changes, restrictions remain largely intact
in those industries—such as banking, telecommunications, and art
and cultural industries †—that have consistently faced heavy con* Telecommunications services in China are divided into basic telecommunications services
and value-added telecommunications services, which include: (1) online data processing and online transaction processing business, (2) domestic multiparty communication business, (3) domestic Internet virtual private network (VPN) business, (4) Internet data center business, (5) store
and forwarding business, (6) call center business, (7) Internet access business, and (8) information service business. Karen Ip and Huang Yilin, ‘‘China: TMT Liberalized in the Shanghai FTZ:Part 1,’’ Mondaq, November 18, 2014.
† Cultural industries include production and publication of broadcasting and television programs and films, construction and operation of cinemas and large theme parks, and brokeringof stage performances. Art industries include publication of books, newspapers, and periodicals,
production and publication of audio and visual products, electronic publications, and radio programs, and auction and antique auction businesses. ‘‘Catalogue for the Guidance of Foreign Investment Industries (Comparison of the English translations of the new 2015 Catalogue against
the 2011 Catalogue),’’ Covington & Burling LLP, 2015.

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trols on foreign investment.43 Moreover, a number of restrictions
on foreign investment in culture and entertainment industries thatwere originally removed from a 2014 draft version of the revised
Catalogue were maintained in the 2015 version.44 Additionally,some industries became more restricted to foreign investment.
• Automobile (auto) manufacturing: For the first time, the 2015
Catalogue designated the manufacturing of complete cars, specialty vehicles, and motorcycles as restricted, requiring at least
50 percent Chinese ownership. In the 2011 Catalogue, foreign
investment was permitted in the industry, and in the 2004
Catalogue it was encouraged. Moreover, one foreign investor is
not permitted to invest in more than two JVs manufacturing
the same type of motor vehicle, except where the foreign investor acquires or merges with a Chinese JV partner.45 While foreign equity restrictions have always been in place in some formin China’s auto manufacturing industry, the new cap on JVs‘‘may be implicitly aimed at encouraging the development of its
self-owned branded vehicles.’’ 46

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• Medical institutions: In contrast to the 2011 Catalogue, underwhich wholly foreign-owned enterprise investment into Chinese medical institutions was permitted, the 2015 Catalogue
categorizes the industry as restricted, and limits foreign investment to JVs with Chinese partners.47 This tightening of restrictions counteracts a MOFCOM pilot program implemented
in July 2014 to allow foreign investors full ownership of medical institutions in seven pilot cities, implying foreign investors
in this sector may meet increased challenges in obtaining thenecessary regulatory approvals.48 Two major U.S. groups—
Massachusetts General Hospital and Columbia Pacific Management—have planned investments upward of $200 million
for two hospitals in China under the pilot program, but municipal and provincial authorities have yet to specify the necessary steps to move forward.49• Educational services: In addition to upper secondary school institutions, which were restricted under the 2011 Catalogue,
tertiary (e.g., university) and preschool educational institutions
are now restricted, and foreign investment is now limited to cooperative JVs with a Chinese partner.50 Compulsory educational institutions (primary school through early secondary
school) remain prohibited to foreign investors. The chief administrator of the JV must be a Chinese national, and the Chinese
partner must account for at least half of the members on theboard of directors.51 Moreover, education provided by the JV
must be unrelated to the military, law enforcement, politics orpolitical parties, and religion.52 The market for educational
services in China is experiencing rapid growth: spending on
education in China reached approximately $66 billion in 2014,
and Chinese households spend 30 percent of their income on
education.53

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84• Legal services: While the legal services industry was restricted
to foreign investment in the 2011 Catalogue, the revised Catalogue categorizes the industry as prohibited, though it clarifies
that foreign law firms may ‘‘provide information on the impactof the Chinese legal environment’’ in an effort to uphold China’s World Trade Organization (WTO) commitments to do so.54
Market access liberalization offered to foreign firms upon WTO
accession was small—limited to opening one representative office, subject to approval—and the types of services they could
provide were restricted.55 Despite encouragement from WTO
members to liberalize its legal services market, China has
made little progress.56
Market Access Barriers in China’s Automotive Industry
Over the past three decades, China’s automotive industry has
grown to become the world’s top auto producer and biggest auto
sales market.57 According to global management consulting firm
McKinsey & Company, China’s auto sector grew at a compound
average rate * of 24 percent per year between 2005 and 2011.58
In 2010, China overtook the United States as the largest singlecountry market for new passenger cars, and by 2020 is expected
to surpass both North America and Europe to become the biggest
regional market.59 As a result, the auto parts manufacturing industry in China is thriving: in 2015, industry revenue is expected to reach $567 billion, a 9.7 percent increase from the previous year.60 Due to faster growth in domestic demand—China’s
vehicle ownership is projected to rise from 58 per 1,000 people in2010 to 269 by 2030—most cars manufactured in China sell todomestic consumers.61 Slowing economic growth and stock market volatility in China, however, have dampened auto sales
growth in 2015. August passenger car sales fell 3.4 percent yearon-year, according to the China Association of Automobile Manufacturers, while future growth is projected to slow to approximately 5 percent annually over the next several years.62

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Foreign automakers have been permitted to participate in thisenormous market only through forming JVs—each no more than
50 percent controlled by the foreign manufacturer—with local
partners, oftentimes state-owned enterprises (SOEs).63 Since theopening of China’s economy in the 1980s, foreign investment inauto manufacturing was limited to JVs under an informal auto
development policy, which employed high tariffs and importquotas to protect the domestic market.64 Restrictions on foreign
ownership of JVs were maintained in the 1994, 2004, and 2009versions of the Policy on Development of the Automotive Industry.65 These industrial policies also mandated the creation of domestic R&D centers and transfer of technology to Chinese partners with the goal of generating indigenous IP.66 According to
U.S.-based industry group Information Technology Innovation* Compound average growth rate is the mean annual growth rate over a specified period oftime.

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Market Access Barriers in China’s Automotive Industry—
Continued
Foundation, these policies fail to deliver on China’s WTO commitments not to condition market access on whether a company
transfers technology or conducts R&D in China.67
China has also pursued policies designed to promote the development of a domestic new energy vehicle (NEV) market.68 After
production of NEVs was identified in the 12th Five-Year Plan
(2011–2015) as a ‘‘strategic emerging industry,’’ foreign manufacturers were told by NDRC officials that approval to manufacture
electric vehicles in China would be granted only if they assume aminority stake in a JV, transfer certain core technology, andagree to local branding for the vehicles.69 Moreover, only domestic NEVs qualify for consumer subsidies and other incentive programs maintained by the Chinese government, raising national
treatment concerns.70 Correspondingly, the whole auto manufacturing industry * changed from ‘‘encouraged’’ for foreign investment in 2007 to ‘‘permitted’’ in the 2011 Catalogue, and in 2015
is now categorized as ‘‘restricted’’ (see Figure 6), with limitations
on the number of JVs one foreign investor can participate in—except where the foreign investor acquires or merges with a Chinese partner.71
Figure 6:

Foreign Investment Catalogue Classification ofWhole Auto Manufacturing* On an industry basis, the manufacturing of whole automobiles is separate from the manufacturing of auto parts.
† One of GM’s two wholly foreign-owned enterprises is an investment company, and the otheris a parts distribution center. As neither produces automobiles or parts, they are not subject
to foreign equity restrictions.

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Despite policy uncertainty and discrimination, foreign auto
manufacturers have still managed to dominate China’s domestic
auto sales and manufacturing markets. In 2014, foreign brands
accounted for 62 percent of passenger vehicle sales in China,
with international JVs comprising the top five carmakers bysales in China (see Table 4).72 General Motors China (GMChina) alone has 11 JVs and two wholly-owned foreign enterprises † in China; in 2014, GM China’s domestic sales of all vehicles rose 12 percent to 3.5 million units, or 15 percent of the 23.7
million vehicles sold in China in 2014.73

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Market Access Barriers in China’s Automotive Industry—
Continued
Table 4:

Top Passenger Car Sales in China by Carmaker, 2014

Rank

Carmaker

ForeignCompany

ChineseCompany

Sales(by unit)

Market
Share

1

FAW
Volkswagen

Volkswagen

FAW

1,780,888

9.04%

2

Shanghai
Volkswagen

Volkswagen

SAIC

1,725,006

8.75%

3

Shanghai GM

General Motors

SAIC

1,723,940

8.75%

4

SAIC–GM–
WulingGeneral Motors

SAIC and
Wuling

1,586,383

8.05%

5

Beijing
HyundaiHyundai

BAIC

1,120,048

5.68%

6

Changann/aChangan

975,431

4.95%

7

Dongfeng
NissanNissanDongfeng
Motor

951,710

4.83%

Note: FAW is First Automobile Works; SAIC is Shanghai Automotive Industry Corporation; BAIC is Beijing Automotive Industry Corporation. These figures cover two- or threebox sedans, multipurpose vehicles, micro vans, and sport utility vehicles. Pickup trucks,
buses, and other commercial vehicles are not included.
Source: China Passenger Car Association via ChinaAutoWeb, ‘‘2014 Passenger Car
Sales by Maker,’’ January 12, 2015.

China’s auto policies nonetheless pose risks to foreign automakers. According to the Office of the U.S. Trade Representative(USTR) 2014 report to Congress on China’s WTO compliance efforts, China’s auto sector industrial plans—including discrimination based on the country of origin of IP, forced technology transfer, R&D requirements, investment restrictions, and discriminatory treatment of foreign brands and imported vehicles—include
guidelines that ‘‘appear to conflict with its WTO obligations.’’ 74
In response to China’s 2004 and 2005 industrial policies in theautomotive industry, the United States, the EU, and Canada initiated dispute settlement proceedings against China at the
WTO * in 2006, charging that China unfairly discriminatedagainst imported automotive parts.75 The WTO panel ruled infavor of the complaining parties in March 2008; China’s appealof the decision was rejected later that year. In 2009 China repealed its discriminatory rules on automobile parts, but ‘‘morework remains to be done’’ to address the full host of concerning
policies, according to the USTR’s 2015 National Trade Estimate
Report on Foreign Trade Barriers.76

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These fluctuations in China’s foreign investment restrictions reflect a pattern whereby the government welcomes FDI into sectors* Upon accession to the WTO in 2001, China committed to lift restrictions on vehicle manufacturers regarding categories, types, or models of vehicles permitted for production, and to increase limits within which investment in motor vehicle manufacturing could be approved byprovincial governments, within two years. U.S. Department of State, 2015 Investment Climate
Report—China, May 2015, 20.

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designated as strategic for China’s national economic development
in order to extract technology, IP, and know-how from foreign
firms. However, after domestic industry is deemed sufficiently developed, policies welcoming investment are gradually withdrawn
and new policies restricting investment are put in place to free up
market space for domestic firms and push out foreign firms. Withina legal framework subject to opaque rule-making procedures anddesigned to serve CCP interests, U.S. investors seemingly have little to no recourse to protect their rights or effectively resolve disputes.77 Moreover, because ‘‘there are no accepted techniques for
estimating the impact of [investment barriers] on U.S. investment
flows,’’ according to the USTR, it is difficult to quantify the effectof China’s restrictive investment policies.78
Despite these concerns, few foreign companies report that theyplan to reduce or stop a planned investment in China. Only 14 percent of USCBC survey respondents in 2014 indicated they canceleda planned investment in the previous year, most citing better business prospects in another country; increasing market access restrictions and reduced capital investment globally were the next
most cited reasons for decreased China investments.* 79 Among
AmCham China survey respondents whose planned increase in investment in 2015 is lower than it was in 2014, the primary causesof their decision were expectations of slower growth in China compared with faster-growing markets elsewhere and market accessbarriers or government policies that disadvantage foreign companies.80 On the whole, European companies exhibited growing unwillingness to expand current China operations in 2015—those notconsidering expansion grew from 6 percent in 2013 to 31 percent
in 2015. However, on a sectoral basis, the majority of surveyed European companies in the professional services, automotive and autocomponents, and medical devices industries are considering expanding current China operations in 2015.81

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China’s Inconsistent and Opaque Anti-Monopoly Law Enforcement
Discretionary, unclear legal and regulatory interpretation andweak or inconsistent enforcement have consistently ranked among
the top business challenges for U.S. companies in China.82 European Chamber companies likewise cited the discretionary enforcement of regulations as one of the top regulatory obstacles to doing
business in China.83 In recent years, a broad range of Chinese regulatory activities seem to have focused disproportionately on foreign investors across various industries of strategic importance toChina’s national economy. AmCham China’s 2015 member survey
indicated that 57 percent (271 companies) of 477 respondent companies believe foreign firms are being singled out in the government’s recent campaigns; of those 271 companies, 65 percent areconcerned that such campaigns will have a detrimental impact on
their companies, while 52 percent report these campaigns have anegative impact on their companies’ intent to invest.84
In 2013 and 2014, China’s increased enforcement of the AML, inparticular against high-profile foreign companies, garnered inter* Information regarding planned investments was not published in the USCBC’s 2015 survey.

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national attention from industry, government, and media actors.
According to the U.S. Chamber of Commerce, although China’s
AML has been used to foster competition in line with international
legal practices, ‘‘China has also employed [the AML] both domestically and extraterritorially to pursue [industrial policy] objectives
that have no place in a free, open, and fair market-based economy.’’ 85 Further, Chinese enforcement agencies appear to use thethreat of AML investigations against foreign actors to control priceand supply of goods to the benefit of Chinese market participants.86 Due to a lack of transparency in China’s investigation andenforcement decisions, it is not possible to conclusively assess
whether foreign companies have been targeted in these campaigns;
however, they do appear to have been subject to unequal treatment.

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History of China’s AML
Compared with other advanced economies, China’s competition
regime is relatively nascent. Its AML came into force in 2008 after
Chinese authorities spent more than a decade drafting the law andconsulting with foreign competition authorities from the UnitedStates, the EU, and other jurisdictions. The AML draws from elements of both the U.S. and EU competition laws, though it is moreclosely tied to the EU model,* and contains some elements uniqueto China.87
China’s AML allows for the consideration of noncompetitive factors, namely industrial policy, in its application and enforcement.
Examples include articles that emphasize the need to harmonize
competition policy with the specific needs of China’s socialist market economy (Articles 1 and 4), encourage mergers and acquisitions(M&As) as a means to achieve economic scale (Article 5), institutenational security reviews of Chinese M&A transactions with foreign companies (Article 31), and prohibit the abuse of IP † to eliminate or restrict market competition (Article 55).88
Three government agencies are primarily responsible for AML
enforcement in China. The NDRC handles price-related conduct,
including investigations of pricing practices by companies, price-related aspects of monopoly agreements, and company abuse of dominant market position to set or control prices, via its Price Supervision and Anti-Monopoly Bureau. MOFCOM reviews M&A transactions and other types of proposed business concentrations via its
antimonopoly bureau. The State Administration for Industry andCommerce (SAIC) investigates non-price-related monopolistic be* Following the EU model, China’s AML purports to develop a healthy economy, prioritize economic integration, promote fairness for business operators of varying sizes, and support technology development alongside consumer interests. US-China Business Council, ‘‘Competition
Policy and Enforcement in China,’’ September 2014, 3–4.
† Chinese regulators seek to prevent IP rights holders with dominant positions in relevantmarkets from misusing these rights or engaging in abusive practices in the name of exercising
their IP rights. These behaviors constitute abuse of dominance only where they eliminate or restrict competition in the relevant market. However, the AML does not clearly define the relevantmarkets involving IP rights, nor does it define the standards for determining abuse of dominance. As a result, Chinese regulators reportedly have pressured foreign firms in some sectors
to disclose IP content or license it to domestic competitors at below-market rates, under threatof ‘‘abuse of intellectual property’’ allegations. For an example of the application of this articleof the AML, see the Qualcomm textbox later in this section. Hao Zhan, ‘‘Abuse of Dominancein Relation to Intellectual Property: The Chinese Perspective,’’ AnJie Law Firm, October 9,
2014.

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havior, including monopoly agreements, abuse of market dominance, and monopoly control, via its Anti-Monopoly and Anti-Unfair Competition Bureau.89
U.S. Business Concerns Regarding China’s AML Enforcement
In its 2014 member company survey, the USCBC found over 86
percent of companies surveyed indicate they are somewhat or very
concerned * about China’s increased AML enforcement activity,with 56 percent of companies indicating enforcement is a primaryconcern regarding China’s competition policy.90 U.S. companies aremost concerned about the following issues:• Fair treatment and nondiscrimination: While it is not clearthat enforcement activities target foreign companies, consideration of nonmarket factors (industrial policy), legal ambiguity
and the discretionary legal framework, and the lack of transparency in pricing decision procedures lead some analysts toconclude that Chinese authorities emphasize industrial policy
priorities over free market and competitive considerations.91• Lack of due process and regulatory transparency: Throughout
Chinese antitrust enforcement activities in 2013 and 2014,
U.S. companies have reported the following procedural shortcomings:
Æ Pressure to admit guilt without the ability to see and respond to evidence;Æ Restricted access to legal representation at unannounced onsite investigations;Æ Restricted access to foreign outside legal representation at
ongoing proceedings;
Æ Insufficient transparency during competition reviews;
Æ Insufficient transparency in publishing case decisions;Æ Lack of effective appeal process; andÆ Threats to personal safety.92• Use of noncompetitive factors in enforcement: U.S. companies
are concerned enforcement agencies use the AML to protect
Chinese companies, industries, and policy goals such as innovation, patent creation, and technology licensing from foreigncompetition.93

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• Broad definition of monopoly agreements: U.S. companies complain that China’s competition enforcement deviates frominternational best practices. For example, Article 14 of the
AML appears to prohibit manufacturers from signing specifickinds of pricing agreements and ‘‘other monopoly agreements’’with distributors.94 However, the interpretation of ‘‘other monopoly agreements’’ is to be determined by the NDRC or the
SAIC. As a result, companies fear agreements they sign could
be arbitrarily construed as monopolistic.
* Surveyed companies described their level of concern as either ‘‘very concerned’’ (25 percent),‘‘somewhat concerned’’ (61 percent), or ‘‘not concerned’’ (14 percent). US-China Business Council,‘‘USCBC 2014 China Business Environment Survey Results: Growth Continues amidst Rising
Competition, Policy Uncertainty,’’ 2014, 20.

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MOFCOM’s AML Enforcement Activities: Reviews of Mergers andAcquisitions
In its reviews of proposed M&As, China’s MOFCOM has exclusively blocked or modified transactions involving foreign companies,
and imposed remedies that tend to protect and promote domestic
industry and cap commodity prices and IP royalties.95 According to
its year-end work report, MOFCOM’s antitrust enforcement sharply intensified in 2014: it reviewed 245 cases, the highest numberof cases reviewed by MOFCOM in a single year since the law’s implementation in 2008.96 From August 2008 through the first quarter of 2015, MOFCOM unconditionally approved 97.5 percent of the
1,062 total transactions it reviewed (see Table 5). All of the 26
transactions that were either rejected or conditionally approved involved foreign firms; 21 of the 26 cases involved foreign-to-foreigntransactions (see Addendum I).* 97 The two transactions rejected by
MOFCOM were in the beverage manufacturing and transportation
shipping industries. Among the 24 conditionally approved transactions, 25 percent involved the manufacturing of high-technology
goods like electronics components, computer components, or mobile
devices, while the remainder involved a variety of different industries.
Table 5:Merger Reviews Completed by MOFCOM, 2008–2015

Approved
Unconditionally

ConditionallyRejected

Total
Reviewed

2008

16

1

0

17

2009

72

4

1

77

2010

113

1

0

114

2011

164

4

0

168

2012

158

6

0

164

2013

211

4

0

215

2014

240

4

1

245

2015Q1

62

0

0

62

1,036

24

2

1,062

Year

Total

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Source: US-China Business Council, ‘‘Update: Competition Policy & Enforcement in China,’’
May 2015, 9; China’s Ministry of Commerce, MOFCOM’s 2014 Year-End Roundup: Rolling out
Antimonopoly Work in Accordance with the Law to Protect Fair Market Competition, January
29, 2015. Staff translation.

* For comparison, only one-third of conditional approvals and rejections issued by the UnitedStates between 2008 and 2012 involved foreign-to-foreign transactions; in the EU, only 54.3 percent of such decisions between 2008 and 2013 involved non-EU companies. U.S. Chamber ofCommerce, ‘‘Competing Interests in China’s Competition Law Enforcement,’’ September 2014,31.

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While all M&A transactions, foreign or domestic, that satisfy theapplicable monetary threshold must be reported to MOFCOM,* evidence suggests most qualifying domestic M&A transactions are notreported. Domestic-to-domestic transactions account for approximately 80 percent of M&A deals with a Chinese target, but from
August 2008 to 2014, only 7.6 percent of the transactions decided
by MOFCOM were domestic-to-domestic, suggesting the majority ofsuch transactions were not submitted to MOFCOM for review.98 By
not reporting to MOFCOM, many domestic-to-domestic transactions were effectively exempted from AML requirements and rigorous review.99 Even though most M&A transactions reviewed by
MOFCOM are approved, the imbalance in reporting expectations
across domestic and foreign M&A transactions puts foreign companies at a disadvantage by unfairly and disproportionately exposing
them to increased scrutiny, regulatory uncertainty, approvaldelays, and associated costs. In December 2014, MOFCOM announced its first published decision penalizing a prominent SOE for
failing to report a merger.100 The company in question, Tsinghua
Unigroup, was fined $48,300 (RMB 300,000) for completing its$907 million acquisition of RDA Microelectronics in November 2013
without reporting the merger to MOFCOM, in violation of Article
21 of the AML.101

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NDRC’s AML Enforcement Activities: Pricing Investigations
The NDRC’s Price Supervision and Anti-Monopoly Bureau investigates pricing-related anticompetitive conduct. Between 2008 and2012, the NDRC conducted nearly 20 pricing-related investigations,according to media reports.102 Starting in 2013, the NDRC’s enforcement activities increased sharply: the agency investigatedmore than 80 companies in 2013, and more than 150 companies
and branches in 2014.103
Throughout China’s intensification of AML enforcement efforts in2013 and 2014, U.S. business groups have found the NDRC enforces the AML disproportionately against foreign companies toachieve industrial policy goals unrelated to the protection of competition.104 The NDRC’s antitrust enforcement officials, however,deny these allegations. On the sidelines of the Summer Davos
Forum in September 2014, Xu Kunlin, then head of the NDRC’s
Price Supervision and Anti-Monopoly Bureau, asserted ‘‘there is no
selective law enforcement’’ between foreign and domestic firms or
private and SOEs, despite the CCP’s dual role as both SOE owner
and regulator.105 According to Mr. Xu, as of September 2014, only
10 percent of the 335 enterprises and industry associations investigated by the NDRC for monopolistic conduct were foreign
firms.106 In a joint statement, the three Chinese antitrust enforce* Normally, cases are reviewed if global turnover or Chinese turnover in the previous year surpasses certain thresholds. In 2014, MOFCOM promulgated two regulations to simplify
premerger filing procedures. To determine whether a proposed transaction can be filed undersimplified procedures, MOFCOM adopts both ‘‘market share thresholds’’—to determine whether
an enterprise has a dominant position in a certain market—and nonmarket share tests to determine whether the transaction will affect the Chinese economy. These regulations can be seen
as a positive development in China’s AML enforcement in that simplified filing requires less paperwork and takes less time for approval, but there is still a degree of uncertainty in the exceptions for simplified filing procedures. For more specific details on MOFCOM filing procedures,
see Amigo Lan Xie, Cecillia Dai, and Aqua Huang, ‘‘What Is Simplified under Anti-Monopoly
Filing Procedures for Simple M&A Cases?’’ K&L Gates, February 12, 2015.

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ment agencies argued that large market positions make multinational corporations ‘‘inevitably the main object of market regulators’’ in recent campaigns, resulting in the appearance of targeted
enforcement.107
Based on a number of industry, legal, and academic reports,
news articles, and Chinese government websites, announcements,
and press conferences, research by Commission staff into the
NDRC’s enforcement activities as of September 2014 found foreigninvested firms constituted approximately 19 percent of the roughly
276 enterprises or associations implicated in price-related
antimonopoly investigations—9 percentage points higher than the
figure cited by Mr. Xu (see Addendum II). Across a case sampling
expanded to include all known completed cases through September
2015, approximately 26.3 percent of entities subject to NDRC penalty decisions for price-related AML violations were foreign-invested entities. This updated case sampling covers a total of 36
completed price-related cases in which at least 269 enterprises andtrade associations in total were penalized.* Foreign-invested enterprises also feature prominently in the NDRC’s ongoing cases, but
the lack of detail provided in investigation announcements makes
the proportion of cases involving foreign-invested firms difficult toassess.
On an industry basis, the nearly $300 million in fines imposedby the NDRC in major antitrust cases in 2014 were most concentrated in four sectors: the automotive industry (cases involving
12 Japanese auto parts and bearing manufacturers, Audi, andChrysler), the insurance sector (a case involving 23 Zhejiang insurance companies), the cement sector (a case involving three Jilin cement companies), and the eyeglass and contact lens market (a caseinvolving seven foreign manufacturers).108 On average, fines imposed by the NDRC in pricing investigations are higher for foreigncompanies (3.3 percent of previous year’s sales revenue in China)
than for domestic companies (2.5 percent of previous year’s sales
revenue in China).109
China’s AML is ambiguous in its application of jurisdiction, definition of key terminology, and determination of penalty amounts;
offers poor procedural protection; and provides for very limited disclosure of decisions.110 Because the law employs vague legal terms
and leaves broad space for enforcement agencies to exercise discretionary power, the agencies, especially the NDRC and local development and reform commissions, have not exercised their power ina fair, equal, and transparent way.111 Moreover, the administrativedecisions of the NDRC and local commissions are short on evaluation of the effect of a certain behavior on competition, and lacking
in evidence of why an actor should be exempted from punishment
or receive a heavier or reduced fine.112 The lack of an effective
mechanism for controlling the overly broad discretion granted by
the AML to enforcement agencies results in inconsistent decisions
and unequal treatment: analysis of the NDRC’s publicly available
investigation and penalty decisions suggests the NDRC ‘‘failed to* Additional information on monopoly offenses investigated by the NDRC but not disclosed on
the NDRC’s website can be found in Zhang Xingxiang, ‘‘China’s Anti-Monopoly Law Enforcement: A Quest for Transparency, Consistency and Fairness,’’ Indiana University Research Centerfor Chinese Politics and Business Working Paper #37, April 2015, Appendix 2, 12–13.

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93treat [the] same or similar cases[s] equally,’’ resulting in more leniency toward SOEs, more rigorous enforcement against foreign companies, and substantially varied penalties imposed on companies,
regardless of nationality of the controlling shareholder, in similar
circumstances.113
SAIC’s AML Enforcement Activities: Non-Pricing Monopoly Investigations
The SAIC and its local branches handle non-pricing-related monopoly conduct and behavior constituting unfair competition, suchas abuse of dominant market position and horizontal monopoly
agreements. According to the agency’s official website, the SAIC
had launched 45 monopoly investigations as of January 28, 2015,and had completed 20 of those cases.114 In 2014, the SAIC investigated 15 new monopoly cases, one-third of all its monopoly cases
since 2008, pointing to an intensification of AML enforcement activity.115 In addition to monopoly cases, the SAIC investigatedmore than 34,000 cases of unfair competition in 2014 alone.116
None of the known completed cases involved foreign companies, but
two ongoing investigations were launched into Swedish company
Tetra Pak in July 2013 and Microsoft in July 2014, both alleging
abuse of market dominance (see Addendum III).
Additional Factors Contributing to China’s Uneven AML Enforcement
At the Commission’s January hearing, three experts testified
that while industrial policy is a consideration in China’s AML enforcement, the extent of its role in investigation and penalty decision making is not known due to a lack of transparency on the partof authorities. Because China’s AML regime is nascent comparedwith other established antitrust regimes, however, a number ofstructural and political factors skew its AML enforcement outcomes. Scholars of Chinese antitrust law generally agree the following additional factors contribute to China’s uneven AML enforcement:

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• Competition between agencies: Because antitrust enforcementis split among the NDRC, the SAIC, and MOFCOM, the agencies compete with each other for antitrust policy control.117
Moreover, each agency’s mandate underlies its style of AML
enforcement. The NDRC is responsible for macroeconomic
management and industrial policy, and so tends to rely on government intervention to solve economic problems.118 MOFCOM
is responsible for formulating trade and investment policies,
and so is perceived to be friendlier to free-market policies. The
SAIC is smaller and focuses on administration of enterprises
and consumer protection, and so tends to play a smaller rolein antitrust enforcement.
• Poor coordination and unclear jurisdiction across agencies:
There is a risk of conflicting or diverging interpretations between the NDRC and the SAIC. For example, while both agencies may pursue investigations of alleged IP abuses, the dis-

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tinction between price-related and non-price-related conduct insuch cases is not always clear.119 In at least one instance
where an antitrust violation came under the jurisdictions ofboth the NDRC and the SAIC, the NDRC exercised jurisdiction, even though the offense was not price related.120• Lack of resources: MOFCOM is understaffed compared to othermerger review antitrust agencies in large jurisdictions elsewhere in the world. In 2012, MOFCOM’s antimonopoly bureau
was staffed with only 35 people to review hundreds of transactions, resulting in heavy delays for M&A reviews.121 As of
February 2014, the NDRC and the SAIC had about 15 and8 staff members working on antitrust enforcement, respectively.122 Local- and provincial-level bureaus are better staffed,
as investigation and enforcement work tends to fall to local
agencies.
• Discrepancies between national- and local-level agencies: Boththe NDRC and the SAIC have extensive networks of corresponding bureaus at various levels of regional government,
and so can delegate their enforcement responsibilities to local
authorities. In both agencies, the majority of cases were initiated and enforced by local antitrust agencies.123 Local authorities face pressure from local governments and local SOEs,
while national-level authorities tend to intervene in high-profile cases to achieve broader policy objectives.124• Lack of judicial oversight: Since the AML went into effect, no
defendant has appealed any administrative decision made by
the enforcement agencies for three main reasons: (1) fear of
backlash from the enforcement agencies and other ministries;(2) ‘‘miniscule’’ likelihood of winning such a case; and (3) the
NDRC’s practice of granting leniency or complete immunity tocompanies that admit their guilt, creating a race to confessamong firms.125• Lack of transparency: To date, the NDRC has not publishedthe rationale for any of its investigations, penalties, or other
determinations in the context of AML enforcement.126 In thelast year, MOFCOM and the SAIC have stepped up efforts topublish relevant decisions on their official websites.
Antitrust and Intellectual Property

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In 2015, U.S. companies surveyed by AmCham China reported
an overall improvement in the effectiveness of China’s intellectual
property rights (IPR) laws and regulations, but more than 75 percent rated China’s IPR enforcement thereof as either ineffective (42percent) or very ineffective (36 percent), as shown in Figure 7.127
Likewise, 56 percent of European Chamber members rated China’s
IPR law enforcement as ‘‘inadequate.’’ * 128* Survey respondents could choose to describe enforcement as excellent, adequate, inadequate,
or not applicable.

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Figure 7: Effectiveness and Enforcement of China’s IPR Laws
and Regulations(surveyed U.S. companies)

Source: American Chamber of Commerce in China, ‘‘2015 China Business Climate Survey Report,’’ February 2015, 29.

* The Ciela database is maintained by Rouse, a global IP consultancy. The data come from
judgments published by the major IP courts around China.
† By comparison, the overall median damages award in IP infringement cases in the UnitedStates between 1995 and 2013 was $5.5 million, and the median award in 2013 was $5.9 million. PricewaterhouseCoopers, ‘‘2014 Patent Litigation Study,’’ July 2014, 6.

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U.S. companies are particularly concerned about the applicationof the AML in the field of IP. According to the U.S. Chamber ofCommerce, the NDRC appears to have used the threat of AML investigations against at least two U.S. companies, InterDigital and
Qualcomm (see Addendum II), to attempt to lower the licensing
fees charged to would-be Chinese licensees, usually telecommunications and electronic equipment producers like Huawei, effectively
giving these Chinese firms a competitive advantage in the domestic
and global telecommunications markets.129 Moreover, the NDRC
appears to have imposed higher fines on alleged AML violations related to IP than other types of cases: typically, AML fines are apercentage of sales within China, but IP-related AML fines havebeen based on percentage of global sales revenue.130
The discrepancy between high fines for IP-related AML violations and low awards for IPR violations harms the ability of foreigncompanies to commercialize, license, or enforce patents or other IP
rights in China.131 According to a private database * of about
31,000 cases, average damages awarded in patent infringementcases in China range from $10,000 to $20,000.132 These damages
are considerably less than average damages in either Europe or theUnited States,† and ‘‘too low to compensate most innovations,’’ ac-96
cording to Mark Cohen, senior counsel at the U.S. Patent andTrademark Office.133 Fines lodged in China against foreign companies for alleged IP-related antitrust violations, on the other hand,average in the millions of dollars. As noted in the following text
box, U.S. chipmaker Qualcomm was fined $975 million in February
2015 for its patent licensing practices—the highest antitrust penalty yet, registering more than 60,000 times the average damages
awarded to foreign IP holders for patent infringement by Chinesecompanies.134 In light of this disparity, prospective licensees in
China are incentivized to continue infringing and risk an adverse
Chinese judicial decision ‘‘while at the same time proactively
launch[ing] a Chinese antimonopoly law case for even greater damages than royalties that are being asked of by the prospective licensor,’’ casting further doubt on how much the Chinese government
values a sound IP enforcement system, according to Mr. Cohen.135
The NDRC’s Qualcomm Decision: Chipping Away at
Patent Protection and Licenses
On November 25, 2013, Qualcomm—the world’s largest
smartphone chipmaker—disclosed it was being investigatedunder China’s AML by the NDRC for price-related violations
after several Chinese telecommunications firms alleged the company was overcharging Chinese mobile device makers on patent
fees and boosting sales by bundling patent licenses with chipsales, among other alleged behaviors.136 During the investigation, one AML regulator made several public remarks prejudging
the outcome against Qualcomm, raising procedural irregularity
concerns.137
On February 9, 2015, Qualcomm announced the NDRC’s finding that the company exploited its dominant market position inseveral key telecommunications standard-essential patents(SEPs)—patents that are incorporated in setting technical standards, allowing for the interoperability of various technical devices—and chips to charge ‘‘unfairly high’’ royalty rates, tie wireless and nonwireless patents, and attach conditions to chipsales.138 Qualcomm did not appeal the decision, and agreed to
pay the $975 million fine levied by the NDRC, representing 3.7
percent of its total earnings in 2014 and 8 percent of its revenue
from China sales in 2013.139 In a press release, the company expressed disappointment with the results of the investigation.140
The penalty levied on Qualcomm was the largest ever AML finein China, though many telecommunications industry analysts
described the fine as ‘‘modest,’’ given the size of Qualcomm’s
China profits.141
In addition, the company agreed to implement a ‘‘rectification
plan’’ to modify its business practices in China.142 The key termsof the rectification plan include:

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• Qualcomm will offer licenses to its current 3G and 4G Chinese SEPs separately from licenses to its other patents.

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The NDRC’s Qualcomm Decision: Chipping Away at
Patent Protection and Licenses—Continued• For 3G devices using Qualcomm’s Chinese SEPs, the company will charge 5 percent in royalties; for 4G devices, thecompany will charge royalties of 3.5 percent. Both will use aroyalty base of 65 percent of the selling price of the device, alower figure than the wholesale price of the device ordinarily
used by Qualcomm.
• Qualcomm agreed not to condition the sale of baseband
chips on the chip customer signing a license agreement withterms considered unreasonable by the NDRC.
Four months after Qualcomm’s historic settlement, thecompany announced a new JV with China’s largest chipmaker, Semiconductor Manufacturing International Corporation(S.M.I.C.), Huawei Technologies, and a Belgian microelectronics
research center, reportedly to focus on R&D of new integrated
circuit technology ‘‘to boost China’s semiconductor capabilities.’’ 143 According to a statement released by the companies,
S.M.I.C. will have the rights to license the IP created by the new
JV.144 In an interview with Reuters, Harvard Business School
professor Willy Shih assesses Qualcomm is taking this step to beable to remain competitive in China. He explained, ‘‘The logic is
if they help S.M.I.C. manufacture Qualcomm chips in China that
improves their ability to sell those chips there.’’ 145
The significance of the NDRC’s Qualcomm decision lies foremost in its application to holders of SEPs: under the NDRC’s interpretation, holding an SEP constitutes having a dominant market position, so licensing of technologies through SEPs may constitute monopolistic conduct.146 Therefore, all SEP holders arepotentially at risk of being investigated for imposing unreasonable and unfair licensing terms. New regulations issued by the
SAIC in April 2015 target non-pricing IP-related antitrust violations (see discussion of the rules below). Without its own formal
rules for IP-related antitrust violations, the NDRC may rely on
the Qualcomm decision as a model for its IP-related AML enforcement, posing danger for U.S. companies going forward, particularly in R&D-intensive industries.

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The conflict between IPR protection and AML enforcement overtechnology licensing and standards setting in China could intensify
starting in August 2015, when the SAIC’s new regulations on theuse of IPR to eliminate or restrict competition—China’s first comprehensive guidelines to regulate IP practices under the AML—
went into effect. (Neither MOFCOM nor the NDRC is required tofollow the rules, but they are expected to do so.) * The rules intend
to ‘‘protect fair market competition and encourage innovation’’ by* Because the SAIC only has AML enforcement authority over conduct that is not related topricing or to M&As, the rules do not address issues such as the charging of ‘‘unfairly high’’ royalties, which was the focus of the NDRC’s Qualcomm investigation. Covington & Burling LLP,‘‘China Issues Final IP/Antitrust Rules,’’ April 21, 2015, 1–2.

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prohibiting firms with a dominant * share of sales in a product ormarket from ‘‘abusing’’ their IPRs to eliminate or restrict competition.147 The rules will regulate the following forms of abusive conduct, among others:• Refusal to license IPRs that amount to ‘‘essential facilities’’; †• Imposing certain exclusivity restrictions;• Imposing unjustified tying and bundling requirements;• Attaching unreasonable trading conditions to an IP agreement;• Engaging in discriminatory conduct; and• Engaging in practices that are inconsistent with ‘‘fair, reasonable, and non-discriminatory’’ (FRAND) ‡ treatment in relation
to the licensing of SEPs.148
These rules could have a significant impact on the licensing of
IP in China, particularly by firms that account for a large shareof sales in the technology market or hold patents that are essential
to an industry standard—as several prominent U.S. tech firms
do.149 For one, the essential facilities doctrine—possibly the mostcontroversial aspect of the regulations—states that refusal to license IP will violate the AML if the IPR holder is dominant, if
the refusal to license ‘‘eliminate[s] or restrict[s] competition,’’ andif the technology is ‘‘essential for production and business operations.’’ § 150
Application of the essential facilities doctrine has faced serious
criticism ¶ in the U.S. Supreme Court because the doctrine fails toprovide clear guidance as to what constitutes a facility, whatmakes a facility essential, and what constitutes a denial of access,while courts in Europe have applied this doctrine in a few exceptional and controversial decisions to facilities involving IP.151 In
the context of patent licensing, the essential facilities doctrine has
never been used anywhere in the world.152 In other countries,
courts and agencies have found the application of the doctrine to* According to the SAIC rules, the threshold for dominance is met for a company that (1) has
a 50 percent or greater share of the relevant technology or product market, (2) together with
one other company has a 66 percent or greater share of the market, or (3) together with twoother companies has a 75 percent or greater share of the relevant market. Covington & Burling
LLP, ‘‘China Issues Final IP/Antitrust Rules,’’ April 21, 2015, 2.
† In general, the essential facilities doctrine prohibits anticompetitive conduct where a dominant firm prevents other competitors in the downstream market from acquiring and using certain essential facilities. The doctrine is traditionally applied in natural monopoly sectors suchas railways, telecommunications, and electricity power generation and transmission. MichaelGu, ‘‘Brief Comments on China’s First Anti-Monopoly Regulation in the IP Field,’’ AnJie Law
Firm, April 29, 2015, 3–4; Steve Harris, Mabel Lui, and Jingwen Zhu, ‘‘China’s New Rules on
Antitrust and Intellectual Property Intersected Issues,’’ Winston & Strawn LLP, April 2015, 1.
‡ In the Qualcomm case, the NDRC decision did not explain an accepted approach for calculating FRAND royalties.
§ A dominant company is prohibited from refusing to license its IPRs on FRAND terms if (1)the IP is not ‘‘reasonably substitutable’’ and is essential for other business undertakings to compete in the relevant market; (2) refusal to license IP in the relevant market will adversely impact competition, innovation, and consumer interests; and (3) the obligation to license the IP
will not cause unreasonable damage to the licensor. Michael Gu, ‘‘Brief Comments on China’sFirst Anti-Monopoly Regulation in the IP Field,’’ AnJie Law Firm, April 29, 2015, 4; Nicolas
French et al., ‘‘A New Dawn? China Introduces First Antitrust Guidelines in Relation to Intellectual Property Rights,’’ Freshfields Bruckhaus Deringer, April 2015, 3.
¶ In Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398(2004), the Court rejected the notion that Verizon (then AT&T) was obligated by the 1996 Telecommunications Act to share infrastructure elements with competitors under antitrust law. U.S.
Department of Justice, Hearings on Single-Firm Conduct, testimony of R. Hewitt Pate, July 18,
2006.

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IPR may substantially harm incentives to innovate, and by extension, technological advancement.153 While IP-specific guidance on
the SAIC’s AML enforcement is a positive development, the lack of
specific and objective criteria leaves companies ‘‘unable to reliably
predict whether refusing to grant a license in particular circumstances or on particular terms or conditions may be considered
to be ‘not justified,’ and thus a violation of the AML, potentially resulting in an order compelling it to grant a license under terms andconditions imposed by the court or agency.’’ 154
Likewise, the SEP rules on standards setting represent a departure from international norms. Typically, a standards-setting organization coordinates across its members to disclose patents that
may be essential to a standard, and requests the disclosing member to commit to license those patents that are essential on a royalty-free basis or on FRAND terms.155 In the United States and theEU, participation in standards setting is voluntary, and SEP holders are free to exclude some or all of their technology from thestandards-setting process.156 In contrast, the SAIC’s new IP rules
could be interpreted to apply to the licensing practices of any holder of SEPs, regardless of whether the SEP holder participated in
the standards-setting organization or committed to license its patents on FRAND terms at all.157 In the Chinese legal context, theseprovisions could be used to extract or impose better terms for licensees under FRAND, creating significant uncertainty for licensing in China.158 Consequently, FRAND developments in China potentially will have global impact on FRAND rates: if China setslower rates on patent licensing under FRAND terms, other jurisdictions will be inclined to follow.159 For example, based on the
FRAND principle, Qualcomm will likely be expected to extend
lower license rates to licenses in other jurisdictions, given its commitment to do so in China under its rectification plan.160 The
SAIC’s IP rules will directly affect AML cases allegedly involving
IP abuse—including the SAIC’s ongoing investigations into Microsoft and Tetra Pak.
The U.S. government response to this growing threat to IPR
holders in China primarily has consisted of multitiered engagement. The U.S. Federal Trade Commission (FTC) has been particularly active in engaging China’s enforcement agencies in rectifying
the practice of threatening AML investigations or penalties to procure cheaper licensing fees for domestic companies. FTC and U.S.
Department of Justice (DOJ) officials have held several high-levelmeetings with Chinese antitrust officials since the two countries
signed a memorandum of understanding on July 27, 2011, to promote communication and cooperation among the agencies.161 FTC
Chairwoman Edith Ramirez and FTC Commissioner Maureen
Ohlhausen have delivered speeches expressing ‘‘serious concern’’that China’s approach to the AML suggests ‘‘an enforcement policy
focused on reducing royalty payments for local implementers as amatter of industrial policy, rather than protecting competition andlong-run consumer welfare.’’ 162 Likewise, China’s antitrust enforcement activities in IP-intensive industries have attracted a streamof criticism from U.S. officials. Jack Lew, U.S. Secretary of theTreasury, reportedly raised U.S. concerns to China’s Vice Premier
Wang Yang in September 2014.163 In December 2014, White House

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National Security Council Spokesman Patrick Ventrell said, ‘‘The
United States government is concerned that China is using numerous mechanisms, including anti-monopoly law, to lower the valueof foreign-owned patents and benefit Chinese firms employing foreign technology,’’ and President Barack Obama raised this issue
with Chinese President Xi Jinping when they met in Beijing in November 2014.164
U.S. officials have also expressed concerns about China’s AML
enforcement in bilateral fora. At the 2014 S&ED, China said it recognized that its competition law enforcement should be fair, objective, transparent, and nondiscriminatory, and committed to provide
any party under investigation with information about concernswith the conduct in question, as well as an effective opportunity topresent evidence in its defense.165 At the 2014 Joint Commission
on Commerce and Trade (JCCT), China committed to increase theability of non-Chinese counsel to attend meetings with the AML
enforcement agencies, and to make more transparent penalty procedures and competition-based remedies.166 In 2015, the ability of
non-Chinese counsel to attend meetings with Chinese enforcers has
improved significantly, according to FTC Commissioner Ohlhausen,
with no reports of exclusion; but it is unclear ‘‘whether this improvement is a result of the JCCT commitment or reflects a broader recognition by China’s AML enforcers that participation of counsel is an important and beneficial element of best competition enforcement practices.’’ 167 Building on China’s 2014 JCCT commitments, at the 2015 S&ED Chinese officials provided clarity on thescope of jurisdiction in administrative appeals and confirmed thatall parties to AML proceedings are entitled to seek administrative
consideration in accordance with Chinese laws.168 While administrative appeals are permissible under Chinese law, no foreign enterprise has appealed an enforcement decision.
Reforms of China’s Foreign Investment Framework
During the Third Plenum in November 2013, the CCP leadershipindicated support for a wide range of structural and economic reforms that could potentially bring China’s foreign investment rules
closer to international standards. Incremental progress has been
made in some of these areas within the boundaries of China’s free
trade zones (FTZs), while the forthcoming proposed foreign investment law (FIL) would lay the groundwork for streamlining government approvals and clarifying the regulatory environment. Overall,however, China’s reform efforts have yet to substantially address
core issues like foreign investment restrictions and preferential
policies toward domestic industry.169

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Draft Foreign Investment Law
In January 2015, MOFCOM and the NDRC jointly circulated adraft of the new FIL, which will abolish the three existing laws
governing foreign investment in China when it goes into effect.** As a procedural matter, the adoption of the draft FIL would require the approval of the National People’s Congress. Given the priority of the draft FIL in relation to the other pending
legislation as well as the legislative process of the National People’s Congress, it is unlikely the
FIL will come into effect until 2018. Anna Elshafei, ‘‘China’s Draft Foreign Investment Law
Could Be a Game Changer?’’ Miller Canfield, June 8, 2015.

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Some elements of the draft FIL reflect key principles of the U.S.
model Bilateral Investment Treaty (BIT), including the use of anegative list to identify instances in which FDI is to be treated differently than domestic investment.170 In its current form, the draft
FIL would significantly improve the legal and regulatory regime fora majority of foreign investment in China by eliminating approvalrequirements in unrestricted sectors.171 Other aspects of the draft
FIL, however, threaten to expand the scope of foreign investments
subject to the increased discretionary power of approval authorities. For example, FIEs in restricted sectors will still need foreign
investment approval and will continue to face numerous market access barriers such as foreign equity caps, geographic limitations,and local hiring minimums, as well as the current MOFCOM review and approval process.172
Under the draft FIL, the definition of a ‘‘foreign investor’’ hasbeen expanded to include instances where the person or entity withultimate ‘‘control’’ * over the company making the investment isforeign, even if the company itself is domestic.173 For example, adomestic, Chinese-owned company structured to allow foreign strategic investors to operate in a sector with foreign equity restrictions—also known as a variable-interest entity (VIE)—would beconsidered a foreign investor. The scope of MOFCOM’s approvalauthority will also be expanded to cover offshore investments—anytransaction outside of China that results in the de facto control ofa Chinese entity by an FIE will be considered a foreign investment—marking a significant shift from the current practice, where
only onshore investments are subject to MOFCOM approval.174
This shift in focus from foreign equity to foreign control will allow
Chinese authorities to treat VIEs, a prevalent investment structureused by foreign investors to access restricted sectors of China’s
economy, with increased scrutiny and administrative discretion.175
The VIE structure is also used by some prominent Chinese companies, like Internet giants Alibaba and Baidu, to access foreign capital by listing on foreign stock exchanges while operating in
China.176
The draft FIL offers China’s first formal regulation on VIE structures; currently, the legal standing of VIEs is ambiguous, causing
uncertainty among foreign investors.† As for preexisting VIEs in
restricted or prohibited industries, MOFCOM offers three possible
approaches: (1) the VIE can continue to operate under the samestructure if it notifies MOFCOM it is controlled by Chinese investors; (2) the VIE can continue to operate under the same structure
if MOFCOM verifies its Chinese-controlled status at the entity’s re* The draft FIL defines ‘‘control’’ as follows: (1) directly or indirectly holding 50 percent ormore of the shares, equity, property shares, voting rights, or other similar rights and interestsof an enterprise; (2) despite holding less than 50 percent of the shares, equity, property shares,
voting rights, or other similar rights and interests of an enterprise, (a) being entitled to directly
or indirectly appoint at least half of the members of the board or a similar decision-making
body, (b) being able to ensure that its nominees obtain at least half of the seats on the board
or a similar decision-making body, or (c) being able to exert a material impact on the resolutionsof the shareholders’ meetings or the directors’ meetings; or (3) being able to exert a decisive influence on such matters as the operations, finance, personnel, and technology of an enterprisethrough contracts, trusts, or other means. Joseph W.K. Chan, Ling Chen, and Calamus Huang,‘‘China Set to Overhaul Foreign Investment Law,’’ Sidley Austin LLP, February 26, 2015.
† For more information on the legal risks associated with VIEs, see Kevin Rosier, ‘‘The Risksof China’s Internet Companies on U.S. Stock Exchanges,’’ U.S.-China Economic and Security Review Commission, June 18, 2014.

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quest; and (3) the VIE can apply to MOFCOM for foreign investment approval, and MOFCOM’s approval decision would reference
various factors, including the VIE’s de facto controller in its approval decision.177 As these guidelines suggest, preexisting VIEs in
restricted or prohibited industries not controlled by Chinese investors are at risk of being denied investment approval or ultimately
terminated.178 For preexisting Chinese companies listed on U.S.
stock exchanges utilizing the VIE structure, however, MOFCOM
would have the discretion to determine de facto Chinese control
and allow the entity to continue operations, even if the majority ofshareholders are foreign.
National Security Review
Although the adoption of a negative list in the new FIL will likely be a positive development for FIEs, the national security review
process proposed in the draft FIL and subsequently detailed in an
April 2015 State Council announcement could worsen the foreign
investment climate in China. Under the new negative list approach, the Foreign Investment Catalogue in use under the current
regime will be abolished, though the negative list itself will still
categorize sectors as either ‘‘prohibited’’ or ‘‘restricted.’’ 179 Foreign
investment in restricted sectors will be subject to a formal national
security review, while foreign investors in unlisted industries will
enjoy ‘‘pre-establishment national treatment’’: in lieu of applying
for approval from MOFCOM as a prerequisite for market entry,
FIEs would be able to establish businesses in China in the same
way as domestic firms-namely, by applying directly to the SAIC.180
Prior to the introduction of the review this year, foreign acquisitions of a controlling stake in Chinese companies in certain industries were subject to review under informal State Council regulations.181
The draft FIL broadens the scope of China’s national security review to include ‘‘any foreign investment which damages or may
damage the national security of China.’’ 182 The review will be conducted by the NDRC and MOFCOM, and will take the following
factors into consideration: (1) impact on national security, including
China’s capacity to provide essential goods and services to thatend; (2) impact on the stability of the economy; (3) impact on basicsocial order; (4) impact on culture and social morality; (5) impact
on Internet security; and (6) impact on sensitive technology for use
in national defense.183 Certain kinds of foreign investment, including investment into sensitive agricultural products, key natural resources and energy, strategic infrastructure, transport capabilities,
technology and information technology, and investment near military facilities, will trigger review.184 In effect, Chinese authorities
will have broader discretion to review incoming foreign investmentsfor perceived national security threats.
Three prominent U.S. business associations—the U.S. Chamberof Commerce, AmCham China, and AmCham in Shanghai—expressed their ‘‘deep concern’’ about the implications of China’s‘‘overly broad’’ definition of national security, which they describeas ‘‘heavily skewed in favor of protecting national interests that falloutside the widely accepted scope of essential national security concerns’’ and ‘‘likely to have a significant adverse impact on the flow

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of foreign investment into China.’’ 185 Specifically, China’s national
security definition includes economic security criteria that raise‘‘fundamental questions about whether future commitments by
China to open its markets to foreign investment will produce theintended results,’’ and ‘‘may also be inconsistent with principles of
non-discrimination, fairness, and openness that are embodied in ahigh-standard BIT,’’ at the risk of undermining ongoing U.S.-China
BIT negotiations.186
Free Trade Zones

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China’s FTZs were designed to test reforms aimed at promoting
further financial liberalization, reforming the foreign investment
management system, and supporting outbound investment for potential application nationwide.* Some relevant financial reform
measures have been carried out in the FTZs, but the promised liberalization has not materialized, much to the disappointment offoreign investors there.187 One estimate shows that of the 12,600
companies registered in the Shanghai FTZ in its first year of operation, only 13.7 percent were FIEs.188 Excluding Hong Kong andTaiwan companies, however, foreign companies comprised just 6
percent.189
The Shanghai FTZ, established in 2013, was specifically designed
to test and accelerate national-level financial reforms including implementation of renminbi (RMB) capital account convertibility,
market interest rates, and cross-border RMB handling. In 2015,
Chinese Premier Li Keqiang approved the creation of three additional FTZs—in Guangdong, Tianjin, and Fujian—and subsequent
expansion of the Shanghai FTZ to include Lujiazhai, the city’s financial district.190 According to Wang Shouwen, China’s AssistantMinister of Commerce, the three new FTZs will play different strategic roles:
The one in Guangdong will focus on promoting the indepth economic cooperation between the Chinese mainland,Hong Kong, and Macao, especially in the services sector. At
the same time, the Guangdong FTZ shoulders the responsibility of upgrading China’s manufacturing industry. The
one in Tianjin will emphasize the joint development of Beijing, Tianjin, and Hebei. The one in Fujian deepens crossStraits economic cooperation and will support the [‘‘One
Belt, One Road’’] initiative.191
All four FTZs adopted a unified negative list approach to foreign
investment in April 2015.192 Compared with the initial FTZ negative list promulgated in 2013, the 2015 FTZ negative list appears
to feature many changes: the number of sectors restricted to foreign investment decreased from 190 in 2013 to 122 in 2015.193 In
practice, however, U.S. officials are concerned that China’s negative list offer is not liberal enough to show a decisive commitment
to ‘‘seriously and significantly’’ opening up to foreign investment.194
Though the size of the FTZ negative list has been reduced, ‘‘many* More detailed discussion of China’s FTZs and related reforms can be found in U.S.-China
Economic and Security Review Commission, Monthly Analysis of U.S.-China Trade Data, May
5, 2015.

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industries and sectors have been merely re-grouped,’’ according to
the European Chamber.195 U.S. business groups believe the revisions reflect ‘‘a streamlining of the negative list with other national
regulations guiding foreign investment rather than a significant
liberalization of the investment environment.’’ 196 The 2015 FTZ
negative list largely maintains restrictions in certain sectors inwhich the United States maintains a competitive advantage with
China, including publishing, news, Internet content, films, law
practices, and banking and asset management.197 Foreign investment remains prohibited in sectors including rare earth mining, airtraffic control system management, postal enterprises, and radio
and television broadcasters.198 Foreign investment in industries including oil and natural gas exploration and development, generalpurpose airplane design, manufacturing, maintenance, and rareearth smelting will be restricted to JVs with Chinese companies.199
In a positive development, foreign investors can now set up e-commerce companies * in all four FTZs.200
U.S.-China Bilateral Investment Treaty
At the June 2015 S&ED, the United States and China reaffirmed
their commitment to prioritize negotiation of a high-standard, mutually beneficial BIT that ‘‘embodies the principles of nondiscrimination, fairness, openness, and transparency.’’ 201 In September 2015, ahead of President Xi’s visit to Washington, DC, BIT
negotiations entered their 21st round since commencing in 2008,
and the two parties exchanged ‘‘improved’’ negative lists.202 U.S.
Trade Representative Michael Froman said China’s newest negative list is ‘‘better than its original’’ and ‘‘represents serious effort
by senior Chinese leaders,’’ but that BIT negotiations are ‘‘a substantial distance from the kind of high standard agreement necessary to achieve our mutual objectives.’’203 Proponents argue theBIT presents an opportunity to address and ban Chinese investment practices that are out of line with international business andlegal standards, including unclear regulatory and legal enforcement, forced technology transfer, preferential policies for SOEs,
and long-standing market access barriers.204 Moreover, for China,
the BIT could serve to ‘‘force domestic reform’’ of the investment
framework by imposing ‘‘external obligations.’’ 205 Critics of the BIT
worry that, given the experience of China’s WTO accession, even ahigh-standard agreement will not be meaningfully enforceable as it
conflicts with Beijing’s stated development path.206
Implications for the United States

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U.S. businesses play a critical role in China’s economic development. As of 2014, cumulative U.S. FDI in China surpassed $65 billion, according to official U.S. data.207 U.S. companies have not
only contributed capital, but also advanced management practices,
technological innovation, and access to global distribution channels* Excluding any value-added technology, media, and telecommunications business, which remains restricted and subject to at least 50 percent Chinese ownership requirement in accordance with the Ministry of Industry and Information Technology’s Telecommunications Catalogue.

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for Chinese products and services.208 As recently as 2010, FIEs *employed 15.9 percent of China’s urban workforce and accounted
for about 26 percent of China’s industrial output.209 In 2014, according to official Chinese data, FIEs in China produced 45.9 percent of China’s exports, down from 58.2 percent in 2006.210 FIEs
in China also accounted for 46.4 percent of Chinese imports, meaning they imported components into China for use in final products.211
Despite these achievements, foreign investors in China are still
operating under a separate and less favorable set of rules designed
to give domestic competitors an advantage. In addition to risinglabor costs, surveyed foreign businesses also cite market access limitations and unclear and inconsistent enforcement of laws and regulations as the main challenges to establishing and operating businesses in China.212 Recent threats of regulatory campaigns havealso appeared to discriminate against FIEs in China, further contributing to the perception of a less welcoming operating environment.
While the laws governing foreign investment and forthcomingchanges to the foreign investment framework are publicly touted asrelaxing restrictions as China pursues its economic reform goals, inreality these policy changes expose U.S. companies in some of theUnited States’ strongest export sectors—especially R&D-intensive
industries—to increased regulatory scrutiny and administrative
discretion. For example, although the number of sectors restrictedor prohibited under China’s updated Foreign Investment Catalogue
has decreased, restrictions in industries that traditionally face
heavy controls remain largely intact, while several new constraints(e.g., restrictions on foreign investment in auto manufacturing andmedical institutions) have been introduced. Likewise, despite claiming to promote fair market competition, China’s AML enforcement
authorities appear to have used the threat of investigations to coerce FIEs into making concessions, giving Chinese competitors anadvantage domestically and abroad. China’s commitments in thedraft FIL and FTZs to liberalize foreign investment rules by adopting a simplified negative list are overshadowed by the potentiallydiscriminatory national security review procedures being tested for
implementation nationwide, as well as by a new series of securityrelated laws.
In response to these threats, the U.S. government continues toraise concerns about China’s investment restrictions and discriminatory policies at the highest levels, including in bilateral fora suchas the JCCT and the S&ED.213 Regarding China’s AML enforcement, U.S. officials from the FTC and DOJ have consistently engaged in consultation, training, and exchanges with Chinese antitrust officials. One FTC commissioner testified that Chinese enforcers have responded seriously to U.S. government engagement, signaling improvement in their approach to AML enforcement—for example, at the 2014 JCCT, U.S. official engagement resulted in Chinese commitments of increased ability of counsel to attend meetings with the AML enforcement agencies, more transparent penalty* Includes Sino-foreign contractual JVs, Sino-foreign equity JVs, and foreign-owned enterprises.

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procedures, and competition-based remedies.214 China’s commitments at the JCCT and S&ED have not fundamentally allayed concerns about its competition policy enforcement, leading some experts to suggest that a number of current U.S. laws could be
amended to better target procedural shortcomings and uneven enforcement.215
Foreign business groups have also been active in bringing attention to discriminatory policies and lobbying the Chinese government for much-needed regulatory clarity—for example, after detailed reports on China’s competition policy were published by suchgroups, China’s AML enforcement activity sharply declined. Experts at the Commission’s January 2015 hearing testified thatunited efforts from government officials, business groups and industry associations, and expert practitioners are the most effective
recourse for pushing China on liberalization.
Hopes for expanded bilateral investment continue to hinge on
China’s implementation of its reform commitments in a transparent and nondiscriminatory way. The U.S. government emphasizes the need for China to open new sectors to foreign investment,
increase transparency, and improve the enforcement of existinglaws to protect investors’ rights.216 If implemented, China’s Third
Plenum initiatives, FTZ reforms, and revised FIL could lead to improvements in the overall investment climate.
Conclusions• U.S. companies continue to invest in China despite an increasing
number of challenges on the ground and declining profitability.
Chinese government measures, policies, and practices contributing to the deteriorating foreign investment climate include inconsistent and unclear legal and regulatory enforcement, increasing Chinese protectionism, and other preferential policies benefitting domestic companies.
• Across industries, market access barriers continue to top the listof Chinese government measures that limit the ability and willingness of U.S. companies to invest in China. As a means to protect its domestic companies and industries, China restricts foreign investment in sectors in which the United States maintains
competitive advantage, including research and development-intensive and value-added information services sectors.
• Fluctuations in China’s foreign investment restrictions reflect apattern whereby the government welcomes foreign direct investment into sectors deemed strategic for China’s national economic
development in order to extract technology, intellectual property,
and know-how from foreign firms. However, after domestic industry is deemed sufficiently developed, policies welcoming investment are gradually withdrawn and new policies restricting investment are put in place to free up market space for domestic
firms and push out foreign firms.
• China’s Anti-Monopoly Law enforcement agencies—the Ministryof Commerce, the National Development and Reform Commission, and the State Administration of Industry and Commerce—have failed to treat identical or similar violations of the law

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equally, resulting in more leniency toward state-owned enterprises, more rigorous enforcement against foreign companies, andsubstantially varied penalties imposed on companies in similar
circumstances, regardless of nationality of the controlling shareholder. The enforcement practices of the National Development
and Reform Commission in particular are lacking in transparency, consistency, and fairness.
• The imbalance in expectations between domestic and foreign
firms for reporting mergers and acquisitions to China’s Ministryof Commerce in accordance with the Anti-Monopoly Law puts foreign-invested enterprises at a disadvantage by unfairly and disproportionately exposing them to increased scrutiny, regulatory
uncertainty, approval delays, and associated costs.
• Chinese Anti-Monopoly Law enforcers’ legal interpretations ofmonopolistic abuse of intellectual property by ‘‘dominant’’ firms
could have a significant impact on the licensing of intellectual
property in China, particularly by firms that account for a large
share of sales in the technology market or hold patents that are
essential to an industry standard—as several prominent U.S.
tech firms do.
• China’s commitments to seriously and significantly open up toforeign investment are overshadowed by new measures that reinforce longstanding market access barriers and discriminatory
treatment toward foreign investors.
• Some aspects of China’s proposed foreign investment law—suchas streamlined approval processes and the negative list approach—are encouraging, and signal a move toward fulfilling economic reform goals set forth in the Third Plenum and converging
with international investment practices. Yet, some troubling provisions remain, including a broadly discretionary and expanded
national security review mechanism and targeting of companies,
commonly foreign, using particular investment structures to access the market.

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Addendum I:

M&As Rejected or Conditionally Approved by MOFCOM *Date Announced

Industry

Parties

RemedyCase
Duration

November
2008

Beverage
Manufacturing

InBev,
AnheuserBusch

Conditionally approved

70 days

March
2009

Beverage
Manufacturing

Coca-Cola,
Huiyuan

Rejected: MOFCOM asserted the proposed acquisition would enable
Coca-Cola to leverage
its dominant position in
the carbonated softdrinks market to dominate the juice market,
raising entry barriers
and limiting the abilityof small- and mediumsized juice companies tocompete.

182 days

April 2009

ChemicalManufacturing

Mitsubishi
Rayon,
LuciteConditionally approved

124 days

September
2009

Auto/Equipment
Manufacturing

GeneralMotors,Delphi

Conditionally approved

42 days

September
2009

Pharmaceuticals

Pfizer,Wyeth

Conditionally approved

113 days

October
2009

Battery
Manufacturing

Panasonic,
Sanyo

Conditionally approved

283 days

August2010

Healthcare

Novartis,
Alcon

Conditionally approved

116 days

June 2011

Chemicals/
Fertilizer

Uralkali,
Silvinit

Conditionally approved

81 days

October
2011

Textile Machine
Manufacturing/
Private Equity

Alpha V,
Savio

Conditionally approved

110 days

November
2011

EnergyGeneralElectric,
Shenhua(formationof a JV)

Conditionally approved

212 days

December
2011

ComputingComponents

Seagate,Samsung

Conditionally approved

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* Italicized rows denote a proposed transaction involving both domestic and foreign-invested
entities; all other listed transactions involve only foreign-invested entities.

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Addendum I:

M&As Rejected or Conditionally Approved by MOFCOM *—Continued

Date Announced

Industry

Parties

RemedyCase
Duration

February
2012

ChemicalManufacturing

HenkelHong Kong,
Tiande(formationof a JV)

Conditionally approved

186 days

March
2012

Electronics
Components

Western
Digital,Hitachi

Conditionally approved

336 days

May 2012

Mobile Phone
Manufacturing

Google,Motorola
Mobility

Conditionally approved

233 days

April 2013

Natural Resources/Mining

Glencore,
Xstrata

Conditionally approved

381 days

April 2013

Agricultural
Products

Marubeni,
GavilonConditionally approved

308 days

August2013

Medical Devices

Baxter,GambroConditionally approved

221 days

August2013

Electronics
Components

Mediatek,
Mstar

Conditionally approved

417 days

January
2014

Biotechnology

TermoFisher,Life Technologies

Conditionally approved

196 days

April 2014

IT/Software/Mobile Equipment
Manufacturing

Microsoft,
Nokia

Conditionally approved

208 days

May 2014

Mobile Device
Manufacturing

Merck
kGaA, AZ
Electronic
Materials

Conditionally approved

106 days

June 2014

Transportation
Shipping

Maersk,MSC,
CMA CGM

Rejected: MOFCOM rejected plans by threeleading European shipping companies to forma shipping alliance thatwould allow the companies to share ships andport facilities, noting
the three companies already held a 46.7 percent market share in
the Asia-Europe container shipping line
market.

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* Italicized rows denote a proposed transaction involving both domestic and foreign-invested
entities; all other listed transactions involve only foreign-invested entities.

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110
Addendum I:

M&As Rejected or Conditionally Approved by MOFCOM *—Continued

Date Announced

Industry

Parties

RemedyCase
Duration

July 2014

Battery
Manufacturing

Primearth
EV Energy, Toyota Motor
China Investment,
ToyotaTsusho,Hunan
Corun New
Energy,Changshu
SinogyVentureCapital(formationof a JV)

Conditionally approved

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* Italicized rows denote a proposed transaction involving both domestic and foreign-invested
entities; all other listed transactions involve only foreign-invested entities.
Source: Adapted from US-China Business Council, ‘‘Update: Competition Policy & Enforcement in China,’’ May 2015, 11–17.

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Household Products

Hubei Price
BureauZhejiang Price
BureauGuangxi Price
BureauLocation/Agency* Italicized cells indicate the involvement of a foreign-invested enterprise.

November 2010

Paper Making

Rice Noodle
Manufacturing

March 2010

August 2010

Industry

Date Announced

Wuchang Salt Company

Fuyang Paper Manufacturing Industry Association

Juezhihe, Xianyige, Liuzhou
Brothers, Yongcai, andother rice noodle manufacturers

Companies Involved

In July and August 2010, the company
required distributors to purchase both
salt and Huolierba detergent powder.
The bureau announced the company
had violated two articles of the AML,
but the company had voluntarily returned illegal revenue to distributors.

In 2010, the association held meetings
with member companies to discuss thesales price for white paperboard. The
bureau ruled this behavior violated thePrice Law and the AML, and fined theassociation $73,437.

Starting in 2010, 18 rice noodle manufacturers colluded to discuss profit
sharing and business integration andto set market prices in violation of thePrice Law and the AML. The bureau
fined the three leading companies$14,648 apiece, and ordered fines ranging from $4,394 to $11,718 for others
according to their behaviors.

Description

Completed Cases[36 known cases involving approximately 269 entities or associations, of which 71 are foreign]

Addendum II: Pricing Investigations Conducted by the NDRC and Provincial Development and Reform Commissions, 2008–2015 *

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February 2012

Chemicals

Pharmaceuticals

Household Products

May 2011

November 2011

Industry

Date Announced

Hubei/NDRC

Shandong/NDRC

Shanghai/NDRC

Location/Agency

Hubei Yihua Group

Weifang Shuntong, Huaxin

UnileverCompanies Involved

Sfmt 6601

The NDRC and its Hubei branch foundYihua had worked with other companies to fix prices, and subsequently imposed those prices on its customers,causing the price of sodium hydrosulphite to increase by 300 percent in2011. The authorities fined Yihua $1.6
million for violation of the AML.

The NDRC found the companies had
signed an exclusive distribution agreement with the only two domestic producers of a key raw material commonlyused in high blood pressure treatments,
thus eliminating competition. The
NDRC found these behaviors violated
the AML and the Price Law, and fined
Weifang Shuntong $1.1 million andHuaxin $23,505 under the AML.

In March 2011, Unilever released information to the media that it might raise
detergent and soap prices because of
raw materials costs, causing ‘‘panic
buying’’ in customers. The NDRC ruled
the behavior violated the Price Law, ordered Unilever to cancel the price hike,and fined the group $307,978.

Description

Completed Cases[36 known cases involving approximately 269 entities or associations, of which 71 are foreign]

Addendum II: Pricing Investigations Conducted by the NDRC and Provincial Development and Reform Commissions, 2008–2015 *—Continued

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Liquor (baijiu)

LCD Panels

Sea Sand

Guizhou Price
BureauNationwide

Guangdong Price
Bureau* Italicized cells indicate the involvement of a foreign-invested enterprise.

February 2013

January 2013

March 2012

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Kweichow Moutai Group

Samsung, LG, Chimei,
AUO, Chunghwa Picture
Tubes (CPT), HannStar
Display Corporation

Guangdong Sea Sand Association and its members

The bureau found Moutai had sought to
fix the minimum resale price to thirdparty distributors since 2012, taking
punitive measures against those who
did not implement the price, in violation of the AML as a resale price maintenance agreement. The bureau fined
the company $39.6 million, or 1 percentof the relevant sales revenue in the previous year.

The NDRC found these six foreign LCD
manufacturers met repeatedly between
2001 and 2006 to exchange informationon the LCD panel market and set ormanipulate LCD panel prices in China
in violation of the Price Law. The
NDRC ordered the parties to return theovercharged funds to Chinese television
enterprises ($27.6 million), confiscatedother illegal gains ($5.9 million), andfined the companies $23.1 million. The
NDRC also ordered the companies totake other corrective measures.

Several companies took steps to set andmanipulate resource fees for mining sea
sand under the umbrella of the association in violation of the AML. Threemembers of the association were collectively fined $120,565, and others were
issued warnings.

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August 2013

Gold Jewelry

Insurance

Liquor (baijiu)

February 2013

July 2013

Industry

Date Announced

Shanghai Price
BureauXinjiang

Sichuan DRC

Location/Agency

Shanghai Laofengxiang,
Yuyan Plaza

Xinjiang Insurance Industry Association and
15 branches of national
property insurance groupcompanies

Wuliangye Group

Companies Involved

The Shanghai Price Bureau ruled thatthe company and other gold jewelry
stores sought to set retail prices under
the umbrella of the Shanghai Gold &Jewelry Trade Association in violationof the AML. The bureau fined the association $81,743 and the five stores a
total of $1.6 million, or 1 percent of
their previous year’s sales.

Six insurance companies were punishedfor horizontal monopoly agreements; it
is unclear whether the other nine companies have yet been punished.

The Sichuan DRC found Wuliangye
signed agreements with over 3,200
dealers from 2009 to 2013 to limit thelowest resale price for its products, taking punitive measures against those
who did not implement the price, in violation of the AML. The DRC fined
Wuliangye $32.4 million, or 1 percent of
the relevant sales revenue in the previous year.

Description

Completed Cases[36 known cases involving approximately 269 entities or associations, of which 71 are foreign]

Addendum II: Pricing Investigations Conducted by the NDRC and Provincial Development and Reform Commissions, 2008–2015 *—Continued

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Tourism

Milk Powder

Concrete Manufacturing

Hainan Price
BureauNationwide

Jiangsu Price
Bureau* Italicized cells indicate the involvement of a foreign-invested enterprise.

September 2013

August 2013

August 2013

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Sanya Platinum Crystal
Crafts, Crystal Source,
Good Royal Crystal

Biostime, Mead Johnson
Nutrition, Dumex, Abbott,
Friesland Campina, Wyeth,
Fonterra, Beingmate, Meiji

Nanjing Concrete Industry
Association and 37 concrete
manufacturers

The bureau ruled that these three companies formed a cartel, holding coordination meetings and signing a formal
agreement in June 2012 to fix prices,commission rates, and market share forcrystal products in violation of the
AML. Sanya and Crystal Source werefined $588,134 (4 percent of the previous year’s revenue) and $220,550 (2percent of the previous year’s revenue),
respectively, for monopoly agreement,with additional fines for concealing,transferring, or destroying financial evidence. Good Royal was exempt frompunishment for cooperating with authorities.

The NDRC found nine milk powder
companies guilty of fixing resale prices
for distributors and retailers in violation of the AML. The NDRC fined six ofthese producers a total of $109.3 million, with fines ranging from 3 to 6 percent of the previous year’s revenue.

After an August 2013 investigation, thebureau found the association and 37
companies engaged in anticompetitive
pricing violations, and imposed a collective $6.2 million fine on all parties. The
association and one other company refused to follow the administrative decision, and were ordered by the NanjingIntermediate Court on December 8,
2014, to pay the fine. Four other firms
filed administrative lawsuits against
the bureau’s decision, but were rejected.

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September 2013

Tourism

Milk Processing

River Sand

September 2013

September 2013

Industry

Date Announced

Hainan, YunnanPrice Bureaus

Qinghai Price
BureauGuangdong Price
BureauLocation/Agency

Tourist shops selling crystal
and spirulina products including Sanya Dijia Tradeand Development Company,
Sanya Zhongyu Crystal
Company, and Lijiang
Kangnuo Biological Development Company 1

Qinghai pasteurized milk
producerTwo domestic river sandcompanies

Companies Involved

Tourist-oriented shops selling crystal
products and spirulina were accused ofusing discounts on artificially inflated
prices for these products to lure in customers. Local pricing agencies foundthese practices violated the Price Law,
and fined each shop $49,011.

The bureau found the company to havea monopoly in the local market, which
it exploited to increase the sales priceby 267 percent, constituting excessive
pricing. The company voluntarily committed to correct the pricing and notraise prices for four months; the bureau
subsequently terminated the investigation.

The two companies, owned by the same
individual, held a 75 percent share of
the local sand mining and processing
market. The companies were accused ofhoarding large amounts of sand, leading to a price increase of up to 54.5 percent over two years. The bureau fined
the companies 2 percent of their previous year’s sales revenue (approximately $86,000).

Description

Completed Cases[36 known cases involving approximately 269 entities or associations, of which 71 are foreign]

Addendum II: Pricing Investigations Conducted by the NDRC and Provincial Development and Reform Commissions, 2008–2015 *—Continued

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Insurance

Tourism

Tourism

Hunan Price
BureauHainan Price
BureauYunnan DRC* Italicized cells indicate the involvement of a foreign-invested enterprise.

December 2013

September 2013

September 2013

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Hunan Loudi City Insurance Industry Associationand 12 domestic insurancerelated companies

Travel agencies in Hainan,
including Hainan Haikou
Civil Tourism Agency, theYangguang Chunjing Travel A5 Tian Tour Group, andthe Hainan Tongxing
Tianxia Travel Agency

Eight travel agencies in
Yunnan, including the
Lijiang branch of Ctrip,
under the guidance of the
Lijiang Tourism Association
Travel Agency Division

The association organized companies toset prices for new car insurance discount rates, divided up the market, andengaged in other anticompetitive behaviors in violation of the AML. The bureau fined the association and six of thecompanies $361,746. The other fivecompanies were exempt from penalties
for cooperating with authorities.

The bureau ruled that several travel
agencies used bait-and-switch tactics tolure customers, pricing tours at or
below cost to attract tourists and thencharging high commissions from shopping activities organized by the tour
groups. The bureau ruled that such behavior violates the Price Law, and finedeach agency $49,011.

The Yunnan DRC ruled that eight travel agencies, operating under the umbrella of the Lijiang Tourism Association’s Travel Agency Division, signed
agreements in 2008 and 2010 to set
prices for tour groups, sharing $37.1
million in profits over two years, in violation of the AML as a price monopoly
agreement. The agency was fined$81,685, and the travel agencies werecollectively fined $547,291, or 5 percentof the previous year’s revenue.

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May 2014

Vision Care

Telecommunications

Banking

February 2014

May 2014

Industry

Date Announced

Nationwide

Nationwide

Nationwide

Location/Agency

Essilor, Zeiss, Nikon,
Bausch & Lomb, Johnson& Johnson, Hoya, WeiconInterDigital

Domestic commercial banks(unnamed)

Companies Involved

Sfmt 6601

Seven manufacturers of eyeglasses andcontact lenses were accused of setting
minimum resale prices and runningpromotions that effectively served as resale price maintenance arrangements.
The NDRC found their actions in violation of the AML and fined five manufacturers a total of more than $3 million, with rates of either 1 or 2 percentof the previous year’s sales.

The company was accused of abuse of
market dominance, charging discriminative high-price patent license fees for
China’s communications equipment
manufacturers, and issuing bundled licenses for nonstandard essential patents and standard essential patents. In
June 2014, the NDRC announced theinvestigation was suspended.

Chinese banks were accused of imposing arbitrary charges and fees on customers. In February 2014, the NDRC
announced it had ordered 64 branchesof different banks to return $66.5 million in fees from those charges, and imposed fines of $67.7 million.

Description

Completed Cases[36 known cases involving approximately 269 entities or associations, of which 71 are foreign]

Addendum II: Pricing Investigations Conducted by the NDRC and Provincial Development and Reform Commissions, 2008–2015 *—Continued

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Automotive

Automotive

Brick Manufacturing

Hubei Price
BureauNationwide

Hainan* Italicized cells indicate the involvement of a foreign-invested enterprise.

August 2014

August 2014

July 2014

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Four Mercedes-Benzdealerships

Hitachi, Denso, Aisan,
Mitsubishi Electric,
Mitsuba, Yazaki, Furukawa
Electric, and Sumitomo
Electric; (separate case)Nachi-Fujikoshi, NSK,JTEKT, and NTN

Five domestic manufacturers of aerated bricks

The bureau announced that four dealerships had overcharged customers forthe predelivery inspection of purchased
automobiles, and had colluded to set
prices. The bureau fined the dealerships a collective total of $264,666.

The NDRC announced that eight autoparts manufacturers and four bearings
manufacturers had held frequent consultations to set and influence pricing
of vehicles, auto parts, and bearings.
Fines for companies that did not cooperate were $135.1 million for theseven auto parts companies and $65.5
million for three bearings companies,
ranging between 4 and 8 percent ofeach company’s previous year’s sales.

In October 2012, five manufacturers ofbricks with holes to allow airflow established without authorization an industry association to harmonize sales price;supervision and control; and statistics
for production, sales, and shipments.
The five companies agreed upon and coordinated price increases and signed
monopoly agreements to divide sales.
Three companies were fined $85,879, or
1 percent of the previous year’s sales,
and the others were exempted for cooperation.

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CementInsurance

September 2014

September 2014

Industry

Date Announced

Jilin Price Bureau

Zhejiang

Location/Agency

Frm 00132

Three domestic cementcompanies: Yatai, Northern,
and Jidong

Zhejiang Insurance Industry Association and
23 property insurance companies

Companies Involved

Fmt 6601

The bureau announced the companies
had held several consultations to agree
to set cement price and implementation
policies in violation of the AML, andfined Yatai and Jidong 2 percent of
their 2012 sales revenues, and fined
Northern 1 percent of its 2012 sales
revenue. Collectively, fines totaled$18,636.

The NDRC announced the associationand 23 companies held frequent consultations to set and influence discountrates of new vehicles and unified commercial commissions for auto insurance
agencies in violation of the AML, fining
the association $81,457 and the companies a total of $18 million, or 1 percentof the previous year’s sales revenue.
Fines were waived or reduced for threecompanies that cooperated with investigating authorities.

Description

Completed Cases[36 known cases involving approximately 269 entities or associations, of which 71 are foreign]

Addendum II: Pricing Investigations Conducted by the NDRC and Provincial Development and Reform Commissions, 2008–2015 *—Continued

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Telecommunications

Automotive

Automotive

Nationwide

Hubei Price
BureauShanghai Price
Bureau* Italicized cells indicate the involvement of a foreign-invested enterprise.

February 2015

September 2014

September 2014

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Qualcomm

FAW-Audi Sales, and ten
Audi dealers in Hubei

Chrysler China Automotive
Sales Company; (separatecase) three Chrysler Shanghai dealerships

The NDRC fined Qualcomm $971.7 million, or 8 percent of its sales revenue in
China in 2013, for violation of the AML.
The NDRC argued Qualcomm holds adominant market position in several
key telecommunications standard-essential patents and in chips, and had
used that position to charge high royalty rates, tie wireless and nonwirelesspatents, and attach conditions to chipsales.

The bureau announced the company
and ten dealers had reached monopoly
agreements to set and influence vehicle
sale and maintenance prices in violation of the AML. The bureau fined
FAW-Audi Sales $40.4 million, or 6 percent of its previous year’s sales revenue,
and fined eight of the dealers a total of$4.9 million: seven were fined 1 to 2
percent of the previous year’s sales revenue; one was fined 0.5 percent of its
previous year’s sales revenue; and two
were exempted from penalties.

The bureau found Chrysler and its
three dealerships engaged in concluding
and implementing price monopoly
agreements by signing dealershipagreements containing resale pricemaintenance terms. Chrysler was fined
approximately $5 million; the three
dealers were collectively fined morethan $300,000.

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Guangdong Price
BureauJiangsu Price
BureauLocation/Agency

Dongfeng Nissan and 17
of its car dealerships inGuangzhou

Mercedes-Benz and its
dealers in Nanjing, Wuxi,
and Suzhou

Companies Involved

The bureau announced in Septemberthat Dongfeng Nissan and its 17 dealers in Guangdong Province carried out
price control through its sales and service agreements. The bureau fined Dongfeng Nissan $19.7 billion (RMB 123.3
billion), and collectively fined the dealerships $3.1 billion (RMB 19.1 billion).

The bureau announced Mercedes-Benzreached a monopoly agreement with its
dealers in Jiangsu Province by enforcing minimum prices for dealers tocharge for its products, and implemented fixed-price agreements for partof the components in violation of the
AML. The bureau fined Mercedes-Benz$56.4 million, or 1 percent of its sales
revenue of the previous year. The dealers were fined $1.27 million in total.

Description

Industry
Telecommunications

Date Announced

November 2011

n/a

Location/Agency

China Mobile, China
UnicomCompanies Involved

Alleged abuse of market dominancethrough price discrimination

Description

Ongoing Cases[nine known cases involving at least 70 entities or associations, of which at least 12 are foreign]

Automotive

Automotive

April 2015

September 2015

Industry

Date Announced

Completed Cases[36 known cases involving approximately 269 entities or associations, of which 71 are foreign]

Addendum II: Pricing Investigations Conducted by the NDRC and Provincial Development and Reform Commissions, 2008–2015 *—Continued

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n/a

n/a

n/a

n/a

n/a

n/a

n/a

* Italicized cells indicate the involvement of a foreign-invested enterprise.

Express Delivery

Pharmaceuticals

Automobile

August 2014

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Automobile

Frm 00135

July 2014

April 2014

PO 00000

August 2013

Pharmaceuticals

CementMarch 2013

July 2013

E-Commerce

August 2012

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Domestic express delivery
companies in Chongqing
and Xiangtan, Hunan

Luxury car makers, including Mercedes-Benz, Audi,
Toyota, Land Rover, andothersNine unnamed pharmaceutical companies across
six provinces, including
Jiangsu, Anhui, Zhejiang,
Hebei, Liaoning, andShanghai

Imported cars and domestic
auto JVs (no specific companies named)

GlaxoSmithKline, Merck,
Astellas, Novartis,
Beohringer Ingelheim, Baxter International, Fresenius,
UCB, and others

Cement companies
nationwide

360 Buy, Gome, Suning

Alleged illegal pricing behavior, including collusion

Alleged abuse of dominant market position; imposition of horizontal andvertical restraints on competition (fines
not yet announced)

Alleged monopolistic pricing practices

Alleged excessive pricing

Alleged unfair import pricing (33 companies); internal cost structure (transfer pricing) (27 companies)

Alleged supply restrictions

Alleged illegal and fraudulent behavior
while engaging in low-cost competition

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Real Estate

August 2014

n/a

Location/Agency
Real estate brokers in
Tianjin (no specific companies named)

Companies Involved

Alleged monopolistic pricing practices

Description

1 At least three individual companies were named in the penalty decision, but the total number of shops operating in violation of the AML was not published.
China’s National Development and Reform Commission, ‘‘Case Involving a Group Illegally Manipulating Market Prices in Tourism Thoroughly Investigated,’’ September 29, 2013. Staff translation.
Source: US-China Business Council, ‘‘Update: Competition Policy & Enforcement in China,’’ May 2015, 19–26; Zhang Xingxiang, ‘‘China’s Anti-Monopoly Law
Enforcement: A Quest for Transparency, Consistency and Fairness,’’ Indiana University Research Center for Chinese Politics and Business Working Paper #37,
April 2015, Appendix 1, 1–5; Christoph Barth and Qiuying Zheng, ‘‘NDRC Issues Decision in Landmark Case against Qualcomm and Imposes Record Fine of
RMB 6.088 Billion,’’ Linklaters LLP, February 2015; China’s National Development and Reform Commission, Case Involving a Group Illegally Manipulating Market Prices in Tourism Thoroughly Investigated, September 29, 2013. Staff translation; Xinhuanet, ‘‘Auto Industry Anti-Monopoly Guide Draft To Be Finished This
Year,’’ September 17, 2015. Staff translation.

* Italicized cells indicate the involvement of a foreign-invested enterprise.

Industry

Date Announced

Ongoing Cases[nine known cases involving at least 70 entities or associations, of which at least 12 are foreign]

Addendum II: Pricing Investigations Conducted by the NDRC and Provincial Development and Reform Commissions, 2008–2015 *—Continued

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Monopoly Investigations Conducted by the SAIC and its Provincial Branches, 2008–Present *PO 00000

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Secondhand Automobiles

Henan/SAIC

Jiangxi AIC

Jiangsu Administration of Industry
and Commerce(AIC)

Location/Agency* Italicized cells indicate the involvement of a foreign-invested enterprise.

January 2012

Liquefied Petroleum Gas(LPG)

Concrete

August 2010

April 2011

Industry

11 secondhand car dealerships in Anyang,
Henan

Taihe County Huawei
LPG Station and six
other gas companies

Lianyungang Construction Material and Machinery Association and
16 member companies

Companies Involved

The SAIC ruled that the group of
three secondhand auto dealerships
formed a cartel and signed an agreement to set a uniform price and market share in 2007. By 2009, the cartel
expanded to include 11 dealerships inviolation of the AML. The SAIC confiscated $232,691 in illegal profits andimposed a collective fine of $42,005 on
the participants.

The Jiangxi AIC found the LPG Station signed an agreement with six
other LPG companies in 2008 to monopolize and divide up the market inviolation of the AML, and confiscatedillegal gains of $31,665. The AIC also
fined Taihe County Huawei LPG Station $20,063.

The Jiangsu AIC found the association and 16 member companies signed
an illegal monopoly agreement prohibiting all involved from independently
signing contracts with buyers. The
AIC confiscated illegal profits of morethan $20,046, and fined five participants in the cartel a combined total of$77,950.

Description

Completed Cases[21 known cases involving approximately 78 enterprises or associations, none of which is foreign]

Addendum III:

Date Announced

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December 2012

November 2012

Insurance

Insurance

CementAugust 2012

Hunan/SAIC

Hunan/SAIC

Liaoning AIC

Location/Agency

Sfmt 6601

Zhangjiajie Insurance
Association and eight
member companies

Yongzhou Insurance Association and ten member companies

Liaoning Construction
Material Industry Association and 12 member
companies

Companies Involved

The SAIC found the association andeight insurance companies signed
agreements in 2010 to establish a new
car insurance service center as a window for consumer purchases of new
car insurance, constituting an illegalmonopoly agreement. The SAIC fined
the association $64,192.

The SAIC found the association and
12 insurance companies signed anagreement in 2011 establishing a new
car insurance service center, which
served as a window for setting up consumer purchases of new car insurance. The SAIC judged the agreement
to be an illegal monopoly agreement,
and fined the ten insurance companies $64,194, and the 12 member companies a total of $155,990.

The association’s cement committee
and 12 member companies signed
agreements in 2010 to monopolize themarket, control production, and set
market share. The Liaoning AIC ruled
their behavior constituted an illegalmonopoly agreement under the AML
and fined the association and the 12
member companies $2.6 million collectively.

Description

Completed Cases[21 known cases involving approximately 78 enterprises or associations, none of which is foreign]

Monopoly Investigations Conducted by the SAIC and its Provincial Branches, 2008–Present *—Continued

Industry

Addendum III:

Date Announced

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Construction Equipment

Concrete

Insurance

Insurance

Zhejiang AIC

Zhejiang AIC

Hunan/SAIC

Hunan/SAIC* Italicized cells indicate the involvement of a foreign-invested enterprise.

March 2013

December 2012

December 2012

December 2012

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Cixi Construction and Engineering Testing Association, Cixi Building and Engineering Quality Supervision Station Energy Office, and three companies

Jiangshan Tiger ProductConcrete, Jiangshan
Yongcheng Concrete, andJiangshan Hengjiang
Product Concrete

Chenzhou Insurance Association and 14 member
companies

Changde Insurance Association and nine member
companies

The Zhejiang AIC found the parties
signed an agreement in 2010 to divide
market share and set ground rules forcompetition. The AIC suspended the investigation in 2012 based on submissions from the parties, and closed theinvestigation in March 2013 without
punishments.

The Zhejiang AIC ruled the three companies made an oral agreement in 2009
to divide up the city’s concrete market,
set prices, and eliminate competition,
constituting an illegal monopoly agreement. The AIC fined the three companies a total of $189,367.

The SAIC found the association and ten
insurance companies signed an agreement in 2007 to establish a new car insurance service center as a window for
consumer purchases of new car insurance. The SAIC fined the association$72,216.

The SAIC ruled the association andnine insurance companies signed agreements in 2006 to establish a new car insurance service center as a window for
consumer purchase of new car insurance, constituting an illegal monopoly
agreement. The association was fined$72,216.

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July 2013

April 2013

Civilian Blasting

Tourism

Bricks/Ceramics

March 2013

Guizhou/Anshun
AIC

Yunnan AIC

Sichuan AIC

Location/Agency

Sfmt 6601

Qianzhong Civilian
Blasting Equipment Operating Company

Xishuangbanna
Tourism Association,
Xishuangbanna Travel
Agency Association

Yibin Building Material
Industry Association
Brick Committee, threeof its member companies, and one individualCompanies Involved

The AIC found a local subsidiary of thecompany was guilty of abuse of market dominance and excessive prices,and fined the company $20,715.

The Yunnan AIC found the tourism
association launched a platform in2003 and convinced more than 80
other groups to sign on, effectively
promoting specific tours to specificstops with punitive actions for those
who deviated. Concurrently, the travel
agency association and 24 travel agencies signed agreements to set prices
and itineraries for travel. The AIC
fined each association $64,859.

The Sichuan AIC ruled the threemember companies of the committee
signed a series of agreements in 2009
designed to limit the output of bricks
in the market and control market
share, constituting an illegal monopoly agreement. The companies werefined a total of $161,093, and an involved individual was fined $9,666.

Description

Completed Cases[21 known cases involving approximately 78 enterprises or associations, none of which is foreign]

Monopoly Investigations Conducted by the SAIC and its Provincial Branches, 2008–Present *—Continued

Industry

Addendum III:

Date Announced

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Fireworks

Sports and Entertainment

Water Supply Engineering

Inner Mongolia
AIC

Beijing AIC

Guangdong AIC* Italicized cells indicate the involvement of a foreign-invested enterprise.

July 2014

June 2014

December 2013

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Six fireworks
companies in Chifeng,
Inner Mongolia

Shankai Sports
International

Huizhou Daya Bay Yiyuan
Purified Water

The six companies that were designatedlocally as the sole wholesalers for various products were accused of abusing
their dominant market position by requiring distributors to apply for fireworks purchases, among other requirements, or see their purchasing quotas
cut. Four of the companies also signed
an illegal monopoly agreement. The
AIC fined the six companies $94,580
total.

The company—the authorized vendor of
package tours to the 2014 FIFA World
Cup in Brazil for China, Hong Kong,and Macau—was accused of bundlingvarious products and services, and requiring customers to purchase set bundles, in violation of a March 2011agreement with Beijing China Travel
Service Company. The Beijing AIC suspended the investigation in June 2014,
stating that Shankai admitted its violations and took undisclosed steps to address concerns. In January 2015, theSAIC announced its decision to terminate the investigation.

The AIC found Yiyuan used its strong
market position to require local real estate companies to sign agreements bundling water supply with other services,
constituting a violation of the AML.
The AIC required the company to halt
operations, turn over illegal gains of$142,056, and pay a fine of 2 percent of
its previous year’s revenue, or $396,434.

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November 2014

October 2014

Natural Gas

TobaccoSand and Gravel Mining

October 2014

Chongqing AIC

Jiangsu AIC

Chongqing AIC

Location/Agency

Chongqing Gas Group

Pizhou Subsidiary of
Xuzhou Tobacco
Company

Four quarry operators
in Wuxi County,
ChongqingCompanies Involved

Sfmt 6601

The company overcharged its customers for natural gas using fee rates
that were inflated. The AIC ruled theactivity constituted abuse of market
dominance in violation of the AML.
Because the company cooperated, theAIC lightened its punishment, resulting in a fine of $291,500, or 1 percent
of its 2010 sales revenue.

The head of the subsidiary was accused of abusing the company’s dominant market position to unfairly determine supply allotted to different retailers without reasonable cause. The
AIC fined the individual $281,394, or
1 percent of the sales revenue madefrom selling cigarettes under limited
supply conditions.

The quarry operators were accused ofsetting a verbal monopoly agreement
in order to divide the sand and gravel
sales required to construct the local
portion of the Fengxi Highway. The
AIC imposed fines of $65,440 on theoperators.

Description

Completed Cases[21 known cases involving approximately 78 enterprises or associations, none of which is foreign]

Monopoly Investigations Conducted by the SAIC and its Provincial Branches, 2008–Present *—Continued

Industry

Addendum III:

Date Announced

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Information technology

Food and Beverage
Packaging

Water Supply

Concreten/an/aHainan AIC

Zhejiang AIC

Microsoft

Tetra Pak

Hainan Dongfang Water
Company

Zhejiang Shangyu
Concrete Association andeight member
companies

Alleged abuse of market dominanceAlleged abuse of market dominanceThe company was accused of abusing
its market dominance to impose conditions on new users when providing
water supplying services, in violation of
the AML. The AIC confiscated illegal
gains of $6,148 and fined the company$94,683, or 2 percent of its sales revenue in the previous year.

The association and eight member companies were determined to be using monopoly agreements to divide local market share, in violation of the AML. The
AIC fined the association $1,611 andimposed fines ranging from $1,611 to$64,477 on the eight firms.

* Italicized cells indicate the involvement of a foreign-invested enterprise.
Source: US-China Business Council, ‘‘Update: Competition Policy & Enforcement in China,’’ May 2015, 27–33; Zhang Xingxiang, ‘‘China’s Anti-Monopoly Law
Enforcement: A Quest for Transparency, Consistency and Fairness,’’ Indiana University Research Center for Chinese Politics and Business Working Paper #37,
April 2015, Appendix II, 6–11; Zhong Lun Law Firm Antitrust Practice Group, Competition Law Bulletin Issue 8 (April 2015), 2.

July 2014

July 2013

February 2015

December 2014

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 2
1. UN Conference on Trade and Development, UNCTADstat database; David
Dollar, ‘‘United States-China Two-Way Direct Investment: Opportunities and Challenges,’’ Brookings Institution, January 2015, 1.
2. Daniel H. Rosen and Thilo Hanneman, ‘‘New Realities in the US-China Investment Relationship,’’ Rhodium Group, April 29, 2014.
3. U.S. Department of Commerce, Bureau of Economic Analysis.
4. U.S. Department of Commerce, Bureau of Economic Analysis, China Factsheet, July 31, 2015.
5. U.S. Department of Commerce, Bureau of Economic Analysis, China Factsheet, July 31, 2015.
6. Organization for Economic Co-Operation and Development, ‘‘OECD FDI Regulatory Restrictiveness Index,’’ OECD.StatExtracts.
7. U.S. Department of State, 2015 Investment Climate Statement (China), May
2015, 6.
8. Dezan Shira & Associates, ‘‘China Releases Draft Foreign Investment Law,
Signaling Major Overhaul for Foreign Investment,’’ China Briefing, January 21,
2015.
9. China’s Ministry of Commerce, Catalogue for the Guidance of Foreign Investment Industries (Amended in 2011), February 21, 2012.
10. U.S. Chamber of Commerce, ‘‘China’s Approval Process for Inbound Foreign
Direct Investment: Impact on Market Access, National Treatment and Transparency,’’ 2012, 8.
11. U.S. Chamber of Commerce, ‘‘China’s Approval Process for Inbound Foreign
Direct Investment: Impact on Market Access, National Treatment and Transparency,’’ 2012, 8.
12. U.S. Chamber of Commerce, ‘‘China’s Approval Process for Inbound Foreign
Direct Investment: Impact on Market Access, National Treatment and Transparency,’’ 2012, 9.
13. U.S. Chamber of Commerce, ‘‘China’s Approval Process for Inbound Foreign
Direct Investment: Impact on Market Access, National Treatment and Transparency,’’ 2012, 7–13.
14. U.S. Chamber of Commerce, ‘‘China’s Approval Process for Inbound Foreign
Direct Investment: Impact on Market Access, National Treatment and Transparency,’’ 2012, 2.
15. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 32.
16. U.S. Chamber of Commerce, ‘‘China’s Approval Process for Inbound Foreign
Direct Investment: Impact on Market Access, National Treatment and Transparency,’’ 2012, 52.
17. U.S. Chamber of Commerce, ‘‘China’s Approval Process for Inbound Foreign
Direct Investment: Impact on Market Access, National Treatment and Transparency,’’ 2012, 40.
18. US-China Business Council, ‘‘USCBC 2015 China Business Environment
Survey Results: Growth Continues amidst Economic Slowdown, Rising Competition,
Policy Uncertainty,’’ 2015, 3.
19. US-China Business Council, ‘‘USCBC 2015 China Business Environment
Survey Results: Growth Continues amidst Economic Slowdown, Rising Competition,
Policy Uncertainty,’’ 2015, 2–3.
20. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 10.
21. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 10; US-China BusinessCouncil, ‘‘USCBC 2015 China Business Environment Survey Results: Growth Continues amidst Economic Slowdown, Rising Competition, Policy Uncertainty,’’ 2015,
3.
22. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 19.
23. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 23.
24. EU Chamber of Commerce in China, ‘‘Business Confidence Survey,’’ June
2015, 13.
25. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 23.
26. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 19.

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133
27. EU Chamber of Commerce in China, ‘‘Business Confidence Survey,’’ June
2015, 14.
28. U.S. business representative, discussion with Commission, Hong Kong Special Administrative Region, July 30, 2015.
29. Chun Han Wong, ‘‘China Adopts Sweeping National-Security Law,’’ WallStreet Journal, July 1, 2015; China Law Translate, ‘‘Cybersecurity Law (Draft),’’July 6, 2015; Zunyou Zhou, ‘‘China’s Draft Counter-Terrorism Law,’’ China Brief(Jamestown Foundation) 15:14, July 17, 2015; Sui-lee Wee, Michael Martina, andJames Pomfret, ‘‘Foreign Governments, Non-Profits Press China to Revise Draft
NGO Law,’’ Reuters, July 1, 2015.
30. U.S. business representative, discussion with Commission, Hong Kong Special Administrative Region, July 30, 2015.
31. U.S. business representative, discussion with Commission, Hong Kong Special Administrative Region, July 30, 2015.
32. World Bank Group, ‘‘Economy Profile 2015: China,’’ in Doing Business 2015:
Going beyond Efficiency, 2015.
33. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 25.
34. U.S. Department of State, China Investment Climate Statement 2015, May
2015, 9.
35. U.S. Department of State, China Investment Climate Statement 2015, May
2015, 10.
36. U.S. business representative, discussion with Commission, Beijing, China,
July 23, 2015.
37. U.S. Department of State, China Investment Climate Statement 2015, May
2015, 13.
38. U.S. business representative, discussion with Commission, Hong Kong Special Administrative Region, July 30, 2015.
39. Don S. Williams, ‘‘An Introduction of Catalogue of Industries for Guiding
Foreign Investment,’’ National Law Review, April 10, 2015.
40. Xu Ping and Wang Rongkang, ‘‘China Plans Sweeping Foreign Investment
Reforms,’’ King & Wood Mallesons, April 14, 2015.
41. Woon-Wah Siu and Liang Tao, ‘‘China’s New Foreign Investment Guidance
Catalogue,’’ Pillsbury Winthrop Shaw Pittman LLP, March 18, 2015, 2.
42. Rainy Yao, ‘‘Update: Latest Guidance Catalogue for Foreign Investment Industries Released,’’ China Briefing (Dezan Shira & Associates), March 20, 2015.
43. Ashwin Kaja, Ning Lu, and Tim Stratford, ‘‘Chinese Government Issues
2015 Foreign Investment Catalogue–Effective April 10, 2015,’’ Global Policy Watch,
March 24, 2015; U.S. Department of State, 2015 Investment Climate Statement(China), May 2015, 9.
44. Rainy Yao, ‘‘Update: Latest Guidance Catalogue for Foreign Investment Industries Released,’’ China Briefing (Dezan Shira & Associates), March 20, 2015.
45. Xu Ping and Wang Rongkang, ‘‘China Plans Sweeping Foreign Investment
Reforms,’’ King & Wood Mallesons, April 14, 2015.
46. Clifford Chance LLP, ‘‘China’s New Industry Catalogue for Foreign Investment to Take Effect,’’ April 2015.
47. Xu Ping and Wang Rongkang, ‘‘China Plans Sweeping Foreign Investment
Reforms,’’ King & Wood Mallesons, April 14, 2015.
48. Sun Hong and Tony Zhong, ‘‘China Foreign Investment: New Catalogue Revises Which Industries Are Accessible to Overseas Investors,’’ Norton Rose Fulbright, July 2015.
49. International Medical Travel Journal, ‘‘US Groups Plan to Establish 100%
Foreign Owned Hospitals in China,’’ April 1, 2015.
50. Xu Ping and Wang Rongkang, ‘‘China Plans Sweeping Foreign Investment
Reforms,’’ King & Wood Mallesons, April 14, 2015.
51. Steven Elsinga, ‘‘The New Free Trade Zones Explained, Part II: The Negative List,’’ China Briefing (Dezan Shira & Associates), April 30, 2015.
52. Steven Elsinga, ‘‘The New Free Trade Zones Explained, Part II: The Negative List,’’ China Briefing (Dezan Shira & Associates), April 30, 2015.
53. Roy K. McCall, ‘‘Investing in China’s Education Industry,’’ China Briefing(Dezan Shira & Associates), October 23, 2014.
54. Xu Ping and Wang Rongkang, ‘‘China Plans Sweeping Foreign Investment
Reforms,’’ King & Wood Mallesons, April 14, 2015; Mark A. Cohen, ‘‘International
Law Firms in China: Market Access and Ethical Risks,’’ Fordham Law Review 80:6
Article 9 (2012), 2569–2575.
55. Mark A. Cohen, ‘‘International Law Firms in China: Market Access and Ethical Risks,’’ Fordham Law Review 80:6 Article 9 (2012), 2569–2575.

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134
56. Mark A. Cohen, ‘‘International Law Firms in China: Market Access and Ethical Risks,’’ Fordham Law Review 80:6 Article 9 (2012), 2569–2575.
57. Rachel Tang, ‘‘China’s Auto Sector Development and Policies: Issues and Implications,’’ Congressional Research Service, June 25, 2012.
58. Arthur Wang, Wenkan Liao, and Arnt-Philipp Hein, ‘‘Bigger, Better, Broader:
A Perspective on China’s Auto Market in 2020,’’ McKinsey & Company, November
2012, 1.
59. Arthur Wang, Wenkan Liao, and Arnt-Philipp Hein, ‘‘Bigger, Better, Broader:
A Perspective on China’s Auto Market in 2020,’’ McKinsey & Company, November
2012, 1.
60. IBISWorld, ‘‘Auto Parts Manufacturing in China,’’ April 2015, 4.
61. Lulu Xue, ‘‘4 Lessons from Beijing and Shanghai Show How China’s Cities
Can Curb Car Congestion,’’ World Resources Institute (blog), April 10, 2015.
62. Jeffrey Hirsch, ‘‘Carmakers Fret over China’s Slowing Auto Market,’’ Los Angeles Times, September 2, 2015; China Association of Automobile Manufacturers,‘‘The Sales and Production of Passenger Cars Continued to Fall for Three Months,’’
September 16, 2015.
63. Rachel Tang, ‘‘China’s Auto Sector Development and Policies: Issues and Implications,’’ Congressional Research Service, June 25, 2012, 9.
64. U.S. International Trade Commission, ‘‘The Effects of China’s Indigenous
Innovation Policies on the U.S. Economy,’’ in China: Effects of Intellectual Property
Infringement and Indigenous Innovation Policies on the U.S. Economy, May 2011,
5–37.
65. U.S. International Trade Commission, ‘‘The Effects of China’s Indigenous
Innovation Policies on the U.S. Economy,’’ in China: Effects of Intellectual Property
Infringement and Indigenous Innovation Policies on the U.S. Economy, May 2011,
5–37.
66. U.S. International Trade Commission, ‘‘The Effects of China’s Indigenous
Innovation Policies on the U.S. Economy,’’ in China: Effects of Intellectual Property
Infringement and Indigenous Innovation Policies on the U.S. Economy, May 2011,
5–37.
67. Stephen J. Ezell and Robert D. Atkinson, ‘‘False Promises: The Yawning Gap
between China’s WTO Commitments and Practices,’’ Information Technology & Innovation Foundation, September 2015, 5.
68. Office of the U.S. Trade Representative, 2014 Report to Congress on China’s
WTO Compliance, December 2014, 93.
69. U.S. Chamber of Commerce, ‘‘China’s Approval Process for Inbound Foreign
Direct Investment: Impact on Market Access, National Treatment and Transparency,’’ 2012, 59.
70. Office of the U.S. Trade Representative, 2014 Report to Congress on China’s
WTO Compliance, December 2014, 93.
71. David J.D. Dai and Mandy Yang, ‘‘China Issues New Foreign Investment Industrial Guidance Catalogue,’’ MWE China Law Offices, 2012; Bank of TokyoMitsubishi UFJ, ‘‘2015 Guidance Catalogue for Foreign Investment Industries Released, Cutting the Number of Industries with Restrictions from 79 to 38,’’ March
31, 2015, 2.
72. EU SME Center, ‘‘The Automotive Market in China,’’ 2015, 5.
73. General Motors, ‘‘About GM China’’; EU SME Center, ‘‘The Automotive Market in China,’’ 2015, 5.
74. Office of the U.S. Trade Representative, 2014 Report to Congress on China’s
WTO Compliance, December 2014, 23.
75. Office of the U.S. Trade Representative, Autos.
76. Office of the U.S. Trade Representative, Autos; Office of the U.S. Trade Representative, 2014 Report to Congress on China’s WTO Compliance, December 2014,
93; Office of the U.S. Trade Representative, 2015 National Trade Estimate Reporton Foreign Trade Barriers—China, 74.
77. U.S. Department of State, 2015 Investment Climate Report—China, May
2015, 5.
78. Office of the U.S. Trade Representative, 2015 National Trade Estimate Report on Foreign Trade Barriers, March 2015, 4.
79. US-China Business Council, ‘‘USCBC 2014 China Business Environment
Survey Results: Growth Continues amidst Rising Competition, Policy Uncertainty,’’
2014, 18–19.
80. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 24.
81. EU Chamber of Commerce in China, ‘‘Business Confidence Survey,’’ June
2015, 21–22.

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135
82. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 26; EU Chamber of Commerce in China, ‘‘Business Confidence Survey,’’ June 2015, 17.
83. EU Chamber of Commerce in China, ‘‘Business Confidence Survey,’’ June
2015, 37.
84. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 20.
85. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 1.
86. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 37.
87. US-China Business Council, ‘‘Competition Policy and Enforcement in China,’’
September 2014, 1.
88. US-China Business Council, ‘‘Competition Policy and Enforcement in China,’’
September 2014, 4.
89. US-China Business Council, ‘‘Competition Policy and Enforcement in China,’’
September 2014, 5.
90. US-China Business Council, ‘‘Competition Policy and Enforcement in China,’’
September 2014, 11.
91. US-China Business Council, ‘‘Competition Policy and Enforcement in China,’’
September 2014, 13.
92. US-China Business Council, ‘‘Competition Policy and Enforcement in China,’’
September 2014, 14–15; U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition Law Enforcement,’’ September 2014, 67–68.
93. US-China Business Council, ‘‘Competition Policy and Enforcement in China,’’
September 2014, 18.
94. US-China Business Council, ‘‘Competition Policy and Enforcement in China,’’
September 2014, 21.
95. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 27.
96. China’s Ministry of Commerce, MOFCOM’s 2014 Year-End Roundup: Rollingout Antimonopoly Work in Accordance with the Law to Protect Fair Market Competition, January 29, 2015. Staff translation.
97. U.S.-China Economic and Security Review Commission, Hearing on the Foreign Investment Climate in China, written testimony of Elizabeth Wang, January
28, 2015.
98. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 28–29.
99. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 28–29.
100. Gibson, Dunn & Crutcher LLP, ‘‘2015 Antitrust Merger Enforcement Update
and Outlook,’’ March 11, 2015, 42.
101. Gibson, Dunn & Crutcher LLP, ‘‘2015 Antitrust Merger Enforcement Update
and Outlook,’’ March 11, 2015, 42.
102. Kazunori Takada, ‘‘China Could Target Oil Firms, Telecoms, Banks in Price
Probes: Report,’’ Reuters, August 15, 2013.
103. US-China Business Council, ‘‘Update: Competition Policy & Enforcement in
China,’’ May 2015, 18.
104. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 54.
105. China Daily, ‘‘China’s Antitrust Probes Not Selective: NDRC,’’ September 12,
2014.
106. China Daily, ‘‘China’s Antitrust Probes Not Selective: NDRC,’’ September 12,
2014.
107. Michael Martina and Matthew Miller, ‘‘ ‘Mr. Confession’ and His Boss Drive
China’s Antitrust Crusade,’’ Reuters, September 15, 2014.
108. Michael Gu, Yu Shuitian, and Bai Chen, ‘‘Annual Review of PRC Anti-Monopoly Law Enforcement (2014),’’ Anjie Law Firm, 2.
109. US-China Business Council, ‘‘Update: Competition Policy & Enforcement in
China,’’ May 2015, 1.
110. Zhang Xingxiang, ‘‘China’s Anti-Monopoly Law Enforcement: A Quest forTransparency, Consistency and Fairness,’’ Indiana University Research Center for
Chinese Politics and Business Working Paper #37, April 2015, 44.
111. Zhang Xingxiang, ‘‘China’s Anti-Monopoly Law Enforcement: A Quest forTransparency, Consistency and Fairness,’’ Indiana University Research Center for
Chinese Politics and Business Working Paper #37, April 2015, 30–31.

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136112. Zhang Xingxiang, ‘‘China’s Anti-Monopoly Law Enforcement: A Quest forTransparency, Consistency and Fairness,’’ Indiana University Research Center for
Chinese Politics and Business Working Paper #37, April 2015, 41.
113. Zhang Xingxiang, ‘‘China’s Anti-Monopoly Law Enforcement: A Quest forTransparency, Consistency and Fairness,’’ Indiana University Research Center for
Chinese Politics and Business Working Paper #37, April 2015, 27; 43–44.
114. China’s State Administration of Industry and Commerce, Dedicated, Sharp,
and Devoted: 2014 SAIC Antimonopoly and Anti-Unfair Competition Enforcement
Work Summary, January 28, 2015. Staff translation.
115. China’s State Administration of Industry and Commerce, Dedicated, Sharp,
and Devoted: 2014 SAIC Antimonopoly and Anti-Unfair Competition Enforcement
Work Summary, January 28, 2015. Staff translation.
116. China’s State Administration of Industry and Commerce, Dedicated, Sharp,
and Devoted: 2014 SAIC Antimonopoly and Anti-Unfair Competition Enforcement
Work Summary, January 28, 2015. Staff translation.
117. Angela Huyue Zhang, ‘‘Bureaucratic Politics and China’s Anti-Monopoly
Law,’’ Cornell International Law Journal 48:1 (2014), 24.
118. Angela Huyue Zhang, ‘‘Bureaucratic Politics and China’s Anti-Monopoly
Law,’’ Cornell International Law Journal 48:1 (2014), 27.
119. Charles Pommiès et al., ‘‘The Tension between Competition Law and IP
Rights in China: What IP Rights Holders Should Know,’’ Kluwer Patent Blog (Allen& Overy), April 27, 2015.
120. Zhang Xingxiang, ‘‘China’s Anti-Monopoly Law Enforcement: A Quest forTransparency, Consistency and Fairness,’’ Indiana University Research Center for
Chinese Politics and Business Working Paper #37, April 2015, 4.
121. Angela Huyue Zhang, ‘‘Bureaucratic Politics and China’s Anti-Monopoly
Law,’’ Cornell International Law Journal 48:1 (2014), 14.
122. Angela Huyue Zhang, ‘‘Bureaucratic Politics and China’s Anti-Monopoly
Law,’’ Cornell International Law Journal 48:1 (2014), 22.
123. Angela Huyue Zhang, ‘‘Bureaucratic Politics and China’s Anti-Monopoly
Law,’’ Cornell International Law Journal 48:1 (2014), 32.
124. Angela Huyue Zhang, ‘‘Bureaucratic Politics and China’s Anti-Monopoly
Law,’’ Cornell International Law Journal 48:1 (2014), 32.
125. Angela Huyue Zhang, ‘‘Bureaucratic Politics and China’s Anti-Monopoly
Law,’’ Cornell International Law Journal 48:1 (2014), 9.
126. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 54.
127. American Chamber of Commerce in the People’s Republic of China, ‘‘2015
China Business Climate Survey Report,’’ February 2015, 29.
128. EU Chamber of Commerce in China, ‘‘Business Confidence Survey,’’ June
2015, 37.
129. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 62.
130. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 63.
131. U.S.-China Economic and Security Review Commission, Hearing on the Foreign Investment Climate in China, written testimony of Mark Cohen, January 28,
2015.
132. U.S.-China Economic and Security Review Commission, Hearing on the Foreign Investment Climate in China, written testimony of Mark Cohen, January 28,
2015.
133. U.S.-China Economic and Security Review Commission, Hearing on the Foreign Investment Climate in China, written testimony of Mark Cohen, January 28,
2015.
134. Don Clark, ‘‘Qualcomm to Pay $975 Million Antitrust Fine to China,’’ WallStreet Journal, February 10, 2015.
135. U.S.-China Economic and Security Review Commission, Hearing on the Foreign Investment Climate in China, written testimony of Mark Cohen, January 28,
2015.
136. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 66.
137. U.S. Chamber of Commerce, ‘‘Competing Interests in China’s Competition
Law Enforcement,’’ September 2014, 66.
138. US-China Business Council, ‘‘Update: Competition Policy and Enforcementin China,’’ May 2015, 25.
139. Qualcomm, ‘‘Qualcomm and China’s National Development and Reform Commission Reach Resolution,’’ February 9, 2015; Don Clark, ‘‘Qualcomm to Pay $975
Million Antitrust Fine to China,’’ Wall Street Journal, February 10, 2015.

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137140. Qualcomm, ‘‘Qualcomm and China’s National Development and Reform Commission Reach Resolution,’’ February 9, 2015.
141. Don Clark, ‘‘Qualcomm to Pay $975 Million Antitrust Fine to China,’’ WallStreet Journal, February 10, 2015; Charles Clover, ‘‘Chipmaker Qualcomm Sets out
China Designs,’’ Financial Times, April 1, 2015.
142. Qualcomm, ‘‘Qualcomm and China’s National Development and Reform Commission Reach Resolution,’’ February 9, 2015.
143. Qualcomm, ‘‘Qualcomm’s Affiliate, QGT, SMIC, Huawei, and imec Create
Equity Joint-Venture Company in China,’’ OnQ (Qualcomm blog), June 25, 2015;
Paul Mozur, ‘‘Qualcomm in Venture with Chinese Chip Maker,’’ New York Times,
June 23, 2015.
144. PRNewswire, ‘‘SMIC, Huawei, imec, and Qualcomm in Joint Investment on
SMIC’s New Research and Development Company,’’ June 23, 2015.
145. Paul Mozur, ‘‘Qualcomm in Venture with Chinese Chip Maker,’’ New YorkTimes, June 23, 2015.
146. Lewis Ho and Monique Lee, ‘‘How Qualcomm Transforms SEP-Licensing
Landscape in China,’’ Law360, April 8, 2015.
147. Covington & Burling LLP, ‘‘China Issues Final IP/Antitrust Rules,’’ April 21,
2015, 1.
148. Nicolas French et al., ‘‘A New Dawn? China Introduces First Antitrust
Guidelines in Relation to Intellectual Property Rights,’’ Freshfields Bruckhaus
Deringer, April 2015, 1–2.
149. Covington & Burling LLP, ‘‘China Issues Final IP/Antitrust Rules,’’ April 21,
2015, 1.
150. Covington & Burling LLP, ‘‘China Issues Final IP/Antitrust Rules,’’ April 21,
2015, 3.
151. Steve Harris, Mabel Lui, and Jingwen Zhu, ‘‘China’s New Rules on Antitrustand Intellectual Property Intersected Issues,’’ Winston & Strawn LLP, April 2015,
1.
152. Maureen K. Ohlhausen, ‘‘Antitrust Enforcement in China—What Next?’’(Second Annual Global Competition Review Live Conference, New York, NY, September 16, 2014), 9; Covington & Burling LLP, ‘‘China Issues Final IP/Antitrust
Rules,’’ April 21, 2015, 3.
153. Steve Harris, Mabel Lui, and Jingwen Zhu, ‘‘China’s New Rules on Antitrustand Intellectual Property Intersected Issues,’’ Winston & Strawn LLP, April 2015,
1.
154. Steve Harris, Mabel Lui, and Jingwen Zhu, ‘‘China’s New Rules on Antitrustand Intellectual Property Intersected Issues,’’ Winston & Strawn LLP, April 2015,
3.
155. Daniel Sokol and Wentong Zheng, ‘‘FRAND in China,’’ Texas Intellectual
Property Law Journal 22 (2013), 71–93.
156. Covington & Burling LLP, ‘‘China Issues Final IP/Antitrust Rules,’’ April 21,
2015, 5.
157. Covington & Burling LLP, ‘‘China Issues Final IP/Antitrust Rules,’’ April 21,
2015, 5.
158. Daniel Sokol and Wentong Zheng, ‘‘FRAND in China,’’ Texas Intellectual
Property Law Journal 22 (2013), 71–93.
159. Daniel Sokol and Wentong Zheng, ‘‘FRAND in China,’’ Texas Intellectual
Property Law Journal 22 (2013), 71–93.
160. Lewis Ho and Monique Lee, ‘‘How Qualcomm Transforms SEP-Licensing
Landscape in China,’’ Law360, April 8, 2015.
161. U.S. Department of Justice, Justice Department and Federal Trade Commission Officials Meet with Chinese Antitrust Agencies Officials at Second Annual HighLevel Meetings, Justice Blogs, January 10, 2014.
162. David Goldstein, ‘‘U.S. Ramps up Criticism of China’s Enforcement of its
Antitrust Laws against Foreign Companies,’’ Orrick, Herrington & Sutcliffe LLP,
October 15, 2014.
163. David Goldstein, ‘‘U.S. Ramps up Criticism of China’s Enforcement of its
Antitrust Laws against Foreign Companies,’’ Orrick, Herrington & Sutcliffe LLP,
October 15, 2014.
164. Michael Martina and Matthew Miller, ‘‘As Qualcomm Decision Looms, U.S.
Presses China on Antitrust Policy,’’ Reuters, December 15, 2014.
165. U.S. Department of the Treasury, Sixth Meeting of the U.S.-China Strategic
and Economic Dialogue U.S. Fact Sheet—Economic Track, July 11, 2014.
166. U.S.-China Economic and Security Review Commission, Hearing on the Foreign Investment Climate in China, oral testimony of Maureen K. Ohlhausen, January 28, 2015.

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138167. Maureen K. Ohlhausen (Commissioner, U.S. Federal Trade Commission), email to Commission staff, August 20, 2015.
168. U.S. Department of the Treasury, 2015 U.S.-China Strategic and Economic
Dialogue Joint U.S.-China Fact Sheet—Economic Track, June 25, 2015.
169. US-China Business Council, ‘‘USCBC China Economic Reform Scorecard—‘Mixed Signals,’ ’’ February 2015, 1.
170. U.S. Department of State, 2015 Investment Climate Statement (China), May
2015, 12.
171. U.S.-China Economic and Security Review Commission, Hearing on the Foreign Investment Climate in China, oral testimony of Lucille Barale, January 28,
2015.
172. Practical Law (Blog), ‘‘Draft Foreign Investment Law Open for Comment
until February 17,’’ January 21, 2015.
173. Alex Zhang and Vivian Tsoi, ‘‘China’s New Proposed Foreign Investment
Law—What to Expect,’’ White & Case LLP via Lexology, April 21, 2015.
174. Niping Wu, ‘‘Corporate Alert: Proposed Foreign Investment Law Would
Bring Profound Changes to Foreign Investment Regime in China,’’ Fenwick & West
LLP, February 11, 2015.
175. Joseph W.K. Chan, Ling Chen, and Calamus Huang, ‘‘China Set to Overhaul
Foreign Investment Law,’’ Sidley Austin LLP, February 26, 2015.
176. Cadwalader, Wickersham & Taft LLP, ‘‘China’s New Foreign Investment
Law: Implications for Restricted Industry Investments in China,’’ March 13, 2015.
177. Niping Wu, ‘‘Corporate Alert: Proposed Foreign Investment Law Would
Bring Profound Changes to Foreign Investment Regime in China,’’ Fenwick & West
LLP, February 11, 2015.
178. Steve Dickinson, ‘‘China VIEs Are Dead. Done. Over. Stick a Fork in Them,’’
China Law Blog, January 22, 2015.
179. Joseph W.K. Chan, Ling Chen, and Calamus Huang, ‘‘China Set to Overhaul
Foreign Investment Law,’’ Sidley Austin LLP, February 26, 2015.
180. Practical Law (Blog), ‘‘Draft Foreign Investment Law Open for Comment
until February 17,’’ January 21, 2015.
181. Christopher W. Betts et al., ‘‘China’s MOFCOM Aims to Fundamentally
Change the Legal Landscape on Foreign Investments,’’ Skadden, Arps, Slate,
Meagher & Flom LLP, February 2015.
182. China Ministry of Commerce, Draft Foreign Investment Law of the People’s
Republic of China, January 19, 2015.
183. Dezan Shira & Associates, ‘‘The New Free Trade Zones Explained, Part II:
The Negative List,’’ China Briefing, April 30, 2015.
184. Dezan Shira & Associates, ‘‘The New Free Trade Zones Explained, Part II:
The Negative List,’’ China Briefing, April 30, 2015.
185. U.S. Chamber of Commerce, American Chamber of Commerce in China, andAmerican Chamber of Commerce in Shanghai, ‘‘Joint Submission to the State Council on the Trial Measures for the National Security Review of Foreign Investments
in China’s Pilot Free Trade Zones and Revised Free Trade Zone Negative List,’’ 1.
186. U.S. Chamber of Commerce, American Chamber of Commerce in China, andAmerican Chamber of Commerce in Shanghai, ‘‘Joint Submission to the State Council on the Trial Measures for the National Security Review of Foreign Investments
in China’s Pilot Free Trade Zones and Revised Free Trade Zone Negative List,’’ 1.
187. U.S.-China Economic and Security Review Commission, Monthly Analysis of
U.S.-China Trade Data, May 5, 2015.
188. Zheng Yangpeng, ‘‘Clearer Rules Can Spur Investment,’’ China Daily, November 10, 2014.
189. Michelle Chen, ‘‘Reform Paralysis, Slow Progress Cloud Shanghai Free Trade
Zone Project,’’ Reuters, September 14, 2014.
190. Dezan Shira & Associates, ‘‘The New Free Trade Zones Explained, Part I:
Guangdong,’’ China Briefing, April 23, 2015.
191. Min Rui, ‘‘China Announces Plans for 3 Pilot Free Trade Zones,’’ China
Radio International English (China), April 20, 2015.
192. China’s State Council, ‘‘State Council Issues FTZ Foreign Investment Negative List,’’ April 20, 2015.
193. EU Chamber of Commerce in China, ‘‘China Free Trade Zones 2015 Update:
European Chamber Initial Assessment,’’ April 22, 2015; Dezan Shira & Associates,‘‘Shanghai Releases ‘Negative List’ for Foreign Investment in Shanghai Free Trade
Zone,’’ China Briefing, September 30, 2013.
194. Michael Martina and Matthew Miller, ‘‘China’s Finance Minister Hits at
U.S. ‘Negative List’—Xinhua,’’ Reuters, April 21, 2015.
195. EU Chamber of Commerce in China, ‘‘China Free Trade Zones 2015 Update:
European Chamber Initial Assessment,’’ April 22, 2015.

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196. U.S. Chamber of Commerce, American Chamber of Commerce in China, andAmerican Chamber of Commerce in Shanghai, ‘‘Joint Submission to the State Council on the Trial Measures for the National Security Review of Foreign Investments
in China’s Pilot Free Trade Zones and Revised Free Trade Zone Negative List,’’ 1.
197. Dow Jones, ‘‘China Unveils Investment Restrictions for Free Trade Zones,’’
Channel News Asia, April 20, 2015.
198. U.S.-China Economic and Security Review Commission, Monthly Analysis of
U.S.-China Trade Data, February 5, 2015.
199. Xinhua (English edition), ‘‘China Announces Plans for Pilot Free Trade
Zones,’’ April 20, 2015.
200. Dezan Shira & Associates, ‘‘The New Free Trade Zones Explained, Part II:
The Negative List,’’ China Briefing, April 30, 2015.
201. U.S. Information Technology Office, ‘‘Bilateral Investment Treaty,’’ June 2015.
202. Inside U.S. Trade—World Trade Online, ‘‘U.S., China Exchange Improved‘Negative List’ Offers at 21st BIT Round,’’ September 15, 2015.
203. Michael Froman, ‘‘Remarks by Ambassador Michael Froman at the CSIS
Asian Architecture Conference’’ (Center for Strategic and International Studies
Asian Architecture Conference, Washington, DC, September 22, 2015).
204. Jeffrey J. Schott et al., ‘‘Toward a U.S.-China Investment Treaty,’’ Petersen
Institute for International Economics, February 2015, 3–4.
205. Jin Fang, ‘‘A Review of China’s Bilateral Investment Treaties,’’ in Towarda Sino-US Investment Treaty, China Development Research Foundation, February
2015, 10.
206. Derek Scissors, ‘‘Stop the US-China Bilateral Investment Treaty (BIT)
Talks,’’ AEIdeas (American Enterprise Institute blog), August 19, 2014.
207. U.S. Department of Commerce, Bureau of Economic Analysis.
208. American Chamber of Commerce in the People’s Republic of China, ‘‘White
Paper Summary,’’ 2015, 2.
209. Wayne Morrison, ‘‘China’s Economic Rise: History, Trends, Challenges, andImplications for the United States,’’ Congressional Research Service, June 14, 2015,13.
210. Wayne Morrison, ‘‘China’s Economic Rise: History, Trends, Challenges, andImplications for the United States,’’ Congressional Research Service, June 14, 2015,13.
211. Wayne Morrison, ‘‘China’s Economic Rise: History, Trends, Challenges, andImplications for the United States,’’ Congressional Research Service, June 14, 2015,13.
212. U.S. Department of State, 2015 Investment Climate China, 3.
213. U.S. Department of State, 2015 Investment Climate China, 4.
214. U.S.-China Economic and Security Review Commission, Hearing on the Foreign Investment Climate in China, oral testimony of Maureen K. Ohlhausen, January 28, 2015.
215. Gil Kaplan, ‘‘Responses to China’s Misuse of its Anti-Monopoly Law,’’ written
submission to the Commission, December 2014.
216. U.S. Department of State, 2015 Investment Climate China, 4.

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SECTION 3: CHINA’S STATE-LED MARKETREFORM AND COMPETITIVENESS AGENDA
Introduction
Soviet-style, top-down planning remains a hallmark of China’s
economic and political system. Five-Year Plans (FYP) * continue toguide China’s economic policy by outlining the Chinese government’s priorities and signaling to central and local officials and industries the areas for future government support. The FYPs arefollowed by a cascade of sub-plans at the national, ministerial, provincial, and county level that attempt to translate these priorities
into region- or industry-specific targets, policy strategies, and evaluation mechanisms.1 While the past six FYPs successfully mobilized resources to spur three decades of double-digit economic
growth, the large-scale infrastructure investment and export-led
economic growth model they promoted is weakening. China’s slowing economic growth combined with concerns over a deteriorating
quality of life are threatening the Chinese Communist Party’s(CCP) ability to deliver prosperity—the basis of its legitimacy since
the Tiananmen Square Massacre of 1989.
To preserve CCP power, the newly installed CCP General Secretary and President Xi Jinping outlined an ambitious economic reform agenda at the Third Plenary Session of the CCP’s 18th Central Committee (the Third Plenum) † in November 2013. The Chinese government is using or attempting to use centrally directedreforms to fulfill its stated goals to sustain economic growth, improve capital allocation and industry efficiency through state-set
market incentives, and ensure a higher quality of life for its citizens. While these reforms aim to make China’s economy more efficient, the Chinese government does not mean to give up control;
rather, the intent is for the state to retain a central role in theeconomy.
This agenda requires significant political commitment to overcome entrenched interests—such as China’s powerful state-owned
enterprises (SOE) and its bloated, export-dependent industries—that doomed reforms under the 11th (2006–2010) and 12th (2011–2015) FYPs.2 The 13th (2016–2020) FYP, to be released in Marchdkrause on DSKHT7XVN1PROD with USCC

* The National Development and Reform Commission coordinates the drafting process with
input from State Council ministries, oversight by the Chinese Communist Party Politburo, andfinal ratification by the National People’s Congress. Subordinate plans are devised for each province and for specific sectors of the economy. Katherine Koleski and Joseph Casey, ‘‘Backgrounder: China’s 12th Five-Year Plan,’’ U.S.-China Economic and Security Review Commission,
June 24, 2011; U.S.-China Economic and Security Review Commission, Hearing on China Aheadof the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Oliver K.
Melton, April 22, 2015, 1–7; and Sebastian Heilmann and Oliver Melton, ‘‘The Reinvention of
Development Planning in China, 1993–2012,’’ Modern China 39:6 (August 2013): 580–628.
† For an in-depth analysis of the Third Plenum’s proposed economic reforms, see Nargiza Salidjanova and Iacob Koch-Weser, ‘‘Third Plenum Economic Reform Proposals: A Scorecard,’’ U.S.China Economic and Security Review Commission, November 19, 2013.

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141
2016, will build upon the Third Plenum agenda to accelerate reforms and transition China’s economy toward greater domestic consumption and higher-value-added manufacturing. However, current
market conditions and the government’s actions have called into
question China’s commitment to reforms. In response to slowing
economic growth and higher market volatility this year, seniorleadership is increasingly stalling or rolling back reforms and returning to investment and export-led economic growth.
This section carries on the Commission’s long examination ofChina’s industrial policies and assesses the likelihood President
Xi’s agenda in sustaining economic growth will succeed.* Building
upon expert testimony received at the Commission’s hearing on
April 22, 2015, and additional research throughout the year, thissection examines the status of the Chinese government’s reforms
and explores their impact on the competitiveness of U.S. companies
and the U.S. economy.
China’s Economic Challenges
Traditional drivers of China’s economic growth—fixed asset investment, exports, and cheap labor—are becoming less relevant.3
At the 2015 National People’s Congress (NPC), Premier Li Keqiang
reiterated this concern, describing China’s economic growth as ‘‘unbalanced, uncoordinated, and unsustainable.’’ 4 Minister of Finance
Lou Jiwei warned that China faces a 50 percent chance of sliding
into a middle-income trap in the next five to ten years.5 This middle-income trap would ensnare the Chinese economy in a cycle oflow growth because its growing wages are unable to compete
against low-cost countries, and high-value-added manufacturing is
not yet fully developed. The 11th and 12th FYPs largely failed atreorienting China’s economy away from unsustainable sources ofgrowth.6 Witnesses at the Commission’s April hearing outlined thechallenges the Chinese government is facing: 7• Smaller returns from fixed asset investments: State-led economic planning has directed cheap capital to SOEs, large-scale
infrastructure projects, and state-designated industries. This
allocation of capital has contributed to industrial overcapacityand enormous growth in local government and SOE debt.

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• Lower labor productivity gains: Higher wages, an emerging
labor shortage, and lack of labor mobility are eroding China’s* For additional information on China’s industrial policies, see U.S.-China Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 99–111; U.S.-China
Economic and Security Review Commission, 2013 Annual Report to Congress, November 2013,
113–152; U.S.-China Economic and Security Review Commission, 2012 Annual Report to Congress, November 2012, 47–81, 393–423; U.S.-China Economic and Security Review Commission,
2011 Annual Report to Congress, November 2011, 40–50, 70–106; U.S.-China Economic and Security Review Commission, 2010 Annual Report to Congress, November 2010, 187–190, 199–210;
U.S.-China Economic and Security Review Commission, 2009 Annual Report to Congress, November 2009, 56–89; U.S.-China Economic and Security Review Commission, 2008 Annual Report to Congress, November 2008, 69–82; U.S.-China Economic and Security Review Commission, 2007 Annual Report to Congress, November 2007, 48–62; U.S.-China Economic and Security Review Commission, 2006 Annual Report to Congress, November 2006, 30–32, 34–35, 167–
181; U.S.-China Economic and Security Review Commission, 2005 Annual Report to Congress,
November 2005, 27–45, 67–75; U.S.-China Economic and Security Review Commission, 2004 Annual Report to Congress, November 2004, 49–54, 177–192; and U.S.-China Economic and Security Review Commission, 2002 Annual Report to Congress, November 2002, 43–44, 47–50.

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labor productivity. China’s residency permit system, or hukou,*tightly controls labor mobility and employment opportunities
for all its citizens.8 The absolute number of working-age people
in China peaked in 2012, so cheap labor is no longer as readily
available.9 This shortage and the annual 14 percent average
wage hikes from 2000 to 2013 have increased overall laborcosts.10 Growing competition from countries (such as Vietnam)with lower labor costs is squeezing profit margins for low-end
manufacturing.11 Moreover, low-end manufacturing is not creating the types of jobs demanded by China’s growing numberof university graduates.12• Dwindling contribution of exports to gross domestic product(GDP): China’s National Bureau of Statistics found the contribution of exports of goods and services to GDP has shrunkfrom 8 percent in 2008 to 3 percent in 2014.13 Slower global
growth is not able to absorb ever more Chinese exports, necessitating the expansion of domestic consumption as a new engine of economic growth.† In addition, higher labor costs areraising the price of Chinese exports, further weakening global
demand for them.14 In the first eight months of 2015, China’s
global exports dropped 1.5 percent year-on-year, signaling contraction.15 Despite the slowing growth of China’s exports, theU.S. trade deficit in goods with China grew 9.7 percent overlast year to reach $237.3 billion in the first eight months of2015.16• Severe environmental degradation: Official reports found that
20 percent of China’s arable land, more than 60 percent of its
underground water, and 33 percent of its surface water arepolluted.17 The World Bank and the State Council’s Development Research Center estimated the costs of this environmental degradation reached approximately 10 percent of GDP
in 2008, representing a significant drag on the economy.‡ Furthermore, air pollution contributed to 17 percent of all deaths,
or 1.6 million people, in China between April 2014 and March
2015, according to estimates by the U.S.-based research nonprofit Berkeley Earth.18 In early March, Under the Dome, an
independent documentary—produced by Chai Jing, previously
an investigative reporter for the official government network
China Central Television (CCTV)—about the gravity of China’s* The hukou establishes eligibility for employment opportunities, compensation, education,
and access to government services for all Chinese citizens based on the status of one’s parents
and place of birth. Since the hukou is tied to a citizen’s place of birth, the holder of a given
hukou can only receive government services and benefits where the citizen is registered, particularly disadvantaging the 270 million rural residents who have migrated to cities. For more information on the hukou, see U.S.-China Economic and Security Review Commission, Chapter 2,
Section 5, ‘‘China’s Five-Year Plans and Technology Development and Transfers to China,’’ in2011 Annual Report to Congress, November 2011, 88–106.
† In July 2015, the International Monetary Fund (IMF) revised its global economic forecasts
downward as global economic growth slowed 0.8 percent below expectations in the first quarterof 2015. In October 2015, the IMF lowered its global growth expectations 0.2 percent below its
July 2015 projections. International Monetary Fund, ‘‘World Economic Outlook,’’ July 2015, 1;
International Monetary Fund, ‘‘World Economic Outlook,’’ October 2015, 1.
‡ These figures incorporate the environmental externalities of pollution-related health damages, property damages, soil erosion, deforestation, fisheries loss, biodiversity loss, water pollution, and watershed degradation. World Bank and Development Research Center of the StateCouncil of the People’s Republic of China, China 2030: Building a Modern, Harmonious, andCreative Society, 2013, 39, 233.

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air pollution was released online and seen by more than 200
million people in China before it was taken down by government censors.19 Reflecting this rising public awareness, therate of reported environmental protests more than tripled fromjust 47 incidents in 2013 to 152 incidents in 2014, based on figures from the U.S. government’s Open Source Center.*
China’s New Normal
At the Third Plenum, President Xi and Premier Li announced an
ambitious economic reform agenda they claimed would allow the‘‘market to play a decisive role in allocating resources.’’ 20 The
Third Plenum established a 60-point reform blueprint that broadly
seeks to liberalize the financial sector; realign fiscal authority; accelerate urbanization; relax requirements on inbound and outboundforeign direct investment and restrictions on market access in finance, education, culture, and medical care; increase the efficiency
and competitiveness of SOEs; and protect the environment.21 As
China registered its slowest economic growth in 24 years, China’s
senior leadership began to promote the ‘‘new normal’’ principle that
focuses on slower economic growth. This principle also attempts toshift the drivers of economic growth toward innovation and hightechnology.22 (For additional discussion of the ‘‘new normal,’’ see
Chapter 1, Section 1, ‘‘Year in Review: Economics and Trade.’’).
President Xi and Premier Li are likely to seize upon the 13th FYP
to push through their objectives.
While the Third Plenum agenda and promotion of the ‘‘new normal’’ principle largely repeat the objectives of the 11th and 12th
FYPs, they are designed to signal a strong political commitment toaddress the underlying structural problems that previously delayed
economic reform.23 The establishment of a new Central LeadingGroup on Comprehensively Deepening Reform led by President Xi
at the Third Plenum appears to strengthen high-level control overthe content and pace of these reforms.24 In addition, over the last
two years, President Xi has weakened political opposition that hindered reform under the 12th FYP. Shortly after taking office in2012, he launched an anticorruption drive that conducted at least
77,606 investigations and disciplined 102,168 officials by the end of
2014.† This campaign has attempted to uproot vested interests
within the CCP and SOEs, while simultaneously eliminating potential political threats to President Xi’s leadership.25
Assessing the Progress of China’s Reforms

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State intervention remains a cornerstone of China’s economic
policy, despite announcements of market-oriented reforms. Eswar
S. Prasad, professor of trade policy at Cornell University, cautioned
in his testimony to the Commission that these market-oriented reforms will differ from Western notions of free market because they
* The Open Source Center data on unrest are based on domestic and international media reports. Since unrest is largely unreported in rural areas and censored by local governments, thesefigures underestimate the scale of overall unrest. Open Source Center, ‘‘Reported Civil Disturbances in 2014,’’ September 1, 2015. ID: CHN2015090102912195.
† In 2014 alone, the Central Commission for Discipline Inspection disciplined 71,748 cadresand conducted 53,085 investigations. Shujie Leng and David Wertime, ‘‘China’s Anti-Corruption
Campaign Ensnares Tens of Thousands More,’’ Foreign Policy, January 9, 2015.

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will occur ‘‘in a manner consistent with a dominant role for thestate.’’ 26 However, slowing economic growth and rising unemployment have increased public unrest and weakened senior leadership’s resolve to implement needed reforms, leading the government to once again stall or roll back reforms while resuscitating old
levers of economic growth.* David Shambaugh, director of George
Washington University’s China Policy Program, noted this tension
in August 2015, arguing, ‘‘The leadership is so paralyzed and preoccupied by even a modest downturn that it reacts with the sameold fiscal tools of investment and pump-priming.’’ 27
Through its announced state-led reforms, the Chinese government is seeking to ensure the permanent rule of the CCP by improving domestic consumption, capital allocation, industry competitiveness, and quality of life (see Table 1). First, the Chinese government is seeking to boost domestic consumption as a new driver of
economic growth through expansion of the social safety net, urbanization, hukou reform, and support for the service sector. Second,fiscal and financial reforms are aimed at improving allocation ofcapital and resources. Third, the Chinese government is seeking toenhance China’s industrial competitiveness by pursuing SOE reform, higher-value-added manufacturing, and innovation. Finally,
the Chinese government set a goal of ensuring a higher quality oflife for its citizens by providing a livable environment for its population. These reforms will require significant political commitment
and financial capital to succeed (see the text box, ‘‘China’s Ability
to Finance Its Reform Agenda’’). The rest of the section outlines thesteps undertaken by the government to address these four key priorities, assesses the progress of these reforms, and evaluates thepotential implications for the United States.
Table 1: China’s Reform Priorities
Priorities

Reforms

Domestic Consumption• Expanding urbanization, the social safety net, andhukou reform• Building a strong service sector

Capital Allocation• Restructuring local government debt
• Opening China’s bank-driven financial sector• Loosening capital controls while maintaining strong
state control

Industry Competitiveness• Reforming SOEs
• Increasing higher-value-added manufacturing• Enhancing indigenous innovation• Reducing industrial overcapacity

Quality of Life

• Increasing energy conservation and environmental
preservation

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Source: Compiled by Commission staff.

* For additional information on unrest in China, see U.S.-China Economic and Security Review Commission, Chapter 2, Section 3, ‘‘China’s Domestic Stability,’’ in 2014 Annual Report toCongress, November 2014, 347–407.

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China’s Ability to Finance Its Reform Agenda
Estimated costs for urbanization and environmental clean-up
and protection alone total $8.3 trillion (renminbi [RMB] 65 trillion).28 Yet China’s government, particularly local governments,
is increasingly indebted and unable to take on significant additional financial obligations (see ‘‘Restructuring Local Government Debt,’’ later in this section, for more information).29 According to the global management consulting firm McKinsey &Company, since 2007 and the rollout of its $586 billion (RMB 4
trillion) stimulus program in 2009, China has accumulated $20.8
trillion of new debt, accounting for more than a third of global
growth in debt.30 Oliver Melton, an analyst for the U.S. Department of State, testifying in his personal capacity, noted that
under the 12th FYP ‘‘debt-fueled investment in industry, real estate, and infrastructure remained a major source of growth, andhas started to slow only in the face of substantial excess capacity
and a mounting debt repayment burden for firms and local governments.’’ 31 McKinsey & Company estimated that China’s total
debt reached 282 percent of GDP by the end of the first half of2014 compared with 269 percent in the United States.32 According to the global investment banking firm Goldman Sachs, China’s debt-to-GDP ratio grew from 153 percent in 2008 to approximately 230 percent in 2013, representing the largest debt buildup in the world in absolute terms.33 While China’s strong credit
and significant foreign exchange reserves would be able to support existing debt obligations, the enormous growth of debt
raises concerns about China’s ability to finance its ambitious andcostly reforms.34

Domestic Consumption

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In the 11th, 12th, and likely 13th FYPs, the Chinese government
has sought to increase the consumption power of Chinese households by expanding the social safety net, increasing urbanization,
reforming the hukou, and opening the service sector to competition
from private domestic and foreign firms.35 Higher domestic consumption will offset the eroding returns on fixed asset investment
and leverage the market power of the world’s second-largest economy. In 2014, China’s domestic consumption totaled 51.2 percent of
GDP (see Figure 1).36 Although domestic consumption has grownroughly two-fold from $2.5 trillion (RMB 15.8 trillion) in 2008 to$5.2 trillion (RMB 32.8 trillion) in 2014, investment in fixed assets
grew even more following the global financial crisis, increasingfrom 41 percent of GDP expenditures in 2007 to 46 percent in2014.37 In his testimony to the Commission, Nicholas Consonery,director of Asia at the political risk consulting firm Eurasia Group,
noted the composition of GDP under the 12th FYP has shifted moderately toward consumption but has ‘‘not materially changed,’’ indicating fundamental problems remain unaddressed.38

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Figure 1: GDP by Expenditure, 2004–2014

Expanding Urbanization, the Social Safety Net, and Hukou
ReformOver the last three decades, an estimated 270 million rural residents moved to Chinese cities, enabling China’s double-digit economic growth by boosting consumption and shifting labor into manufacturing and services.39 The Chinese government is seeking torepeat this success by moving an additional 100 million people, orapproximately 6 percent of its population, to cities by 2020.40 This
migration should significantly raise incomes of rural migrants (theincome gap between urban and rural residents currently stands at
more than 3:1) and enhance productivity.41 McKinsey & Company
forecasts consumption by urban Chinese households will increase
from $1.6 trillion (RMB 10 trillion) in 2012 to nearly $4.3 trillion(RMB 27 trillion) in 2022.42 While China’s economic growth has decelerated in part due to a slowdown in fixed asset investments,‘‘consumption growth remained steady,’’ according to the International Monetary Fund (IMF).43 Andy Rothman, an investment
strategist for Matthews Asia, highlighted the continued strength ofChinese consumption with double-digit year-on-year economic
growth of retail sales, real estate sales, and express parcel deliveries in July at 10.4 percent, 21 percent, and 47 percent, respectively.44 However, further productivity and domestic consumption
gains are hindered by the hukou residency system. Although nearly
54 percent of China’s population resides in cities, under the hukou
system only 36 percent of China’s population has access to urban
healthcare, housing, employment, and education opportunities.45
As part of the 12th FYP, the Chinese government expanded thesocial safety net by raising provincial and city-set minimum wages,
providing low-cost housing, increasing rural and urban healthcare
coverage, strengthening the pension system, and creating moreeducational opportunities in rural areas.46 As the government assumes responsibility for long-term costs of healthcare, retirement,

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Source: National Bureau of Statistics of the People’s Republic of China via CEIC database.

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and education, Chinese citizens are expected to save less and consume more. In his testimony before the Commission, Stephen
Roach, senior fellow and senior lecturer at Yale University, noted
the Third Plenum addressed the significant funding shortfall for social services under the 12th FYP, and the 13th FYP is likely to provide additional provisions for China’s social safety net.47 In lateAugust 2015, the State Council announced it will allow up to $96
billion (RMB 600 billion) of its pension funds * to be invested in thestock market, in part to prop up the stock market and offset aroughly $16 billion (RMB 100 billion) depreciation of its pension
funds over the last two decades.48 (For a discussion of China’s
stock market collapse and the government’s response, see Chapter
1, Section 1, ‘‘Year in Review: Economics and Trade.’’) Beyond expanding social services, the Chinese government is promoting higher-value-added manufacturing and encouraging urbanization toraise wages and spark consumption.
In March 2014, the Chinese government released the National
Plan on New Urbanization (2014–2020), which outlines plans to(1) move an additional 100 million rural residents to cities in central and western provinces, (2) develop affordable housing for 100
million current urban residents, (3) improve access to public services and social security by expanding urban hukou registration for
100 million rural migrants currently residing in cities,† and (4) enhance the environmental sustainability of cities by 2020.49 The government hopes this migration will unleash additional economic
growth by creating a new consumer base and working class.50 In
July 2015, Guangdong Province published guidelines to grant local
hukou registration to approximately 13 million migrant workers in
the province by 2020; however, this reform affects only 37 percentof the estimated 35 million migrant workers, and maintains restrictions on migration to its major cities of Guangzhou andShenzhen.51 Similarly, strict controls on migration to China’s
megacities such as Beijing or Shanghai will remain in place, limiting access to the most lucrative employment and educational opportunities.52
The continued rise in urbanization will require major investments in transportation, public utilities, healthcare facilities, andenvironmental infrastructure. While returns on fixed asset investments are shrinking in China, the central government is attempting to redirect its significant capital resources and construction capabilities toward more sustainable, profitable investments—such as
hospitals and urban transportation—that will soften the transition
to long-term, consumption-led growth. In 2014, China’s Ministry of
Finance estimated this transition will cost $6.8 trillion (RMB 42
trillion), involving funding from municipal bond markets, local government revenue channels, and public-private partnerships.53 In
April 2014, the State Council widened the potential sources offunding for these projects by pledging to open 80 major public infrastructure projects to private and foreign investment.54 The scale* At the end of 2014, pension funds were worth $560 billion (RMB 3.5 trillion). Hou Limei,‘‘China to Invest 2 Trillion Pension Funds in Stocks and Other Assets,’’ CRIEnglish, August 28,
2015.
† Collectively, these three policies are known as the ‘‘three 100 million people.’’ People’s Daily,‘‘Government Work Report: The ‘Three 100 Million People’ Principles Expound New-Type Urbanization,’’ March 5, 2014. Staff translation.

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and number of these proposed projects creates new opportunities
for both domestic and, potentially, foreign firms, including:• Transportation: Additional roads, railways, airports, and urban
transit systems are needed to connect the millions of people
within cities and the surrounding areas with their homes,
work, and schools. For example, in 2014, only 22 of the 150
Chinese cities with over one million people had urban railtransit systems.55 To expand urban transit systems to 50 cities
by 2020, the total investment in these systems will surpass$320 billion over the next five years, according to estimates by
the market research firm China Research and Intelligence.56
Additionally, China is augmenting its general aviation infrastructure to meet expected growth in air travel demand.* In
2015, China led global airport construction, with 56 ongoingprojects worth nearly $60 billion in investment.57• Healthcare: China’s rapidly aging population is demanding access to better-quality healthcare.† Accounting for this majordemographic transition, McKinsey & Company estimated China’s healthcare spending will increase from $357 billion in2011 to $1 trillion in 2020.58 In the pharmaceutical industry,
the National Bureau of Asian Research projected China’s overthe-counter and branded generic pharmaceutical market willgrow from $23 billion in 2010 to $369 billion in 2020.59• Housing: Approximately 62 million urban Chinese residents
live in substandard housing,‡ and an estimated 14 million lowincome households are financially strained by housing costs,
creating enormous demand for affordable housing, according to
McKinsey & Company.60 McKinsey & Company also estimatesthat further rural-to-urban migration could increase the number of low-income urban households by an additional 56 million
by 2025.61 To fill this gap, the Chinese government built an estimated 13.4 million housing units from 2012 to 2014, and its
National Plan on New Urbanization (2014–2020) outlines plansto build affordable housing for 100 million current urban residents.62
Building a Strong Service Sector to Meet Demand and Create Jobs

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Greater urbanization, higher wages, and an aging population are
increasing demand for the service sector in areas such as healthcare and retail. In 2014, according to China’s National Bureau of
Statistics, services accounted for 48.2 percent § of GDP and rose to* For analysis on China’s aerospace industry, see Roger Cliff, Chad J.R. Ohlandt, and David
Yang, ‘‘Ready for Takeoff: China’s Advancing Aerospace Industry,’’ prepared for the U.S.-China
Economic and Security Review Commission, March 1, 2011.
† For an in-depth background on China’s healthcare industry, see U.S.-China Economic andSecurity Review Commission, Chapter 1, Section 3, ‘‘China’s Health Care Industry, Drug Safety,
and Market Access for U.S. Medical Goods and Services,’’ in 2014 Annual Report to Congress,
November 2014, 127–182.
‡ Substandard housing is defined as dwellings that lack durability, sufficient living space, access to safe water, sanitation, and security against eviction. Jonathan Woetzel et al., ‘‘A Blueprint for Addressing the Global Affordable Housing Challenge,’’ McKinsey & Company, October
2014, 27.
§ Research by Rhodium Group and the Center for Strategic and International Studies (CSIS)
suggests flaws in official accounting methods underestimated the size of China’s service sector.

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50.2 percent of GDP in the first half of 2015 (see Figure 2).63 In
his testimony before the Commission, Dr. Roach argued the development of China’s service sector could provide higher-paying jobs
for China’s recent college graduates and meet growing public demand for retail, healthcare, tourism, and public services. He calculated that services employ 30 percent more workers per unit of
GDP than manufacturing or construction, creating more jobs despite slower growth.64 In addition, research by Bloomberg found anannual shift of 1 percent of GDP from the energy-intensive heavy
industry to the service sector over the next five years would decrease emissions by about 8 percent relative to the no-reform baseline scenario, meeting China’s environmental reform priorities.65
Figure 2: Service Sector Composing Greater Share of GDP, 2011–2015H1(Quarterly)

Source: National Bureau of Statistics of the People’s Republic of China via CEIC database.

The Rhodium-CSIS recalculation of China’s 2008 GDP revises the value of the service sector upward by 22.2 percentage points and finds the services share of GDP was already larger thanthe manufacturing share in 2009. Dan Rosen and Beibei Bao, ‘‘Broken Abacus? A More Accurate
Gauge of China’s Economy,’’ Center for Strategic and International Studies, September 2015,
158–160.

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To accelerate service sector growth, the Third Plenum pledged toopen a number of largely state-dominated service sectors, such as
financial services, education, healthcare, e-commerce, and logistics,
to competition from private domestic and foreign firms.66 Progress,
however, has been slow. Mr. Consonery said in his testimony that‘‘each sector will have a distinct story about how the government
balances the need for new investments against the desire to protect

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local firms.’’ He remarked that ‘‘sectors that see greater openings
will be those where the government sees continued need for foreign
expertise, and those that have been classified as ‘market competitive’ and where Beijing is more interested in reducing the state’srole,’’ but in strategic sectors such as finance, resistance from vested interest groups will remain substantial.67
In August 2013, the State Council created the Shanghai Free
Trade Zone (FTZ) to serve as a pilot program for national implementation of financial sector reforms and opening China’s service
industries to foreign investment.68 In December 2014, Premier Liannounced the expansion of the Shanghai FTZ area and creationof three new FTZs in Tianjin municipality, Guangdong Province,
and Fujian Province.69 While some restrictions are being lifted
gradually, significant limitations still remain.70 As of April 2015,
the negative list,* which designates the sectors restricted or prohibited to foreign investment, has only been trimmed down to 119 sectors from the initial 190.71 Furthermore, the U.S.-China BusinessCouncil found the 2015 Catalogue for the Guidance of Foreign Investment Industries, which guides national foreign investment policies, removed few restrictions and ownership caps on priority areas
for foreign companies in areas such as agriculture, automotive, andbanking.72 (For more information on China’s treatment of foreign
investment, see Chapter 1, Section 2, ‘‘Foreign Investment Climate
in China.’’)Capital Allocation

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China’s fiscal system has saddled local governments with highlevels of debt that is increasingly costly to pay off. Without fiscal
reform, local governments will be challenged in financing China’s
other reform objectives, such as urbanization, expansion of socialand healthcare benefits, and infrastructure projects (see the text
box, ‘‘China’s Ability to Finance Its Reform Agenda’’ earlier in thissection). A 2015 World Bank report analyzed the status of China’s
financial reform and found distorted incentives, poor governancestructures, and pervasive implicit government guarantees have exacerbated China’s inefficient allocation of financial resources.73
Subsequently, the World Bank redacted the section on China’s financial reform, allegedly due to Chinese government interference.74
Significant reforms are needed to realign lending incentives, introduce risk and market competition, and reduce the role of the government within the financial sector. However, the Chinese government’s continued intervention in the market weakens the impact ofthese stated reforms.

* China traditionally has used purchasing catalogues such as the annual Catalogue for the
Guidance of Foreign Investment Industries to designate the products, services, and investments
approved for market access. Sectors not listed in the catalogs are restricted from foreign competition. In contrast, a negative list designates only those sectors that face market access restrictions; sectors not listed are considered open. The use of a negative list represents a shift toward
a more widely used global approach.

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Restructuring Local Government Debt
China’s fiscal system * allocates only 53 percent of tax revenue
to local governments, while placing on local governments the responsibility for funding 85 percent of centrally mandated programs.75 Prevented from issuing bonds as U.S. municipalities do,
local governments in China largely rely on land-use sales, commonly seized from local farmers at below-market prices,† and offbalance-sheet local government financing vehicles (LGFV), which
use land and other government assets as collateral to raise funds
for major infrastructure and real estate projects.76 The 2009 stimulus program exacerbated the debt crisis as the central government
encouraged local governments to take on substantial high-cost
LGFV debt to finance infrastructure projects. According to
McKinsey & Company, LGFV debt nearly tripled from $600 billion
in 2007 to $1.7 trillion by the second quarter of 2014, accountingfor 58.6 percent of total local government debt (see Figure 3).77
With falling land prices and lower growth in tax revenues fromslower economic growth, it is becoming more difficult for local governments, particularly those in poorer provinces, to service thesedebts.78
Figure 3: Outstanding Balance of China’s Government Debt by Source(US$ trillions; constant exchange rate, 2013)* China’s fiscal system determines tax revenue allocation and funding responsibilities for central and local governments. For additional information on China’s fiscal system and local government challenges, see Iacob Koch-Weser, ‘‘China Fiscal Policy Revamp Faces Hurdles,’’ U.S.China Economic and Security Review Commission, September 30, 2014.
† These land seizures are a leading cause of domestic unrest in China. For additional information, see U.S.-China Economic and Security Review Commission, Chapter 2, Section 3, ‘‘China’s
Domestic Stability,’’ in 2014 Annual Report to Congress, November 2014, 352.

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Note (1): LGFV refers to local government financing vehicles.
Source: McKinsey Global Institute, ‘‘Debt and (Not Much) Deleveraging,’’ February 2015, 81.

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In 2014, the State Council outlined its fiscal restructuring plan
to reduce the risk of local government default and create more affordable revenue sources by taking steps to calculate the magnitude of debt, rein in lending, remove the heavy debt burden, andintroduce new sources of local government revenue.79 However, fiscal reforms have been subject to numerous reversals as the central
government struggles to maintain employment and growth. An
analysis on the status of reforms finds that:• The magnitude of local government debt is unknown: In 2013,
the National Audit Office assessed the scale of local debt andfound local government debt and liabilities totaled $2.9 trillion(RMB 17.9 trillion), with nearly half in costly LGFVs.80 Private
estimates highlight the unreliability of these government figures. McKinsey & Company estimated total local government
debt at $2.9 trillion at the end of the first half of 2014.81 BCA,
an independent investment research house, estimated $3.2 trillion (RMB 20 trillion) at the end of 2014,82 and Goldman Sachs
estimated LGFV debt alone reached $3.4 trillion (RMB 21 trillion) by the end of 2014.83 To address this ambiguity, China’s
Ministry of Finance required provincial governments to update
their debt figures by January 2015. Implementation, however,has been exceedingly difficult because provincial governments
are incentivized to overstate their debt figures to qualify forbetter loan concession and a higher bank debt ceiling. The subsequent inability of provincial governments to submit revised
figures by a March 2015 deadline led the Ministry of Finance,
National Development and Reform Commission (NDRC), People’s Bank of China (PBOC), and China Banking Regulatory
Commission (CBRC) to establish a centrally controlled audit
system that will rely less on local government figures.84 Thissystem assigned the NDRC to audit enterprise debt and LGFV
debt, the PBOC and CBRC to jointly audit bank loans andshort-term commercial debt, and local governments to audit
payments and accounts payable for buy-transfer projects * andproject financing.85• Local government borrowing continues: In October 2014, theChinese government outlawed the expansion of LGFV borrowing to rein in runaway local debt.86 But in May 2015 thecentral government reversed course in the face of faltering economic growth and rising unemployment.87 The State Council
reopened LGVFs’ access to short- and medium-term bond markets and relaxed previous restrictions on LGFV-financed infrastructure spending. That same month, the Ministry of Finance,
PBOC, and CBRC explicitly required financial institutions toextend existing loans for insolvent infrastructure projects thatwere started before January 2015, resuming the very lending
practices reforms were meant to reverse.88 According to Deut* Buy-transfer is a type of financing model used in China for public infrastructure projects.
Investors bid for government projects then the winning investor provides the financing and constructs the project. Once complete, the government pays for the cost of construction as agreed
upon in the contract through installment payments. Liu Hongyong and Deng Li, ‘‘Study on the
BT Financing Model of Non-business Public Building in the Post-Disaster Reconstruction—Case
Study of Guangyuan,’’ Proceedings of 2011 International Symposium—Geospatial Information
Technology & Disaster Prevention and Reduction, May 2011.

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sche Bank economists Zhang Zhiwei and Audrey Shi, this policy change represented ‘‘a 180-degree reversal of the fiscal policy from tightening to loosening.’’ 89• Central intervention ensures debt-for-bonds swap succeeds: To
prevent defaults and reduce the burden of repayments, theMinistry of Finance in March 2015 issued a $161 billion (RMB
1 trillion) quota to convert roughly half of the nearly $296 billion (RMB 1.85 trillion) of local governments’ high-risk debt
due this year into lower-yielding, longer-maturity municipal
bonds.90 Expected purchasers of these new bonds—primarily
state-owned commercial banks—delayed the launch of the pilot
program until the PBOC intervened to offer more favorable
terms, such as higher yield rates and access to low-interest
loans.91 According to the central government, state banks willbuy 70–80 percent of these local government bonds.92 In April
2015, the State Council widened the pool of purchasers by permitting its nearly $200 billion (RMB 1.24 trillion) national
state-security fund to invest up to 20 percent of its portfolio in
local government debt and corporate bonds.93 In May 2015,
Jiangsu Province sold $8.4 billion (RMB 52.2 billion) worth ofbonds, the first provincial government in China to do so. The
provinces of Hebei, Shandong, Hubei, and Guangxi, as well as
the Chongqing and Tianjin municipalities, have followed suit.94
In June 2015, the Chinese government doubled the bond quota
to turn over the rest of the local government debt due thisyear.95 While these policies significantly reduced local government financing costs, Barry Naughton, professor of economics
at the University of California, San Diego, cautioned that because the costs for reckless borrowing were negligible and central intervention reaffirmed central government backing forbonds, ‘‘the debt swap failed to achieve its most essential objectives as market-oriented reform.’’ 96• New sources of local government revenue introduced: The Chinese government is attempting to create more transparent andaffordable revenue streams by increasing the amount of central
proceeds reallocated to local authorities, reinstituting the provincial bond issuance system * in 2014, and restructuring thetax system.97 The Chinese government is in various stages ofrolling out value-added, resource, and property taxes.98

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Æ Value-added tax: The State Administration of Taxationand Ministry of Finance are in the process of phasing out
the ‘‘business tax’’ † that disadvantages the service sector,
and expect to fully replace it with a value-added tax(VAT) ‡ by the end of 2015.99 This transition in part
spurred the growth of newly registered businesses by 46
percent in 2014, according to the written testimony of Dali
* The local government bond issuance was outlawed in 1994 after local governments built up
enormous debt in the early 1990s.
† Business tax is calculated based on the gross revenue of a business.
‡ VAT is calculated based on the difference between a good’s price before taxes and its costof production.

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Yang, professor of political science at the University of
Chicago.100
Æ Resource tax: The Ministry of Finance has also been rolling out a resource tax based on prices rather than volumes, raising costs of these resources for producers andconsumers from virtually nonexistent levels.101 The Ministry of Finance imposed a 2–10 percent tax on coal in October 2014, increased its fuel-consumption tax for the firsttime in five years in November 2014, and expanded the resource tax structure for rare earths and metals in May
2015.102 According to Dr. Yang, these taxes create newrevenue streams while curbing resource use. The increaseof China’s fuel-consumption tax raises revenue, marking
the largest growth in tax revenue this year.103 These taxes
also keep the costs of fuel high—despite the significant
drop in oil prices over the last year—and discourage additional consumption.104
Æ Property tax: In 2011, Chongqing and Shanghai municipalities launched pilot property tax programs, but these
programs generated low levels of revenue due to lax enforcement and widespread exemptions.105 Despite theseissues, in March 2015, the Ministry of Land and Resources
launched a nationwide property registration system thatsets the stage for a nationwide property tax and expandedcrackdown on official corruption.106 Jia Kang, director of
the Ministry of Finance’s Research Institute on Fiscal
Science, expects that the property tax will be implemented
in 2017, but Dr. Yang remains skeptical, citing a history
of inaction on property tax reform and the recent failuresof the Chongqing and Shanghai pilot programs.107

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Opening China’s Bank-Driven Financial Sector
China’s financial system is ‘‘repressed, unbalanced, costly tomaintain, and potentially unstable,’’ according to a joint report released in 2013 by the World Bank and the State Council’s Development Research Center.108 State-set interest rates, tight regulations
on capital flows, and de facto state control of 95 percent of commercial bank assets have led to politically driven capital allocation anda burgeoning shadow banking * sector.109 High levels of savings by
the Chinese public and extremely low interest rates offered to depositors have created approximately $21.5 trillion of cheap capitalfor China’s state-dominated banking sector. These banks lend to
SOEs over more efficient private firms based on the implicit government guarantees on SOE debt and explicit government pressure
on state-owned banks to lend to their government cousins.110
Small- and medium-sized enterprises (SME) receive only 20 percent
of bank lending despite holding 65 percent of patents and contributing 70 percent of employment, 60 percent of GDP, and 50 percent* Shadow banking is lending—to include wealth management products, credit guarantees, entrusted loans, and peer-to-peer lending—that occurs outside of the official banking system. For
more information on China’s shadow banking sector, see U.S.-China Economic and Security Review Commission, Chapter 1, Section 3, ‘‘Governance and Accountability in China’s Financial
System,’’ in 2013 Annual Report to Congress, November 2013, 113–152.

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of tax revenue.111 This inefficient allocation of capital has contributed to ‘‘wasteful investments, excess capacity, and weaker loan capacities,’’ forcing SMEs to seek credit in the unofficial shadowbanking sector.112
To address these issues, the Chinese government is taking small
steps toward loosening its interest rate controls, increasing competition in the banking sector, reducing moral hazard, and enhancing capital convertibility. Thus far, financial reforms have madethe most headway, but policymakers have begun to reassert control
in light of the market volatility these reforms create.113 Anemic
economic growth in 2015 led the PBOC to ease financial constraints by lowering interest rates five times in 2015.114 The PBOC
also cut reserve requirements four times in 2015.115
At the same time, the Chinese government supported the rapid
growth of its stock markets to accelerate economic growth. According to BCA, the financial sector accounted for close to 30 percent
of GDP growth this year compared with only 10 percent previously—driven primarily by the growth of equity trading in thestock market.116 The subsequent collapse of the stock market thissummer despite significant government intervention has shaken
the faith of investors in the Chinese government’s ability to manage the economy. (For a discussion of China’s stock market and thegovernment’s response, see Chapter 1, Section 1, ‘‘Year in Review:
Economics and Trade.’’)Initial Steps toward Market-Set Interest Rates and Opening Banking Sector to Competition
The Chinese government is slowly loosening control over interest
rates and opening the state-controlled banking sector to new entrants. Reforms have:• Partially deregulated interest rates: In November 2014, the
PBOC lowered the benchmark interest rate, but permitted
banks to offer deposit rates up to 20 percent above the benchmark, allowing banks to compete for depositors within a set
range.117 In August 2015, the PBOC further loosened interest
rates by allowing banks to set savings rates for deposits thatare longer than a year and offer short-term deposit rates up to
150 percent above the benchmark.118 According to Le Xia andJinyue Dong, economists from the Spanish-based multinationalbanking firm Banco Bilbao Vizcaya Argentaria S.A., these reforms will foster competition between banks for depositors andborrowers; banks are increasing returns for ordinary depositors
to attract them, but will need to offset these higher costs byseeking higher returns from their loans. In addition, Dr. Xia
and Dr. Dong found ‘‘the lift of the deposit rate cap also meansthat the PBOC will lose one of its important monetary policy
tools.’’ 119 The PBOC previously leveraged its ability to cut interest rates to channel China’s cheap capital toward government priorities such as financing SOEs and to spur investment-led economic growth.120• Loosened market access restrictions for Chinese firms in banking: In January 2015, China launched its first fully online private bank. Several Chinese Internet companies, including

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JD.com, Alibaba, and Tencent, have since entered the financial
service industry.121 This entry of new competitors into the previously state-controlled sector could foster additional competition between banks for depositors interested in higher returns,
and between borrowers for banks’ capital, thus encouraging theflow of capital to higher-return private firms.
Steps to Reduce Moral Hazard
The Chinese government is making small changes to alter theperception that it will bail out any company in danger of default.
In May 2015, the PBOC introduced a deposit insurance programand set upper limits on insurance coverage for bank deposits at$80,000 (RMB 500,000) to introduce risk and erode the view thatall deposits at state-owned banks are implicitly guaranteed by the
Chinese government.122 In addition, over the past year, the government has allowed the domestic bond market to experience its first
defaults.123 In April 2015, the Chinese government stood by whilestate-owned Baoding Tianwei Group Co. defaulted on its $13.8 million interest payment.* Nor did the government prevent the $1 billion default of Kaisa Group Holdings Ltd. later that month, marking the first defaults in the offshore bond market.124 More defaults
are likely as overcapacity, particularly in the property sector,
squeezes profitability and cash flows.125 Although limited defaults
have been tolerated, the Chinese government’s strong history ofintervention and recent steps to prop up the stock market demonstrate that the government is unlikely to allow more substantial
losses or defaults.
Loosening Capital Account Controls but Maintaining Strong State
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Over the last two decades, the Chinese government has gradually loosened its tight capital controls to allow greater flow of RMB
across borders. These small steps serve to promote the RMB as aninternational currency and set the stage for China’s emergence asa key player in the global financial markets.126 Since 2010, theChina Securities Regulatory Commission and State Administrationof Foreign Exchange have incrementally expanded the Qualified
Domestic Institutional Investor (QDII) and Qualified Foreign Institutional Investor (QFII) schemes † that allow greater capital flows
while maintaining government control through quotas, approvals,
and ceilings (see Figure 4).127 The QFII scheme remains underutilized; however, signaling that though controls are loosening, additional reforms are necessary to entice greater foreign investment.128* For more information about the April 2015 defaults, see U.S.-China Economic and Security
Review Commission, Monthly Analysis of U.S.-China Trade Data, May 5, 2015, 7–9.
† For background on the QDII and QFII schemes, see Nargiza Salidjanova, ‘‘The RMB’s Long
Road to Internationalization,’’ U.S.-China Economic and Security Review Commission, September 22, 2014.

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Figure 4: Quotas for the Qualified Domestic and Foreign Institutional
Investors, 2007–2014(RMB billions [LHS]; number [RHS])

In November 2014, the Shanghai-Hong Kong Stock Connect
opened, allowing for greater usage of the RMB across previously
closed borders and removing the arbitrage gaps between the twostock markets.129 (For a discussion of the Shanghai-Hong Kong
Stock Connect, see Chapter 3, Section 4, ‘‘Hong Kong.’’) China has
also expanded offshore RMB trading centers beyond Hong Kong
and Taiwan to a number of international financial centers, such as
Frankfurt, London, and Singapore.130 In July 2015, the London
Metal Exchange, the world’s largest trading venue for metals, announced it would accept the RMB as collateral for trades on its
platform by banks and brokers.131 That same month, the PBOC announced that central banks, sovereign wealth funds, and international financial institutions will have immediate open access toChina’s interbank debt market worth $6.1 trillion.132 The RMB became the fourth-most-active currency for global payments in August 2015, according to data from the Society for Worldwide Interbank Financial Telecommunications, the global leader in processing
payments.133
Despite these limited steps forward, PBOC Governor Zhou
Xiaochuan noted in April 2015 that the Chinese government will
maintain control over cross-border financial transactions, external
debt, short-term capital flows, and temporary capital control measures.134 In June 2015, U.S.-based stock market index provider
MSCI yet again delayed the inclusion of China’s ‘‘A’’ shares into its
Emerging Markets Index, citing the continued use of opaque andunequal investment quotas and concerns regarding the recognitionof foreign ownership under Chinese law.135 The IMF extended thecurrent special drawing rights (SDR) basket of currencies until
September 30, 2016, and will decide on whether to add the RMB
to the composition of its SDR basket by the end of this year.136 The
IMF’s decision to include the RMB would legitimize China’s man-

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Source: Sean Miner, ‘‘Equity Series Part 6: The Equity Market’s Role in Cross-Border Capital
Flows,’’ China Economic Watch (Peterson Institute for International Economics blog), July 23,
2015.

158
aged convertibility approach.137 (For a discussion of China’s exchange rate management, see Chapter 1, Section 1, ‘‘Year in Review: Economics and Trade.’’)Industry Competitiveness
China’s old industrial model created bloated, export-dependent
industries, inefficient SOEs, and severe overcapacity. The 2008
stimulus exacerbated these issues. Reforms are seeking to revitalize China’s industrial sector and boost innovation by restructuring SOEs, moving up the value-added chain, and minimizing
overcapacity.
Reforming State-Owned Enterprises
Although they are less profitable than private Chinese companies, SOEs remain an important driver of economic growth due topreferential government treatment and subsidies.138 Lack of competition, high operating costs, overstaffing, significant debt, andcronyism continue to erode SOEs’ productivity and global competitiveness. A 2015 Goldman Sachs study found the return on assets(ROA) gap between private Chinese firms and SOEs widened in 75
percent of the 36 sectors surveyed, while the debt-to-equity ratio
for SOEs increased faster than for private Chinese firms for 70 percent of the 36 sectors surveyed (see Figure 5).139
Figure 5: SOEs Are Less Profitable and More Indebted than Private
Chinese Firms(percentage points [LHS]; ROA, percentage points [RHS])

The dominance of SOEs in core strategic industries and the authority of SOE executives within the government hierarchy havecreated strong vested interests and endemic corruption.140 President Xi’s aggressive anticorruption drive that detained at least 124
high-level SOE officials has weakened but not fully eliminated re-

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Source: Yu Song et al., ‘‘Harnessing Global Capital to Drive the Next Phase of China’s
Growth,’’ Goldman Sachs, February 2015, 27.

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159
sistance to reform.141 Last year, reforms of the state sector stalled
largely due to resistance from SOEs and struggles for control between the Ministry of Finance and the State-Owned Assets Supervision and Administration Commission of the State Council.142 The
anticipated announcement of other major reforms in March thisyear was also pushed back until September.143
In September 2015, the State Council and Central Committee of
the CCP jointly released the Guiding Opinion on Deepening the Reform of State-Owned Enterprises.144 These guidelines cemented thecommitments the Chinese government has already made this year
to improve SOEs’ productivity and global competitiveness throughmixed ownership and consolidation, but offered few concrete steps
forward.145 Andrew Batson, the China Research Director at the economics and market research firm Gavekal Dragonomics, described
the guidelines as ‘‘an ungainly mishmash of bureaucratic compromises that sets no clear goals and is riven by internal contradictions.’’ 146 Gordon Orr, senior advisor to McKinsey China, summed
up the guidelines as ‘‘we still want to do what we said we weregoing to do before but haven’t yet done.’’ 147 Concurrently, theseguidelines build upon President Xi’s earlier calls for greater CCP
leadership within SOEs, the very driver of inefficiency and cronyism.148 As Dr. Prasad explained, SOE reforms do not ‘‘intend to
upend state control of key enterprises but, rather, subject them togreater market discipline.’’ 149 Announced reforms seek to:• Reinforce the CCP and state control over SOEs: The guidelines
specifically reinforce the importance of CCP control within
SOE management and personnel, placing it at odds with thepush for mixed ownership.150 Zhang Yi, head of the StateOwned Assets Supervision and Administration Commission,emphasized the CCP’s central role, stating, ‘‘In the process ofdeepening reforms of state-owned enterprises, the leadership of
the party can only be strengthened, not weakened.’’ 151• Separate SOEs into commercial and public interest enterprises:
In his testimony before the Commission, Mr. Consonery argued
that with SOE restructuring, the Chinese government is ‘‘doubling down and intensifying support for and control over some
sectors, while opening others to more market competition andeven foreign competition.’’ 152 The guidelines further clarified
this distinction, stating that the Chinese government will separate SOEs into commercial and public interest enterprises(without providing any detail on which sectors or firms would
be commercial or public interest).153 Commercial SOEs willseek to maximize profits and incorporate both mixed-ownershipand greater market competition; for strategically important
SOEs, the state will maintain a controlling share. In contrast,
public interest SOEs will remain wholly state-owned with afocus on delivering quality, efficient, and reasonably priced
products and services to the Chinese public.154• Increase private capital while preserving state control: The Chinese government is continuing to increase the amount of nonstate investment—private equity, social welfare funds, and private enterprises—in local and central SOEs’ ownership structure by expanding mixed-ownership of SOEs.155 Mixed-owner-

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ship enterprises, with various combinations of state and private controls, already comprise 40 percent of China’s industrial
economy, and expansion of this ownership model would seek toincrease technology transfer and managerial expertise and enhance productivity.156 Marshall Meyer, emeritus professor ofmanagement at the University of Pennsylvania Wharton
School of Business, explained that in practice, mixed ownership often means cross-ownership among SOEs.157 In March
2015, the oil refiner Sinopec sold a 30 percent stake in its sales
arm to 25 non-Sinopec entities, mainly SOEs and SOE subsidiaries.* In June 2015, the Bank of Communications announced
it will sell minority stakes to private investors.158 In addition,over 20 provinces have announced plans to list or sell off theassets of up to 70 percent of their provincially owned SOEs by
2017.159 In May 2015, Shandong Province announced it willtransfer equity shares in 471 of its provincially owned SOEs to
its pension fund in order to pressure the companies to maximize profits and provide sufficient capital for its retirement
fund.† In September 2015, Jiangxi Province sold a 47 percent
stake in its local SOE Jiangxi Salt to other SOEs and SOE
subsidiaries.‡ However, Dr. Meyer cautioned that ‘‘no matter
how many shares are privately-owned, the decision lies withthe state,’’ limiting the ability of non-state shareholders to influence corporate decision making.160• Create global players through megamergers: The State Council
is seeking to capitalize on economies of scale and ample funding resources by consolidating (and in some cases reconsolidating) central SOEs into global competitors. This consolidation is a reversal of reforms in the 1990s that sought to increase SOE efficiency through managed competition.161 According to the German-based think tank Mercator Institute for
China Studies (MERICS), the Chinese government is using
megamergers to reduce overcapacities, enhance SOEs’ international competitiveness, increase state control and oversightof SOE operations, and rectify the fierce price wars among Chinese SOEs in the global market.162 As one Chinese government official said, ‘‘They’re [SOEs] increasingly fighting
amongst each other. . . . That has led to lots of waste and ineffi* Six SOEs and 11 state-controlled asset management companies account for 16 of the 25
shareholders and control 20.2 percent of the 30 percent stake offered by Sinopec. Some of thesestate-controlled shareholders include Citic Securities, China Life Insurance Company, Bank of
China, Cinda Asset Management, and China Post Life Insurance. Xinhua (English edition),‘‘China to Tighten Supervision of State Assets,’’ May 26, 2015; Shirley Yam, ‘‘Sinopec Offers
Master Class in SOE Mixed Ownership Reform,’’ South China Morning Post, September 20,
2014 (Updated April 28, 2015); and Neil Gough, ‘‘Sinopec Stake Sale Leaves Investors Unimpressed,’’ New York Times, September 15, 2014.
† This pension fund will act as a shareholder with profits invested by the National Council
for Social Security Fund. Shi Rui, ‘‘In First, Shandong Has SOEs Hand Over Stakes to Its Social
Security Fund,’’ Caixin (English edition), May 20, 2015.
‡ These shareholders include: Cinda Asset Management Company (controlled by China’s Ministry of Finance) at 22.8 percent, Zhongxinjian Merchants Investment (owned jointly by central
SOE China Merchants Group and the Chinese government’s quasi-military, quasi-commercial
Xinjiang Production and Construction Corps) at 9.1 percent, Ximen ITG Group (owned by the
Xiamen municipal government) at 7.6 percent, and Jianggangshan Investment (the private equity arm of the municipal SOE Beijing Automotive Industry Corporation) at 7.6 percent. Jiangxi
Province’s State-Owned Assets Supervision and Administration Commission retains 46.9 percent, and Jiangxi Salt management has 5.9 percent. David Keohane, ‘‘SOE You Think You Can
Reform? Mixed-Ownership Edition,’’ Financial Times, September 28, 2015.

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ciency.’’ 163 In April 2015, official Chinese media announced thegovernment will consolidate the existing 112 centrally controlled SOEs into 40 large SOE conglomerates under the oversight of 16 ministries and authorities.164 For example, themerger between China North Railway and China South Railway in December 2014 combined the world’s largest railway
contractors in terms of sales. Their collective market capitalization totaled approximately $130 billion—far ahead of its
main competitors: the German firm Siemens AG with $84.2
billion and French firm Alstom SA at $8.7 billion.165 Similarly,
major mergers of China Power Investment with State Nuclear
Power Technology and China Huafu Trade and Development
Group with China National Cereals, Oils and Foodstuffs Corporation are creating firms as large as their leading global
competitors.166 While consolidation will increase economies ofscale, it merely reinforces SOEs’ dominance of the state in key
sectors of the economy. The guidelines provided little direction
on how the Chinese government will manage these mega conglomerates, reflecting internal divides on how to balance its desire to supervise these merged firms while achieving moremarket-oriented operations.167 The Ministry of Finance has advocated for Singapore’s Temasek model of governance, where
the state collects dividends and operates as an asset manager
allowing SOEs to largely operate unfettered, while the StateOwned Assets Supervision and Administration Commission
prefers to maintain strong managerial oversight.168

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Increasing Higher-Value-Added Manufacturing
Chinese manufacturing is moving up the value-added chain, driven by fierce domestic and international competition, higher laborcosts, and government incentives.169 To accelerate its shift, China
implemented an indigenous innovation policy in 2006 * and established ‘‘strategic emerging industries’’ under the 12th FYP (seeTable 2 for a list of these sectors). Strong state-directed subsidies
for renewable energy—a strategic emerging industry—allowed
China to achieve global dominance in the solar and wind sectors †in less than a decade.170 Testifying before the Commission in his
personal capacity, Mr. Melton, cautioned that despite producing
successful Chinese companies and new technologies, such state-directed policies exacerbate corruption, misallocate resources, anddistort the market.171
The 2015 NPC Government Work Report, which reviewed lastyear’s accomplishments and established tasks for 2015, announced
two new initiatives, ‘‘Made in China 2025’’ and ‘‘Internet Plus,’’ toaccelerate China’s transition to higher-value-added manufacturing(for additional discussion of the Internet Plus initiative, see Chapter 1, Section 4, ‘‘Commercial Cyber Espionage and Barriers to Dig* The indigenous innovation policy was first introduced in the National Medium- and LongTerm Program for Science and Technology Development (2006–2020) and later incorporated into
the 12th FYP. Although the Chinese government no longer uses the term ‘‘indigenous innovation’’ after pressure from the United States to roll back those policies, its current innovation
policy continues to reflect the spirit of indigenous innovation.
† For in-depth coverage of China’s wind and solar policies, see Iacob Koch-Weser and Ethan
Meick, ‘‘China’s Wind and Solar Sectors: Trends in Deployment, Manufacturing, and Energy Policy,’’ U.S.-China Economic and Security Review Commission, March 9, 2015.

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ital Trade in China’’). These initiatives focus on innovation and upgrading key emerging industries, including high-end equipment, integrated circuits, biomedicines, cloud computing, mobile Internet,
and e-commerce—sectors in which the United States currently enjoys technological advantages.172
Dr. Prasad has warned that while U.S. companies in industries
such as finance or insurance could leverage their ‘‘technologicalforte’’ to gain a foothold in the Chinese market, the Chinese government has made clear it will demand that foreign firms transfer
technology and corporate governance know-how in exchange formarket access.173 Eurasia Group noted that in the high-valueadded sectors outlined as priorities by the Chinese government,‘‘foreign firms are likely to face a tougher competitive landscape in
the coming years as the need for foreign know-how decreases.’’ 174
In August 2015, 19 U.S. technology and industry associations submitted a letter to President Barack Obama regarding China’s adverse policies toward U.S. information technology (IT) and communications firms.175 For example, the letter highlighted China’s new
program that attempts ‘‘to acquire or indigenize U.S. semiconductor
technology,’’ a sector where U.S. multinational firms account for 11of the top 20 global semiconductor suppliers and made up nearly
51 percent of the global market in 2014.* Such policies are seeking
to dislodge established U.S. market leaders and replace them withdomestic firms, to the detriment of U.S. businesses and workers.
Made in China 2025

dkrause on DSKHT7XVN1PROD with USCCIn May 2015, the State Council released the Made in China 2025
action plan that outlines a ten-year strategy to build intelligent
manufacturing capabilities, enhance innovation, and upgrade ten
key sectors. These sectors are: (1) energy saving and new energy
vehicles, (2) next-generation IT, (3) biotechnology, (4) new materials, (5) aerospace, (6) ocean engineering and high-tech ships,(7) railway, (8) robotics, (9) power equipment, and (10) agricultural
machinery.176 Many of these sectors are not new, and merely redouble government support for long-held strategic interests (seeTable 2). In June 2015, the State Council announced that to support this plan, it will be creating a leading group headed by Vice
Premier Ma Kai.177 To build intelligent manufacturing capabilities
and support the development of these ten sectors, Citigroup estimates China will invest $1.3 trillion (RMB 8 trillion) in the next
few years, while the consultancy PRC Macro forecasts funding will
increase between $64 billion (RMB 400 billion) and $128 billion(RMB 800 billion) by the fall of 2016.178* For an overview of the semiconductor industry, see U.S.-China Economic and Security Review Commission, Monthly Analysis of U.S.-China Trade Data, August 5, 2015, 10–14; American
Chamber of Commerce in China et al., ‘‘Letter to President Barack Obama,’’ August 11, 2015.

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Table 2: China’s Key Industries
Made in China
2025 (2015)(1) Clean energy
vehicles(2) Next-generation IT(3) Biotechnology(4) New materials(5) Aerospace(6) Ocean engineering andhigh-tech ships(7) Railway(8) Robotics(9) Power equipment(10) Agricultural
machinery

Strategic
EmergingIndustries (2010)(1) Clean energy
technologies(2) Next-generation IT(3) Biotechnology(4) High-end
equipment
manufacturing(5) Alternative
energy(6) New materials(7) Clean energy
vehiclesStrategic
Industries (2006)(1) Armaments(2) Power generation and distribution(3) Oil and petrochemicals(4) Telecommunications(5) Coal(6) Civil aviation(7) Shipping

Heavyweight
Industries(2006)(1) Machinery(2) Automobiles(3) IT(4) Construction(5) Iron, steel,and nonferrous
metals

Source: State Council of the People’s Republic of China, Made in China 2025, May 8, 2015;
U.S.-China Economic and Security Review Commission, Hearing on China’s Five-Year Plan, Indigenous Innovation and Technology Transfers, and Outsourcing, written testimony of Willy C.
Shih, June 15, 2011; U.S.-China Economic and Security Review Commission, Hearing on the
Extent of the Government’s Control of China’s Economy, and Implications for the United States,
written testimony of George T. Haley, May 24–25, 2007; and U.S.-China Economic and Security Review Commission, Chapter 1, Section 1, ‘‘The Relationship’s Current Status and Significant Changes during 2007,’’ 2007 Annual Report to Congress, November 2007, 38–39.

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While the plan seeks to strengthen China’s industrial base with
automation and technological efficiency, it continues China’s statedirected innovation policy with the establishment of 15 manufacturing innovation centers in the next five years, and an additional
25 by 2025.179 Of concern to U.S. companies is the plan’s goal ofraising domestic localization of core components and materials for
sectors such as railway, home appliances, aerospace, telecommunications, and power generation to 40 percent by 2020 and to 70 percent by 2025.180 The presence of these absolutist requirements supports the view that China may be violating fair and equal treatment for domestic and foreign firms under the World Trade Organization (WTO).
Enhancing Indigenous Innovation
The Chinese government has accelerated efforts to become a
global center of innovation through its indigenous innovation policy. This policy is designed to ensure its future global competitiveness and technological edge. Created under the auspices of the 12th
FYP, China’s indigenous innovation policy has centered on researchand development (R&D) funding, high-technology industrial clusters, and market creation. According to Mr. Melton, these policies
seek to address its perceived shortcomings: ‘‘low R&D expenditureby firms, lack of marketable technologies from research institutes,
insufficient financial resources for small technology firms, and theuneven performance of China’s firms abroad.’’ 181 In his opinion,
these shortcomings reflect China’s legal and institutional failuresrather than a need for greater government intervention; therefore,‘‘less nationalistic innovation policies would have the same—or

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greater—economic value at a much lower cost and fewer distortionsin the economy.’’ 182
Over the past decade, China’s overall R&D spending increased
an average of 23 percent per year, making it the world’s secondlargest investor in R&D after the United States since 2011.183
Spending on R&D as a share of GDP reached 2.1 percent in 2014
and is expected to grow at the same rate in 2015.184 In comparison,
Batelle, a nonprofit R&D organization, projected that the combined
public and private spending on R&D in the United States would
reach 2.8 percent of GDP in 2014.185 While the United States iscurrently the world’s largest investor in R&D, the Organization for
Economic Co-operation and Development (OECD) expects China
will outspend the United States by 2019 (see Figure 6).186
Figure 6: Current and Projected R&D Spending by China andthe United States, 2004–2024

The Chinese government has set up hundreds of high-technology
industrial clusters similar to Silicon Valley and uses a variety oftools to attract and expand foreign high-technology firms’ R&D operations in China in order to encourage technology transfer andcreate synergies with domestic firms.187 These incentives include
tax rebates, customs duty and VAT exemptions, or refunds for
R&D purchases.188 Chinese firms such as telecommunications
firms Huawei and ZTE have successfully leveraged these foreign
partnerships to build technological capability and gain access to external markets.189 The Chinese government also created new markets to encourage innovation in designated sectors. For example,
under the 12th FYP, the NDRC expanded feed-in tariffs, renewable
portfolio standards, and capacity targets to incentivize renewableenergy production.190

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Note: These figures are based on gross domestic expenditure on R&D. Trends are projected
after 2012 based on linear growth from U.S. and Chinese data since 2000.
Source: Organization for Economic Co-operation and Development, ‘‘Science, Technology, andIndustry Outlook 2014,’’ November 12, 2014, 58.

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Despite China becoming one of the largest R&D investors andleading applicants for patents in the world, Gary Jefferson, professor of international trade and finance at Brandeis University,
argues that China’s transformation is due less to a fundamental
shift in innovation capability than it is to forces unrelated to innovation, such as increased filing for placeholder patents.* A comparison of the quality of China’s innovation capability through proxies
such as the number of triadic patents † and total citations of papers
with the United States finds that China lags far behind (see Figure
7).191 According to testimony from Xiaolan Fu, professor and director of the Technology and Management for Development Center at
Oxford University, state-led innovation in sectors such as solar andsemiconductors has created a strong production capacity rather
than the more profitable technology or innovation capacity.192 Mr.
Melton found China’s state-led industrial plan approach to innovation produced meaningless patents, excess capacity, and aggressive
protectionist policies.193 Jost Wübbeke, research associate at
MERICS, further cautioned that China’s innovation system remains plagued by inefficient allocation of funding, weak quality
management, and plagiarism.194* Placeholder patents are provisional utility patents that are filed more for strategic value toextend the duration of a patent, reduce up-front costs, and provide the firm more time for moreground-breaking developments than to secure intellectual property rights. Gary Jefferson, ‘‘A
Great Wall of Patents: What Is behind China’s Recent Patent Explosion?’’ Working Paper, January 30, 2006; Albert G.Z. Hu, Zhang Peng, and Zhao Lijing, ‘‘China’s Patenting Surge from 2007
to 2011: More Innovation or Just More Patents?’’ Working Paper, 2014; Gary Jefferson, Carl
Marks Professor of International Trade and Finance, Brandeis University, discussion with theCommission, April 15, 2015; for more information on patent placeholder strategy, see John T.
McNelis, ‘‘A Power Patent Strategy . . . Provisionally,’’ Fenwick & West, February 26, 2004; andfor more information on China’s utility model patent practices and procedures, see Thomas T.
Moga, ‘‘China’s Utility Model Patent System: Innovation Driver or Deterrent,’’ U.S. Chamber ofCommerce, November 2012.
† Triadic patents are patents that are simultaneously filed at the European Patent Office, U.S.
Patent and Trademark Office, and the Japan Patent Office, and are considered a strong indicator of high-quality patents. These types of patents require lengthy processing in exchange forprotection in three of the world’s largest markets.

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Figure 7: Comparison of China’s Innovation Capability with theUnited States, Japan, and Germany

Although they benefited from establishing over 1,200 R&D centers in China, in recent years U.S. businesses started to protest
China’s domestic procurement requirements, forced technology
transfer policies, opaque standards-setting processes, and intellectual property theft.195 In May 2015, the U.S.-China Business Council criticized local governments for favoring Chinese products ingovernment procurement at the expense of U.S. firms. This practice

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Note: The number of coauthored articles refers to the number of papers coauthored with foreign academics.
Source: McKinsey Global Institute, ‘‘The China Effect on Global Innovation,’’ July 2015, 19.

167
persists despite China’s commitment to join the WTO Government
Procurement Agreement, as well as repeated promises from senior
Chinese leaders to eliminate the policy.196 (For more information
on China’s investment climate, see Chapter 1, Section 2, ‘‘Foreign
Investment Climate in China’’; for more information on cyber theft,
see Chapter 1, Section 4, ‘‘Commercial Cyber Espionage and Barriers to Digital Trade in China.’’)Reducing Industrial Overcapacity

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While housing, commercial real estate, and large infrastructure
projects have contributed to job creation in the past two decades,
China’s subsidies to these sectors have created pervasive overcapacity in related sectors, particularly steel and cement (see Figure 8).197 In 2013, the Ministry of Industry and Information Technology identified more than 1,400 companies in 19 industries thatneed to reduce their capacity.198 For instance, an additional $60
billion in annual demand is needed to absorb China’s excess supplyof steel.199 Where oversupply in a market economy would cause
firms to reduce production in order to minimize losses, continued
subsidies in China have created cascading oversupply.200 This excess production has artificially lowered global prices below production costs and significantly reduced the industry’s profitability.201
In April 2015, industry estimates found nearly three-quarters ofChina’s iron ore mines were unprofitable.202 Rather than letting
them close, the State Council reduced the iron ore resource tax
from 80 percent to 40 percent to shore up struggling producers,
thus exacerbating excess global production.203 In the steel sector,
government subsidies have allowed Chinese steel firms to sell at
below production costs despite falling prices, putting U.S. competitors at a disadvantage.204 While China’s steel policies have bolstered domestic employment, they have also contributed to the decline in employment levels and profitability of steel firms in the
United States * and other countries, resulting in antidumping andcountervailing duty investigations.205* For analysis on the steel industry, see U.S.-China Economic and Security Review Commission, Monthly Analysis of U.S.-China Trade Data, September 3, 2015, 8–10.

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Figure 8: China’s Capacity Utilization Rates in Selected Sectors

Note 1: Capacity utilization is the operating rate of a firm measured by the (actual output—
potential output)/potential output. The gap between the sectors’ rate and full utilization (100percent) indicates a slump in demand.
Note 2: Coal industry utilization rate is shown as over 100 percent in past years because many
coal mines’ production was over their respective designed production capacity.
Source: Yu Song et al., ‘‘Harnessing Global Capital to Drive the Next Phase of China’s
Growth,’’ Goldman Sachs, February 2015, 10.

* President Xi’s One Belt, One Road initiative seeks to facilitate access to natural resourcesand encourage economic development in China’s poorer western provinces. This initiative is composed of a land-based road through Central Asia and a maritime counterpart that will run
through Southeast Asia and the Indian Ocean to Africa and the Mediterranean Sea.

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The overcapacity issue remained largely unaddressed underformer President Hu Jintao (2002–2012), but President Xi and Premier Li have publicly stated their desire to consolidate the industries by closing outdated facilities and creating new markets tosoak up excess supply. In his 2015 NPC Work Report, Premier Li
noted the closing of outdated facilities in 15 industries, but overcapacity persists.206 Continued local and central support for domestic industries—including lowering the iron ore tax in April 2015—
have limited the effort’s overall effectiveness.207
The Chinese government is also attempting to spark new demand for its overcapacity through urbanization and exports toemerging economies. Urbanization is providing an important domestic market for fixed asset investments in housing, transportation, and other sectors.208 The anticipated massive infrastructure
projects in rail and ports emerging from the ‘‘One Belt, One Road’’ *initiative and the creation of the Asian Infrastructure Development

169Bank and New Development Bank could spur new demand for theexcess iron, steel, and cement capacity.209 As Guo Wensan, chairman of Anhui Conch Cement, noted, ‘‘The Silk Road initiative gives
the cement industry a great opportunity to expand overseas.’’ 210(For additional discussion of the One Belt, One Road initiative, see
Chapter 3, Section 1, ‘‘China and Central Asia,’’ and Chapter 3,
Section 2, ‘‘China and Southeast Asia.’’)dkrause on DSKHT7XVN1PROD with USCC

Quality of Life
The Chinese government is attempting to improve the quality oflife for its citizens by meeting public demands for greater prosperity and a safe, healthy environment. Urbanization, hukou reform, higher-value-added manufacturing, and innovation initiatives
are attempting to increase wages and employment opportunities forthe country’s citizens. At the same time, the Chinese government
is seeking to address its severe environmental degradation.
Increasing Energy Conservation and Environmental Protection
At the March 2015 NPC meeting, Premier Li acknowledged theseriousness of air, water, and land pollution in China, describing
it as a ‘‘blight on people’s quality of life.’’ 211 Public anger over hazardous levels of air pollution in 2013 forced the Chinese government to redouble its efforts.* In the last two years, the Chinese
government has pursued a multipronged approach, including:• Government spending: The Chinese government spent approximately $32.5 billion (RMB 203.3 billion) last year to build
over 1,400 air monitoring stations, subsidize the purchase ofenergy-efficient vehicles, construct nearly 8,813 miles (14,100
kilometers) of pipelines to urban sewage water treatment facilities, and implement air pollution mitigation efforts in the
Beijing-Tianjin-Hebei region.† In its 2015 budget, the Chinese
government allocated $21.9 billion (RMB 137 billion) for energy conservation and environmental protection, including$14.1 billion (RMB 88.2 billion) to address air pollution andsubsidize emissions reductions, $2.8 billion (RMB 17.6 billion)
in subsidies for forest protection, and $4.9 billion (RMB 30.9
billion) to return cultivated land to forest.‡ An April 2015 report by more than 40 leading Chinese financial policy and regulation experts and government officials estimated that an annual investment of at least $320 billion (RMB 2 trillion) § in
* For more information on environment-related unrest, see U.S.-China Economic and Security
Review Commission, Chapter 2, Section 3, ‘‘China’s Domestic Stability,’’ in 2014 Annual Reportto Congress, November 2014, 357–358.
† The central government spent approximately $5.5 billion (RMB 34.5 billion) while transfer
payments to local governments totaled roughly $27 billion (RMB 168.8 billion). China’s Ministryof Finance, Report on the Implementation of the Central and Local Budgets for 2014 and on the
Draft Central and Local Budgets for 2015 (Third Session of the 12th National People’s Congress,
Beijing, China, March 5, 2015), 12.
‡ The central government appropriated $4.7 billion (RMB 29.1 billion) and set aside $17.3 billion (RMB 107.9 billion) in special transfer payments. China’s Ministry of Finance, Report on
the Implementation of the Central and Local Budgets for 2014 and on the Draft Central andLocal Budgets for 2015 (Third Session of the 12th National People’s Congress, Beijing, China,
March 5, 2015), 25–26.
§ A further breakdown of investment needs anticipates $128 billion (RMB 800 billion) in environmental protection, $80 billion (RMB 500 billion) to clean energy, $80 billion (RMB 500 billion) to clean transportation, and $32 billion (RMB 200 billion) to energy efficiency. People’s
Bank of China and UN Environment Program, Establishing China’s Green Financial System:
Report of the Green Finance Task Force, April 2015. 6.

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environmental protection, energy efficiency, clean energy, andclean transportation is required over the next five years.* However, according to the same report, the Chinese government
will only be able to fund between 10 and 15 percent or around$48 billion (RMB 300 billion) of this needed annual investment
due in part to slowing growth rates of fiscal revenue. Private
capital will need to contribute the remaining 85 to 90 percent,estimated at $272 billion (RMB 1.7 trillion).212• Emissions and water quality targets: At the March 2015 NPC
meeting, Premier Li established additional reduction targets inchemical oxygen demand † and emissions of sulfur dioxide, ammonia nitrogen, and nitrous oxides.213 China is also expanding
its seven pilot carbon trading emissions projects under the
12th FYP to launch a national carbon trading market,‡ expected to be the world’s largest carbon offset market, in
2017.214 Similar adjustments are being made to improve thequality of water in Chinese cities. In 2011, around half of the
634 Chinese rivers, lakes, and reservoirs tested met drinking
standards, and in April 2015, the government announced it
would increase the amount of drinkable water for cities to 93
percent by 2020.215 In June 2015, the Chinese government released its Intended Nationally Determined Contributions tocombat climate change, in which it pledged by 2030 to both cut
carbon dioxide emissions per unit of GDP by 60–65 percent of
the 2005 level and expand the share in its non-fossil fuels forprimary energy consumption from about 11 percent in 2014 to
20 percent.216• Stronger regulations and harsher penalties: In January 2015,
new environmental regulations came into effect with harsher
penalties and more stringent emissions caps.217 Five months
later, after nearly two years of delays, the State Council released a draft law on environmental taxes that would penalize
heavily polluting industries, such as coal and steel, with taxes
on water and air pollution.218 In Hebei Province, which is oneof China’s most polluted provinces and responsible for a significant portion of Beijing’s air pollution, the provincial government in 2014 spent an estimated $1 billion on environmental
protection, and is seeking to close small factories while forcing
larger firms to adhere to regulations and upgrade equipment.219 Already, steel facilities in Tangshan, China’s largest
steel-producing city, are either closing or undergoing upgrades
to meet these regulations.220* This estimate is based on the 12th FYP Environmental Protection Plan and the Ministryof Environmental Protection (final investment expected to exceed RMB 5 trillion under the 12thFYP); 2014 Plan on Water Pollution Prevention (RMB 2 trillion expected); 2014 Plan on Air Pollution Prevention and Control (RMB 1.7 trillion expected); China Railway Annual Report (RMB
800 billion allocated in 2014); Renewable Energy Policy Network (RMB 350 billion invested in2013); and Bloomberg’s estimate of renewable energy investment (RMB 420 billion invested in2012). People’s Bank of China and U.N. Environment Program, Establishing China’s Green Financial System: Report of the Green Finance Task Force, April 2015. 5.
† Chemical oxygen demand indirectly measures water quality by determining the amount ofoxygen-consuming capacity of organic and inorganic matter in the water. U.S. Environmental
Protection Agency, Terminology Services.
‡ The national carbon trading market was initially scheduled to begin in 2015. For additional
analysis on China’s cap-and-trade system, see U.S.-China Economic and Security Review Commission, Monthly Analysis of U.S.-China Trade Data, October 6, 2015, 4–5.

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171• Environmental targets within CCP and Chinese government
promotion structure: In May 2015, the Chinese government attempted to strengthen the importance of its environmental targets in the evaluation and promotion process for local government officials, who were previously judged almost entirely on
their ability to generate economic growth.221 In August 2015,
the State Council and the CCP Central Committee tightened
accountability for CCP and government officials, restricting
promotion based on achieving environmental targets and enacting retrospective punishment for environment harm. But
Wang Yi, director of the Institute of Policy Management at the
Chinese Academy of Science, cautioned that data collection andverification of environmental harm remains limited.222• Public interest lawsuits: In October 2014, Taizhou City Environmental Protection Association * sued local factories for contaminating waterways, leading to a $25.6 million (RMB 160
million) settlement, the largest environmental fine ever awarded in China.223 In May 2015, China’s Supreme People’s Procuratorate announced it would expand such public interest lawsuits into a two-year pilot program.224 While these steps create
new opportunities, Scott Wilson, professor at The University of
the South, found that state-backed nongovernmental organizations are crowding out grassroots participation and reasserting
government control at the expense of public accountability.225
Elizabeth Economy, senior fellow and director of Asia Studies
at the Council on Foreign Relations, also cautioned that President Xi’s clampdown on civil society organizations and theInternet along with its proposed Overseas NGO Management
Law † could significantly limit the ability of these organizations
to push forward reform.226

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• Support for the development of the clean technology industry:
The International Energy Agency estimated China spent morethan $80 billion in new renewables-generating capacity in
2014—more than the United States and European Union combined.227 The Made in China 2025 action plan reaffirmed
strong support for clean technology and green manufacturing
through an increase in R&D spending, creation of thousands ofgreen demonstration factories, reinforcement of energy intensity targets, and designation of clean energy vehicles as a key
sector.228* Taizhou City Environmental Protection Association is a local government-backed civil society
organization, officially known as a government-organized nongovernmental organization.
Taizhou City Environmental Protection Association’s chairman is the local head of Taizhou’s environmental protection bureau. Such types of organizations allow the Chinese government totacitly control civil society organizations and protect its interests while providing a venue forexpressing public outrage and holding firms accountable. Edward Wong, ‘‘Fines Total $26 Million for Polluters in China,’’ New York Times, December 31, 2014; Scott Wilson, ‘‘Mixed Verdict
on Chinese Environmental Public Interest Lawsuits,’’ Diplomat (Tokyo), July 20, 2015; and Jennifer YJ Hsu and Reza Hasmath, ‘‘The Local Corporatist State and NGO Relations in China,’’
Journal of Contemporary China 23:87 (2014): 516–534.
† This proposed law would further tighten restrictions on foreign nongovernmental organizations, such as foreign charities and international development organizations operating in China,
and preclude Chinese nongovernmental organizations from accepting foreign funding. Stephen
Noakes and Victoria Brownlee, ‘‘The Pacific Implementation of China’s Proposed NGO Law,’’
Diplomat (Tokyo), July 10, 2015.

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Despite robust public spending and success in meeting most of
its environmental targets, the Chinese government’s efforts overall
have fallen short in addressing the severity of existing environmental degradation.* Fundamental issues such as fragmented enforcement, conflicting legislation that can override the environmental protection law, lack of capacity, and competition between
economic growth objectives and environmental protection interests
remain largely unaddressed (see the text box, ‘‘Tianjin Chemical
Explosion,’’ for a recent example of these systemic challenges).229
Research by the environmental activist organization Greenpeacefound that although China’s strict pollution controls lowered particulate matter (PM2.5) † levels in the 189 cities analyzed in the study
an average of 16 percent for the first half of 2015 compared withthe same period last year, China’s average annual PM2.5 level isfive times the World Health Organization’s recommended levels.230
A comparison of hourly PM2.5 levels from the U.S. Embassy in Beijing for the first eight months of the last three years similarly
found improvements in the overall air quality in Beijing, thoughhazardous levels of air pollution still remain (see Figure 9).231 Zhai
Qing, China’s Deputy Minister of Environmental Protection, noted
the gravity of the pollution problem, stating, ‘‘Emissions will haveto fall another 30–50 percent below current levels if we are to see
noticeable changes in environmental quality.’’ 232* China is on track to meet its 12th FYP targets to include meeting its 16 percent reduction
in energy intensity, 17 percent reduction in carbon intensity from 2010, 11.4 percent compositionof non-fossil fuel in primary energy, and 21.7 percent forest coverage. China has been able tomeet these targets through a command-control approach of shutting down inefficient and polluting factories, but this approach is becoming less effective as the most egregious violators havealready been shuttered and Chinese households become a larger share of energy consumption.
For additional analysis of China’s energy and environmental policy implementation under the
12th FYP, see Ranping Song et al., ‘‘Assessing Implementation of China’s Climate Policies in
the 12th 5-Year Period,’’ World Resources Institute, Working Paper, September 2015; DamienMa, ‘‘Rebalancing China’s Energy Strategy,’’ Paulson Papers on Energy and Environment(Paulson Institute), January 2015, 10, 19–20.
† PM2.5 is made up of metal, organic chemical, acid, soil or dust, and allergen particulates
measuring 2.5 micrometers or smaller in diameter. Excessive exposure to PM2.5 aggravates existing heart and lung disease and is linked to higher incidences of heart attacks, asthma attacks, and bronchitis. U.S. Environmental Protection Agency, Basic Information. www3.epa.gov/
pm/designations/basicinfo.htm.

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Figure 9: Hourly PM2.5 Data Finds Improvement in Beijing’s Air Pollution
Levels, January–August 2013–2015

Note: The data are hourly and cover January 1–August 31 of each year. The classification ofthese data is based on the U.S. Environmental Protection Agency’s Guideline for Reporting ofDaily Air Quality-Air Quality Index.
Source: U.S. Department of State, U.S. Embassy in Beijing, Historical Data.

Tianjin Chemical Explosion
In August 2015, massive chemical explosions in Tianjin killed
more than 100 people, injured nearly 700 people, and destroyed
more than 17,000 homes.233 Excessive levels of cyanide—up to
277 times normal levels, according to the Tianjin Environment
Protection Bureau—have contaminated the area and placed thecity’s groundwater and the Bohai Sea at risk.234 Already, reportsof thousands of dead fish washing up on shore near the blast site
have heightened public concern.235 The volume and types ofchemicals released and the scale of the damage represent both amajor manmade industrial and environmental disaster and a significant test for the Xi Administration’s handling of political malfeasance and public outcry.

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Investigations by the Chinese government into the explosion
have unveiled that the company responsible, Rui Hai International Logistics, leveraged its political connections to improperly obtain licenses and skirt existing safety regulations.236
Zhang Ming, a political scientist at Renmin University, said, ‘‘It
was a man-made disaster that could have been prevented, and it
has exposed a range of systemic problems, from the lack of regulation for handling hazardous chemicals to the collusion of business and corrupt officials.’’ 237 The Supreme People’s Procuratorate is investigating ten officials and port executives for theirinvolvement and dereliction of duty.238

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Tianjin Chemical Explosion—Continued
This explosion is an example of the depth of corruption andpervasive safety violations that remain in China today.239 Eachyear more than 68,000 people die in industrial accidents, according to official statistics.240 Inspections conducted at 124 sitesthat handle toxic chemicals in Beijing shortly after the explosion
found 70 percent contained ‘‘hazards,’’ highlighting the depth
and pervasiveness of safety violations.241
Given strong public outcry and the seriousness of environmental
degradation, demand for environmental technologies is likely togrow, creating a potential new market for U.S. environmental services companies. From 2004 to 2014, sectors related to energy efficiency, emissions reduction and monitoring, and environmental remediation experienced 20 percent annual growth, and the Chinese
government’s recent efforts and increases in spending will only accelerate this growth.242 A 2015 Goldman Sachs report forecasts
enormous opportunities for domestic and foreign firms in soil remediation, solid and hazardous waste management, wastewater treatment, clean energy, and pollution monitoring equipment.243 For example, the report predicts China’s spending on soil remediation
will reach $109.6 billion (RMB 685 billion) from 2016 to 2020 (a585 percent increase over current levels) and wastewater treatment
will total $304 billion (RMB 1.9 trillion) over the next five years,
creating significant new market opportunities.244 These investments could also benefit the United States, where pollutants from
China are eroding emissions reductions on the West Coast.245

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Implications for the United States
China’s status as the world’s most populous nation, second-largest economy, top trading nation, and largest manufacturer means
its economic reform agenda, even if partially implemented, will redefine the global competitive landscape. China’s focus on services
and technology may create one of the world’s largest consumer
markets, which could generate enormous benefits for the UnitedStates. If high market access barriers to U.S. investors and preferential government policies for domestic companies continue, they
will prevent U.S. firms from competing on a level playing field. As
an example, U.S. technology firms such as Google and Facebook
are shut out of China’s domestic market while facing growing competition from Chinese state-supported firms such as Baidu andRenren in global markets.246 In addition, the government has beenreluctant to relinquish control of key sectors of the economy andhas rolled back reforms in politically sensitive areas, which bodes
ill for the progress of the reform agenda and could prevent U.S.
companies from participating.
With consumer spending expected to increase approximately$10.9 trillion in the next decade, China’s service sector could create
up to $6 trillion of new market opportunities for U.S. firms, according to one estimate.247 Service sectors such as film, express delivery, environmental technologies, and IT are experiencing double-

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digit growth in China.248 China is already the world’s largest express delivery market in terms of workload and the largest e-commerce market * with over 600 million users; it is also the world’s
second-largest market for film.249 Access to China’s market could
benefit the U.S. service sector—which in 2014 comprised 80 percentof the U.S. economy, employed 80 percent of the U.S. workforce,and accounted for 30 percent of U.S. exports.250 Dr. Roach argued
in his testimony before the Commission that China’s service sector
is a huge opportunity for the United States, ‘‘provided we can bargain effectively for market access.’’ 251 In spite of limited market access in many industries, U.S. service exports to China have grownin the last five years from $17.1 billion in 2009 to $42.5 billion in
2014.252 In the first half of 2015, U.S. service exports to Chinagrew 9.4 percent over the same period last year to reach $22.3 billion.253
But strict market entry criteria, opaque regulations, China-specific technical standards, and state-set pricing are increasing costs
for U.S. companies to compete in the Chinese market. The Officeof the U.S. Trade Representative identified market access challenges for U.S. banking, film, express delivery, and several otherservice sectors.254 U.S. financial firms continue to face quotas, approvals, and ceilings that restrain their growth in China’s capital
markets. As a result, foreign firms accounted for less than 2 percent of China’s nearly $6 trillion (RMB 36.8 trillion) debt market
in April 2015, and less than 5 percent of China’s $8.2 trillion stock
market as of August 2015.255 U.S. multinationals FedEx Corporation and United Parcel Service (UPS) lost access to China’s express
package delivery market in 2009 following a revision to China’s
Postal Law, and did not regain it until August 2014.† Furthermore,
U.S. IT and communications firms encounter onerous cyber regulations and standards as well as extensive censorship of Internet content and social media that limit U.S. digital service exports (seeChapter 1, Section 4, ‘‘Commercial Cyber Espionage and Barriers
to Digital Trade in China,’’ for analysis of China’s barriers to digital trade). Such restrictions cap U.S. export growth, to the detriment of U.S. businesses and workers.
The U.S. government has challenged China’s market restrictions
at the WTO with mixed success. For example, in June 2015—after
a favorable 2012 WTO ruling—foreign payment processors such as
Visa and MasterCard earned the right to compete against China’s
state-owned Union Pay. This ruling promised to open a market
that last year reached $6.8 trillion (RMB 42 trillion) in retailsales.256 However, after implementing changes to comply with the
WTO ruling, the PBOC instituted a China-specific technical standard different from the international payments standard, forcing
MasterCard and Visa to redesign their credit cards, and yet again
delaying their entry into the market.257 In July 2015, the U.S. government again raised the issue to the WTO Dispute Settlement
Body.258* For more information on China’s e-commerce industry, see U.S.-China Economic and Security Review Commission, Monthly Analysis of U.S.-China Trade Data, July 7, 2015, 5–10.
† For more information on China’s express delivery services sector, see U.S.-China Economic
and Security Review Commission, Monthly Analysis of U.S.-China Trade Data, September 4,
2014, 8–10.

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The Chinese government is leveraging market access to force
U.S. businesses to transfer technology and know-how to Chinesecompetitors in order to replace foreign businesses with domestic
firms.259 In its 2014 Report to Congress, the Office of the U.S.
Trade Representative reported ‘‘longstanding concerns’’ about
China’s technology transfer policies that have been largely‘‘unaddressed.’’ 260 For example, in September 2014, the CBRC
issued requirements for foreign IT and communication firms toturn over proprietary software codes and encryption keys for market access.261 In April 2015, the CBRC temporarily suspended therules, but as James Zimmerman, chairman of the American Chamber of Commerce in China, cautioned, ‘‘These [rules] were suspended but that doesn’t mean it’s over yet.’’ 262 Four months later,
the CBRC revived these regulations, highlighting the continued
pressure China is placing on U.S. firms.263
Subsidies and other forms of government support create unfair
competitive advantages for Chinese firms at the expense of theirforeign competitors. Under the 12th FYP, extensive subsidies forsolar and wind manufacturers enabled Chinese firms to dump theirproducts in the global market. In response, U.S. competitors petitioned the U.S. Department of Commerce to impose tariffs beginning in 2012, and even higher tariffs in 2015.264 State-supported
national champions, such as Huawei and China Railway Construction Company, have also benefited from preferential loans to successfully dislodge established industry leaders and take over the
global market.265
Proposed reforms to SOEs incorporate market drivers while reaffirming CCP control. The recent SOE consolidations attempt tobuild national brands to compete with established international
competitors.266 For example, the recent merger between China
Huafu Trade and Development Group and China National Cereals,
Oils and Foodstuffs seeks to challenge established U.S. multinationals Archer Daniels Midland, Bunge Limited, and Cargill.267
The proposed merger of China’s oil SOEs would create the Chinese
equivalent of U.S. multinational ExxonMobil in terms of size; similarly, the proposed deal between the Aluminum Corporation ofChina and China Power Investment Corporation would make it theworld’s largest aluminum producer by capacity.268 In addition tostrengthening the state’s control, these mergers by themselves do
not solve the existing overcapacity and inefficiency issues. Excess
production has artificially lowered global prices below production
costs and severely limited profitability in many key U.S. industries.269 Alcoa, the largest U.S. aluminum producer, expects China
will add more than 80 percent of new global capacity in 2015, inspite of falling global prices.270 China’s strong support for its steel
industry is contributing to layoffs, factory closures, and financial
losses in the U.S. steel industry.271 In response, the U.S. Department of Commerce’s International Trade Commission has pursued
several antidumping investigations against China.272
Finally, the recently announced Made in China 2025 and Internet Plus initiatives target sectors in which the United States currently enjoys technological advantages, such as e-commerce andbiotechnology. Both plans reinforce preferential support for domestic firms, effectively shutting U.S. firms out of the market. While

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Chinese social media firms Baidu, RenRen, and Weibo enjoy unfettered access to the world’s largest Internet market, U.S. firms such
as Google, Facebook, and Twitter remain blocked. Boosted bystrong government support, Chinese firms will seek to challenge
U.S. firms in industries such as biotechnology, clean energy, e-commerce, railway, and robotics, both in China and abroad.
Conclusions

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• President Xi Jinping and Premier Li Keqiang announced an ambitious reform agenda at the Third Plenary Session of the Chinese Communist Party’s (CCP) 18th Central Committee (theThird Plenum) in November 2013 to transition China’s economy
toward consumption-led growth and allow the market to play a‘‘decisive role.’’ However, these reforms still reserve a dominantrole for the Chinese government in the economy. As the economy
slows and markets have shown volatility, the Chinese government is once again stalling or rolling back reforms while resuscitating old levers of economic growth—fixed asset investments
and export-led growth—in order to boost economic growth andmaintain employment.
• The Chinese government is calling for greater CCP leadershipwithin state-owned enterprises, while simultaneously subjecting
them to market forces such as competition, mixed ownership, andconsolidation. These policies merely reinforce state-owned enterprises’ special status and do little to level the playing field for
private sector and foreign competitors.
• China’s efforts to upgrade its industries and enhance innovation
are largely state driven and target sectors in which the UnitedStates currently enjoys technological advantage. Recent policies
clearly favor domestic Chinese firms, placing pressures on U.S.
firms to transfer technology and shift production to China, to thedetriment of U.S. businesses and workers.
• China’s growing level of consumption, increasing rate of urbanization, opening of the service sector, and massive spending on
the environment and clean technology are creating one of theworld’s largest markets. However, strict market entry criteria,
opaque regulations, China-specific technical standards, state-set
pricing, and preferential support for domestic firms are increasing the costs to compete in this market.
• While fiscal reforms have made progress in providing new
sources of local government revenue such as bonds and newforms of taxes, the Chinese government abandoned its attempt torein in local government debt after sluggish first and second
quarter data in 2015. Instead, the Chinese government restarted
local government lending and required financial institutions tocontinue supporting insolvent infrastructure projects. Central
intervention to prop up the debt-for-bonds swap for local governments ensured the costs of local governments’ borrowing were
negligible.
• China’s financial sector reforms have made the most headway
with progress in the liberalization of interest rates, opening of

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the banking sector, and loosening of capital controls. However,
Chinese policymakers are uncomfortable with the market volatility these reforms create. This year, the Chinese government reaffirmed its role in managing capital accounts and reasserted
state control over the stock market after it faced volatility beginning in June 2015.
• Public alarm over environmental degradation within China continues to rise. Robust public spending has contributed to enormous demand for technologies focused on energy efficiency, emissions reduction and monitoring, and environmental remediation,
creating potential opportunities for U.S. environmental technology firms. China’s environmental reforms could also benefit
the U.S. environment through reduced emissions and pollution.
• China has achieved its enormous economic growth through investment and export-led policies that now must be coupled withgreater domestic consumption to ensure a more balanced economy. CCP leaders could persevere in structural reforms, which—assuming the short-term dislocation is not too destabilizing—
could confirm China as one of the world’s great markets. If, however, the CCP draws back from such reforms as it has in thepast, there is a possibility China could enter a period of low orstagnant growth, which affects its potential as a market and a
producer. In either case, economic pressure on CCP leaders could
lead to greater discrimination against foreign firms and investors
or an enhancement of other practices, like technology theft,
which will make China less attractive as a market for investment.

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 3
1. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Oliver K. Melton, April 22, 2015, 2–5.
2. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Oliver K. Melton, April 22, 2015, 9–10; U.S.-China Economic and Security
Review Commission, Hearing on China Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Stephen S. Roach, April 22, 2015,
2; and U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Nicholas Consonery, April 22, 2015, 3.
3. Yu Song et al., ‘‘Harnessing Global Capital to Drive the Next Phase of China’s Growth,’’ Goldman Sachs, February 2015, 6–7; International Monetary Fund,‘‘People’s Republic of China: Staff Report for the 2015 Article IV Consultation,’’ July
7, 2015.
4. National Development and Reform Commission of the People’s Republic ofChina, Report on the Implementation of the 2014 Plan for National Economic andSocial Development and on the 2015 Draft Plan for National Economic and Social
Development (Third Session of the 12th National People’s Congress, Beijing, China,
March 5, 2015), 11.
5. Lou Jiwei, ‘‘The Possibility of Achieving High-Speed Growth,’’ Qinghua University School of Economics and Management, April 30, 2015.
6. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Nicholas Consonery, April 22, 2015, 3.
7. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Oliver K. Melton, April 22, 2015; U.S.-China Economic and Security Review
Commission, Hearing on China Ahead of the 13th Five-Year Plan: Competitivenessand Market Reform, written testimony of Stephen S. Roach, April 22, 2015; U.S.China Economic and Security Review Commission, Hearing on China Ahead of the
13th Five-Year Plan: Competitiveness and Market Reform, written testimony of
Nicholas Consonery, April 22, 2015; U.S.-China Economic and Security Review Commission, Hearing on China Ahead of the 13th Five-Year Plan: Competitiveness andMarket Reform, written testimony of Dali Yang, April 22, 2015; U.S.-China Economic and Security Review Commission, Hearing on China Ahead of the 13th FiveYear Plan: Competitiveness and Market Reform, written testimony of Eswar S.
Prasad, April 22, 2015; and U.S.-China Economic and Security Review Commission,
Hearing on China Ahead of the 13th Five-Year Plan: Competitiveness and Market
Reform, written testimony of David Frey, April 22, 2015.
8. Shijin Liu et al., ‘‘Urban China: Toward Efficient, Inclusive, and Sustainable
Urbanization,’’ World Bank, June 16, 2014; W. Raphael Lam, Xiaoguang Liu, andAlfred Schipke, ‘‘China’s Labor Market in the ‘New Normal,’ ’’ International Monetary Fund Working Paper, July 2015, 3; and Chris Buckley, ‘‘With Urbanization as
Goal, China Moves to Change Registration Rules,’’ New York Times, July 30, 2014.
9. Gabriel Wildau, ‘‘China’s ‘Migrant Miracle’ Nears an End as Cheap Labor
Dwindles,’’ Financial Times, May 4, 2015; Christina Larson, ‘‘Scrapping Its OneChild Policy Won’t Solve Worker Shortage,’’ Bloomberg, November 19, 2013; Mark
Purdy, Gong Li, and David Light, ‘‘Beyond Capital and Labor: The View from China’s Productivity Frontier,’’ Outlook (Accenture), 2014; and Yu Song et al., ‘‘Harnessing Global Capital to Drive the Next Phase of China’s Growth,’’ Goldman Sachs,
February 2015, 8.
10. China Daily (English edition), ‘‘Give Workers Their Due,’’ February 13, 2012;
U.S. Department of Commerce, Labor Costs, August 11, 2015.
11. Dezan Shira & Associates, ‘‘The Competitive Advantages of Manufacturing
in Vietnam,’’ China Briefing, August 20, 2014; Bloomberg, ‘‘Made in Chindia: Two
Paths toward Industrialization,’’ May 31, 2015; and Wang Liwei, ‘‘Chinese Cabinet
Unveils ‘Made in China 2025’ Master Plan,’’ Caixin Online (English edition), May
20, 2015.
12. Yukon Huang and Canyon Bosler, ‘‘China’s Burgeoning Graduates—Too
Much of a Good Thing?’’ National Interest, January 7, 2014; Te-Ping Chen and MaSi, ‘‘Meet China’s Boomerang Kids: One-Third of Graduates Still Rely on Parents,
Survey Says,’’ China Real Time Report (Wall Street Journal blog), August 7, 2014.
13. National Bureau of Statistics of the People’s Republic of China via CEIC
database.

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180
14. Yu Song et al., ‘‘Harnessing Global Capital to Drive the Next Phase of China’s Growth,’’ Goldman Sachs, February 2015, 6–7.
15. China Administration of Customs via CEIC database.
16. U.S.-China Economic and Security Review Commission, Monthly Analysis of
U.S.-China Trade Data, October 6, 2015, 1.
17. New York Times Editorial Board, ‘‘China’s Ravaged Farmlands,’’ April 28,
2014; David Stanway and Kathy Chen, ‘‘More than 60 Pct of China’s Underground
Water Rated Unfit for Human Contact,’’ Reuters, June 4, 2015.
18. Robert A. Rohde and Richard A. Muller, ‘‘Air Pollution in China: Mapping
Concentrations and Sources,’’ Berkeley Earth, August 2015.
19. Edward Wong, ‘‘China Blocks Web Access to ‘Under the Dome’ Documentaryon Pollution,’’ New York Times, March 6, 2015; Anthony Kuhn, ‘‘The Anti-Pollution
Documentary That’s Taken China by Storm,’’ National Public Radio, March 4, 2015.
20. Nargiza Salidjanova and Iacob Koch-Weser, ‘‘Third Plenum Economic Reform
Proposals: A Scorecard,’’ U.S.-China Economic and Security Review Commission,
November 19, 2013.
21. Nargiza Salidjanova and Iacob Koch-Weser, ‘‘Third Plenum Economic Reform
Proposals: A Scorecard,’’ U.S.-China Economic and Security Review Commission,
November 19, 2013.
22. Yang Yao, ‘‘A New ‘New Normal,’ but with Robust Growth: China’s Growth
Prospects in the Next 10 Years,’’ in Growth, Convergence and Income Distribution:
The Road from the Brisbane G–20 Summit, Brookings Institution, November 2014,
77–82.
23. Katherine Koleski and Joseph Casey, ‘‘Backgrounder: China’s 12th Five-Year
Plan,’’ U.S.-China Economic and Security Review Commission, June 24, 2011; U.S.China Economic and Security Review Commission, Hearing on China Ahead of the
13th Five-Year Plan: Competitiveness and Market Reform, written testimony of
Nicholas Consonery, April 22, 2015, 1; and U.S.-China Economic and Security Review Commission, Hearing on China Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Stephen S. Roach, April 22, 2015, 2.
24. Lance L.P. Gore, ‘‘China’s Leading Group for Comprehensively Deepening
Reforms,’’ Academia; Alice Miller, ‘‘More Already on the Central Committee’s Leading Small Groups,’’ China Leadership Monitor 47 (July 14, 2015).
25. Christopher K. Johnson, senior advisor and Freeman Chair in China Studies
at the Center for Strategic and International Studies, briefing to the Commission,
Washington, DC, February 19, 2015; Cheng Li, director of the John L. Thornton
China Center and senior fellow in the Foreign Policy program at the Brookings Institution, briefing to the Commission, Washington, DC, February 26, 2015.
26. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Eswar S. Prasad, April 22, 2015, 3.
27. Enda Curran and David Tweed, ‘‘To Become the Biggest Economy, China
Needs to Stop Fighting Itself,’’ Bloomberg Businessweek, August 20, 2015.
28. Dexter Roberts, ‘‘A $6.8 Trillion Price Tag for China’s Urbanization,’’Bloomberg, March 25, 2014; People’s Bank of China and UN Environment Program,
Establishing China’s Green Financial System: Report of the Green Finance Task
Force, April 2015. 5–6.
29. Neil Gough, ‘‘China, Trying to Bolster Currency, Taps Foreign Reserves,’’
New York Times, September 7, 2015.
30. McKinsey Global Institute, ‘‘Debt and (Not Much) Deleveraging,’’ February
2015, 75–76; Economist, ‘‘China Seeks Stimulation,’’ November 10, 2008.
31. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Oliver K. Melton, April 22, 2015, 11.
32. McKinsey Global Institute, ‘‘Debt and (Not Much) Deleveraging,’’ February
2015, 75.
33. Yu Song et al., ‘‘Harnessing Global Capital to Drive the Next Phase of China’s Growth,’’ Goldman Sachs, February 2015, 10; Jan Hatzius et al., ‘‘Asia in Focus– Untangling China’s Credit Conundrum: Deleveraging after a Credit Boom Requires Years of Adjustment,’’ Goldman Sachs, January 26, 2015, 4–7, 18.
34. McKinsey Global Institute, ‘‘Debt and (Not Much) Deleveraging,’’ February
2015, 75–76, 86–87.
35. C. Cindy Fan, ‘‘China’s Eleventh Five-Year Plan (2006–2010): From Getting
Rich First ‘to Common Prosperity,’ ’’ Eurasian Geography and Economics 47:6
(2006): 718; State Council of the People’s Republic of China, People’s Economy andSocial Development 12th FYP Outline, March 16, 2011; U.S.-China Economic andSecurity Review Commission, Hearing on China Ahead of the 13th Five-Year Plan:
Competitiveness and Market Reform, written testimony of Stephen S. Roach, April

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181
22, 2015, 2, 14–15; and U.S.-China Economic and Security Review Commission,
Hearing on China Ahead of the 13th Five-Year Plan: Competitiveness and Market
Reform, written testimony of Nicholas Consonery, April 22, 2015, 4–5.
36. National Bureau of Statistics of the People’s Republic of China, China’s
Economy Realized a New Normal of Stable Growth in 2014, January 20, 2015; U.S.
Department of Commerce, Bureau of Economic Analysis, National Data, April 29,
2015.
37. National Bureau of Statistics the People’s Republic of China via CEIC database.
38. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Nicholas Consonery, April 22, 2015, 3.
39. Shijin Liu et al., ‘‘Urban China: Toward Efficient, Inclusive, and Sustainable
Urbanization,’’ World Bank, June 16, 2014; PricewaterhouseCoopers and China Development Research Foundation, ‘‘Chinese Cities of Opportunity 2015,’’ 2015, 13;David Frey, Simon Gleave, and Richard Dawson, ‘‘China’s Urban Future: Financing
a New Era of Urbanization,’’ KPMG China, May 2014; and W. Raphael Lam,
Xiaoguang Liu, and Alfred Schipke, ‘‘China’s Labor Market in the ‘New Normal’ ’’International Monetary Fund Working Paper, July 2015, 3.
40. Shijin Liu et al., ‘‘Urban China: Toward Efficient, Inclusive, and Sustainable
Urbanization,’’ World Bank, June 16, 2014; PricewaterhouseCoopers and China Development Research Foundation, ‘‘Chinese Cities of Opportunity 2015,’’ 2015, 13;
and David Frey, Simon Gleave, and Richard Dawson, ‘‘China’s Urban Future: Financing a New Era of Urbanization,’’ KPMG China, May 2014.
41. David Dollar, ‘‘China’s Rise as a Regional and Global Power: The AIIB andthe ‘One Belt, One Road,’ ’’ Horizons Issue 4 (Summer 2015): 167.
42. Economist, ‘‘Chinese Consumers: Doing It Their Way,’’ January 25, 2014.
43. International Monetary Fund, Global Prospects and Policy Challenges (G–20
Finance Ministers and Central Banking Governors Meeting, Ankara, Turkey September 4–5, 2015) 3.
44. Andy Rothman, ‘‘China: Double, Double Toil and Trouble/Fire Burn, andCauldron Bubble?’’ Sinology (Matthews Asia blog), September 10, 2015.
45. Xinhua (English edition), ‘‘China Unveils Landmark Urbanization Plan,’’March 17, 2014.
46. Bruce Kennedy, ‘‘China Increases Minimum Wage Rates,’’ CBS MoneyWatch,
March 31, 2014; Eurasia Group, ‘‘China’s Great Rebalancing Act: Implications for
Investors and Companies,’’ August 2011.
47. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Stephen S. Roach, April 22, 2015, 2–3, 5.
48. Hou Limei, ‘‘China to Invest 2 Trillion Pension Funds in Stocks and Other
Assets,’’ CRIEnglish, August 28, 2015.
49. People’s Daily, ‘‘Government Work Report: The ‘Three 100 Million People’Principles Expound New-Type Urbanization,’’ March 5, 2014. Staff translation;
PricewaterhouseCoopers and China Development Research Foundation, ‘‘Chinese
Cities of Opportunity 2015,’’ 2015, 13; and Margit Molnar and Ben Westmore,‘‘OECD Economic Surveys China,’’ Organization for Economic Co-operation and Development, March 2015, 8.
50. Chris Buckley, ‘‘With Urbanization as Goal, China Moves to Change Registration Rules,’’ New York Times, July 30, 2014.
51. Chun Han Wong, ‘‘13 Million Guangdong Migrants Could Gain Permanent
Residence by 2020,’’ China Real Time Report (Wall Street Journal blog), July 10,
2015.
52. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of David Frey, April 22, 2015, 6–7; Kam Wing Chan et al., ‘‘China’s Transition: The Third Plenum—One Year On,’’ Bloomberg Brief, October 2014, 9, 14; andChun Han Wong, ‘‘13 Million Guangdong Migrants Could Gain Permanent Residence by 2020,’’ China Real Time Report (Wall Street Journal blog), July 10, 2015.
53. Dexter Roberts, ‘‘A $6.8 Trillion Price Tag for China’s Urbanization,’’Bloomberg, March 25, 2014; U.S.-China Economic and Security Review Commission,
Hearing on China Ahead of the 13th Five-Year Plan: Competitiveness and Market
Reform, written testimony of David Frey, April 22, 2015, 6–7.
54. Zhao Yinan, ‘‘Infrastructure Opening to Foreign Investors,’’ China Daily(English edition), April 24, 2014.
55. Andy Rothman, ‘‘China Designs Program to Determine Size of Local Government Debt Burden,’’ South China Morning Post, June 24, 2015.

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56. PR Web, ‘‘China Urban Rail Transit Sector Analyzed and Forecast in New
CRI Study Published at MarketPublishers.com,’’ July 24, 2015.
57. Center for Aviation, ‘‘The World’s Biggest Airport Construction Projects
2015; Total over USD 500 Billion. Part 1,’’ January 20, 2015.
58. Franck Le Deu et al., ‘‘Health Care in China: Entering ‘Uncharted Waters,’ ’’McKinsey & Company, November 2012.
59. U.S.-China Economic and Security Review Commission, Hearing on China’s
Healthcare Sector, Drug Safety, and the U.S.-China Trade in Medical Products, written testimony of Benjamin Shobert, April 3, 2014. 1.
60. Jonathan Woetzel et al., ‘‘A Blueprint for Addressing the Global Affordable
Housing Challenge,’’ McKinsey & Company, October 2014, 27.
61. Jonathan Woetzel, ‘‘Meeting China’s Affordable Housing Challenge,’’
McKinsey & Company, March 16, 2015.
62. Jonathan Woetzel, ‘‘Meeting China’s Affordable Housing Challenge,’’
McKinsey & Company, March 16, 2015; People’s Daily, ‘‘Government Work Report:
The ‘Three 100 Million People’ Principles Expound New-Type Urbanization,’’ March
5, 2014. Staff translation.
63. National Bureau of Statistics of the People’s Republic of China, Press Release: China’s Economy Realized a New Normal of Stable Growth in 2014, January
20, 2015.
64. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Stephen S. Roach, April 22, 2015, 5.
65. Tom Orlik and Fielding Chen, ‘‘A Tailwind from China’s Rebalancing Could
Blow Its Smog Away,’’ Bloomberg Brief, May 13, 2015, 3.
66. David Dollar, ‘‘China’s Rise as a Regional and Global Power: The AIIB andthe ‘One Belt, One Road,’ ’’ Horizons Issue 4 (Summer 2015): 167; Nargiza
Salidjanova and Iacob Koch-Weser, ‘‘Third Plenum Economic Reform Proposals: A
Scorecard,’’ U.S.-China Economic and Security Review Commission, November 19,
2013, 4–5.
67. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Nicholas Consonery, April 22, 2015, 7.
68. Daniel Rosen, ‘‘Avoiding the Blind Alley: China’s Economic Overhaul and Its
Global Implications,’’ Asia Society, October 2014, 74–75.
69. Rainy Yao and Steven Elsinga, ‘‘China Announces Three New Free Trade
Zones in Tianjin, Guangdong, and Fujian,’’ China Briefing (Dezan Shira & Associates), December 25, 2014; for additional information on Guangdong’s FTZ, see
Dezan Shira & Associates, ‘‘The New Free Trade Zones Explained, Part I:
Guangdong,’’ China Briefing, April 23, 2015.
70. Rainy Yao and Steven Elsinga, ‘‘Further Signs of Liberalization for E-Commerce in the Shanghai Free Trade Zone,’’ China Briefing (Dezan Shira & Associates), January 23, 2015; Elizabeth Leclaire, ‘‘Logging into China’s E-Commerce Market: Nationwide Access Announced for Foreign Investors,’’ China Briefing (Dezan
Shira & Associates), June 24, 2015; and U.S.-China Economic and Security Review
Commission, Monthly Analysis of U.S.-China Trade Data, August 6, 2014, 4–5.
71. State Council of the People’s Republic of China, State Council Issues FTZ
Foreign Investment Negative List, April 20, 2015.
72. U.S.-China Business Council, ‘‘USCBC China Economic Reform Scorecard—
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73. World Bank, ‘‘China Economic Update: Special Topic: Reform Priorities in
China’s Financial Sector’’ (Redacted), June 2015, 25.
74. Shawn Donnan, ‘‘World Bank Denies China Sought to Have Critical Report
Censored,’’ Financial Times, July 3, 2015; for the redacted report, see World Bank,‘‘China Economic Update,’’ Updated July 3, 2015.
75. Economist, ‘‘Weak Local Government Revenue Growth Raises Fiscal Concerns,’’ April 16, 2015.
76. Economist, ‘‘Weak Local Government Revenue Growth Raises Fiscal Concerns,’’ April 16, 2015; Daniel H. Rosen and Beibei Bao, ‘‘China’s Fiscal and Tax Reforms: A Critical Move on the Chessboard,’’ Rhodium Group, July 11, 2014.
77. McKinsey Global Institute, ‘‘Debt and (Not Much) Deleveraging,’’ February
2015, 81.
78. Qu Hongbin, ‘‘Fiscal Surplus to Offset Slower Growth,’’ HSBC, May 21,
2015; McKinsey Global Institute, ‘‘Debt and (Not Much) Deleveraging,’’ February
2015, 82.

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79. Barry Naughton, ‘‘Local Debt Restructuring: A Case of Ongoing Authoritarian Reform,’’ China Leadership Monitor 47 (July 14, 2015): 2; Fitch, ‘‘Fitch: China
Local Gov’t Bond Law to Improve Budget Transparency,’’ Reuters, September 4,
2014; and Du Juan, ‘‘Transparency Made Key to Gov’t Financial Reports,’’ China
Daily (English edition), January 3, 2015.
80. Richard Silk, ‘‘Local Government Debt Audit Sheds Light on What’s Ailing
China,’’ Wall Street Journal, December 31, 2013.
81. McKinsey Global Institute, ‘‘Debt and (Not Much) Deleveraging,’’ February
2015, 81.
82. Yan Wang, ed. ‘‘Weekly Report: More on the Debt Swap ‘Game Changer,’ ’’
BCA Research, March 18, 2015, 4.
83. Yu Song et al., ‘‘Harnessing Global Capital to Drive the Next Phase of China’s Growth,’’ Goldman Sachs, February 2015, 33–34; Peter Monson, ‘‘China’s LGFV
Debt Swap—Shining Light on the Shadows,’’ Nikko Asset Management, April 14,
2015.
84. Barry Naughton, ‘‘Local Debt Restructuring: A Case of Ongoing Authoritarian Reform,’’ China Leadership Monitor 47 (July 14, 2015): 3–4.
85. Barry Naughton, ‘‘Local Debt Restructuring: A Case of Ongoing Authoritarian Reform,’’ China Leadership Monitor 47 (July 14, 2015): 3–4.
86. Lingling Wei, ‘‘China Backtracks on Local Government Debt,’’ Wall Street
Journal, May 15, 2015.
87. U.S.-China Economic and Security Review Commission, Monthly Analysis of
U.S.-China Trade Data, May 5, 2015.
88. Jamil Anderlini, ‘‘China Orders Banks to Keep Lending to Insolvent State
Projects,’’ Financial Times, May 15, 2015; Lingling Wei, ‘‘China Backtracks on Local
Government Debt,’’ Wall Street Journal, May 15, 2015.
89. Bloomberg, ‘‘China Backpedals on Fiscal Reform,’’ May 28, 2015.
90. Barry Naughton, ‘‘Local Debt Restructuring: A Case of Ongoing Authoritarian Reform,’’ China Leadership Monitor 47 (July 14, 2015): 4; Helen Sun, ‘‘China’s Solution to $3 Trillion Debt Is to Deal with It Later,’’ Bloomberg, March 10,
2015.
91. Lingling Wei, ‘‘China Launches Stimulus Aimed at Local Debt Crisis,’’ WallStreet Journal, May 13, 2015.
92. Jamil Anderlini, ‘‘China Province Completes Landmark Bond Sale,’’ Financial Times, May 19, 2015.
93. William Kazer, ‘‘China Expands Social-Security Fund Investments to LocalGovernment Debt,’’ Wall Street Journal, April 1, 2015.
94. Liyan Qi and Grace Zhu, ‘‘China Approves another 1 Trillion Yuan Local
Debt Swap,’’ Wall Street Journal, June 10, 2015.
95. Liyan Qi and Grace Zhu, ‘‘China Approves another 1 Trillion Yuan Local
Debt Swap,’’ Wall Street Journal, June 10, 2015.
96. Barry Naughton, ‘‘Local Debt Restructuring: A Case of Ongoing Authoritarian Reform,’’ China Leadership Monitor 47 (July 14, 2015): 7.
97. LehmanBrown, ‘‘China: Expansion of the Value Added Tax Reform,’’ March
3, 2015; Helen Sun, ‘‘China’s Solution to $3 Trillion Debt Is to Deal with It Later,’’
Bloomberg, March 10, 2015; Jamil Anderlini, ‘‘China Opens Debt Window for Local
Governments,’’ Financial Times, May 21, 2014; and Daniel H. Rosen and Beibei
Bao, ‘‘China’s Fiscal and Tax Reforms: A Critical Move on the Chessboard,’’ Rhodium Group, July 11, 2014.
98. Daniel Rosen, ‘‘Avoiding the Blind Alley: China’s Economic Overhaul and Its
Global Implications,’’ Asia Society, October 2014, 51; Iacob Koch-Weser, ‘‘China Fiscal Policy Revamp Faces Hurdles,’’ U.S.-China Economic and Security Review Commission, September 30, 2014.
99. Xinhua (English edition), ‘‘Chinese Small Firms Save about 49 Bln Yuan inTaxes in H1,’’ July 27, 2015; Economist, ‘‘A Better Service Game,’’ March 2, 2013.
100. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Dali Yang, April 22, 2015, 8.
101. Damien Ma, ‘‘Rebalancing China’s Energy Strategy,’’ Paulson Papers on Energy and Environment (Paulson Institute), January 2015, 10, 19–20.
102. Judy Hua and Chen Aizhu, ‘‘China Issues Details on New Resource Tax
Structure for Rare Earth, Metals,’’ Reuters, April 30, 2015; Xiaoqing Pi, ‘‘China to
Increase Fuel Tax to Curb Pollution, Carbon Emissions,’’ Bloomberg Business, November 28, 2014; and Damien Ma, ‘‘Rebalancing China’s Energy Strategy,’’ Paulson
Papers on Energy and Environment (Paulson Institute), January 2015, 10, 19–20.
103. Dali Yang, Professor of Political Science and Faculty Director of the Centerin Beijing, University of Chicago, discussion with Commission staff, September 20,
2015.

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184104. Dali Yang, Professor of Political Science and Faculty Director of the Centerin Beijing, University of Chicago, discussion with Commission staff, September 20,
2015; Xiaoqing Pi, ‘‘China to Increase Fuel Tax to Curb Pollution, Carbon Emissions,’’ Bloomberg Business, November 28, 2014.
105. W. Raphael Lam and Philippe Wingender, ‘‘China: How Can Revenue Reforms Contribute to Inclusive and Sustainable Growth?’’ International Monetary
Fund Working Paper, March 2015, 11; Dan Cheng, ‘‘An Economic Analysis of Pilot
Property Tax,’’ Journal of Chinese Tax and Policy 4:1 (August 2014): 2–14.
106. Zhao Lei, ‘‘Property Register to Come under One Roof,’’ China Daily (English
edition), April 21, 2015; Grace Zhu, ‘‘China Unveils Property Registration Rules,’’Wall Street Journal, December 22, 2014.
107. China Daily (English edition), ‘‘China Plans Property Tax in 2017,’’ November 3, 2014; Dali Yang, Professor of Political Science and Faculty Director of theCenter in Beijing, University of Chicago, discussion with Commission staff, September 20, 2015.
108. World Bank and the Development Research Center of the State Council of
the People’s Republic of China, China 2030: Building a Modern, Harmonious, andCreative Society, 2013, 115.
109. World Bank, ‘‘China Economic Update: Special Topic: Reform Priorities in
China’s Financial Sector’’ (Redacted), June 2015, 30–31.
110. Yu Song et al., ‘‘Harnessing Global Capital to Drive the Next Phase of China’s Growth,’’ Goldman Sachs, February 2015, 1; Douglas J. Elliot and Yu Qiao,‘‘Reforming Shadow Banking in China,’’ Brookings Institution, May 2015, 6; and Gabriel Wildau, ‘‘China Marks Milestone in Rates Deregulation Push,’’ Financial
Times, August 10, 2015.
111. Andrew Sheng, Chow Soon Ng, and Christian Edelmann, ‘‘Asia Finance
2020: Framing a New Asian Financial Architecture,’’ Oliver Wyman and Fung Global Institute, 2013, 14; Xinhua (English edition), ‘‘Chinese Small Firms Save about
49 Bln Yuan in Taxes in H1,’’ July 27, 2015.
112. World Bank, ‘‘China Economic Update: Special Topic: Reform Priorities in
China’s Financial Sector’’ (Redacted), June 2015, 29; Gabriel Wildau, ‘‘China Duck
Producer Cites Tighter Bank Credit as Cause of Default,’’ Financial Times, June 1,
2015.
113. Reuters, ‘‘Manage, Meddle or Magnify? China’s Corporate Debt Threat,’’ July18, 2015.
114. Lingling Wei, ‘‘China’s Central Bank Cuts Interest Rates,’’ Wall Street Journal, August 25, 2015; Neil Gough and Chris Buckley, ‘‘China Cuts Interest Rates
amid Concerns over Economy,’’ New York Times, August 25, 2015; and Lingling Wei,‘‘China’s Central Bank Moves to Spur Economic Growth,’’ Wall Street Journal, October 23, 2015.
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116. Yan Wang ed., ‘‘Weekly Report: Growth and Market Outlook—A Mid-Year
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117. McKinsey Global Institute, ‘‘Debt and (Not Much) Deleveraging,’’ February
2015, 83.
118. Bloomberg News, ‘‘China Falls Back on Rate-Cut Lever to Stem Stock Market Rout,’’ August 25, 2015.
119. Le Xia and Jinyue Dong, ‘‘The PBoC’s New CDs Guidelines Indicate That
China’s Interest Rate Liberalization Is Close to Completion,’’ BBVA, June 3, 2015.
120. Lingling Wei, ‘‘China Central Bank Cuts Interest Rates,’’ Wall Street Journal, November 23, 2014; for a primer on what China’s interest rate cuts mean, see
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121. U.S.-China Economic and Security Review Commission, Monthly Analysis of
U.S.-China Trade Data, January 7, 2015, 5.
122. State Council of the People’s Republic of China, Bank Deposit Insurance Program Launched, March 31, 2015; Nathaniel Taplin, ‘‘China Bank Deposit Insurance
Could Tilt Competitive Landscape,’’ Reuters, April 1, 2015.
123. Christopher Lee et al., ‘‘China Braces for More Corporate Defaults in 2015,’’
China Credit Spotlight Issue 1 (Standard & Poor’s Ratings Services), May 2015, 4–5.
124. Heather Timmons, ‘‘Chinese Developer Kaisa’s Default Could Be the Startof a Bloodbath for Overseas Investors,’’ Quartz, April 21, 2015.

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185125. Christopher Lee et al., ‘‘China Braces for More Corporate Defaults in 2015,’’
China Credit Spotlight, Issue 1 (Standard & Poor’s Ratings Services), May 2015, 4–
5; Qiang Liao, ‘‘For China’s Banks, the Credit Downturn Has Yet to Bottom Out,’’
China Credit Spotlight Issue 1 (Standard & Poor’s Ratings Services), May 2015, 8–9.
126. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Eswar S. Prasad, April 22, 2015, 11.
127. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Eswar S. Prasad, April 22, 2015, 11; PricewaterhouseCoopers, ‘‘Introductionof the Pilot QFLP Program in Qingdao: RMB Funds Invest in Domestic Market,’’July 2015; and PricewaterhouseCoopers, ‘‘The Pilot ADLP Program in Qingdao:
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128. Nargiza Salidjanova, ‘‘The RMB’s Long Road to Internationalization,’’ U.S.China Economic and Security Review Commission, September 22, 2014, 6.
129. U.S.-China Economic and Security Review Commission, Monthly Analysis of
U.S.-China Trade Data, June 3, 2015, 4–5; Michelle Price and Saikat Chatterjee,‘‘Factbox: The Shanghai-Hong Kong Stock Scheme,’’ Reuters, November 16, 2014.
130. Deutsche Bank, ‘‘At the Center of RMB Internationalization,’’ March 2014.
131. Chiara Albanese, ‘‘China’s Yuan Pushes Deeper into Global Financial System,’’ Wall Street Journal, July 27, 2015.
132. Lingling Wei, ‘‘China to Allow Wider Access to Bond Market,’’ Wall Street
Journal, July 14, 2015.
133. Society for Worldwide Interbank Financial Telecommunications, ‘‘Chinese
Yuan Demonstrates Strong Momentum to Reach #4 as an International Payments
Currency,’’ October 6, 2015.
134. Zhou Xiaochuan, ‘‘IMF Statement’’ (Thirty-First Meeting of the International
Monetary and Financial Committee, Washington, DC, April 18, 2015).
135. Michelle Price and Pete Sweeney, ‘‘MSCI Puts Decision to Include China ‘A’
Shares on Hold,’’ Reuters, June 10, 2015.
136. International Monetary Fund, ‘‘IMF Executive Board Approves Extension of
Current SDR Currency Basket until September 30, 2016,’’ August 19, 2015.
137. Bloomberg Business, ‘‘China Wants to Internationalize its Currency, so It’s
Easing Capital Restrictions,’’ May 26, 2015.
138. Mirjam Meissner et al., ‘‘Like a Phoenix from the Ashes: Reforms Are to Bolster China’s State-Owned Enterprises,’’ Mercator Institute for China Studies, June
2015, 1.
139. Yu Song et al., ‘‘Harnessing Global Capital to Drive the Next Phase of China’s Growth,’’ Goldman Sachs, February 2015, 27.
140. Economist, ‘‘Not Just Tilting at Windmills,’’ October 6, 2012.
141. Angela Meng, ‘‘A Quarter of Chinese SOE Executives Investigated for Corruption Work in Energy Sector,’’ South China Morning Post, April 28, 2015.
142. Mirjam Meissner et al., ‘‘Like a Phoenix from the Ashes: Reforms Are to Bolster China’s State-Owned Enterprises,’’ Mercator Institute for China Studies, June
2015.
143. U.S.-China Economic and Security Review Commission, Chapter 1, Section
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186149. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Eswar S. Prasad, April 22, 2015, 3.
150. Donald C. Clarke, ‘‘Central Committee and State Council Issue Document on
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151. Lingling Wei, ‘‘China Unveils Overhaul of Bloated State Sector,’’ Wall Street
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152. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Nicholas Consonery, April 22, 2015, 6.
153. Open Source Center, ‘‘PRC: Combined Full Text of CPC Central Committee
Document on Deepening State-Owned Enterprise Reform,’’ September 13, 2015. ID:
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154. Open Source Center, ‘‘PRC: Combined Full Text of CPC Central Committee
Document on Deepening State-Owned Enterprise Reform,’’ September 13, 2015. ID:
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155. Knowledge (Wharton School of the University of Pennsylvania), ‘‘China’s
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156. Marshall W. Meyer and Changqi Wu, ‘‘Making Ownership Matter: Prospects
for China’s Mixed Ownership Economy,’’ Paulson Institute, September 2014, 6, 14;
Knowledge (Wharton School of the University of Pennsylvania), ‘‘China’s MixedOwnership Model: Can the State Let Go?’’ September 26, 2014.
157. Marshall W. Meyer, Emeritus Professor of Management, University of Pennsylvania Wharton School of Business, discussion with Commission staff, September
22, 2015.
158. Gabriel Wildau, ‘‘China’s Bocom Sets Template for Reform of State-Owned
Banks,’’ Financial Times, June 17, 2015.
159. Daniel Dusek and Peter X. Huang, ‘‘China M&A: Reform Plan Promotes
Mixed Ownership of State-Owned Enterprises,’’ Skadden, Arps, Slate, Meagher &Flom LLP, January 2015.
160. Knowledge (Wharton School of the University of Pennsylvania), ‘‘China’s
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161. Dong Zhang and Owen Freestone, ‘‘China’s Unfinished State-Owned Enterprise,’’ Economic Roundup, Issue 2 (Australian Government, The Treasury), 2013.
162. Mirjam Meissner et al., ‘‘Like a Phoenix from the Ashes: Reforms Are to Bolster China’s State-Owned Enterprises,’’ Mercator Institute for China Studies, June
2015, 7–10.
163. Christopher Harder, ‘‘China Considers Oil Megamergers—Energy Journal,’’Moneybeat (Wall Street Journal blog), February 18, 2015.
164. Shu Zhang and Matthew Miller, ‘‘Update 2-China Plans Mergers to Cut
Number of Big State Firms to 40—State Media,’’ Reuters, April 27, 2015; Mirjam
Meissner et al., ‘‘Like a Phoenix from the Ashes: Reforms Are to Bolster China’s
State-Owned Enterprises,’’ Mercator Institute for China Studies, June 2015, 7.
165. Lily Kuo, ‘‘China’s Newest Corporate Giant Is Selling Cheap High-Speed
Rail to the Rest of the World,’’ Quartz, June 8, 2015.
166. Paul Carsten and Dominique Patton, ‘‘UPDATE 1-China’s COFCO to Control
State Food Firm Huafu in Efficiency Drive,’’ Reuters, November 27, 2014; Global
AgInvesting, ‘‘China’s COFCO Plans IPO,’’ October 28, 2014; and Eric Ng, ‘‘China’s
State Nuclear Power Technology to Merge with China Power Investment Corporation,’’ South China Morning Post, February 4, 2015.
167. Keira Lu Huang, ‘‘There’s about to Be a Massive Shake-up at China’s StateOwned Enterprises,’’ South China Morning Post, August 16, 2015; Lingling Wei,‘‘China Unveils Overhaul of Bloated State Sector,’’ Wall Street Journal, September
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168. Keira Lu Huang, ‘‘There’s about to Be a Massive Shake-up at China’s StateOwned Enterprises,’’ South China Morning Post, August 16, 2015; Lingling Wei,‘‘China Unveils Overhaul of Bloated State Sector,’’ Wall Street Journal, September
13, 2015; and Economist, ‘‘A Whimper, Not a Bang,’’ September 19, 2015.

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187169. Loren Brandt and Eric Thun, ‘‘The Fight for the Middle: Upgrading, Competition, and Industrial Development in China,’’ World Development 38:11 (2010):
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170. Xiaolan Fu, China’s Path to Innovation, Cambridge University Press, 2015,
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171. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Oliver K. Melton, April 22, 2015, 10.
172. U.S.-China Economic and Security Review Commission, Monthly Analysis of
U.S.-China Trade Data, April 2, 2015, 7–10.
173. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Eswar S. Prasad, April 22, 2015, 13; U.S.-China Economic and Security Review Commission, Hearing on China Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, oral testimony of Eswar S. Prasad, April 22, 2015.
174. Eurasia Group, ‘‘Mapping China’s Regional Economies: Slowing Growth andAccelerating Reform,’’ March 12, 2015, 17.
175. American Chamber of Commerce in China, et al., ‘‘Letter to President
Barack Obama,’’ August 11, 2015.
176. State Council of the People’s Republic of China, Made in China 2025, May
8, 2015. Staff translation.
177. Xinhua (English edition), ‘‘China Creates Leading Group for Enhancing
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178. Victoria Ruan, ‘‘ ‘Made in China’: the Smart Revolution Blueprint Set toBring Beijing into the Digital Age,’’ South China Morning Post, June 1, 2015; PRC
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180. PRC Macro, ‘‘Planning for China’s Real Industrial Revolution,’’ May 24,
2015, 7.
181. U.S.-China Economic and Security Review Commission, Hearing on China
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182. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Oliver K. Melton, April 22, 2015, 12.
183. Nature, ‘‘China,’’ Nature Index on Innovation 519:7544 (March 26, 2015): 54–
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184. National Development and Reform Commission of the People’s Republic ofChina, Report on the Implementation of the 2014 Plan for National Economic andSocial Development and on the 2015 Draft Plan for National Economic and Social
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185. Battelle, ‘‘2014 Global R&D Funding Forecast,’’ December 2013, 4.
186. Organization for Economic Co-operation and Development, ‘‘Science, Technology, and Industry Outlook 2014,’’ November 12, 2014, 58.
187. Gao Yuan, ‘‘China to Subsidize High-Tech Clusters,’’ China Daily (English
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188. Nick Marro, ‘‘Foreign Company R&D: In China, for China,’’ China Business
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3, 2014; and KPMG, ‘‘Innovated in China: New Frontier for Global R&D,’’ August
2013.
189. Xiaolan Fu, China’s Path to Innovation, Cambridge University Press, 2015,
291–313.
190. Iacob Koch-Weser and Ethan Meick, ‘‘China’s Wind and Solar Sectors:
Trends in Deployment, Manufacturing, and Energy Policy,’’ U.S.-China Economic
and Security Review Commission, March 9, 2015.
191. McKinsey Global Institute, ‘‘The China Effect on Global Innovation,’’ July
2015, 19.
192. U.S.-China Economic and Security Review Commission, Hearing on China
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188193. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Oliver K. Melton, April 22, 2015, 12–13.
194. Gabriel Domı́nquez, ‘‘ ‘Made in China 2025’—The Next Stage of China’s Economic Rise?’’ Deutsche Welle, June 1, 2015.
195. McKinsey Global Institute, ‘‘The China Effect on Global Innovation,’’ July
2015, 23; Robert D. Atkinson, ‘‘ICT Innovation Policy in China: A Review,’’ Information Technology & Innovation Foundation, July 2014.
196. U.S.-China Business Council, ‘‘Update: China’s Innovation and Government
Procurement Policies,’’ May 2015; Ryan Ong, ‘‘Local Governments Backtracking on
Key US-China Innovation Commitment,’’ U.S.-China Business Council, May 7, 2015.
197. U.S.-China Economic and Security Review Commission, Chapter 1, Section
1, ‘‘Year in Review: Economics and Trade,’’ in 2014 Annual Report to Congress, November 2014, 40–44; for a short overview on overcapacity, see Ryan Rutkowski,‘‘Will China Finally Tackle Overcapacity?’’ China Economic Watch (Peterson Institute for International Economics blog), April 22, 2014.
198. Xinhua (English edition), ‘‘China Accelerates Overcapacity Reduction,’’ August 17, 2013.
199. David Dollar, ‘‘China’s Rise as a Regional and Global Power: The AIIB andthe ‘One Belt, One Road,’ ’’ Horizons Issue 4 (Summer 2015): 166.
200. Ryan Rutkowski, ‘‘Will China Finally Tackle Overcapacity?’’ China Economic
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201. Jamil Anderlini, ‘‘Chinese Industry: Ambitions in Excess,’’ Financial Times,
June 16, 2013.
202. Jamie Smyth and Lucy Hornby, ‘‘China Moves to Shore Up Miners with Tax
Cut,’’ Financial Times, April 9, 2015.
203. Jamie Smyth and Lucy Hornby, ‘‘China Moves to Shore Up Miners with Tax
Cut,’’ Financial Times, April 9, 2015; Manolo Serapio, Jr. and James Regan, ‘‘Update 2-China to Cut Iron Ore Tax in New Blow to Glut-Hit Prices,’’ Reuters, April
9, 2015; and Jock O’Callaghan and Amy Hogan, ‘‘Iron Ore Tax Cut Will Delay the
Exit of High-Cost Producers but Won’t Bring Fundamental Change’’ PricewaterhouseCoopers.
204. Maytaal Angel, ‘‘For Squeezed Global Steel Sector, No Quick Fix in Prospect,’’ Reuters, October 6, 2015.
205. American Iron and Steel Institute, ‘‘Request for Comments Concerning China’s WTO Compliance, Docket No. USTR–2014–0015,’’ September 17, 2014; Officeof the U.S. Trade Representative, U.S. Wins Trade Enforcement Challenge to China’s Duties on Steel, July 31, 2015; and Amy Kazmin and David Keohane, ‘‘India
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2015.
206. Li Keqiang, Report on the Work of the Government (Third Session of the 12th
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207. U.S.-China Economic and Security Review Commission, Chapter 1, Section
1, ‘‘Year in Review: Economics and Trade,’’ in 2014 Annual Report to Congress, November 2014, 42; Jamie Smyth and Lucy Hornby, ‘‘China Moves to Shore up Minders with Tax Cut,’’ Financial Times, April 9, 2015.
208. PricewaterhouseCoopers, ‘‘Cities of Opportunity,’’ November 2013, 9.
209. Li Qiaoyi, ‘‘High Hopes for ‘One Belt, One Road’ Initiative,’’ Global Times(China), March 10, 2015.
210. Ken Moriyasu, ‘‘Beijing Banks on a Glut-Busting ‘Silk Road,’ ’’ Nikkei Asian
Review (Japan), April 2, 2015.
211. Li Keqiang, Report on the Work of the Government (Third Session of the 12th
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212. People’s Bank of China and UN Environment Program, Establishing China’s
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213. Li Keqiang, Report on the Work of the Government (Third Session of the 12th
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214. Alex Lo, ‘‘Too Big to Fail: China Pledges to Set up Landmark Emissions
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215. Tao Tao and Kunlun Xin, ‘‘Public Health: A Sustainable Plan for China’s
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2015.

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189216. Xinhua (English edition), ‘‘China’s Climate Goals to Boost Opportunities in
Clean Energy,’’ July 22, 2015; for full text of its pledges, see National Development
and Reform Commission of the People’s Republic of China, Department of Climate
Change, ‘‘Enhanced Actions on Climate Change: China’s Intended Nationally Determined Contributions’’ (United Nations Framework Convention on Climate Change,
June 30, 2015).
217. Bo Zhang and Cong Cao, ‘‘Policy: Four Gaps in China’s New Environmental
Law,’’ Nature 517:7535 (January 21, 2015): 433–434; U.S.-China Economic and Security Review Commission, Hearing on China Ahead of the 13th Five-Year Plan:
Competitiveness and Market Reform, written testimony of Dali Yang, April 22, 2015,
6–7.
218. Zhang Chun, ‘‘China Issues Draft on Environmental Taxes to Combat Pollution,’’ ChinaDialogue, June 11, 2015; for analysis of the expected implementation ofthis environmental tax, see PricewaterhouseCoopers, ‘‘Will Enterprises Pay More for
Pollutant Discharge with the Environmental Protection Tax Law?’’ News Flash—
China Tax and Business Advisory Issue 36, August 2015.
219. Brian Spegele, ‘‘China War on Pollution Benefits from Economic Slowdown,’’
Wall Street Journal, July 20, 2015.
220. David Stanway, ‘‘China’s Steel City Feels Impact of Pollution Regulations,’’
Reuters, August 5, 2015.
221. Hannah Beech, ‘‘China Ties Officials’ Promotions to Saving the Environment,’’ Time, May 6, 2015.
222. Xinhua (English edition), ‘‘China Focus: New Rules on Officials’ Environmental Responsibility,’’ August 18, 2015.
223. Edward Wong, ‘‘Fines Total $26 Million for Polluters in China,’’ New YorkTimes, December 31, 2014.
224. Xinhua (English edition), ‘‘China to Pilot Reform on Public Interest Litigations,’’ May 21, 2015.
225. Scott Wilson, ‘‘Mixed Verdict on Chinese Environmental Public Interest Lawsuits,’’ Diplomat (Tokyo), July 20, 2015.
226. Elizabeth Economy, ‘‘Is China’s Environmental Tide Turning? 4 Things to
Watch,’’ Diplomat (Tokyo), May 23, 2015.
227. Roger Harrabin, ‘‘China ‘Deserves More Credit’ for Renewable Energy Effort,’’ BBC, June 15, 2015.
228. Will Hess, Co-CEO and Head of Research, PRC Macro, discussion with Commission staff, June 2, 2015; PRC Macro, ‘‘Planning for China’s Real Industrial Revolution,’’ May 24, 2015.
229. Bo Zhang and Cong Cao, ‘‘Policy: Four Gaps in China’s New Environmental
Law,’’ Nature 517:7535 (January 21, 2015): 433–434.
230. Dong Liansai, ‘‘Falling Fast: It Wasn’t Just Stock Prices That Dropped in
China Recently,’’ Greenpeace, July 22, 2015.
231. U.S. Department of State, U.S. Embassy in Beijing, Historical Data.
232. Reuters, ‘‘China Must Cut Pollution by Half before Environment Improves:
Official,’’ February 13, 2015.
233. Dan Levin, ‘‘Chinese Report Details Role of Political Connections in Tianjin
Blasts,’’ New York Times, August 19, 2015.
234. State Council of the People’s Republic of China, ‘‘Expert Warns of Groundwater Pollution in Tianjin,’’ August 20, 2015.
235. Dan Levin and Javier C. Hernandez, ‘‘New Concerns in Tianjin Blast after
Dead Fish Are Found,’’ New York Times, August 20, 2015.
236. Andrew Jacobs, Javier C. Hernandez, and Chris Buckley, ‘‘Behind Deadly
Tianjin Blast, Shortcuts and Lax Rules,’’ New York Times, August 30, 2015.
237. Andrew Jacobs, Javier C. Hernandez, and Chris Buckley, ‘‘Behind Deadly
Tianjin Blast, Shortcuts and Lax Rules,’’ New York Times, August 30, 2015.
238. Xinhua, ‘‘11 under Investigation and 12 Detained over Tianjin Explosions,’’
China Daily (English edition), August 27, 2015.
239. Dan Levin, ‘‘Chinese Report Details Role of Political Connections in Tianjin
Blasts,’’ New York Times, August 19, 2015.
240. Andrew Jacobs, Javier C. Hernandez, and Chris Buckley, ‘‘Behind Deadly
Tianjin Blast, Shortcuts and Lax Rules,’’ New York Times, August 30, 2015.
241. Xinhua (English edition), ‘‘Beijing Strengthens Checks, Reveals Location ofDangerous Chemicals,’’ August 20, 2015.
242. U.S. Department of Commerce, U.S. Commercial Service, ‘‘Doing Business in
China: 2014 Country Commercial Guide for U.S. Companies,’’ 2014, 43–44.
243. Julian Zhu et al., ‘‘China’s Environment: Big Issues, Accelerating Effort, andAmple Opportunities,’’ Goldman Sachs, July 13, 2015.
244. Julian Zhu et al., ‘‘China’s Environment: Big Issues, Accelerating Effort, andAmple Opportunities,’’ Goldman Sachs, July 13, 2015. 17, 43.

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190
245. Willem W. Verstraeten et al., ‘‘Rapid Increases in Tropospheric Ozone Production and Export from China,’’ Nature Geoscience, August 10, 2015; Carol Rasmussen, ‘‘Global Is the New Local: Pollution Changes Clouds, Climate Downstream,’’
U.S. National Air and Space Administration, Global Climate Change, January 26,
2015.
246. Scott D. Livingston, ‘‘Will China’s New Anti-Terrorism Law Mean the End
of Privacy?’’ ChinaFile, April 22, 2015; Edward Lucoco, ‘‘Facebook Says Chinese
Want Its Site as Regulator Says No,’’ Bloomberg Businessweek, September 11, 2014.
247. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Stephen S. Roach, April 22, 2015, 6; U.S.-China Economic and Security Review Commission, Hearing on China Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony accompanying charts of Stephen S.
Roach, April 22, 2015, Figure 7.
248. Matthew Plowright, ‘‘Furious Competition in China’s Fast-Growing Film Industry,’’ Financial Times, June 1, 2015; U.S.-China Economic and Security Review
Commission, Monthly Analysis of U.S.-China Trade Data, June 3, 2015, 8–10; andU.S. Department of Commerce, U.S. Commercial Service, Doing Business in China:
2014 Country Commercial Guide for U.S. Companies, 2014, 43–44.
249. McKinsey & Company, ‘‘China’s Digital Transformation: The Internet’s Impact on Productivity and Growth,’’ July 2014, 1, 15; PR Web, ‘‘Express Delivery
Market in China 2015 Analysis: Key Companies are UPS, FedEx, DHL, TNT,’’ July18, 2015; and Matthew Plowright, ‘‘Furious Competition in China’s Fast-Growing
Film Industry,’’ Financial Times, June 1, 2015.
250. Executive Office of the President of the United States, The Economic Benefits of U.S. Trade, May 2015, 33.
251. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, oral testimony of Stephen S. Roach, April 22, 2015.
252. U.S. Department of Commerce, Bureau of Economic Analysis data, September 17, 2015.
253. U.S. Department of Commerce, Bureau of Economic Analysis data, September 17, 2015.
254. Office of the U.S. Trade Representative, 2014 Report to Congress on China’s
WTO Compliance, December 2014, 14–16.
255. Reuters, ‘‘China Opening US$6 Trillion Bond Market to Boost Yuan Global
Footprint,’’ June 18, 2015; Mia Lamar and Chao Deng, ‘‘China Crackdown on Citadel Shines Light on Foreign Firms,’’ Wall Street Journal, August 6, 2015.
256. Gabriel Wildau, ‘‘China Opens Door for Visa and MasterCard to Challenge
Union Pay,’’ Financial Times, May 31, 2015.
257. Gabriel Wildau, ‘‘Visa and MasterCard Face Down China Techno-Nationalism,’’ Financial Times, June 14, 2015.
258. Inside U.S. Trade—World Trade Online, ‘‘U.S. Continues to Press China on
E-Pay as Beijing Issues New Draft Rules,’’ July 23, 2015; World Trade Organization
Secretariat, ‘‘Proposed Items for Consideration at the Dispute Settlement Body,’’World Trade Organization, July 10, 2015.
259. U.S.-China Economic and Security Review Commission, Hearing on China
Ahead of the 13th Five-Year Plan: Competitiveness and Market Reform, written testimony of Eswar S. Prasad, April 22, 2015, 13; U.S.-China Economic and Security Review Commission, Hearing on Foreign Investment Climate in China: Present Challenges and Potential for Reform, written testimony of Robert D. Atkinson, January
28, 2015.
260. Office of the U.S. Trade Representative, 2014 Report to Congress on China’s
WTO Compliance, December 2014, 10–11.
261. Gillian Wong, ‘‘China Halts Implementation of Banking-Technology Rules,’’Wall Street Journal, April 16, 2015.
262. Gillian Wong, ‘‘China Halts Implementation of Banking-Technology Rules,’’Wall Street Journal, April 16, 2015; Laurie Burkitt, ‘‘U.S. Firms Want China to Improve Business Conditions,’’ Wall Street Journal, April 20, 2015.
263. Gerry Shih, Michael Martina, and Matthew Miller, ‘‘China Summons Western Tech Firms, Revives Bank Cyber Rules,’’ Reuters, August 19, 2015.
264. Everett Rosenfield, ‘‘U.S.-China Trade War Leave Some Solar Firms Reeling,’’ CNBC, December 28, 2014.
265. Nathaniel Ahrens, ‘‘China’s Competitiveness: Myth, Reality, and Lessons for
the United States and Japan,’’ Center for Strategic and International Studies, February 2013; Yan Sun, ‘‘Picking Up Steam: The Expansion of Chinese Railways in
Africa,’’ Brookings Institution, September 26, 2014.

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266. Zhibo Qiu, ‘‘Political Centralization Drives Upcoming Industrial Consolidation,’’ Jamestown Foundation 15:7 (April 3, 2015).
267. Javier Blas, ‘‘State Commodity Traders Grow to Take on Glencore, Cargill,’’Bloomberg, June 1, 2015.
268. Gaurav Agnihotri, ‘‘A Closer Look at the World’s 5 Biggest Oil Companies,’’Oil Price, April 21, 2015; Lucy Hornby, ‘‘China Shuffle to Form World’s Top Aluminum Producer,’’ Financial Times, August 31, 2015.
269. Jamil Anderlini, ‘‘Chinese Industry: Ambitions in Excess,’’ Financial Times,
June 16, 2013.
270. Bloomberg, ‘‘China’s Aluminum Exports Peak,’’ April 13, 2015.
271. John W. Miller, ‘‘U.S. Steel to Idle Plant, Lay off 412 More Workers,’’ WallStreet Journal, March 12, 2015.
272. American Iron and Steel Institute, ‘‘Request for Comments Concerning China’s WTO Compliance, Docket No. USTR–2014–0015,’’ September 17, 2014; for additional information on the U.S. steel industry, see U.S. Department of Commerce,International Trade Administration, Steel Import Monitoring and Analysis System.

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SECTION 4: COMMERCIAL CYBER ESPIONAGE
AND BARRIERS TO DIGITAL TRADE IN CHINA
Introduction
China causes increasing harm to the U.S. economy and security
through two deliberate policies targeting the United States: coordinated, government-backed theft of information from a variety of
U.S.-based commercial enterprises and widespread restrictions oncontent, standards, and commercial opportunities for U.S. businesses. This section examines how hackers working for the Chinese
government—or with the government’s support and encouragement—have infiltrated the computer networks of U.S. agencies,
contractors, and companies, and stolen their trade secrets, including patented material, manufacturing processes, and other proprietary information. The Chinese government has provided that purloined information to Chinese companies, including state-owned enterprises (SOEs).
The Chinese government also imposes heavy-handed censorshipon Internet content and social media, which has driven from the
Chinese market those U.S. companies unwilling to follow the authoritarian dictates of the government.* The Chinese government
has also begun to censor material originating outside its borders bydirecting distributed denial of service (DDoS) attacks against U.S.based information providers. In addition, Beijing has implemented
discriminatory regulations and standards in China to limit thecommercial opportunities for U.S. companies seeking to conduct legitimate business there.
The United States is ill prepared to defend itself from cyber espionage when its adversary is determined, centrally coordinated, andtechnically sophisticated, as is the Chinese Communist Party(CCP) and government. The design of the Internet—developed in
the United States to facilitate open communication between academia and government, and eventually expanded to include commercial opportunities—leaves it particularly vulnerable to spies
and thieves. As the largest and most web-dependent economy in
the world, the United States is also the largest target for cyber espionage of commercial intellectual property (IP). ‘‘Well-resourced,
advanced cyber threats that use sophisticated tactics, techniques
and procedures are able to bypass [U.S.] conventional security deployments almost at-will,’’ according to Jen Weedon, manager of
threat intelligence at FireEye, Inc., a cybersecurity firm. ‘‘American

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* The France-based watchdog group Reporters Without Borders ranked China 175 out of 180
countries in its 2014 worldwide Index of Press Freedom. Among the U.S.-based companies excluded or heavily censored by China are Google, Facebook, Twitter, and Instagram. For moreon Chinese censorship, see Beina Xu, ‘‘Media Censorship in China,’’ Council on Foreign Relations, April 7, 2015.

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companies are being forced to fight a battle against adversaries
possessing nation-state capabilities, which is not a fair fight.’’ 1
These activities by China’s government were the subject of theCommission’s June 15 Hearing on Commercial Cyber Espionage
and Barriers to Digital Trade in China, held shortly after the Office of Personnel Management (OPM) revealed that its computer
network experienced an intrusion apparently originating in China.
This network breach resulted in the theft of personal information
on more than 22 million federal employees, retirees, contractors,
applicants for government jobs, and their contacts and families.*
Some of the stolen files included SF–86 application forms, whichcontain detailed personal information of federal workers and contractors applying for security clearances.2

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Cyber Espionage for Commercial and Strategic Advantage
The Cost and Extent of Chinese Cyber Espionage
The incidence of sophisticated cyber intrusions into U.S. government and private computer networks—particularly those involving‘‘zero-day attacks’’ † and the exfiltration of large amounts of commercial data and personally identifiable information ‡—is on the increase. Cyber espionage for the purpose of commercial gains ‘‘presents one of the most significant economic and national security
challenges facing the United States,’’ according to Paul Tiao, aformer Federal Bureau of Investigation (FBI) official who now is anattorney in private practice at Hunton & Williams in Washington,
DC, and who testified before the Commission.3 The economic costof cyber crime and espionage is estimated at $375 billion to $575
billion annually worldwide, or between 15 percent and 20 percentof the value created by the Internet, according to a 2014 study byIntel Corporation’s McAfee cybersecurity branch and the Center for
Strategic and International Studies.4 The study estimates thatcyber attacks against targets in the United States could result ina permanent reduction of as many as 200,000 U.S. jobs due to lost
business income and expenses to repair the damage. The cost of defending against such attacks is also increasing. The global market
for cybersecurity products and services is estimated to be $77 billion in 2015—about the size of all the Federal Government’s public
information technology (IT) spending budget—with spending growing twice as fast as general spending on IT.5
The cost of individual cyber intrusions, which includes detection,
repair, and remediation, has also been on the rise. A 2014 survey* For more information on China’s cyber espionage and related activities, see U.S.-China Economic and Security Review Commission, 2012 Annual Report to Congress, November 2012, and2013 Annual Report to Congress, November 2013.
† Zero-day attacks employ hacking techniques and malware tailored to a specific target rather
than generic products available online, which can be detected through the use of commerciallyavailable cybersecurity software.
‡ Personally identifiable information can include name, Social Security number, passport number, driver’s license number, taxpayer identification number, financial account or credit card
number, banking information, address, date of birth, place of birth, religion, race, weight, activities, employment and medical information, education, fingerprints, retinal scan, voice signature,
facial geometry, photographic image, and travel records. Erika McCallister, Tim Grance, andKaren Scarfone, Guide to Protecting the Confidentiality of Personally Identifiable Information:
Recommendations of the National Institute of Standards and Technology (Special Publication
800–122), National Institute of Standards and Technology, U.S. Department of Commerce, April
2010.

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of 59 large U.S. companies by the Ponemon Institute and HewlettPackard found the average annual cost of responding to commercial
cyber attacks was $12.7 million, up 96 percent from the previous
five years.6 During this period, the number of attacks against the
59 firms was up 176 percent, with an average of 138 successful attacks each week. The average time taken to detect an attack was
170 days, with an average of 45 days spent resolving the damage.
The costs included detection, data recovery, loss of information, andbusiness disruption.7
The cost of a network breach can impact a company in a variety
of ways, according to Mr. Tiao. They include:• Loss of IP to a potential competitor that may be able to use
it to develop and sell a competing product or to reduce researchand development costs;• Reduced incentives for technological innovation by targetedcompanies;• Loss of confidential business-sensitive information that may,for example, be used by a company to underbid the victim fora lucrative contract or to undermine the victim’s strategy inbusiness negotiations;• Opportunity costs in the form of service and employment disruptions, lost sales and revenues, and reduced trust and use of
online commercial activities;• Costs of securing networks, cyber insurance, and recovery fromcyber attacks;• Legal fees associated with breach-related litigation and government enforcement actions; and• Reduced stock prices and reputational harm suffered by victim
companies.8
Even companies that have not been victimized have substantial
costs to subtract from their bottom lines, according to Mr. Tiao:

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Prior to an incident taking place, large companies devote
extensive financial, staff, and consultant resources to keeping information security policies up to date, implementing
technical network security programs, developing and exercising breach response plans, participating in public-private and private-private cybersecurity information sharing
arrangements, negotiating the information security terms ofthird-party vendor agreements, ensuring that those vendors
maintain adequate information security, and purchasing
cyber security insurance, and training employees.9
Since at least 2009, China has directed ‘‘the single largest, mostintensive foreign intelligence gathering effort since the Cold War,’’according to cybersecurity firm Medius Research.10 The increased
success rate for intrusions against U.S. companies is often attributed to the presence of government-run or government-sponsored

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teams of hackers—with China the primary culprit. The U.S. government is equating the struggle in cyberspace to a war directedagainst the U.S. economy, U.S. aerospace and weapons contractors,
and the energy grid, among other public targets. Former Directorof National Intelligence Mike McConnell warned in 2015 that ‘‘theUnited States is fighting a cyber war and we are losing.’’ 11 At theCommission’s June 15 hearing, witness Dennis F. Poindexter, a 30year veteran of the U.S. Intelligence Community, noted that if, during the Cold War, ‘‘we had done nuclear deterrence the way we docyber deterrence [against China], we’d all be speaking Russiannow.’’ 12
Concern over the cyber theft of personally identifiable information and trade secrets has grown as massive intrusions into U.S.
corporate and government computer networks have come to light.
By most authoritative accounts, the largest benefactor of thattransfer is China, whose government has adopted a strategy of
exfiltrating large amounts of data from U.S. networks and sharingthat information with Chinese competitors. ‘‘Out of the dozens ofadvanced cyber threat groups that we track, by far the most prevalent and focused are those that are engaging in commercial cyberespionage,’’ testified Ms. Weedon during the Commission’s June 15
hearing. According to Ms. Weedon, Chinese government hacker
groups ‘‘continue to engage in widespread commercial data theft at
staggering rates.’’ 13
In 2012, then director of the National Security Agency (NSA)
General Keith Alexander said in a speech to a Colorado audiencethat cyber espionage represented ‘‘the biggest transfer of wealth inhistory.’’ 14 In testimony before the Senate Armed Services Committee, Director of National Intelligence General James R. Clapper
warned in February that, ‘‘[c]yber threats to U.S. national and economic security are increasing in frequency, scale, sophisticationand severity of impact; [and] the ranges of cyber threat actors,
methods of attack, targeted systems and victims are also expanding,’’ 15 On April 1, 2015, President Barack Obama noted that ‘‘theincreasing prevalence and severity of malicious cyber-enabled activities constitute an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.’’ 16
The President followed with a ‘‘declaration of a national emergency
to deal with this threat.’’ 17
Mr. Poindexter describes the U.S. relationship with China as an
escalating, multifaceted economic and ‘‘information war’’:
The Chinese use their intelligence services and military tocollect information from the competition and feed that backinto their companies. From a policy view, they steal information as a part of their national strategy to win an economic war. Their military owns some companies and what
they don’t own, the Central Committee controls. They winbids; they control their own commodity prices; they harassthe competition as they did with Walmart and Rio Tinto.
They steal intellectual property, which they then use tocompete with the companies they steal it from. They leverage their surplus for political benefit and manipulate theircurrency valuation.18

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Not all China-based groups are the same, though, as Ms. Weedon
noted:
They have different government sponsors, different targets,and varying degrees of state sponsorship or support. Somethreat actors and groups that we track appear to be contractors. Certain individuals may moonlight on the side
and operate for financial gain. In spite of these differences,though, the vast majority of China-based APT [Advanced
Persistent Threat] * groups that we track are engaged in
massive theft of IP from global corporations, particularly
those involved in what the Chinese government views as
areas of strategic importance.19
Ms. Weedon told the Commission that China’s strategic emerging
industries—high-tech sectors singled out by the Chinese government for development and special support in the 12th Five-Year
Plan—act as ‘‘an almost to-do list’’ for China-based hackers.20 During its work on behalf of Western and Japanese clients, FireEye
identified 22 ‘‘separate groups of actors stealing information’’ fromthe strategic emerging industries. Table 1 correlates the strategic
emerging industries with the number of known China-based hacking groups engaging in cyber theft of information in that industry,based on figures compiled by FireEye. (This list likely understates
the extent of Chinese cyber spying on behalf of strategic emerging
industries in China.)
Table 1: China’s Strategic Emerging Industries

Strategic Emerging Industry

Number of China-Based APT Groups
Targeting This Strategic Emerging
Industry

Clean Energy Technology

3

Next-Generation IT

19

Biotechnology

6High-End Equipment Manufacturing

22

Alternative Energy

7

New Materials

12

New Energy Vehicles

6

Source: U.S.-China Economic and Security Review Commission, Hearing on Commercial
Cyber Espionage and Barriers to Digital Trade in China, testimony of Jen Weedon, June 15,
2015.

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Other sectors targeted for infiltration by the Chinese government
include electronics, telecommunications, robotics, data services,
pharmaceuticals, mobile phone services, satellite communications
and imagery, and business application software.21* APT stands for Advanced Persistent Threat, a designation that indicates the hackers areusing sophisticated techniques over a long period to extract large amounts of information.
Mandiant, ‘‘APT1: Exposing One of China’s Cyber Espionage Units,’’ February 2013.

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dkrause on DSKHT7XVN1PROD with USCCThe U.S. government has recognized and documented the threat
posed by cyber espionage and has singled out China as the cause.
A 2009 study for the Commission by Northrup Grumman warned
that Chinese hacking of U.S. networks ‘‘now comprises the single
greatest threat to U.S. technology and has the potential to erode
the United States’ long-term position as a world leader in [scienceand technology], innovation, and competitiveness.’’ 22 A 2011 reportfrom the Office of the National Counterintelligence Executive acknowledged that ‘‘Chinese actors are the world’s most active andpersistent perpetrators of economic espionage.’’ 23 FBI Director
James B. Comey said that Chinese hackers are ‘‘at the top of thelist’’ of international cyber spies: ‘‘They are extremely aggressive
and widespread in their efforts to break into American systems tosteal information that would benefit their industry. There are twokinds of big companies in the United States; there are those who’vebeen hacked by the Chinese and those who don’t know they’ve been
hacked by the Chinese.’’ 24
Attributing Cyber Attacks to China
China routinely denies any official involvement in cyber espionage against U.S. government or U.S. corporate networks. Chinese
authorities maintain that such accusations are ‘‘baseless,’’ and ‘‘irresponsible, and unscientific,’’ and choose instead to accuse theUnited States itself of cyber espionage.25 China’s official news
agency, Xinhua, said that ‘‘while [the United States] has rarely
made [a] direct response to widespread concerns over appalling revelations of its cyber spying programs, some of its people, out of ulterior motives, habitually scapegoat and demonize China, repeatedly leveling groundless allegations and accusations against
China.’’ 26
Attributing individual computer network intrusions can require
intensive forensic investigation and is not always conclusive. Cyberattacks can be routed through servers in multiple countries in an
attempt to disguise their origin. ‘‘Cyber operations are extraterritorial,’’ said Mr. Poindexter, ‘‘You can conduct operations from
Russia that go through China and attack the United States. You
can do the reverse. . . . Anybody can attack from anywhere becauseof virtualization of our computer systems.’’ 27 And there is no international convention or agreement on what constitutes attribution.28
Consequently, says one expert, ‘‘many states currently prefer to respond to such attacks using only passive computer security measures, at least until there is more information available about theorigin and the intent of the attack.’’ 29
Nevertheless, according to Mr. Tiao, the U.S. government andprivate cybersecurity companies ‘‘are so much further along in ourability to establish attribution and to identify individuals and entities that are responsible for this sort of hacking activity than wewere five years ago or four years ago.’’ 30 Attribution can be accomplished when forensics experts find patterns in ‘‘tools, tactics andprocedures’’ and link ‘‘intrusion sets’’ to hacker groups and even to
individuals.31
U.S. companies that specialize in investigating cyber attacks andespionage trace many intrusions back to servers and hackers in
China. In 2013, U.S. Internet security firm Mandiant said its hun-

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dreds of investigations showed that groups hacking into U.S. newspapers, government agencies, and companies ‘‘are based primarily
in China and the Chinese government is aware of them.’’ 32
The U.S. government and cyber counterintelligence firms havegrown more comfortable revealing their attribution methodology.
For example, when the New York Times hired Mandiant to determine who hacked into its newsroom computer system to steal suchsensitive data as the identities of reporters’ confidential sources,
the firm released a detailed report along with the methodology it
used to trace the network intrusion back to the Chinese government.33 In February 2013, Mandiant released a report tracing amajor set of intrusions to a particular Chinese military intelligenceunit housed in a 12-story building in Shanghai. Mandiant also published details of more than 3,000 domain names, Internet protocol
addresses, encryption certificates, and malware programs of one
digital spy network run by the People’s Liberation Army (PLA),‘‘Unit 61398,’’ which Mandiant named ‘‘APT1.’’ The unit ‘‘has systemically stolen hundreds of terabytes of data from at least 141
companies spanning 20 major industries,’’ the Mandiant reportsaid.34 According to the firm, ‘‘Once APT1 has established access,they periodically revisit the victim’s network over several months
or years and steal broad categories of IP, including technology blueprints, proprietary manufacturing processes, test results, businessplans, pricing documents, partnership agreements, and emails andcontact lists from victim organizers’ leadership.’’ 35
Recent Cyber Intrusions Originating in China
The improved ability of the U.S. government and cybersecurity
firms to attribute cyber attacks paints a damning picture of China
as an active perpetrator of cyber espionage. Table 2 summarizes select recent attacks.

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Table 2:

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Recent Examples of Cyber Intrusions Originating in China

RecentCyber
Intrusions
from China

Date
Identified

PLA
Espionage

TargetSource ofAttackMay 2014

Six U.S. entities involved in nuclear power, metals, and solar
power.

Five PLA officers indicted in
May 2014

USPS
Espionage

November
2014

Personal data of 800,000 employees of the U.S. Postal Service, including Social Security numbers
and addresses.

China

AnthemHack

February
2015

Social Security numbers andhealth information of 80 million
Anthem users.

‘‘Deep Panda’’(according to
CrowdStrike’s
analysis)

The Great
CannonAttackApril 2015

Chinese cyber weapon executed
DDoS
attacks
againstU.S.
websites GitHub and GreatFire.

Chinese government (according
to Universityof Toronto’s
Citizen Lab)

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Table 2:

Recent Examples of Cyber Intrusions Originating in China—
Continued

RecentCyber
Intrusions
from China

Date
Identified

Mysterious
Eagle Attack

TargetSource ofAttackApril 2015

Journalists, dissidents, economic
data, and military organizations
that have a relation to China.

Chinese government (according
to FireEye report)

OPM Hack

April 2015

Millions of sensitive and classified
documents, as well as personallyidentifiable information of morethan 22 million Americans.

China is officially the ‘‘leading suspect’’Engineering
Universities
Hacks

May 2015

Penn State University’s engineering school, along with the school’s
500 research partners. Other U.S.
engineering schools hacked include Johns Hopkins University,
Carnegie Mellon University, theUniversity of California-Berkeley,
and the Massachusetts Institute ofTechnology.

Chinese hackers(according to
FireEye’s analysis)

United Airlines Hack

July 2015

Personal and flight information ofUnited Airlines passengers.

Same group as
the OPM hackdkrause on DSKHT7XVN1PROD with USCC

Source: News reports and official U.S. documents; compiled by Commission staff.

PLA Hackers
A federal grand jury in May 2014 indicted five Chinese PLA officers for hacking and economic espionage directed at six U.S. entities involved in nuclear power, metals, and solar power.36 According to the indictments, the five PLA officers belong to Unit 61398,
the same network identified by Mandiant in 2013.37 The May 2014indictment was unusual for several reasons: it was a rare indictment brought under the economic espionage statute of a foreignstate actor; it specifically identified individuals who are government employees, including their names, office addresses, and even
their photographs and nicknames; and it identified the victims anddescribed the attackers’ methodologies. All five Chinese PLA officers are charged with 31 counts of computer fraud, identify theft,
computer hacking, and trade secret theft. The espionage charge
carries a penalty of up to 15 years in prison. The victims include
Westinghouse Electric Company, U.S. subsidiaries of SolarWorld,
United States Steel Corp., Allegheny Technologies, Inc., Alcoa, Inc.,and the United Steelworkers Union.
At the time of the hack, Westinghouse was negotiating terms forconstruction of a nuclear power plant with a Chinese SOE. Allegheny was in a joint venture with a Chinese SOE while pursuinga trade complaint against the company, and Alcoa was also in apartnership with an SOE. The Financial Times reported in October
2015 that according to U.S. authorities three large Chinese SOEs—
steelmaker Baosteel, aluminum manufacturer Chinalco, and
SNPTC, a nuclear power company—gained an advantage over their
U.S. competitors as a result of the PLA’s cyber espionage.38

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The U.S. Department of Justice promised more attempts at prosecutions and noted that, ‘‘state actors engaged in cyber espionage
for economic advantage are not immune from the law just because
they hack under the shadow of their country’s flag.’’ 39 The indictments will have a limited effect on the accused since China likely
will not extradite the five for a trial in the United States.* However, by releasing details of the alleged crimes involving Chinese
government employees, the Administration sought to highlight therole of the Chinese government in a practice that Beijing has repeatedly refused to acknowledge. In retaliation for the indictment,
the Chinese government suspended bilateral talks with the UnitedStates on cyber spying. The diplomatic loss to the United States
was minimal since the Chinese negotiators were unlikely to makeconcessions on a practice they insisted did not exist.
Chinese Hackers Breach U.S. Postal Service Network
Chinese government hackers are suspected of an intrusion into
the U.S. Postal Service’s (USPS) personnel database.40 The breach
was detected in September 2014. The loss included the names, Social Security numbers, addresses, dates of birth, dates of employment, emergency contacts, and other information of all 800,000 of
the Postal Services’ employees, from letter carriers to the postmaster general. Data on customers who contacted the Postal Service Customer Care Service by phone or e-mail were also obtainedby the hackers. Randy Miskanic, the head of the USPS digital security testified before a House committee that the hack was ‘‘very sophisticated.’’ 41 The revelation coincided with the visit of President
Obama to Beijing for talks with CCP General Secretary and President Xi Jinping, which included a discussion about China’s cyber
spying. At the time, former NSA general counsel Steward A. Baker
noted that while most countries are cautious about getting caught
cyber spying, ‘‘It’s only the Chinese that think there are no consequences to getting caught.’’ 42 The hack is being investigated by
the FBI, but no details have been released and no charges havebeen filed.

dkrause on DSKHT7XVN1PROD with USCCThe Great Cannon
A months-long attack in early 2015 against two U.S.-based websites, GreatFire.org and GitHub †—which provide methods to allow
Chinese citizens to circumvent government-imposed, network-level
censorship—was attributed in May to the Chinese government by
the University of Toronto’s Citizen Lab.43 Nicknamed ‘‘the Great
Cannon,’’ the Chinese cyber weapon provides the government the* The Washington Post, quoting unnamed Administration officials, reported on October 9 that
the Chinese government had ‘‘quietly arrested a handful of hackers at the urging of the U.S.
government—an unprecedented step to defuse tensions with Washington at a time when the
Obama Administration has threatened economic sanctions.’’ Those arrested were not named nor
were their particular offenses revealed. According to the Washington Post, the action was taken
by Chinese authorities in advance of President Xi’s visit to Washington in response to an Administration list of hackers ‘‘identified by U.S. officials as having stolen commercial secrets from
U.S. firms to be sold or passed along to Chinese state-owned companies.’’ Ellen Nakashima andAdam Goldman, ‘‘In a First, Chinese Hackers are Arrested at the Behest of the U.S. Government,’’ Washington Post, October 9, 2015.
† GitHub is a U.S. website for developers that hosts content forbidden in China andGreatFire.org, is an organization that monitors Internet censorship in China.

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means to harness Internet traffic and redirect it to flood websites
it considers dangerous, even those overseas. If the attack is successful, the offending websites are overloaded and cease functioning due to the DDoS attack. Before fielding the Great Cannon,
the Chinese government simply attempted to filter out content
from foreign and domestic media, or tried to block the websites entirely. That technique did not always work, particularly if Chinese
citizens were using a virtual private network to access forbidden
websites. Instead of blocking traffic entering China, the Great Cannon can be used to sabotage a website hosting material forbidden
by Chinese censors, or to ‘‘aggressively go after sites outside China’s borders deemed objectionable by Beijing.’’ 44 The new Chinesecyber weapon was used to seize foreign web traffic headed to China’s most popular search engine, Baidu, and redirect it to flood
GitHub and GreatFire.org.45
Mysterious Eagle Preys on U.S. Businesses for a Decade
In mid-April 2015, the U.S. computer security firm FireEye identified a hacking group apparently backed by the Chinese government that has been stealing information for a decade about ‘‘journalists, dissidents, and political developments in relation to China,
targeting government and military organizations and targeting economic sectors of interest to China’s economy.’’ 46 The group has
been using malware that has been able to cross the ‘‘air gap’’ * andinfect standalone computer networks not connected to the Internet.
The malware’s name, translated from Chinese, is ‘‘Mysterious
Eagle.’’ 47 FireEye called this hacker group ‘‘APT30,’’ one of 20 suchgroups probably controlled by the Chinese government. ‘‘Such asustained, planned development effort coupled with the group’s regional targets and mission, leads us to believe that this activity isstate sponsored, most likely by the Chinese government,’’ theFireEye report said. APT30 also targeted at least 15 companies incommunications, news media, technology, finance, and aviation.48
The Chinese hackers gained access to these companies throughspear phishing attacks: e-mails that appear legitimate from senders known to the recipient, but which contain malware inserted by
the hackers. In the Mysterious Eagle case, network administrators
were tricked into downloading malware on their home computers;
when the network administrators transferred data from their homecomputers via thumb drives to the company network, they inadvertently introduced the malware from their home machines to the
network.49

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OPM Hack Affects More Than 22 Million Americans
On April 4, OPM revealed the first details of what turned out tobe one of the largest data breaches of any U.S. network—an attack
in which hackers gained access to the personally identifiable information of more than 22 million people, as well as millions of sensitive and classified documents.50 Though the U.S. government has* Air gap refers to a computer network with no connection to the Internet through which a
hacker might gain access. In some cases, access to the air-gapped network is gained throughthe use of thumb drives to infect a network through USB ports that may transfer the virus froman infected thumb drive to an air gapped computer.

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not officially attributed the attack to China, it is the ‘‘leading suspect,’’ according to national intelligence director Clapper, who characterized the intrusions of the OPM computer network as government-to-government espionage.51 Given the scope and difficulty ofdetecting the intrusion, said the former general, ‘‘you have to kindof salute the Chinese for what they did.’’ 52 Hackers will continue
to try to steal information from the government and from U.S. companies ‘‘until such time as we can create both the substance andthe psychology of deterrence,’’ he warned. Meanwhile, Director
General Clapper said, because of an unresolved internal debate
within the Administration on whether to retaliate, Washington
must focus ‘‘a lot more attention to defense.’’ 53 In addition, he continued, ‘‘That’s frankly been a struggle for us, because of unintended consequences and other related policy issues.’’
The information taken from the OPM computer network included
lengthy forms, dating back to 2000, completed by federal employees
and contractors as part of the process to obtain and maintain security clearances. The records include such personal identifiers as fingerprints, Social Security numbers, birthdates, and financial
records, as well as such sensitive information as admissions of past
drug abuse, arrests, and mental health treatment, foreign travel,interviews of colleagues and neighbors, and reports by security
clearance investigators, and the names of relatives and foreign contacts for millions of current and former federal employees. ‘‘The impact on national security is staggering,’’ said Dmitri Alperovitch,founder of CrowdStrike Inc., a cybersecurity company in Arlington,
Virginia.54 Said FBI Director Comey: ‘‘It is a very big deal from anational security perspective and from a counterintelligence perspective. . . . It’s a treasure trove of information about everybody
who has worked for, tried to work for, or works for the UnitedStates government.’’ 55 Among the ‘‘treasures’’ are 5.6 million fingerprints that could be used to identify undercover government
agents or to fashion duplicates to biometric data to obtain accessto classified areas.* 56
According to the New York Times, the inspector general at OPM
had warned in November 2014 that computer security at the agency was inadequate: OPM had not inventoried the computer servers
and devices with access to its networks, did not require anyone
gaining access to information from the outside to use the kind ofbasic authentication techniques most Americans use for online
banking, and did not regularly scan for vulnerabilities in the system.57 The inspector general found that 11 of the 47 computer systems that were supposed to be certified as safe for use were not‘‘operating with a valid authorization.’’ 58 Although OPM claims tohave employed the most up-to-date intrusion detection software
programs, including the Einstein 3 system and the Continuous
Diagnostics and Mitigation program, those systems apparently
failed. Even more important, none of OPM’s data were encrypted,
and the malware detection system did not detect the intrusions forfour months.59* The Washington Post reported that unnamed officials told the newspaper that the CIA‘‘pulled a number of officers from the U.S. Embassy in Beijing as a precautionary measure in
the wake’’ of the OPM breach. Ellen Nakashima and Adam Goldman, ‘‘CIA Pulled Officers from
Beijing after Breach of Federal Personnel Records,’’ Washington Post, September 29, 2015.

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Under current law, the Federal Information Security Modernization Act of 2014, federal agencies are responsible for their own security. No agency officially responsible for national cybersecurity,
such as the Department of Homeland Security, is actually responsible for enforcing any standards on any other Federal Government
agency.60 Thus, no one is responsible for enforcing standards acrossthe Federal Government.
Despite the numerous press accounts quoting named andunnamed Administration officials blaming China for the intrusion,
including Director of National Intelligence Clapper and former
NSA and Central Intelligence Agency Director Michael Hayden, theAdministration has not officially attributed the action to China.*
Chinese Hackers Breach Major Engineering Universities
Hackers apparently based in China gained access to and stole information from Penn State University’s engineering school for morethan two years, the school disclosed on May 16 after a report byfederal and private investigators.61 The data breach included information about the school’s 500 research partners, including government agencies, companies, and other schools. Penn State specializes in aerospace engineering, and has a significant research partnership with the U.S. Department of Defense.62 The Californiabased network security company FireEye said forensic analysis
showed that Chinese hackers were among at least one of two separate groups that stole data from the college, based on an examination of the malware and other tools used to breach the network.
Other U.S. engineering schools targeted by Chinese hackers are
Johns Hopkins University, Carnegie Mellon University, the University of California-Berkeley, and the Massachusetts Institute ofTechnology.63

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Chinese Hackers Breach United Airlines and Anthem for Customer
Data
The group responsible for the OPM intrusion also exfiltrated
data on passengers flying on United Airlines aircraft and on enrollees in California’s largest health care insurer, Anthem Blue Cross
Blue Shield, according to numerous news reports.64 United, theworld’s second-largest airline, is often used by U.S. government employees, who are required to fly on U.S. carriers whenever possible.
In the hack, United likely lost records that contained the names ofpassengers, their flights, destinations, passport numbers, and expiration dates, dates of birth, frequent flyer numbers, and home addresses. The data can be cross-referenced with other data takenfrom OPM to track the movement of federal workers, including
those in the 17 different intelligence agencies whose workers arealso required to fly on U.S.-flagged carriers. The Anthem breachexposed Social Security numbers and sensitive details about thehealth of 80 million customers, marking the attack as one of thebiggest thefts of medical-related customer data in U.S. history.65* Director Hayden said the OPM data was ‘‘a legitimate foreign intelligence target’’ and that‘‘this is not shame on China; this is shame on us for not protecting that kind of information.
. . . This is a tremendously big deal. And my deepest emotion is embarrassment.’’ Wall Street
Journal, ‘‘Michael Hayden Says U.S. Is Easy Prey for Hackers,’’ June 21, 2015.

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Cybersecurity firm CrowdStrike has attributed the Anthem breachto a Chinese hacker group nicknamed ‘‘Deep Panda,’’ and has been
following the group’s efforts, including a data theft from RSA, another cybersecurity firm.66
Remedies and Retaliation for Cyber Attacks from China
Executive Order to Impose Sanctions
On April 1, 2015, President Obama issued an executive order following the attacks on the U.S. affiliate of Sony, Inc. by North
Korea, China’s ally. The President declared a national emergency
due to the ‘‘increasing prevalence and severity of malicious cyberenabled activities’’ from abroad, constituting ‘‘an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.’’ 67 Under the order, a wide variety ofcyber activities could result in sanctions, including ‘‘malicious
cyber-enabled activity’’ that leads to theft of or harm tocritical infrastructure, misappropriating funds or economic
resources, trade secrets, personal identifiers or financial information for commercial or competitive advantage or private financial gain; knowingly receiving or using trade
secrets that were stolen by cyber enabled means for commercial or competitive advantage or private financial gain;
disrupting the availability of computer or network of computers (for example through a DDoS attack) and attempting, assisting, or providing a material support for any of
the above activities.68
The President’s executive order also followed Congress’ inaction
on an Administration-supported bill to establish standards for privately owned critical infrastructure, such as telecommunications,electricity, and financial services. Following objections from thebusiness community that even voluntary standards might become
mandatory, the bill was defeated. A 2013 executive order establishing the Cybersecurity Framework to encourage adoption of cybersecurity standards is entirely voluntary.69 Legislation on threatdata sharing is pending in Congress.
Following revelations of the breach on the OPM computer network in mid-April, the Administration did not announce any sanctions under the April 1 executive order. The wording of the executive order appears to support the argument that it covers commercial cyber espionage. The order specifies that it is intended to punish those responsible or ‘‘complicit’’ in ‘‘malicious cyber-enabled activities that are reasonably likely to result in, or have materiallycontributed to, a significant threat to the national security, foreign
policy, economic health or financial stability of the UnitedStates.’’ 70 It also lists the theft of ‘‘personal identifiers’’ as being
among the ‘‘malicious cyber-enabled activities’’ covered by the executive order. The standard of evidence for naming any malefactor is
low—‘‘a reasonable basis to believe or a reasonable cause to believe.’’ Taken together, this wording appears to include the theft ofpersonal identifiers in the OPM hack as a ‘‘malicious cyber-enabledactivity’’ covered by the executive order.71
The White House refrained from interpreting whether the executive order would cover commercial espionage but left little doubt

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that sanctions were being considered. Deputy National Security
Adviser Ben Rhodes told reporters September 22 in advance ofPresident Xi’s visit to Washington that, ‘‘While our preference is resolving this through dialogue, we’re not averse to punitive measures, including sanctions, if we feel like there are actors in China
and entities that are engaged in activities that are sanctionable.’’ 72
President Obama, in a speech to the Business Roundtable before
President Xi’s visit noted, ‘‘We are preparing a number of measuresthat will indicate to the Chinese that this is not just a matter ofus being mildly upset, but is something that will put significant
strains on the bilateral relationship if not resolved, and that we areprepared to [take] some countervailing actions in order to get theirattention.’’ 73
One hurdle to explicitly blaming China, however, may be the reluctance of the Administration to detail the sources and methods
used to identify the Chinese government as the originator or thesponsor of the hack. In a briefing describing the circumstances forinvoking the sanctions under the executive order, White House
Cyber Coordinator Michael Daniel noted that ‘‘we will consider
whether we have the evidence in a form that we are willing to disclose publicly.’’ 74
Weighing Defensive and Offensive Countermeasures
As the evidence has increased that nation states are involved incyber attacks and espionage, the principal response has remained
defensive: principally shoring up systems to detect network intrusions and malware. A more offensive strategy has slowly evolved,
however, even as its details remain largely classified. The U.S. Department of Defense in 2011 published a doctrine equating themost damaging cyber attacks—those directed against public infrastructure—with an act of war, and theoretically allowing equivalent retaliation.75 ‘‘When warranted, we will respond to hostile attacks in cyberspace as we would to any other threat to our country,’’ the Pentagon said in the report to Congress. ‘‘We reserve theright to use all necessary means—diplomatic, informational, military, and economic—to defend our nation, our allies, our partners
and our interests.’’ In 2012, then Defense Secretary Leon Panetta
made the doctrine more explicit, noting that a cyber attack on the
United States resulting in large-scale property destruction and lossof life—a ‘‘cyber Pearl Harbor’’—could be considered an act of war
and could justify proportionate cyber retaliation.76 Defense Secretary Ashton Carter updated the strategy in 2015 ‘‘to fit the ageof probe, thievery, and assault over computer networks.’’ 77 At thecore of the strategy is a hierarchy of cyber attacks: Fending off routine commercial attacks remains the responsibility of targeted companies. The Department of Homeland Security is responsible fordetecting more complex attacks and helping the private sector defend against them. The most damaging attacks would be handled
by the military’s Cyber Command, which is based at the NSA headquarters in Maryland. ‘‘As a matter of principle, the United States
will seek to exhaust all network defense and law enforcement options to mitigate any potential cyber risk to the U.S. homeland or
U.S. interests before conducting a cyberspace operation,’’ the strategy says.78

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206
At a speech at Stanford University unveiling the new doctrine,
Secretary Carter defined a major cyber attack as ‘‘something thatthreatens significant loss of life, destruction of property, or lasting
economic damage.’’ 79 The new doctrine also lays out the case forthe threat of cyber retaliation to deter attacks, much as the threatof nuclear deterrence kept the missiles from flying during the Cold
War:
Deterrence is partially a function of perception. It works byconvincing a potential adversary that it will suffer unacceptable costs if it conducts an attack on the United States,and by decreasing the likelihood that a potential adversary’s attack will succeed. The United States must be able
to declare or display effective response capabilities to deteran adversary from initiating an attack; develop effective defensive capabilities to deny a potential attack from succeeding; and strengthen the overall resilience of U.S. systems to withstand a potential attack if it penetrates theUnited States’ defenses.80
But as Secretary Carter acknowledged, such a policy is easier todeclare than to implement. The overall head of NSA’s Cyber Command, Admiral Michael S. Rogers, has often noted that the priceof conducting cyber attacks is still far too low for many countries
to resist computer network attacks.81 Secretary Carter and NSA
Director Rogers have said that the United States should develop aplan to signal hackers about the consequences of their actions.82
One recent proposal from the Council for Foreign Relations criticizes the Administration for tolerating ‘‘incessant cyber-attacks by
China on the U.S. government, critical infrastructure, and businesses.’’ 83 The paper says that ‘‘virtually nothing has been done tostop this cyber assault,’’ and that U.S. ‘‘passivity’’ must end, ‘‘especially since there is no way to reach a verifiable cyber-security
agreement with China.’’ 84 The authors believe current U.S. strategy to confront Chinese government commercial espionage lacks
the following: (1) the imposition of costs on China that are in excess of the benefits it receives from its violations in cyberspace; (2)increased U.S. offensive cyber capabilities to dissuade China’s leaders from using cyber attacks against the United States and its
partners in the region; (3) continued improvement in U.S. cyber defenses, including a law regulating information sharing between intelligence agencies and the corporate world; and (4) legislation,such as the Cyber Information Security Protection Act, allowing
businesses to rapidly share intelligence on cyber threats with eachother and the government without fear of lawsuits.85
In its June hearing, the Commission considered testimony on theidea of government-directed offensive operations against other nation states as a form of retaliation and deterrence. The Commission
also considered the possibility of U.S. corporations mounting retaliatory cyber strikes against Chinese companies or seeking damages
against companies that either mounted attacks or benefited frominformation stolen by government or private hackers.
Given that the Internet is a relatively new phenomenon and that
war is rooted in ancient history, it is not surprising that internationally recognized laws of war embodied in the Geneva Conven-

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tions and elsewhere have not kept up.86 The authors of an authoritative law review article note thatthe law of war provides a useful legal framework for only
the very small slice of cyber attacks that amount to anarmed attack or that take place in the context of an ongoingarmed conflict. . . . Other existing legal frameworks—both
domestic and international—offer equally fragmentary assistance in addressing cyber attacks through law. Examining existing law leads to a clear conclusion: A new, comprehensive legal framework is needed to address cyber attacks. That framework includes a more robust system of domestic enforcement but a truly effective solution to thisglobal challenge will require global cooperation.87
Mr. Poindexter cautioned that a counterattack could escalate beyond the theft of data to ‘‘real destructive mechanisms.’’ 88 Mr. Tiao
warned that the many U.S. economic ties with China would makecyber retaliation difficult: ‘‘In order to take action against a nation
state like China where we have a complex economic and security
relationship, it’s a little more complicated than taking sort of aquick strike action against, say, the North Koreans with which we
don’t have a similarly complicated relationship.’’ 89 Mr. Tiao, however, suggested an indictment of individual hackers could form thelegal basis for a trade retaliation case or economic sanctions. And,the creation of a Foreign Intelligence Cyber Court could also provide the legal basis for further action. However, noted Mr. Tiao,
U.S. companies cannot retaliate or ‘‘hack back’’ without violating
current U.S. law * prohibiting computer hacking.
When the Commission on the Theft of American Intellectual
Property (IP Commission) examined the issue in 2013, it noted thatcurrent U.S. law does not permit corporations that have been
hacked to use an an active defense. An ‘‘active network defense . . .
allows companies not only to stabilize a situation but to take further steps, including actively retrieving stolen information, altering
it within the intruder’s networks, or even destroying the information within an unauthorized network [and] . . . photographing thehacker using his own system’s camera, implanting malware in the
hacker’s network, or even physically disabling or destroying thehacker’s own computer or network.’’ 90 Among the reasons the IP
Commission cited for not allowing an active defense are the potential for collateral damage to the Internet and the possibility of
doing damage to an innocent third party. The IP Commission recommended further study of the issue while acknowledging that ‘‘entirely defensive measures are likely to continue to become increasingly expensive and decreasingly effective, while being unlikely tochange the cost benefit calculus of hackers away from attacking
corporate networks.’’ 91
Asked at the June Commission hearing to comment on one suggestion that U.S. intelligence agencies could aid U.S.-based companies whose IP or competitive bids had been stolen by a Chinesecompany, Mr. Poindexter responded: ‘‘We have a lot of restrictions
on what the Intelligence Community is allowed to supply a busi* 18 U.S.C. § 1030 criminal law, ‘‘Fraud and Related Activity in Connection with Computers.’’

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ness, and the Intelligence Community doesn’t want to supply that
because they know what the problems are going to be. . . . Who do
you support? Do you support BAE, a big British company? They arein the United States. They get hacked. What do we do then? Do
we do the same kind of work?’’
Mr. Tiao suggested that a Section 337 trade act case identifying
the stolen IP might be easier to pursue in court rather than an ordinary tort case that would require proof of monetary damages
from the theft of IP—far beyond what a U.S. cyber intelligenceagency might be able to provide.* Doing so, however, would likely
require a publicly traded U.S. company to file an 8–K report with
the U.S. Securities and Exchange Commission (SEC). (The report’s
purpose would be to notify shareholders of a situation that could
have a ‘‘material’’ effect on the earnings of a company and, therefore, its share price.) The SEC has not issued guidance specificallyon what circumstances would trigger the disclosure requirement in
the case of theft of IP through a computer network intrusion. U.S.
companies have strongly opposed any requirement that they disclose to the public or to the SEC the intrusions on their computer
network.92 According to the Office of the National Counterintelligence Executive, ‘‘no legal requirement to report a loss of sensitive information or a remote computer intrusion exists, and announcing a security breach of this kind could tarnish a company’s
reputation and endanger its relationships with investors, bankers,
suppliers, customers, and other stakeholders.’’ 93
In the absence of criminal prosecution, U.S. companies may beable to pursue a civil action against a hacker for the theft of IP.
In the case of a cyber attack or intrusion from abroad, the civil casemight require evidence obtained by a U.S. intelligence agency inorder to be successful.† While that has not become commonplace,
Mr. Tiao noted that since a 2013 executive order,‡ U.S. intelligenceagencies made it ‘‘a major priority for the government to push information that the intelligence community was collecting and thelaw enforcement agencies were collecting in a timely fashion out tocompanies that had been identified as victims.’’ 94

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Recent Attempts to Negotiate a Solution to Chinese Cyber
Espionage
The visit of President Xi to the United States in late September
provided an opportunity to raise directly Washington’s objections to
Chinese commercial cyber espionage, intrusions into U.S. government computer networks, and the imposition of regulations andstandards in China meant to disadvantage foreign-based providers* Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, allows the seizure by customs authorities of imports that contain stolen IP.
† One possible remedy is Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, which allows
the seizure by customs authorities of imports that contain stolen IP.
‡ Executive Office of the President, Executive Order 13636, ‘‘Improving Critical Infrastructure
Cybersecurity,’’ February 12, 2013. The National Institute for Standards and Technology wasordered to work with the private sector to develop guidelines on information sharing, privacy,
and the adoption of cybersecurity practices. Similar legislation was considered by Congress but
did not pass, due in part to opposition from the business community based on fears that voluntary guidelines would eventually become mandatory. The National Institute for Standards
and Technology subsequently released a framework agreement in February 2014. The program
remains entirely voluntary. Congress is considering new legislation, the Cybersecurity Information Sharing Act, which has been endorsed by the U.S. Chamber of Commerce.

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209
of Internet services. The actual negotiations preceded the official
state visit.
The Administration revealed in early September that it had conducted a series of talks in Washington with a Chinese delegation
headed by Meng Jianzhu, secretary of the CCP’s Central Politicaland Legal Affairs Commission. He met with a number of highranking officials, including National Security Adviser Susan Rice,FBI Director James Comey, Department of Homeland Security Secretary Jeh Johnson, and Secretary of State John Kerry.95 Mr.
Meng said that China ‘‘resolutely opposes cyber attacks and cyberespionage’’ and promised that ‘‘whoever carries out cyber attacks
and cyber espionage in China violates the national law and will beheld accountable by law.’’ 96
President Xi began his trip to the United States with a stop in
Seattle, where he met with executives of some of the top U.S. technology companies, such as Microsoft—the host of the event—Apple,
IBM, Facebook, Google, and Cisco Systems. President Xi repeatedstock denials that the Chinese government conducts or sponsors or
tolerates commercial cyber espionage or attacks on U.S. government agencies. ‘‘Both commercial cyber theft and hacking against
government networks are crimes that must be punished in accordance with the law or relevant international treaties,’’ President Xi
told the conference group.97 ‘‘The Chinese government will not in
whatever form engage in commercial theft,’’ he added.98 After
Presidents Xi and Obama met in Washington, DC, the WhiteHouse distributed a fact sheet stating that the two leaders had
agreed 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 theintent of providing competitive advantages to companies or commercial sectors.’’ 99 The two leaders also agreed to establish a‘‘high-level joint dialogue mechanism on fighting cybercrime and related issues’’ that will meet twice a year. A previous dialogue at alower level was suspended by the Chinese government to protest
the indictment in May 2014 of five PLA officers for cyber espionage.
The form of the announcement—a fact sheet released solely by
the White House—along with the lack of any signed document anda lack of precision on the meaning of ‘‘cyber theft,’’ ‘‘cyber attack,’’‘‘cyber espionage,’’ ‘‘economic espionage,’’ ‘‘economic cyber spying,’’and ‘‘cyber-enabled theft of intellectual property,’’ led some to question the level of commitment by both sides.100 As President Obamasaid at the joint press conference September 25: ‘‘What I’ve said to
President Xi and what I say to the American people is the question
now is, are words followed by actions? And we will be watchingcarefully to make an assessment as to whether progress has been
made in this area.’’ 101 The White House fact sheet explained, inpart:
Further, both sides agree to cooperate, in a manner consistent with their respective national laws and relevantinternational obligations, with requests to investigate
cybercrimes, collect electronic evidence, and mitigate malicious cyber activity emanating from their territory. Bothsides also agree to provide updates on the status and results of those investigation to the other side, as appropriate.

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dkrause on DSKHT7XVN1PROD with USCCThe United States and China agree 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 advantages to companies or commercial sectors.102
This agreement appears to create a much narrower definition of
cyber misbehavior than is encompassed by President Obama’s April
1 executive order. That executive order appears to cover the theftof personally identifiable information, such as the Office of Personnel Management theft of the personal details of 22.1 million federal employees, applicants, and contractors.
Regulatory Barriers to Digital Trade in China, and Costs to
U.S. Firms
Censorship
China’s authoritarian government maintains tight control overthe flow of information across and within its borders with a systemtermed the ‘‘Great Firewall.’’ 103 As part of this effort to control dissent by restricting speech, news, and social media, the Chinese government has implemented a policy of replacing foreign IT andInternet providers with Chinese companies. This not only affects
human rights in China and skews the thinking of Chinese citizens
about the United States and their own country, it also has a profound impact on a large segment of the U.S. economy. At the Commission’s June hearing, Mr. Poindexter said that China’s government is ‘‘not content to manage only their own content; they wantto manage ours. . . . China controls the distribution of ideas, modifies them to suit its own needs, removes them, or allows access tothem and monitors who has them.’’ 104
The U.S. economy has much at stake. The United States has themost advanced IT and software industry in the world and accounts
for 55 percent of global expenditures on research and development,
according to a study by the U.S. Department of Commerce.105 U.S.
firms in digitally intensive industries sold $935.2 billion in products and services online in 2012 (latest data available), including$222.9 billion in exports—about a quarter of the total sales, according to a 2014 study by the U.S. International Trade Commission.106
That makes the IT and software sector one of the most exportdependent industries in the United States. The U.S. International
Trade Commission estimates removing existing foreign barriers to
U.S. digital trade would increase the U.S. real gross domestic product (GDP) by an estimated $16.7 billion to $41.4 billion.107 Since
China is the second largest trading partner of the United States,
and its other major trading partners—Canada, Japan, and Europe—do not discriminate against U.S. digital products, China’s adverse policies are the single-largest drag on U.S. exports of digital
services.
The Chinese government heavily regulates, monitors, and controls online content, and requires all market participants in China
to comply with vague guidelines and regulations through self-censorship. In cases where foreign sites and services have refused tocomply with China’s censorship policies, Chinese authorities have

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blocked online access to them. Examples include the New YorkTimes, Bloomberg News, the Guardian, Facebook, Picasa, Twitter,
Tumblr, Google, Foursquare, Hulu, YouTube, Flickr, Dropbox, andLinkedIn.108 China’s censors can block any search result; in thepast, sensitive subjects (including Tibet, Tiananmen Square, thenames of dissidents, and the wealth of the families of China’s top
leaders) and coverage of news events (such as the capsized ferryboat in the Yangtze River near Shanghai and the slow government
response to the 2008 Sichuan earthquake) have been or remain
blocked. Three organizations that monitor freedom of expression—
the Open Network Initiative, Freedom House, and Reporters Without Borders—found China to be a ‘‘pervasive’’ censor.109
The Great Firewall directly limits the participation of U.S. information and communication technology (ICT) companies in China’s
market in a variety of ways:• Censoring the information available on foreign-based websites
or requiring Internet-based companies to self-censor to accessthe market;• Using the Great Firewall to slow down or degrade or redirect
some foreign web-based services rather than block them outright;• Blocking access to key words and web page advertising domains;• Requiring Internet search engines to remove results; anddkrause on DSKHT7XVN1PROD with USCC

• Issuing technology mandates that hobble user privacy and security.110
In his testimony at the Commission’s June hearing, Matthew
Schruers, vice president for law and policy at the Computer andCommunications Industry Association, noted that orders by Chinese authorities to filter and block information online are ‘‘unpublished and unappealable through state control or influence over thecommunications infrastructure.’’ 111 Mr. Schruers continued, ‘‘Some
have explained the elaborate Chinese censorship system as being
geared towards maximizing the economic benefits of the Internet
while maintaining strict social control; whatever the domestic aimof these mechanisms may be, they function, intentionally or not, as
unlawful barriers to international trade.’’ 112
Some cases of discrimination against U.S. firms have been moreblatant. Chinese authorities have redirected traffic sent to U.S.based search engines to Baidu—the China-based competitor to
Google, Yahoo, and Microsoft search engines—presumably, in part,
because Baidu does not respond to searches for banned terms suchas Tiananmen Square massacre, Tibet, Nobel Peace Prize winner
Liu Xiaobo, or the artist Ai Weiwei.113 Stepped-up censorship efforts in recent months include a crackdown on virtual private networks, which are often used by companies and individuals to accesssecure data and blocked websites. More than 80 percent of U.S.
companies surveyed by the American Chamber of Commerce in
China in 2015 reported being limited by the censorship of Internet

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content and websites when conducting business.* Other reported
censorship methods include blocking sites by Internet protocol addresses, and blocking and filtering uniform research locators(URLs) and search engine results.
These nontariff market barriers may violate China’s World Trade
Organization (WTO) commitments to treat foreign and domestic
businesses equally. While the WTO has not been asked to rule on
the issue, one theory holds that China in particular could be vulnerable to such a charge, based on its relatively sophisticated censorship capabilities. Although countries might successfully claim to
impose censorship on moral or religious grounds, ‘‘there is a goodchance that a panel might rule that permanent blocks [by China]
on search engines, photo-sharing applications, and other services
are inconsistent with the GATS [General Agreement on Trade inServices] † provisions, even given morals and security exceptions;less resourceful countries, without means of filtering more selectively, and with a censorship based on moral and religious rounds,
might be able to defend such bans in the WTO.’’ 114 GATS also stipulates that a system of judicial or administrative review be available to WTO members—a process that is not available in China.115
By contrast, Chinese Internet firms enjoy a fast-growing andwalled-off market on the Mainland while they have unrestrictedmarket access to the United States, including the ability to access
U.S. capital markets to fund expansion at home and abroad.116 To
date, the United States has not brought any WTO cases against
China on its nontariff barriers against foreign information andcommunication technology companies.

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Regulations and Standards as a Barrier to Trade
The Chinese government is in the process of passing and implementing comprehensive new laws and regulations that affect theuse of information and software technology and the Internet andhave the potential to limit or exclude U.S. technology companies
from key tech-intensive sectors of the Chinese market. Existing
regulations combined with new and stricter proposals would impose
localization requirements, market access limits, data privacy andprotection requirements, IP rights infringement, and uncertain
legal liability rules. Among the digitally intensive industries affected are: newspapers, periodicals, books, directories and mailinglists, motion pictures, sound recordings, video and music production and distribution, broadcasting, news syndicates, banking andinsurance, credit card transactions, online retail trade, and wholesale trade in business-to-business transactions.117 As part of the effort, the Chinese government asked U.S. technology companies overthe summer to sign a pledge that they would, among other commitments, store Chinese user data within the country and provide thegovernment access to its networks and, according to some interpretations, encryption keys and source code.118
According to testimony from Samm Sacks, a technology analyst
at the Eurasia Group in Washington, U.S. technology companies* The figure in 2013 was 55 percent. American Chamber of Commerce in China, ‘‘China Business Climate Survey Report,’’ May 2015, 30.
† GATS is an international trade agreement within the WTO.

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may be required by China’s central government to ‘‘undergo
invasive audits, turn over source code, and provide encryption keys
for surveillance.’’ 119 The key legislation and policy directives thathave been proposed or are under consideration include:• A purge of foreign firms from government-sanctioned procurement lists;• Restrictions on foreign equipment in the banking sector requiring suppliers to meet ‘‘secure and controllable’’ standards;• A draft counterterrorism law compelling telecom and Internetcompanies to provide encryption keys to enable government
surveillance on stored data on local Chinese servers;• A new national security law that will expand Beijing’s regulatory powers under a broad and far-reaching definition of national security and calls for sovereignty in cyberspace;• Creation of a cyberspace review body to evaluate security for
all Internet and IT products;• A new cybersecurity law or framework; and• A 13th Five-Year Plan for software and ‘‘big data’’ focused on
boosting data security for SOEs, financial institutions, and government agencies.120

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National Security Law
The central government’s Standing Committee approved a new
National Security Law on July 1 that expands the nation’s authoritative rule over a far greater list of ‘‘core interests,’’ including control over the press, social media, and the entire Internet in China,
which must be made ‘‘secure and controllable.’’ 121 Zheng Shuna, aNational People’s Congress official, explained at the unveiling of
the new National Security Law in Beijing that ‘‘Internet spacewithin the territories of the People’s Republic of China is subject
to the country’s sovereignty.’’ 122 He added that ‘‘the country must
defend its sovereignty, security, and development interests. It mustalso maintain political and social stability. . . . Any government will
stand firm and will not leave any room for disputes, compromises,
and interference when it comes to protecting core interests. China
is no exception.’’ 123 (For more information, see Chapter 1, Section2, ‘‘Foreign Investment Climate in China.’’)Cybersecurity Law
A week after the new national security law received approval,
China’s central government proposed a cybersecurity law thatwould likely put the Cyberspace Administration of China and theMinistry of Industry and Information Technology in charge of ‘‘comprehensively planning and coordinating network security efforts
and related supervision and management efforts.’’ 124 The law is intended to ‘‘ensure network security, to preserve cyberspace sovereignty, national security and societal public interest, to protect
the lawful rights and interests of citizens, legal persons and otherorganizations, and to promote the healthy development of economic
and social information,’’ according to the draft.125 Among the 67 ar-

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ticles in the draft are several declaring that network providers are
responsible for the material on their websites, which must not contain ‘‘state secrets’’—a term with a constantly shifting meaningthat can include information the government has already madepublic. Network providers must also ensure that those using theirservice are identifiable to the government. ‘‘Critical information infrastructure operators’’ are required to exclusively store data on
servers within China.126 Foreign companies seeking to obtain
Internet service provider licenses in China must partner with a domestic company that holds a license.127
Foreign Investment Control
China’s insistence on applying the principle of sovereignty to theInternet, which respects no borders, ‘‘suggests that the Chinese
government is pursuing a policy strategy that could eventually overthe long term lead to fragmentation of the U.S.-led global Internet,’’ Ms. Sacks told the Commission.128 The concept also is likely
to provide the legal basis for an expanded protocol for national security reviews of inbound foreign investment, which is also in thedraft of a new foreign investment law. The policy, warned Ms.
Sacks, could justify restricting inbound foreign investment on thebasis of ‘‘strategic, economic, social, ideological, and technical readings of national security.’’ 129 (For more information, see Chapter 1,
Section 2, ‘‘Foreign Investment Climate in China.’’)dkrause on DSKHT7XVN1PROD with USCC

Banking Regulations
The China Banking Regulatory Commission also decreed lastSeptember that financial institutions in China must increasinglyuse ‘‘secure and controllable’’ ICT products and services in order to‘‘meet banking information security requirements.’’ 130 The goal, according to the China Banking Regulatory Commission, is for 75
percent of ICT products in Chinese banking institutions to be considered ‘‘secure and controllable’’ by 2019. Less than 15 percent ofbanks operating in China meet the criteria.131 The new rules accompany China’s efforts to reduce its reliance on U.S. technology,
a plan that ‘‘picked up steam after former U.S. National Security
Agency contractor Edward Snowden alleged in 2013 that the U.S.
government used some of the country’s technology firms to spy on
foreign governments,’’ according to some news accounts.132
While ‘‘secure and controllable’’ is not defined in the national security, cybersecurity, or banking laws, business groups have interpreted it as an excuse to favor Chinese software, hardware, andservices over foreign competing products.133 A January 28 letter
signed by 18 U.S. business groups addressed to the CCP Central
Leading Group for Cyberspace Affairs warned that under the banking regulation, ICT products and services would be required to ‘‘undergo intrusive security testing, contain indigenous Chinese intellectual property (IP), implement local encryption algorithms, comply with country-specific (Chinese) security standards, disclose
source code and other sensitive and proprietary information to theChinese government, and engineer their products so as to restrict
the flow of cross-border data.’’ 134 In the letter, the U.S. businessgroups suggested these policies would effectively exclude sales of

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U.S. hardware, software, and services to Chinese banks, and would
violate China’s WTO commitments to refrain from technical barriers to trade and to not discriminate against imports.135 In addition, disclosing source code could provide government hackers access to private computer networks.
Subsequent letters signed by U.S. ICT business associations andRepublican House leaders urged the Chinese leadership to postpone implementation pending further dialogue. In response tounnamed ‘‘financial institutions and related parties,’’ the China
Banking Regulator Commission instructed Chinese banks on April
13 to temporarily ‘‘suspend implementation’’ of the rules, which are
expected to be revised and reissued after integrating suggestions
from relevant domestic parties.136 However, Ms. Sacks told theCommission at its June hearing that the banking law ‘‘remains inplay’’ and is unlikely to be altered in any substantial way.137 Indeed, in August, the China Banking Regulatory Commission summoned to a meeting several Western technology companies, including IBM, Microsoft, and Cisco Systems Inc., and told them thebanking regulations were being revived, jeopardizing hundreds ofmillions of dollars in revenue for foreign tech companies selling awide range of products from servers to cloud computing software.138 In addition to revelations of NSA cyberspying, Chinese officials cited as justification for the impending restrictions on foreign technology the opposition in Congress to purchases by U.S.
telecommunications companies of equipment manufactured by the
Chinese IT companies Huawei and ZTE.139

dkrause on DSKHT7XVN1PROD with USCCCounterterrorism Law
China’s draft counterterrorism law presents another obstacle forforeign ICT firms. Expected to go into effect in the coming months,
the law would require ICT firms to submit encryption keys to theChinese government and to install security back doors to allow access to government officials. The initial draft of the law requires
companies to keep servers and user data within China (localization), provide communications records to law enforcement authorities, and censor terrorism-related Internet content.140
According to President Obama, the counterterrorism provisions‘‘would essentially force all foreign companies, including U.S. companies, to turn over to the Chinese government mechanisms where
they can snoop and keep track of all the users of those services. . . .
[T]hey are going to have to change [the ICT policy] if they are to
do business with the United States.’’ 141
In response to this criticism, National People’s Congress spokeswoman Fu Ying said the ICT proposals in China’s draft counterterrorism law were ‘‘in accordance with the principles of China’s administrative law as well as international common practices, andwon’t affect Internet firms’ reasonable interests.’’ 142 She pointed to
Edward Snowden’s allegations that operatives of the NSA and its
British equivalent, the Government Communications Headquarters, hacked into the internal computer network of the Dutch
multinational firm Gemalto, the largest manufacturer of subscriber
identity module (SIM) cards in the world, stealing encryption keys
that can be used to monitor mobile communications.143

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Less obvious but of equal importance to the new regulations is
the reorganization of China’s Internet regulatory authority, Ms.
Sacks told the Commission at the June hearing. President Xi
Jinping has assumed the top post at the Central Leading Small
Group for Network Security and Informationization. The agency
was created in February 2014 to consolidate the leadership’s role,
which had been fragmented. Of the 22 members of the group, according to Ms. Sacks, half hold the most senior rank among Party,
military, and government officials. In the top-down Chinese government where the Party occupies the pinnacle, this agency is expected to be the last word on policy and implementation.144
Import Substitution Policies
To boost its homegrown technology sector and address its cybersecurity concerns, China is shifting from foreign to domestic technology suppliers in sensitive segments of the economy by 2020, including banking, military, SOEs, and key government agencies.145
House Republican leaders say that if these new ICT policies are
fully implemented, they will ‘‘negatively impact other sectors, suchas banking, manufacturing, and health care, and harm the U.S.
economy and jobs due to falling sales, outright theft of business secrets, and companies simply leaving the market.’’ 146
The Chinese government has started to implement these policies.
The number of foreign technology brands on China’s list of ICT
products approved for government purchase fell by one-third, whilemore than half of foreign suppliers of security-related products
were dropped from the approval list.147 For example, the numberof government-approved products made by U.S. network equipment
maker Cisco Systems Inc. fell from 60 in 2012 to zero in 2014.148
In some cases, U.S. companies that lose business operating licenses
or government procurement approval will be forced to partner witha Chinese firm to preserve at least some business for their Chinese
affiliate company.

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Internet Plus
Ms. Sacks also noted two related policies implemented by President Xi—the Made in China 2025 initiative and the Internet Plus
plan—as the main channels to promote local high-value-added
technology sectors as the economy slows.149 (See Chapter 1, Section
3, ‘‘China’s State-Led Market Reform and Competitiveness Agenda,’’ for discussion of the Made in China 2025 plan.) The Internet
Plus plan seeks to capitalize on China’s huge online consumer market by building up the country’s domestic mobile Internet, cloudcomputing, big data, and the ‘‘Internet of Things,’’ * and to create
global competitors by assisting domestic firms’ expansion
abroad.150 China’s Internet Network Information Center reported
there were 649 million Internet users and 557 million mobile device users in China as of December 2014, far outstripping the second-largest Internet user country, the United States.151 McKinsey& Company, a global management and consulting firm, estimated* The Internet of Things is the interconnectivity between physical objects such as asmartphone or electronic appliance via the Internet that allows these objects to share data. For
more information, see Harald Bauer, Mark Patel, and Jan Veira, ‘‘The Internet of Things: Sizing
Up the Opportunity,’’ McKinsey & Company, December 2014.

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that starting in 2013, e-commerce would contribute up to 22 percent of China’s productivity growth by 2025 and fuel between 7 and22 percent of the total GDP through 2025.152 Furthermore,
McKinsey estimated e-commerce could create 46 million new jobs
between 2013 and 2025.153
U.S. technology firms seeking to enter the fast-growing Chinese
market face increasing costs of doing business due to censorshiprelated restrictions, onerous regulations, and preferential support
for domestic firms.154 Because Google, Facebook, Twitter, andYouTube remain blocked in China due to their refusal to censor
content, domestic copycats such as Baidu, RenRen, Weibo, andYouku have filled the gap.155 (See Chapter 1, Section 2, ‘‘Foreign
Investment Climate in China,’’ for further discussion of China’s investment climate for foreign firms.)

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Implications for the United States
China’s increasing use of cyber espionage directed against commercial targets in the United States and abroad has already cost
U.S. companies tens of billions of dollars in lost sales and the expenses of repairing and remediating the damage. The largest andmost sophisticated cyber attacks have been traced to governmentsponsored or government-run teams of hackers in China. In manycases, the trade secrets and confidential information about bidding
and business strategy have been turned over to Chinese government-owned competitors. This has led to the creation of global competitors to U.S. companies and industries, where none would otherwise exist. Some of those IP thefts have done harm to the national
security and the economy of the United States, particularly because
they have targeted large U.S. defense contractors such as Northrup
Grumman and Lockheed Martin.
The United States has relied on a passive defense, and the U.S.
government has failed to create an overall strategy to counter theincreasingly sophisticated cyber attacks on some of our most valuable technology companies. Legislation to encourage U.S. companies to share information about cyber intrusions among each otherand to voluntarily report theft of their information to the government has not been enacted into law. U.S. law has not kept up withthe challenges posed by cyber attacks from government-sponsoredhackers, nor does international law adequately address the issue.
Although some policy discussions on offensive operations to countercyber attacks have taken place, nothing has been decided. As a result of this inertia, the United States remains unable to thwart
state-sponsored or state-supported cyber attacks.
The United States has the most advanced and globally integrated
digital economy in the world.156 Exports from its digitally intensive
industries make up nearly a quarter of total industry sales.157 Of
the world’s 35 digital ‘‘category kings,’’ the United States claims
half, including such names as Google, Facebook, Twitter, LinkedIn,
YouTube, and Instagram. There are currently 83 U.S. based, venture-backed companies founded since 2000 that have reached a $1
billion valuation.158 But that success is jeopardized by a concerted
Chinese government effort to wall off the fastest-growing market in
the world for digital commerce.

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China is employing a combination of censorship, regulations, andsupport for homegrown companies over international competitors.
Longstanding censorship has already forced major U.S. companies
to limit their business dealings in China or to exit the country.
Meanwhile, the Chinese government has been removing foreign
software and hardware companies from its official procurement
lists in an effort to shift buying to domestic information and communications technology companies. The result will be the continuing loss of market access for U.S. firms, declining revenue, anda reduction in jobs in the United States.
Conclusions• China’s government conducts and sponsors a massive cyber espionage operation aimed at stealing personally identifiable information and trade secrets from U.S. corporations and the U.S.
government. Some of the stolen information is provided to Chinese state-owned businesses that compete with U.S. firms in
China and abroad. Other recipients of U.S. trade secrets include
sectors of the Chinese economy that the central government designated as Strategic Emerging Industries, which China intends
to nurture into global competitors.
• The cost to the U.S. economy and to U.S. companies of government-sponsored cyber theft has been on the rise as network intrusions have become more sophisticated and harder to detect.
The financial damage results from the loss of trade secrets suchas copyrights and patents, manufacturing processes, foregone
royalties, the costs of cyber defense, the loss of business and jobs,
and the expense of remediating and repairing the damage tocomputer networks.
• U.S. cybersecurity companies and the Federal Government havebecome more adept at attributing computer network attacks to
specific countries and to groups of hackers within those countries. Their willingness to release details on the culprits has also
increased. U.S. companies have also become more willing to reveal details of the attacks on their computer networks.
• The U.S. reaction to the increasing number and sophistication offoreign cyber espionage and malicious network attacks has beenmostly defensive. U.S. law does not allow retaliatory cyber attacks by private citizens and corporations, nor does it appear toallow counterintrusions (or ‘‘hack backs’’) for the purpose of recovering, erasing, or altering stolen data in offending computer
networks. International law has not kept up with developments
in cyber warfare, and no international consensus exists on how
to attribute or appropriately respond to cyber attacks. However,a policy discussion on the issue of offensive and retaliatory cyber
operations has begun.
• The Chinese government appears to believe that it has more togain than to lose from its cyber espionage and attack campaign.
So far, it has acquired valuable technology, trade secrets, and intelligence. The costs imposed have been minimal compared to theperceived benefit. The campaign is likely to continue and may
well escalate as the Chinese Communist Party leadership con-

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tinues to seek further advantage while testing the limits of any
deterrent response.
• The Chinese government maintains strict censorship controls
over the flow of information across and within its borders, andholds Internet providers, websites, search engines, and online
news media responsible for censoring their content on the basisof vague guidelines and arbitrary rulings. The Chinese government’s obsession with limiting citizen access to information
harms U.S. companies attempting to compete in China. SomeU.S. companies have faced retaliation, including the filtering or
outright blocking of their websites, and all foreign companies
risk loss of business licenses for violating the Chinese government’s unpredictable sensitivities.
• The Chinese government is in the process of passing comprehensive new laws and regulations on cybersecurity that would affecttrade in digital goods and services in a wide range of industries,
including the news media, banking, credit card transactions, online retail trade, entertainment media, and telecommunications.
Some of the new rules would have the effect of excluding U.S.
companies from participating in the world’s fastest-growing digital market by requiring, for example, that servers containing information about Chinese citizens and companies be located exclusively in China, and that companies doing business in China provide encryption keys to allow government entry into their databases.

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 4
1. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Jen
Weedon, June 15, 2015.
2. Damian Paletta, ‘‘Breached Network’s Security Is Criticized,’’ Wall Street
Journal, June 24, 2015, 1.
3. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Paul
Tiao, June 15, 2015.
4. McAfee and the Center for Strategic and International Studies, ‘‘Net Losses:
Estimating the Global Cost of Cybercrime,’’ June 9, 2014; International Trade Administration, Jobs Supported by Exports: An Update, March 12, 2012.
5. Bill Whyman and Matthew L. Williams, ‘‘The Cybersecurity Imperative: ‘Defend & Spend’ in a New Landscape,’’ Evercore ISI Research, May 19, 2015, 1.
6. Agency France-Press, ‘‘Cost of Cyber Attacks Jumps for U.S. Firms: Study,’’
October 16, 2014.
7. Agency France-Press, ‘‘Cost of Cyber Attacks Jumps for U.S. Firms: Study,’’
October 16, 2014.
8. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Paul
Tiao, June 15, 2015.
9. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Paul
Tiao, June 15, 2015.
10. Michael Stevens, ‘‘China’s Cyber Threat Growing,’’ Security Week, July 8,
2010.
11. Mark Slavit, ‘‘McConnell Said U.S. Losing Cyber War,’’ KRCGTV.com, March
12, 2015.
12. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Dennis
F. Poindexter, June 15, 2015.
13. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Jen
Weedon, June 15, 2015.
14. Ken Dilanian, ‘‘General Warns of Dramatic Increase of Cyber-Attacks on
U.S. Firms,’’ World Now (Los Angeles Times blog), July 27, 2012.
15. Evercore ISI, ‘‘The Cybersecurity Imperative: ‘Defend & Spend in a New
Landscape,’’’ May 19, 2015.
16. The White House, Office of the Press Secretary, Executive Order—Blocking
the Property of Certain Persons Engaging in Significant Malicious Cyber-Enabled
Activities, April 1, 2015.
17. The White House, Office of the Press Secretary, Executive Order—Blocking
the Property of Certain Persons Engaging in Significant Malicious Cyber-Enabled
Activities, April 1, 2015.
18. Dennis F. Poindexter, The Chinese Information War: Espionage, Cyberwar,
Communications Control, and Related Threats to United States Interests, McFarland& Company, Inc., 2013, 7.
19. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Jen
Weedon, June 15, 2015.
20. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Jen
Weedon, June 15, 2015
21. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Jen
Weedon, June 15, 2015.
22. Northrup Grumman Corporation, ‘‘Capability of the People’s Republic ofChina to Conduct Cyber Warfare and Computer Network Exploitation,’’ October 9,
2009.
23. Office of the National Counterintelligence Executive, Foreign Spies Stealing
U.S. Economic Secrets in Cyberspace: Report to Congress on Foreign Economic Collection and Industrial Espionage, 2009–2011, October 2011.
24. CBS News, ‘‘FBI Director on Threat of ISIS, Cybercrime’’ (Interview withFBI Director James Comey), October 5, 2014.
25. Ellen Nakashima, ‘‘China Compiling Americans’ Data,’’ Washington Post,
June 6, 2015.

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26. Zhu Junqing, ‘‘Commentary: U.S. Wronging of China for Cyber Breaches
Harms Mutual Trust,’’ Xinhua (English edition), June 6, 2015.
27. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Dennis
F. Poindexter, June 15, 2015.
28. Dimitar Kostadinov, ‘‘The Attribution Problem in Cyber Attacks,’’ Infosec Institute, February 1, 2013.
29. Dimitar Kostadinov, ‘‘The Attribution Problem in Cyber Attacks,’’ Infosec Institute, February 1, 2013.
30. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Paul
Tiao, June 15, 2015.
31. Mandiant, ‘‘APT1: Exposing One of China’s Cyber Espionage Units,’’ February 2013.
32. Mandiant, ‘‘APT1: Exposing One of China’s Cyber Espionage Units,’’ February 2013.
33. Nicole Perlroth, ‘‘Hackers in China Attacked the Times for Last 4 Months,’’
New York Times, January 30, 2013, 1.
34. Mandiant, ‘‘APT1: Exposing One of China’s Cyber Espionage Units,’’ February 2013.
35. Mandiant, ‘‘APT1: Exposing One of China’s Cyber Espionage Units,’’ February 2013.
36. U.S. Department of Justice, Office of Public Affairs, U.S. Charges Five Chinese Military Hackers for Cyber Espionage against U.S. Corporations and a Labor
Organization for Commercial Advantage, May 19, 2014; Dune Lawrence, ‘‘U.S.
Charges Five Chinese Military Hackers with Online Spying,’’ Bloomberg News, May
19, 2014.
37. Mark A. Stokes, ‘‘The PLA General Staff Department Third Department Second Bureau: An Organizational Overview of Unit 61398,’’ Project 2049 Institute, July27, 2015.
38. Geoff Dyer, Gina Chon, Hannah Kuchler, ‘‘Cyber Tensions Rise as U.S. Says
Three Big Chinese Groups Benefitted from Hacking,’’ Financial Times, October 8,
2015.
39. U.S. Department of Justice, Office of Public Affairs, U.S. Charges Five Chinese Military Hackers for Cyber Espionage against U.S. Corporations and a Labor
Organization for Commercial Advantage, May 19, 2014; Dune Lawrence, ‘‘U.S.
Charges Five Chinese Military Hackers with Online Spying,’’ Bloomberg News, May
19, 2014.
40. Ellen Nakashima, ‘‘China Suspected of Breaching U.S. Postal Service Computer Networks,’’ Washington Post, November 10, 2014.
41. Keith Wagstaff, ‘‘USPS Hack that Affected 800,000 Employees ‘Very Sophisticated,’ ’’ NBC News, November 19, 2014.
42. Ellen Nakashima, ‘‘China Suspected of Breaching U.S. Postal Service Computer Networks,’’ Washington Post, November 10, 2014.
43. Sarah Logan, ‘‘Beijing’s Great Cannon Exposes Vulnerable Chinese TechFirms,’’ Interpreter, May 4, 2015.
44. Paul Mozur, ‘‘Attack on GitHub Appears to Have Ended,’’ Bits (New YorkTimes blog), April 1, 2015.
45. Christian de Loope, ‘‘China Develops ‘Great Cannon’ Censorship Tool—Is It
Gearing up for a Cyber War?’’ Tech Times, April 13, 2015.
46. Charles Clover, ‘‘China Accused of Decade-Long Asia Cyber Espionage Campaign,’’ Financial Times, April 13, 2015; FireEye, ‘‘APT30 and the Mechanics of aLong-Running Cyber Espionage Operation,’’ April 2015.
47. Charles Clover, ‘‘China Accused of Decade-Long Asia Cyber Espionage Campaign,’’ Financial Times, April 13, 2015.
48. Tim Culpan, ‘‘Decade-Long Cyberspy Attack Hacked Southeast Asian Targets,’’ Bloomberg Businessweek, April 12, 2015.
49. Newley Purnell, ‘‘China’s Hackers Run 10-Year Spy Campaign in Asia, Report Finds,’’ Wall Street Journal, April 12, 2015.
50. Cory Bennett, ‘‘OPM Hack Hit over 22 Million People,’’ Hill, July 9, 2015.
51. Damien Paletta, ‘‘U.S. Intelligence Chief James Clapper Suggests China behind OPM Breach,’’ Wall Street Journal, June 25, 2015; Kristen Finklea, et al.,‘‘Cyber Intrusion into U.S. Office of Personnel Management: In Brief,’’ Congressional
Research Service (R44111), July 17, 2015.
52. Damien Paletta, ‘‘U.S. Intelligence Chief James Clapper Suggests China behind OPM Breach,’’ Wall Street Journal, June 25, 2015.
53. Damien Paletta, ‘‘U.S. Intelligence Chief James Clapper Suggests China behind OPM Breach,’’ Wall Street Journal, June 25, 2015.

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54. Damien Paletta and Danny Yadron, ‘‘Over 21 Million Hit by Hack,’’ WallStreet Journal, July 10, 2015, 2.
55. Ellen Nakashima, ‘‘Hacks of OPM Databases Compromised 22.1 Million People, Federal Authorities Say,’’ Federal Eye (Washington Post blog), July 9, 2015.
56. Jose Pagliery, ‘‘OPM Hack’s Unprecedented haul: 1.1 million Fingerprints,
CNN Money, July 10, 2015; Jason Miller, ‘‘OPM Finds Fivefold Increase in Fingerprint Data Stolen during Data Hack,’’ Federal News Radio, September 23, 2015.
57. David E. Sanger, Julie Hirshfeld Davis, and Nicole Perlroth, ‘‘U.S. Was
Warned of System open to Cyberattacks,’’ New York Times, June 5, 2015.
58. David E. Sanger, Julie Hirshfeld Davis, and Nicole Perlroth, ‘‘U.S. Was
Warned of System open to Cyberattacks,’’ New York Times, June 5, 2015.
59. Sean Lyngaas, ‘‘Security Experts: OPM Breach Shows Einstein Isn’t
Enough’’ Federal Computer Week, June 5, 2015.
60. Senate Committee on Homeland Security and Government Affairs, testimonyof Andy Ozment, Assistant Secretary for Cybersecurity and Communications, Department of Homeland Security, June 25, 2015.
61. Felicia Schwartz, ‘‘Penn State’s Engineering School Computers Hacked,’’Wall Street Journal, May 16, 2015.
62. Felicia Schwartz, ‘‘Penn State’s Engineering School Computers Hacked,’’Wall Street Journal, May 16, 2015.
63. Felicia Schwartz, ‘‘Penn State’s Engineering School Computers Hacked,’’Wall Street Journal, May 16, 2015.
64. Michael Riley and Jordan Robertson, ‘‘China-Tied Hackers That Hit U.S.
Said to Breach United Airlines,’’ Bloomberg Businessweek, July 29, 2015; David E.
Sanger, Julie Hirshfeld Davis, and Nicole Perlroth, ‘‘U.S. Wars Warned of Systemopen to Cyberattacks,’’ New York Times, June 5, 2015.
65. Michael Riley and Jordan Robertson, ‘‘China State-Sponsored Hackers Suspected in Anthem Attack,’’ Bloomberg Business, February 5, 2015.
66. Jeremy Wagstaff, ‘‘Hunt for Deep Panda Intensifies in Trenches of U.S.China Cyberwar,’’ Reuters, June 21, 2015.
67. White House Office of the Press Secretary, Executive Order—Blocking theProperty of Certain Persons Engaging in Significant Malicious Cyber-Enabled Activities, April 1, 2015.
68. White House Office of the Press Secretary, Statement by the President on Executive Order—Blocking the Property of Certain Persons Engaging in Significant
Malicious Cyber-Enabled Activities, April 1, 2015.
69. National Institute of Standards and Technology, Cybersecurity Framework
Frequently Asked Questions.
70. White House Office of the Press Secretary, Statement by the President on Executive Order—Blocking the Property of Certain Persons Engaging in Significant
Malicious Cyber-Enabled Activities, April 1, 2015.
71. White House Office of the Press Secretary, Statement by the President on Executive Order—Blocking the Property of Certain Persons Engaging in Significant
Malicious Cyber-Enabled Activities, April 1, 2015.
72. White House Office of the Press Secretary, Conference Call to Preview the
Visit of President Xi Jinping of the People’s Republic of China, via telephone, September 22, 2015; Politico, ‘‘Rhodes: Sanctions Still on the Table,’’ September 23,
2015.
73. White House Office of the Press Secretary, Remarks by the President to theBusiness Roundtable, September 16, 2015.
74. White House Office of the Press Secretary, On-the-record Press Call on the
President’s Executive Order, via telephone, April 1, 2015.
75. U.S. Department of Defense, Department of Defense Strategy for Operating
in Cyberspace, July 2011.
76. Elisabeth Bumiller and Thom Shanker, ‘‘Panetta Warns of Dire Threat ofCyberattack on U.S.’’ New York Times, October 11, 2012.
77. David E. Sanger, ‘‘Pentagon Announces New Strategy for Cyberwarfare,’’New York Times, April 23, 2015.
78. David E. Sanger, ‘‘Pentagon Announces New Strategy for Cyberwarfare,’’New York Times, April 23, 2015.
79. U.S. Department of Defense, News Transcript: Remarks of Secretary Carterat the Drell Lecture Cemex Auditorium, Stanford Graduate School of Business, April
23, 2015.
80. U.S. Department of Defense, Department of Defense Strategy for Operating
in Cyberspace, July 2011.
81. David E. Sanger, ‘‘Pentagon Announces New Strategy for Cyberwarfare,’’New York Times, April 23, 2015.

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82. Damien Paletta, ‘‘U.S. Intelligence Chief James Clapper Suggests China behind OPM Breach,’’ Wall Street Journal, June 25, 2015.
83. Robert D. Blackwill and Ashley J. Tellis, ‘‘Revising U.S. Grand Strategy toward China,’’ Council on Foreign Relations, March 2015, 27.
84. Robert D. Blackwill and Ashley J. Tellis, ‘‘Revising U.S. Grand Strategy toward China,’’ Council on Foreign Relations, March 2015, 27.
85. Robert D. Blackwill and Ashley J. Tellis, ‘‘Revising U.S. Grand Strategy toward China,’’ Council on Foreign Relations, March 2015, 27.
86. Oona A. Hathaway, et al., ‘‘The Law of Cyber-Attack,’’ California Law Review, 2012.
87. Oona A. Hathaway, et al., ‘‘The Law of Cyber-Attack,’’ California Law Review, 2012, 1.
88. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Dennis
F. Poindexter, June 15, 2015.
89. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Paul
Tiao, June 15, 2015.
90. National Bureau of Asian Research, ‘‘The Report of the Commission on the
Theft of American Intellectual Property,’’ May 2013, 81.
91. National Bureau of Asian Research, ‘‘The Report of the Commission on the
Theft of American Intellectual Property,’’ May 2013, 81.
92. Matthew Eggers, Senior Director, National Security and Emergency Preparedness Department, U.S. Chamber of Commerce, interview with Commission
staff, August 18, 2015.
93. Office of the National Counterintelligence Executive, Foreign Spies Stealing
U.S. Economic Secrets in Cyberspace, October, 2011, 3.
94. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Paul
Tiao, June 15, 2015.
95. Shannon Tiezzi, ‘‘U.S., China Hold Cyber Talks before Xi’s Visit,’’ The Diplomat, September 15, 2015.
96. Shannon Tiezzi, ‘‘U.S., China Hold Cyber Talks before Xi’s Visit,’’ The Diplomat, September 15, 2015.
97. China Trade Extra, ‘‘Xi Pledges Cooperation on Cybertheft, Implies Other
U.S. Complaints are Baseless,’’ September 23, 2015.
98. Elise Viebeck, ‘‘Will the Chinese Really Stop Hacking?’’ Washington Post,
September 28, 2015, A19.
99. The White House Office of the Press Secretary, FACT SHEET: President Xi
Jinping’s State Visit to the United States, September 25, 2015.
100. Review & Outlook, ‘‘The Obama-Xi Cyber Mirage,’’ Wall Street Journal, September 28, 2015, A16; Jack Goldsmith, ‘‘What Explains the U.S.-China Cyber‘Agreement?’’’ Lawfare Blog, September 26, 2015; Greg Austin, ‘‘China-U.S. Cyber
Agreements: Has Beijing Outmaneuvered Washington?’’ Diplomat,’’ September 28,
2015.
101. The White House Office of the Press Secretary, Remarks by President
Obama and President Xi of the People’s Republic of China in Joint Press Conference,
September 25, 2015.
102. The White House Office of the Press Secretary, FACT SHEET: President Xi
Jinping’s State Visit to the United States, September 25, 2015.
103. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Dennis
F. Poindexter, June 15, 2015.
104. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Dennis
F. Poindexter, June 15, 2015.
105. U.S. Department of Commerce, SelectUSA initiative, The Software and Information Technology Services Industry in the United States.
106. U.S. International Trade Commission, Digital Trade in the U.S. and Global
Economies, Part 2, August 2014, 1.
107. U.S. International Trade Commission, Digital Trade in the U.S. and Global
Economies, Part 2, August 2014, 1.
108. U.S. International Trade Commission, Digital Trade in the U.S. and Global
Economies, Part 2, August 2014, 98.
109. U.S. International Trade Commission, Digital Trade in the U.S. and Global
Economies, Part 1, July 2013.

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224110. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Matt
Schruers, June 15, 2015.
111. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Matt
Schruers, June 15, 2015.
112. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Matt
Schruers, June 15, 2015.
113. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Matt
Schruers, June 15, 2015.
114. Fredrick Erixon, Brian Hindley, and Hosuk Lee-Makiyama, ‘‘Protectionism
Online: Internet Censorship and International Trade Law,’’ European Centre forInternational Political Economy, 12, 2009, 1.
115. Fredrick Erixon, Brian Hindley, and Hosuk Lee-Makiyama, ‘‘Protectionism
Online: Internet Censorship and International Trade Law,’’ European Centre forInternational Political Economy, 12, 2009, 15.
116. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Matt
Schruers, June 15, 2015.
117. U.S. International Trade Commission, Digital Trade in the U.S. and Global
Economies, Part 2, August 2014, 1.
118. Paul Mozur, ‘‘China Tries to Extract Pledge of Compliance from U.S. TechFirms,’’ New York Times, September 16, 2015.
119. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Samm
Sacks, June 15, 2015.
120. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Samm
Sacks, June 15, 2015.
121. Edward Wong, ‘‘Security Law Suggests a Broadening of China’s Core Interests,’’ New York Times, July 2, 2015; U.S.-China Economic and Security Review
Commission, ‘‘Beijing Expands Control with Sweeping New Security Law’’ in Monthly Analysis of U.S.-China Trade Data, July 7, 2015.
122. Tom Mitchell, ‘‘China Passes Sweeping National Security Law,’’ Financial
Times, July 2, 2015, 1.
123. Tom Mitchell, ‘‘China Passes Sweeping National Security Law,’’ Financial
Times, July 2, 2015, 1.
124. Austin Ramzy, ‘‘What You Need to Know about China’s Draft Cybersecurity
Law,’’ Sinosphere (New York Times blog), July 9, 2015.
125. National People’s Congress, Cybersecurity Law (Draft), China Law Translate,
July 6, 2015.
126. National People’s Congress, Cybersecurity Law (Draft), China Law Translate,
July 6, 2015.
127. U.S.-China Economic and Security Review Commission, Red Cloud Rising:
Cloud Computing in China, March 2014.
128. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Samm
Sacks, June 15, 2015.
129. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Samm
Sacks, June 15, 2015.
130. Eva Dou, ‘‘U.S., China Discuss Proposed Banking Security Rules,’’ WallStreet Journal, February 13, 2015.
131. Eva Dou, ‘‘U.S., China Discuss Proposed Banking Security Rules,’’ WallStreet Journal, February 13, 2015.
132. Eva Dou, ‘‘U.S., China Discuss Proposed Banking Security Rules,’’ WallStreet Journal, February 13, 2015.
133. China Trade Extra, ‘‘Tech Groups Call on USG to Fight Chinese Cybersecurity Policies,’’ Vol. 33, No. 5, March 4, 2015.
134. Letter from various U.S. business associations to the Chinese Communist
Party Central Leading Group for Cyberspace Affairs, January 28, 2015.
135. China Trade Extra, ‘‘Tech Groups Call on USG to Fight Chinese Cybersecurity Policies,’’ Vol. 33, No. 5, March 4, 2015.
136. China Trade Extra, ‘‘Tech Groups Call on USG to Fight Chinese Cybersecurity Policies,’’ Vol. 33, No. 5, March 4, 2015.

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137. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Samm
Sacks, June 15, 2015.
138. Gerry Shih, Michael Martina, and Matthew Miller, ‘‘China Summons Western Tech Firms, Revives Bank Cyber Rules,’’ Reuters, August 8, 2015.
139. Gerry Shih, Michael Martina, and Matthew Miller, ‘‘China Summons Western Tech Firms, Revives Bank Cyber Rules,’’ Reuters, August 8, 2015.
140. Michael Martina, ‘‘China Draft Counterterror Law Strikes Fear in Foreign
Tech Firms,’’ Reuters, February 27, 2015.
141. Jeff Mason, ‘‘Exclusive: Obama Sharply Criticizes China’s Plans for New
Technology Rules,’’ Reuters, March 2, 2015.
142. Gerry Shih and Paul Carsten, ‘‘China Says Tech Firms Have Nothing toFear from Anti-Terror Law,’’ Reuters, March 4, 2015.
143. Jeremy Scahill and Josh Begley, ‘‘The Great SIM Heist,’’ Intercept, February
19, 2015.
144. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Samm
Sacks, June 15, 2015.
145. Steven Yang, Keith Zhai, and Tim Culpan, ‘‘China Said to Plan Sweeping
Shift from Foreign Technology to Own,’’ Bloomberg News, December 17, 2014.
146. China Trade Extra, ‘‘House Republican Leaders Urge Obama to Fight Harder against China Cybersecurity Rules,’’ February 20, 2015.
147. Paul Carsten, ‘‘China Drops Leading Tech Brands for Certain State Purchases,’’ Reuters, February 27, 2015.
148. Paul Carsten, ‘‘China Drops Leading Tech Brands for Certain State Purchases,’’ Reuters, February 27, 2015.
149. U.S.-China Economic and Security Review Commission, Hearing on Commercial Cyber Espionage and Barriers to Digital Trade in China, testimony of Samm
Sacks, June 15, 2015; Michael Kan, ‘‘China Aims to Help Local Internet Firms Cross
into the Market,’’ PC World, March 5, 2015.
150. National Development and Reform Commission, Report on the Implementation of the 2014 Plan for National Economic and Social Development and on the2015 Draft Plan for National Economic and Social Development, Third Session of
the Twelfth National People’s Congress, March 5, 2015, 23.
151. China Internet Network Information Center, CNNIC Released the 35th Statistical Report on Internet Development in China, February 4, 2015. Internet Live
Stats, ‘‘Internet Users by Country (2014).’’152. McKinsey & Company, ‘‘China’s Digital Transformation: The Internet’s Impact on Productivity and Growth,’’ July 2014.
153. McKinsey & Company, ‘‘China’s Digital Transformation: The Internet’s Impact on Productivity and Growth,’’ July 2014, 5–6.
154. Scott D. Livingston, ‘‘Will China’s New Anti-Terrorism Law Mean the End
of Privacy?’’ ChinaFile, April 22, 2015.
155. Michael Kan, ‘‘China Aims to Help Local Internet Firms Cross into the Market,’’ PC World, March 5, 2015.
156. Irving Wladawsky-Berger, ‘‘The Rise of the Digital Capital Economy,’’ CIO
Journal (Wall Street Journal blog), April 17, 2015; Boston Consulting Group, ‘‘TheInternet Economy in the G–20,’’ BCG Report, March 2012.
157. U.S. Department of Commerce, SelectUSA initiative, The Software and Information Technology Services Industry in the United States, Select USA.
158. Al Ramadan et al., ‘‘Time to Market Cap: The New Metric That Matters,’’
Play Bigger Advisors, LLC.; U.S. Department of Commerce, SelectUSA initiative,
The Software and Information Technology Services Industry in the United States,
Select USA.

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RECOMMENDATIONS
Foreign Investment Climate in China
The Commission recommends:• Congress assess the ability of, and if necessary amend, existing
U.S. trade laws to address China’s industrial policies, abusive
legal or administrative processes, and discriminatory treatmentof foreign investors, and to determine the consistency of thesepractices with China’s World Trade Organization commitments.
• Congress consider legislation requiring the President to submit arequest to Congress for approval before any change occurs, either
for the country as a whole or for individual sectors or entities,
in China’s status as a non-market economy. Under such legislation, any change to China’s designation could not proceed without the consent of both Houses of Congress.
• Congress consider legislation conditioning the provision of market access to Chinese investors in the United States on a reciprocal, sector-by-sector basis to provide a level playing field for
U.S. investors in China.
• Congress direct U.S. antitrust enforcement agencies to conduct
an analysis and legal assessment of alleged anticompetitive behavior by Chinese antitrust enforcers, and report in full on enforcement activities.
• Congress expand the guidelines for consultation and transparency relating to trade negotiations covered by Trade Promotion Authority to include negotiations on a Bilateral Investment Treaty between the United States and China.
• Congress require the Administration to provide a comprehensive,
publicly-available assessment of Chinese foreign direct investments in the United States prior to completion of negotiations on
a Bilateral Investment Treaty. This assessment shall include an
identification of the nature of investments, whether investments
received support, of any kind, from the Chinese government andat which level (national, provincial, or municipal), and the sector
in which the investment was made.

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• Congress urge the U.S. Trade Representative to initiate consultations with China’s Ministry of Commerce to identify the extent
to which China’s policy regarding subsidies and other incentives
for purchases of domestically-produced new energy vehicles may
violate its World Trade Organization commitments and whatsteps should be taken to address any inconsistencies with thosecommitments.
(226)

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China’s State-led Market Reform and Competitiveness Agenda
The Commission recommends:• Congress direct the U.S. Government Accountability Office toprepare a report that analyzes U.S. exposure to China’s financial
sector, the progress of China’s financial sector reforms, and theeffect of China’s financial sector reforms on the U.S. and global
financial systems, and identifies the policies the U.S. governmentis adopting to protect U.S. interests in light of this changing environment.
• Congress urge the U.S. Department of Commerce to undertakea comprehensive review and prepare a report on China’s Madein China 2025 and Internet Plus initiatives, including theirforced localization of manufacturing and research and development requirements, to determine their potential impact on domestic U.S. production and market access for U.S. firms.
• Congress direct the U.S. Environmental Protection Agency, U.S.
Department of Energy, and U.S. Department of Commerce tojointly prepare a report that outlines China’s stated targets toaddress pollution and climate change, and evaluates whether the
Chinese government has allocated sufficient resources (including
expenditures) to meet those commitments.

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Commercial Cyber Espionage and Barriers to Digital Tradein China
The Commission recommends:• Congress assess the coverage of U.S. law to determine whether
U.S.-based companies that have been hacked should be allowed
to engage in counterintrusions for the purpose of recovering,erasing, or altering stolen data in offending computer networks.
In addition, Congress should study the feasibility of a foreign intelligence cyber court to hear evidence from U.S. victims of cyberattacks and decide whether the U.S. government might undertake counterintrusions on a victim’s behalf.
• Congress require the Administration prepare an annual classified report on foreign government-sponsored cyber attacks
against all Federal Government agencies, including but not limited to an assessment of the damage and the affected agencies’plans to secure their networks against further attacks.
• Congress consider legislation amending the Federal Information
Security Modernization Act of 2014 to require an annual review
by the U.S. Department of Homeland Security of the steps taken
by all federal agencies to ensure that adequate systems are inplace to protect cyber assets.
• Congress pass legislation to require the Securities and Exchange
Commission (SEC) to make clear to publicly traded companies
and their investors the circumstances under which the theft ofintellectual property through a computer network intrusion may
be a material fact that might affect a company’s revenues andshould therefore be required to be disclosed to the SEC.

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• Congress evaluate existing consumer right-to-know laws to determine whether a cloud-based computing company has an affirmative duty to identify the physical location of its cloud-based assets.

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CHAPTER 2
SECURITY AND FOREIGN POLICYISSUES INVOLVING CHINASECTION 1: YEAR IN REVIEW:SECURITY AND FOREIGN AFFAIRSIntroduction

dkrause on DSKHT7XVN1PROD with USCCThe Commission’s previous annual reports to Congress documented that Chinese national security and foreign policy have become more centralized and focused under President and Chinese
Communist Party (CCP) General Secretary Xi Jinping, who took
power in 2012.1 This trend continued in 2015, as the Xi Administration took further steps to articulate and pursue China’s priorities and objectives in both the security and foreign policy realms.
President Xi continues to position himself at the apex of the security and foreign policy decision-making apparatus in Beijing, andappears to be successfully advancing a foreign policy and security
agenda that reinforces CCP rule and seeks to enable China toachieve great power status.2
Meanwhile, China’s military modernization continues apace, withimpressive new systems and capabilities coming online that augment China’s ability to defend its stated interests and field a globally active, world-class military. In some cases, China is deploying
the People’s Liberation Army (PLA) in ways that contribute to regional peace and security, such as antipiracy operations in the Gulfof Aden, noncombatant evacuation operations, and humanitarianassistance and disaster relief operations. At the same time, however, the PLA is deploying weapons and honing capabilities thatwill allow it to hold at risk U.S. and allied forces in the Western
Pacific. Also of concern are China’s aggressive actions in the Southand East China seas and its relentless use of cyber espionage toseek economic and military advantage over the United States.
This section—based on Commission hearings, discussions withoutside experts and U.S. government officials, and open source research and analysis—reflects on these trends and examines major
developments in China’s national security and foreign policy, military modernization, global security activities, and U.S.-China security relations, since the publication of the Commission’s 2014 Annual Report.

(229)

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Major Developments in China’s National Security andForeign Policy in 2015

dkrause on DSKHT7XVN1PROD with USCC‘‘One Belt, One Road’’ and the Continued Emphasis on Peripheral Diplomacy
Collectively referred to as the ‘‘One Belt, One Road’’ initiative,the ‘‘Silk Road Economic Belt’’ and ‘‘21st Century Maritime Silk
Road’’ have become key components of the Xi Administration’s foreign policy agenda.3 Focused respectively on Eurasia and maritime
Asia, the Silk Road Economic Belt and 21st Century Maritime Silk
Road encompass approximately 60 countries and seek to enhance
regional connectivity and economic, cultural, and diplomatic exchange. The initiatives, for which Beijing has already promised
enormous political and financial resources, are designed to advance
China’s objectives to facilitate trade and boost exports, provide opportunities for Chinese companies, facilitate access to natural resources, and relieve overcapacity in China’s construction-oriented
sectors. They also appear designed to enhance China’s influenceamong its neighbors and project an image of China as a powerful
and responsible regional, even global, power.4
The One Belt, One Road initiative is emblematic of the Xi Administration’s focus on ‘‘peripheral diplomacy,’’ which was highlighted at two major CCP meetings on foreign affairs held in 2013
and 2014.5 According to Michael D. Swaine, senior associate at theCarnegie Endowment for International Peace’s Asia Program,[Peripheral diplomacy initiatives] imply a higher level ofChinese pro-activism in foreign and defense policy and abroader definition of [China’s] national interests toward its
periphery than has characterized Beijing’s approach during
most of the reform era. In particular, they suggest at thevery least a decreased emphasis on Deng Xiaoping’s longstanding exhortation for China to remain modest andmaintain a low profile in its external relations. They also
raise many questions and potential problems for China’s
external relations going forward. This includes, most importantly, how Beijing will reconcile the potentially contradictory policy imperatives of deepening positive relations
with neighboring countries while more resolutely advancing
or protecting China’s territorial and resource interests andclaims.6(For a detailed discussion of how the One Belt, One Road initiative and China’s renewed focus on peripheral diplomacy inform
China’s relations with its neighbors, see Chapter 3, Section 1,‘‘China and Central Asia,’’ and Chapter 3, Section 2, ‘‘China andSoutheast Asia.’’)New and Proposed Laws on National Security
China under the Xi Administration is advancing legal infrastructure to more tightly control its national security policies and processes. This includes a National Security Law (enacted in July 2015)that broadly expands the CCP’s control over ‘‘security’’ in a wide
range of fields including culture, education, cyberspace, and international seabeds; 7 a draft cybersecurity law (introduced in July

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2312015) that provides the Chinese government broad powers to control and restrict online information and activity; 8 and a draft
counterterrorism law (introduced in November 2014 and again in
February 2015) that provides the state sweeping authority to investigate, deter, and punish terrorists.9 All three laws contain provisions that would broaden and deepen the authority and power ofthe government, expand the reach of China’s security state, andfurther limit the freedom of citizens already living under politicalrepression. Moreover, due to provisions in each law to control theflow of information on the Internet, they could have negative implications for U.S. and other foreign information and communications
technology companies operating in China.10 (See Chapter 1, Section4, ‘‘Commercial Cyber Espionage and Barriers to Digital Trade in
China,’’ for more details on how these laws can impact U.S. companies.)
These developments are just the latest in a series of steps President Xi has taken to streamline and centralize China’s security policymaking apparatus, and to solidify his personal role at the helmof that apparatus. According to Cheng Li, director of the John L.
Thornton China Center at the Brookings Institution and prominent
scholar of elite Chinese politics, ‘‘The continuing consolidation of
power has been the most noticeable trend under the leadership ofXi Jinping’’ since 2012.11 For example, in late 2013, China established the Central National Security Commission, led by President
Xi, ‘‘to perfect national security systems and strategies in order toensure national security.’’ 12 Though little is known about the workings of the Central National Security Commission, it appears tohave a broad mandate encompassing both domestic and foreign national security matters as well as issues such as ‘‘economic security,’’ ‘‘ecological security,’’ and ‘‘societal security,’’ among others.13

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White Paper on ‘‘China’s Military Strategy’’
In May 2015, China published the latest iteration of its biennial
defense white paper.* 14 The new defense white paper tracks closely with the previous defense white paper, released in 2013, andcontains no major revelations about China’s military strategy ormodernization; however, it does provide insight into Chinese leaders’ perceptions of the country’s evolving security and defense priorities by including some new guidance and emphasizing or clarifying certain aspects of existing strategy.15 Highlights of the 2015
defense white paper include the following:• The new defense white paper decisively elevates the maritime
domain in China’s strategic thinking as China assesses that its
most likely conflict scenarios will be at sea, asserting that ‘‘thetraditional mentality that land outweighs sea must be abandoned.’’ 16 The defense white paper emphasizes that the PLA
Navy needs to transition from a primarily coastal force to one
capable of global operations.
* Defense white papers—China’s most authoritative statements on national security—are published by the State Council Information Office and approved by the Central Military Commission, Ministry of National Defense, and State Council. Beijing primarily uses these documents
as a public relations tool to help ease deepening international concern over China’s militarymodernization and to answer calls for greater transparency.

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232• In contrast to past defense white papers, which have emphasized offshore defense as the primary focus of the PLA Navy,
the new defense white paper notes ‘‘the PLA Navy will gradually shift its focus from ‘offshore waters defense’ to the combination of ‘offshore waters defense’ with ‘open seas protection.’ ’’ 17 The PLA Navy’s recent acquisitions, training, and operations—including longer-endurance patrols by PLA Navysurface ships and submarines—reflect this priority shift. (Formore information on China’s overseas military activities, see‘‘China’s Global Security Activities in 2015,’’ later in this section.)• With respect to maritime territorial disputes, the defense white
paper says China will ‘‘strike a balance between rights protection and stability maintenance’’ and strive to ‘‘prevent crises.’’ 18 This suggests Beijing will continue to employ an incremental approach designed to enable China to successfully realize its territorial ambitions while avoiding conflict and limiting
forceful reactions from the other claimants or the UnitedStates. (See Chapter 3, Section 2, ‘‘China and Southeast Asia,’’
for an examination of recent developments in the South China
Sea dispute.)• The defense white paper asserts that ‘‘space and cyberspacehave become the new commanding heights in strategic competition,’’ * and that China will seek to achieve sufficient defense capabilities in both realms to protect its economic andstrategic interests. The paper refers to China as a purely defensive actor in both realms. China’s reliance on space andcyberspace will continue to grow as the PLA’s most sophisticated long-range weapons—which will require unimpeded access to these domains for C4ISR † and targeting—come online.19• The defense white paper emphasizes the need for a more unified, coordinated, and streamlined mechanism for defense policymaking by China’s civilian and military leadership through‘‘in depth development of civil-military integration,’’ and announces the PLA will ‘‘set up a system and a working mechanism for overall and coordinated programming and planning.’’ 20 This is consistent with other steps taken by the Xi Administration to centralize and tightly control national security
decision making in China.21

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China’s Maritime Disputes in the South China Sea
China is aggressively advancing its territorial claims in theSouth China Sea by using land reclamation and construction onland features to vastly expand its civilian and military presence incontested waters. For a discussion of developments in China’s
South China Sea maritime disputes in 2015, see Chapter 3, Section* This in part echoes a 2009 interview with then PLA Air Force commander General Xu
Qiliang, in which he said that ‘‘the domain of space and air have become the new commandingheight for international strategic competition.’’ Kevin Pollpeter, ‘‘The PLAAF and the Integration of Air and Space Power,’’ in Richard P. Hallion et al., eds., The Chinese Air Force: Evolving
Concepts, Roles, and Capabilities, National Defense University Press, 2012, 165.
† C4ISR stands for command, control, communications, computers, intelligence, surveillance,and reconnaissance.

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2, ‘‘China and Southeast Asia.’’ See also, ‘‘U.S.-China Tensions in
the South China Sea,’’ later in this section.
China’s Maritime Dispute in the East China Sea
Although the South China Sea dominated headlines in 2015,
China also sought to strengthen its position vis-à-vis Japan in its
maritime dispute over the Senkaku Islands (called the Diaoyu Islands in Chinese) in the East China Sea.* Tensions in the East
China Sea had reached a high point in November 2013 when China
established an Air Defense Identification Zone (ADIZ) † over contested waters to ‘‘[protect] state sovereignty and territorial and airspace security.’’ ‡ 22 Since then, bilateral ties have improved somewhat, and no single event has ratcheted up tensions.23 Nevertheless, China continues to quietly build up its military and civilian
presence in the East China Sea.
• In July 2015, the Japanese government reported that ‘‘China
has accelerated its development activities of natural resourcesin the East China Sea,’’ identifying 16 freestanding structures
China had erected ‘‘on the Chinese side of the geographicalequidistance line between Japan and China’’ to facilitate thedevelopment of subsea natural gas resources (see Figure 1).§
According to Japanese officials, 7 of the 16 structures had
begun drilling activities by September.24 Although the structures are on the Chinese side of the ‘‘equidistance line,’’ theJapanese government has asked China to stop construction of
the platforms, noting ‘‘it is extremely regrettable that China isadvancing unilateral development.’’ 25 Japanese Minister of Defense Gen Nakatani suggested China ‘‘could install a radar system on the platform, or use it as an operating base for helicopters or drones conducting air patrols.’’ 26

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• Satellite imagery analysis conducted by IHS Jane’s in January
2015 suggests China is upgrading existing military infrastructure on Nanji Island, part of an island chain off the coast ofZhejiang Province about 160 nautical miles (nm) from the
Senkaku Islands. The island now appears to host a heliportwith ten landing pads and wind turbines, in addition to previously built radar and communications infrastructure.27 According to Li Jie, a senior researcher from the PLA-affiliatedChinese Naval Research Institute, the island is ‘‘a strategicallyimportant location because [of its] proximity to the Diaoyu Islands, [because] it can provide support to the East China Sea* Taiwan is a claimant in the East China Sea dispute as well.
† An ADIZ is a publicly declared area established in international airspace adjacent to astate’s national airspace in which civil aircraft must be prepared to submit to local air traffic
control and provide aircraft identifiers and location.
‡ China does not appear to have used its East China Sea ADIZ as a tool of aggression against
Japan since it was established in 2013. Interestingly, the only publicly reported incident ofChina requiring a civilian aircraft to leave the ADIZ was in July 2015, when a Lao Airlines
plane en route from South Korea to Laos was denied permission to enter Chinese airspace overthe East China Sea and was forced to return to South Korea. Jeremy Torr, ‘‘China Turns Back
Lao Airlines Flight for Failing to Comply with ADIZ Rules,’’ Air Transport World, July 27, 2015.
§ In the absence of delimited maritime territory in the East China Sea, Japan takes the position that ‘‘maritime delimitation should be conducted based on the geographical equidistanceline between Japan and China.’’ Japan Ministry of Foreign Affairs, The Current Status of China’s Unilateral Development of Natural Resources in the East China Sea, July 22, 2015.

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Figure 1: China’s Natural Gas Infrastructure in the East China Sea

Note: A jacket is a support structure for a drilling platform.
Source: Japan Ministry of Foreign Affairs, The Current Status of China’s Unilateral Development of Natural Resources in the East China Sea, July 22, 2015.

[ADIZ], and [because] it’s a major naval point on the Chinese
coastal defense lines. . . . It’s unarguable that China would liketo enhance the existing military presence there.’’ 28* In military aviation, scrambling refers to directing the immediate takeoff of aircraft from aground alert condition of readiness to react to a potential air threat.

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• Chinese aircraft and China Coast Guard ships continue to patrol contested waters. The Japanese Ministry of Defense reported 706 scrambles * against Chinese aircraft flying near the
Senkaku Islands between January 2014 and June 2015 (latest
data available).29 A commanding officer from a Japanese SelfDefense Force squadron based at Naha, the closest Japanesebase to the Senkakus, told reporters, ‘‘It’s practically everyday. . . . It’s absolutely extraordinary to ask one squadron to235
deal with more than 400 scrambles a year. It’s an extremely
heavy burden.’’ 30 Japan’s Ministry of Defense also reported
that China Coast Guard ships entered the territorial sea * ofthe Senkaku Islands between seven and nine times per month
during the same timeframe.31• In May 2015, a PLA Air Force squadron, which included atleast one bomber, transited from the East China Sea to theWestern Pacific through Japan’s Miyako Strait † for the firsttime (see Figure 2).32 This is one of several indicators that the
PLA Air Force is enhancing its capabilities to conduct overwater operations far from China’s coast, including in the East
China Sea (see ‘‘PLA Training and Exercises,’’ later in this section).
Figure 2: Map of Miyako Strait

Source: NPR, ‘‘The Role for the US in the East China Sea Dispute,’’ January 30, 2013.

* The UN Convention on the Law of the Sea defines ‘‘territorial sea’’ as a 12-nautical-mile zone
extending from a country’s coastline or island shore over which that country enjoys full sovereignty. UN Convention on the Law of the Sea, ‘‘Part 2: Territorial Sea and Contiguous Zone.’’† The Miyako Strait runs between the Japanese islands of Miyako and Okinawa.

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Corruption in the PLA
As part of President Xi’s ongoing nationwide anticorruption campaign, China is conducting a campaign against corruption in the
PLA. This campaign is widely understood to be aimed at mitigating
growing public disillusionment with politics and governance in
China, as well as ending practices such as graft and paying for promotion, which could reduce the quality of officers, perpetuate oppo-

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236
sition to reforms, and threaten PLA modernization and readiness.33
Aside from these objectives, the anticorruption campaign also appears to be a useful political tool for President Xi to marginalize
his political opponents and consolidate power.34
The scale of PLA corruption has potentially serious implications
for U.S. security interests. According to a RAND Corporation reportsponsored by the Commission, ‘‘China’s Incomplete Military Transformation: Assessing the Weaknesses of the People’s Liberation
Army’’:
If the assessment that the PLA is highly corrupt is accurate
and if the PLA’s corruption seriously limits its warfighting
capabilities, it may mean that the United States might be
inclined to assume China has more sway in international
affairs than its actual combat power merits. On the other
hand, if the PLA is a highly capable fighting force despite
its problems with corruption, the United States might risk
overestimating the hollowness of the Chinese armed forces
and be insufficiently cautious of confrontation with a PLA
that is actually more capable than stories about widespread
corruption in the ranks might suggest.35
Measuring the scale and location of corruption in the PLA andevaluating the progress of China’s anticorruption campaign is a difficult task.36 Statements by current and retired PLA officials, Chinese state media, and some foreign analysts frame corruption as aserious threat to PLA combat readiness.37 A PLA Daily editorial in
April 2015 emphasized China faced ‘‘national humiliation’’ on thebattlefield if it did not address PLA corruption.38 However, someanalysts, such as former U.S. Army attaché in Beijing Dennis
Blasko, suggest the effect of institutional PLA corruption on China’s combat readiness is relatively small. Mr. Blasko writes, ‘‘Todate, very few (if any) operational combat unit (i.e., divisions, brigades, regiments, etc.) commanders and staff officers are known tohave been caught in the corruption dragnet.’’ 39 Moreover, he notes:
From the evidence available, the vast majority of corruption
in the PLA is found within the political officer system(mostly involving promotions and assignments), the logistics and armaments systems (among those who handle official funds and property and are involved in the procurement of supplies and equipment), and potentially in lowlevel local headquarters responsible for conscription/recruitment (but likely involving relatively small sums ofmoney). There is little indication that the PLA’s frontline
operational leaders, those in command of the units tasked
to do the fighting, have been smitten by the scourge of corruption to the degree that some rear area personnel havebeen.40
Major developments in the PLA anticorruption campaign fromlate 2014 to 2015 include:• In November 2014, the Central Military Commission, China’s
highest military decision-making body, made the auditing office of the PLA directly responsible only to the Central MilitaryCommission. The auditing office had been subordinate to the

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PLA General Logistics Department, which analysts and media
reports suggest is a hotbed of corruption.* 41 By taking directoversight of the PLA auditors, the Central Military Commission likely intends to reduce institutional obstacles to its reforms and increase its control over PLA discipline.42• Former Central Military Commission vice chairman Xu
Caihou, one of the highest-ranking PLA officials to fall in the
anticorruption campaign, died of cancer in March 2015 before
he could be brought to trial on corruption charges.43• In March 2015, Chinese state media announced 14 PLA generals, including Guo Zhenggang, the son of former Central
Military Commission vice chairman Guo Boxiong, had been arrested for corruption.44• In July 2015, Guo Boxiong himself was expelled from the CCP
and placed under investigation for graft. General Guo was thehighest-ranking PLA official to fall in the anticorruption campaign.45• According to a January 2015 report from state-run China
Daily, China’s anticorruption campaign has led to the arrestsof more than 4,000 officers with the rank of lieutenant colonel
and above, including about 100 generals, since January 2013.46

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China’s Military Parade
In September 2015, China held its largest-ever military parade
to commemorate the 70th anniversary of the end of World War II,
which China refers to as the Chinese People’s Resistance against
Japanese Aggression and World Antifascist War. The parade featured 12,000 Chinese troops (as well as military units from 17
other countries),† 500 pieces of military equipment, and close to
200 aircraft.47 Among these were many of China’s most advanced
weapons, some of which had not previously been publicly revealed.48 Although Chinese officials insist the parade was not
aimed at any particular country or countries,49 it signaled clearly
how China could employ its military might against potential adversaries. For example, among the nine classes of ballistic and cruise
missiles on display—all of which were prominently labeled—were
missiles that pose obvious threats to U.S. forces in the Pacific: theDF–21D ‘‘carrier killer’’ antiship ballistic missile, capable of targeting U.S. ships at sea, and the DF–26 ballistic missile, capableof targeting Guam (thus its nickname, the ‘‘Guam killer’’).‡In a pre-parade speech commemorating end of the war, President
Xi announced the PLA would reduce the number of its troops by* Some of the most powerful PLA officers to fall in the anticorruption campaign include Gu
Junshan, former deputy director of the General Logistics Department (charged with corruptionin March 2014) and Liu Zheng, also former deputy director of the General Logistics Department(expelled from the CCP in January 2015). Reuters, ‘‘China Military Official Booted from Parliament in Anti-Graft Drive,’’ February 28, 2015; BBC, ‘‘China Ex-General Gu Junshan Charged
with Corruption,’’ April 1, 2014.
† The following countries sent military units to China’s parade: Afghanistan, Belarus, Cambodia, Cuba, Egypt, Fiji, Kazakhstan, Kyrgyzstan, Laos, Mexico, Mongolia, Pakistan, Russia,
Serbia, Tajikistan, Vanuatu, and Venezuela. Andrew S. Erickson, ‘‘China Military Parade—3
September 2015—Your Complete Hardware and Logistics Guide (Updated Version),’’ Andrew S.
Erickson Blog, September 2, 2015.
‡ Other missiles on display at the parade were the DF–10, DF–15B, DF–16, DF–5B, DF–31A,
YJ–12, and YJ–83. Andrew Erickson, ‘‘Missile March: China Parade Projects Patriotism at
Home, Aims for Awe Abroad,’’ China Real Time Report (Wall Street Journal blog), September
3, 2015.

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300,000,50 which would bring the number of China’s total troops
down to approximately two million, according to state-run news
service Xinhua.51 The announcement, couched in language about
China’s commitment to ‘‘carry out the noble missions of upholding
world peace,’’ 52 seemed intended to reassure global audiences that
China’s rise will continue to be peaceful. According to Dean Cheng,research fellow on Chinese political and security affairs at the Heritage Foundation, the troop reduction ‘‘is consistent with thelonger-term effort by the PLA to both pare down its size and shift
from a military focused on quantity to one more focused on quality’’and ‘‘will presumably free up resources that can be reallocated tobetter pay, better quality of life, additional training, and/or equipment acquisition.’’ 53
Major Developments in China’s Military Modernization in2015
Since the publication of the Commission’s 2014 Annual Report,
China’s national security and foreign policy apparatus has madenew military budget announcements, developed and acquired new
military platforms and weapons, engaged in large-scale training
and exercises, and conducted significant overseas military operations. Many of these developments are detailed below. (For an indepth examination of China’s space and offensive missile forces
modernization programs, which are not covered here, see Chapter
2, Section 2, ‘‘China’s Space and Counterspace Programs’’ andChapter 2, Section 3, ‘‘China’s Offensive Missile Forces.’’)China’s 2015 Defense and Security Budget

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China’s announced annual defense budget rose 10.1 percent to$141.9 billion (RMB 886.9 billion) in 2015.54 Although the 2015
spending increase is down from a 12.2 percent increase in 2014, in
real terms it is roughly consistent with defense spending increases
in recent years because China’s inflation rate is near a five-year
low.55

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239
Figure 3: China’s Announced Defense Spending, 1989–2015

Source: This figure reflects Commission judgments based on several sources, each of which
provides data for part of the period 1989–2014. The most recent source is used when thesesources disagree. For 1989–1993, David Shambaugh, Modernizing China’s Military: Progress,
Problems, and Prospects, University of California Press, 2002, 189; for 1994–2001, Dennis J.
Blasko et al., ‘‘Defense-Related Spending in China: A Preliminary Analysis and Comparison
with American Equivalents,’’ United States-China Policy Foundation, 2007, 19; for 2002–2012,
Andrew Erickson and Adam Liff, ‘‘Demystifying China’s Defense Spending: Less Mysterious in
the Aggregate,’’ China Quarterly, December 2013, 805–830; for 2013, Jeremy Page, ‘‘China
Raises Defense Spending 12.2% for 2014,’’ Wall Street Journal, March 5, 2014; for 2014, Andrew
Erickson and Adam Liff, ‘‘The Budget This Time: Taking the Measure of China’s Defense Spending,’’ Asan Forum, March–April 2014; and for 2015, Andrew Erickson and Adam Liff, ‘‘China’s
Military Spending Swells Again despite Domestic Headwinds,’’ Wall Street Journal, March 5,
2015.

* There is no consensus on which items should be included in a country’s ‘‘official’’ defense
budget. Every major power—including the United States and major allies—spends money on
defense not captured in its official defense budget. When evaluating China’s actual defense
spending, some observers, such as the Stockholm International Peace Research Institute, include
China’s spending on the People’s Armed Police in their calculations, which can increase budget
estimates by as much as one-fifth of the official figure. DOD does not disclose its methodology
for calculating actual Chinese defense spending. Sam Perlo-Freeman et al., ‘‘Trends in World
Military Expenditure, 2014,’’ Stockholm International Peace Research Institute, April 2015, 2;
Sam Perlo-Freeman, ‘‘Deciphering China’s Latest Defense Budget Figures,’’ Stockholm International Peace Research Institute, March 2014; U.S.-China Economic and Security Review Commission, Hearing on China’s Military Modernization and its Implications for the United States,
written testimony of Andrew Erickson, January 30, 2014; Andrew Erickson and Adam Liff,
Continued

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China’s actual aggregate defense spending is higher than the official budget because Beijing omits from its official figures somemajor defense-related expenditures, such as research and development programs, purchases of advanced weapons, and local government support to the PLA. The U.S. Department of Defense (DOD)
estimates China’s actual defense spending in 2014 exceeded $165
billion, approximately 25 percent higher than China’s announced
defense budget of $131.6 billion; 56 the Stockholm International
Peace Research Institute estimates China’s actual defense spendingin 2014 was $216 billion, approximately 64 percent higher thanChina’s announced defense budget.*240
China’s defense spending increases appear sustainable in the
short term. Although China’s official nominal defense spending has
grown by double digits almost every year since 1989, the rapid
growth of China’s economy has kept defense spending at a relatively low percentage of China’s gross domestic product (GDP): official defense spending in 2015 will account for only 1.34 percent
of China’s GDP, and even high-end foreign estimates put Beijing’s
actual aggregate defense spending at a moderate 2–3 percent ofChina’s GDP.57 Furthermore, increases to overall state expenditures have outpaced increases to official defense spending in recent
years,58 which has probably insulated Chinese leaders from potential criticism that they are spending too much on the military. Because China’s economic growth has slowed, further double-digit increases to military spending will continue to generate opportunity
costs as government spending strains to meet other national priorities.59 However, there is no indication China’s government is slowing the growth rate of military spending in response to growing opportunity costs.
PLA Navy
In 2015, the PLA Navy’s acquisitions continued to reflect China’s
efforts to transform it from a coastal force into a technologically advanced navy capable of projecting power throughout the Asia Pacific and beyond.* Significant developments in China’s naval forcesfrom late 2014 to 2015 include the following:• China launched its fifth Type 815 DONGDIAO-class intelligence-gathering ship in January. China’s continued production of DONGDIAOs suggests it will increase intelligence activities in what China considers its near and far seas † andconduct more frequent ISR ‡ missions farther from the Chinese
mainland in coming years.60 China sent a Type 815
DONGDIAO to spy on the 2014 Rim of the Pacific exercises off
Hawaii, even as China was participating in the exercises forthe first time.61

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• In February, China introduced into service its first advanced
antisubmarine warfare aircraft, an indigenously built Y–9.62
Although China is expanding the PLA Navy’s antisubmarine
warfare capability, Stratfor, a security-focused consulting firm,
asserts China is likely at least ten years from deploying
enough antisubmarine warfare aircraft to challenge U.S. submarines in the Western Pacific.63 The Y–9 has antisubmarine
warfare technology roughly comparable to the U.S. P–3C
Orion.64‘‘Demystifying China’s Defense Spending: Less Mysterious in the Aggregate,’’ China Quarterly,
December 2013; and Dennis J. Blasko et al., ‘‘Defense-Related Spending in China: A Preliminary
Analysis and Comparison with American Equivalents,’’ United States-China Policy Foundation,
2007.
* For a comprehensive discussion of trends in PLA Navy modernization, including order of battle and acquisition information, see U.S.-China Economic and Security Review Commission,2014 Annual Report to Congress, November 2014, 299–308.
† China typically defines its ‘‘near seas’’ as waters within the Yellow Sea, East China Sea, andSouth China Sea. China typically describes its ‘‘far seas’’ as waters outside of its near seas.
‡ ISR refers to intelligence, surveillance, and reconnaissance.

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241• In January, China commissioned two Type 054A JIANGKAI IIclass missile frigates.65 China has now commissioned 18 of its
planned 22 JIANGKAI IIs.66 The JIANGKAI IIs each likely
carry 32 HHQ–16 surface-to-air missiles and 8 YJ–82 antiship
cruise missiles, and have served a variety of missions, including antipiracy missions in the Gulf of Aden and patrols in China’s near seas.67

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• China launched its 27th Type 056 JIANGDAO-class corvette inearly May.68 China’s JIANGDAOs most likely will be used primarily for near-seas surface patrols because their armaments
are not sufficient for deep-water combat operations.69 China
expects to field an additional 5 to 15 ships.70• In July, China commissioned its second Type 052D LUYANG
III-class destroyer.71 According to the U.S. Office of Naval Intelligence report, The PLA Navy: New Capabilities and Missions for the 21st Century, the LUYANG III’s advanced air defense radar ‘‘allows the PLA [Navy] surface force to operatewith increased confidence outside of shore-based air defense
systems, as one or two ships are equipped to provide air defense for the entire task group.’’ 72 The LUYANG III carries avariant of the advanced, long-range YJ–18 antiship cruise missile. The YJ–18’s supersonic speed and assessed maximum
range of 290 nautical miles will improve the antiaccess/area
denial * capabilities of the PLA Navy.73 In the next five years,
China expects to deploy ten LUYANG IIIs in total.74• In late 2014, China for the first time landed several production-line J–15 fighters on its Soviet-built KUZNETSOV-classaircraft carrier, the Liaoning.75 As China’s naval aviators andthe Liaoning’s crew gain experience operating aircraft from the
Liaoning, China will make progress toward developing a potent expeditionary aircraft carrier force. Among other things, afully operational Liaoning could contribute significantly to the
PLA’s combat capabilities in the South China Sea, where theshort range of China’s fighter fleet limits its power projection
capabilities.76• In July, Chinese state media published an internal documentof the China Shipbuilding Industry Corporation that confirmed
China’s first indigenous aircraft carrier is under construction.77
If construction began in 2013, as U.S. analysts widely reported,
it could reach initial operational capability † by 2020.‡ 78 China* According to DOD, ‘‘antiaccess’’ actions are intended to slow deployment of an adversary’s
forces into a theater or cause them to operate at distances farther from the conflict than theywould prefer. ‘‘Area denial’’ actions affect maneuvers within a theater, and are intended to impede an adversary’s operations within areas where friendly forces cannot or will not prevent access. China, however, uses the term ‘‘counterintervention,’’ reflecting its perception that such operations are reactive. U.S. Department of Defense, Military and Security Developments Involving
the People’s Republic of China 2013, 2013, i, 32, 33; U.S. Department of Defense, Air Sea Battle:
Service Collaboration to Address Anti-Access & Area Denial Challenges, May 2013, 2.
† According to DOD, a system achieves initial operational capability when some units in theforce structure scheduled to receive a system have received it and have the ability to employ
and maintain it. Defense Acquisition University, Glossary: Defense Acquisition Acronyms andTerms, December 2012, B–107.
‡ One unattributed Chinese source suggests the carrier could be launched as early as December 2015. David Tweed, ‘‘China Aircraft Carrier Launch by End-2015 Plausible, Experts Say,’’
Continued

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appears to be building a second indigenous carrier,* and probably intends to build an additional one or two indigenous carriers.79 Boasting a more sizable hull, which will likely allow it
to accommodate a larger air wing than the Liaoning, China’s
new carrier will also feature engine and launch system improvements.
• China launched three new Type 093 SHANG-class nuclear attack submarines in May, according to Chinese media reports.80
The new submarines are reportedly the first SHANGs to carrya vertical missile launch system capable of firing the longrange YJ–18 antiship cruise missile.† 81 The increasing numberof Chinese submarines and the growing range of Chinese submarine-launched munitions will greatly complicate the threat
environment for U.S. ships operating near China.
• Popular Science reported in May that the PLA Navy has built
a simulator to begin training the crew of its Type 095 guidedmissile, nuclear-powered submarine, which is still under development.82 Jesse L. Karotkin, senior China analyst at the U.S.
Office of Naval Intelligence, testified to the Commission that
the Type 095 may ‘‘provide a generational improvement inmany areas such as quieting and weapon capacity’’ and carry
the PLA Navy’s first submarine-launched land-attack cruise
missile.83• In May, a report from Chinese state-run People’s Daily claimed
China has developed a highly efficient air-independent propulsion (AIP) system for diesel-electric submarines. Because AIPequipped diesel-electric submarines need to surface to recharge
their batteries less frequently, this will allow China’s AIPequipped submarines to operate for longer periods while limiting their chance of detection.84• Media reports suggest China launched its fifth Type 903
FUCHI-class auxiliary replenishment oiler in June.85 China
now fields nine auxiliary replenishment oilers, and its growing
fleet better equips the PLA Navy’s surface fleet, including future aircraft carrier task groups and expeditionary forces, tosustain high-tempo operations at longer ranges.86 The demands of the PLA Navy’s expanding missions in far seas haveplaced its auxiliary replenishment oiler fleet on near-constant
deployment status.87• In July 2015, China commissioned the Donghaidao, the PLA
Navy’s first semisubmersible mobile landing platform.88 The
Donghaidao is a logistics ship capable of transporting troops,
cargo, and some naval craft in the relatively shallow waters
Bloomberg, September 30, 2015; Open Source Center, ‘‘PRC Internet: China’s First Indigenously
Built Aircraft Carrier to Float out in December 2015,’’ September 24, 2015. ID: CHR20150924
59609733.
* A Taiwan Ministry of Defense report on the PLA reportedly notes China’s second indigenous
carrier is currently under construction in Shanghai. Reuters, ‘‘China Building Two Aircraft Carriers: Taiwan Defense Ministry Report,’’ September 3, 2015.
† The YJ–18 has a much longer range than the YJ–82, which was previously China’s only indigenous submarine-launched antiship cruise missile. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China
2015, May 2015, 10; U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 16.

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near contested land features in the South China Sea. It is capable of embarking China’s POMORNIK hovercraft, which will
significantly extend the range of the hovercraft and increase
their usefulness in contingencies in the East and South China
seas and those involving islands held by Taiwan.89

China’s Amphibious Forces
The PLA’s continued investment in amphibious forces reflects
China’s perception of a rising need to meet security challenges in
its maritime domain. Although amphibious forces, including amphibious lift, amphibious infantry, and auxiliary transport vehicles, would be crucial in an invasion of Taiwan, China does notappear to be building the amphibious lift capability necessary to
conduct such a large campaign.90 China would more likely use
its amphibious forces in contingencies in the East and South
China seas and those involving islands held by Taiwan. Significant developments in China’s amphibious forces from late 2014
to 2015 include the following:• With the conversion of two mechanized infantry divisions
into amphibious mechanized infantry divisions from 2007 to
2012, China doubled its total amphibious mechanized infantry division personnel from about 30,000 soldiers to 52,000–
60,000 soldiers and reorganized its amphibious mechanizedinfantry forces from two to four divisions.91 The primary roleof China’s amphibious mechanized infantry divisions is tosupplement the PLA Marine Corps as China’s main infantry
force in amphibious invasions.
• China launched its fourth Type 071 YUZHAO-class landing
platform dock in January 2015.92 China will eventually fieldsix Type 071s, each of which can carry up to 60 armored vehicles and 800 troops, and up to four helicopters.93 The expanding landing platform dock fleet will improve China’s
ability to move troops and equipment in South and East
China sea missions.94

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• By early 2015, China had acquired two Ukrainian-built and
one indigenously built POMORNIK hovercraft, the largest
military hovercraft in the world.95 China would deploy its
hovercraft on amphibious lift ships to provide quick transport of infantry, tanks, and heavy equipment to shore duringamphibious invasions. China plans to have a total of four
POMORNIKs in service by the end of 2015.96

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China’s Amphibious Forces—Continued• Images of a model of a landing helicopter dock appeared on
Chinese military web pages in April.97 Although the model
is not necessarily authoritative, it fits the description of alanding helicopter dock rumored since 2013 to be under construction.98 A landing helicopter dock based on the model
would be significantly larger than China’s current landing
platform docks, and as a mobile platform would increase
China’s ability to launch helicopters and move troops andequipment in East and South China seas contingencies.99• In March, China announced the completion of the front fuselage assembly for the prototype of its AG600 seaplane. The
AG600 will be China’s largest seaplane, and with a range of
2,970 nm it could improve China’s troop transport and patrol capabilities throughout the South China Sea.100 In addition to civilian uses, China will likely use the AG600 tocarry supplies by air to South China Sea islands without anairstrip, and could use the AG600 to transport up to 50
troops at a time.101 Some analysts believe the AG600 could
also conduct intelligence missions.102
PLA Air Force
China’s PLA Air Force modernization in 2015 included the development of cutting-edge force projection equipment and additions
and upgrades to forthcoming and deployed weapon systems.* Significant developments in PLA Air Force modernization from late2014 to 2015 include the following:dkrause on DSKHT7XVN1PROD with USCC

• In February 2015, documents emerged detailing the characteristics and flight test records of China’s Divine Eagle unmanned
aerial vehicle. These documents suggest the Divine Eagle isequipped with seven radars, including five active electronicallyscanned array radars, which could allow it to monitor stealthaircraft, such as the United States’ B–2 bomber and F–35
fighter.103 The Divine Eagle is well equipped to track incoming
aircraft, ships, and cruise missiles and help coordinate interceptors from the Chinese mainland during a contingency. The
vehicle’s array of stealth features and 25-kilometer flight ceiling could degrade the ability of U.S. forces to detect and engage it.104• China introduced its first KJ–500 airborne early warning andcontrol aircraft into service in early 2015, according to media
reports.105 China is expanding its fleet of approximately 13 airborne early warning and control aircraft to improve high-fidelity and time-sensitive tracking for China’s air and maritime
forces.106 The KJ–500 will reportedly carry radar comparable
to China’s KJ–2000 airborne early warning and control plane,* For a discussion of long-term trends in PLA Air Force modernization, including order of battle and acquisition information, see U.S.-China Economic and Security Review Commission,2014 Annual Report to Congress, November 2014, 308–314.

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which ‘‘employs radar technology two generations ahead of thatused by the U.S. Air Force’s E–3C [airborne early warning andcontrol aircraft],’’ according to Carlo Kopp, an Australia-based
military analyst and editor of Air Power Australia.107 The KJ–
500 uses the indigenous Y–8 airframe.
• Satellite imagery from October 2014 confirms China has received one of three ordered Ilyushin IL–78 MIDAS air refueling tankers from Ukraine.* The plane is the first modern addition to China’s small and outdated fleet of air refueling aircraft, which previously consisted of about 20 modified H–6
bombers operated by the PLA Air Force and the PLA Naval
Air Force.108 In addition to the two IL–78 tankers still due
from Ukraine, China purchased up to 8 IL–78 tankers from
Russia in the mid-2000s, but production issues have prevented
Russia from delivering any planes to date.109 Moreover, China
may build new tankers based on the airframe of the indigenous
Y–20 transport aircraft, which is still in development.110 Overthe next decade, these air refueling tanker acquisitions could
significantly extend the combat reach of some of China’s attack
aircraft. However, the PLA will need to modernize its fleet of
attack aircraft—most of which cannot refuel in the air—to takeadvantage of its expanding air refueling fleet.111• Media reports suggest China has built two new fifth-generation J–20 fighters, bringing its J–20 fleet to six aircraft. The
two aircraft reportedly conducted their first flights in late
2014.112 The J–20 could reach initial operational capability in
2017–2018, and China reportedly hopes to build 24 J–20s by
2020.113 The PLA Air Force views the J–20 as key to improving China’s ability to conduct offensive operations to deny anenemy’s chance to mobilize defensive forces.114 The J–20’s
stealth features and electronic warfare capabilities would degrade the ability of U.S. forces within the first island chain to
detect and engage it.†dkrause on DSKHT7XVN1PROD with USCC

• China’s prototype J–11D fighter had its first flight in April
2015. The J–11D has better radar and stealth features thanprevious fighters in the J–11 line, and almost certainly is capable of carrying China’s most advanced air-to-air and antiship
missiles.115 The J–11D reportedly will feature a turbofan engine with improved thrust and reliability.116 The J–11 is amodern fighter comparable in performance to fourth-generation
U.S. jets.117* For more information on China’s expanding air refueling fleet, see Michael Pilger, ‘‘First
Modern Tanker Observed at Chinese Airbase,’’ U.S.-China Economic and Security Review Commission, November 18, 2014.
† The first island chain refers to a line of islands running through the Kurile Islands, Japanand the Ryukyu Islands, Taiwan, the Philippines, Borneo, and Natuna Besar. The second island
chain is farther east, running through the Kurile Islands, Japan, the Bonin Islands, the Mariana Islands, and the Caroline Islands. PLA strategists and academics have long asserted theUnited States relies primarily on the first island chain and the second island chain to strategically ‘‘encircle’’ or ‘‘contain’’ China and prevent the PLA Navy from operating freely in the Western Pacific. Open Source Center, ‘‘PRC Article Surveys China’s Naval Rivals, Challenges,’’ January 6, 2012. ID: CPP20120109671003; Bernard D. Cole, The Great Wall at Sea (Second Edition),
Naval Institute Press, 2010, 174–176.

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246• The Aviation Industry Corporation of China may be developinga high-altitude hypersonic unmanned aerial vehicle for regional strategic reconnaissance operations. Taiwan press reporting suggests that the drone would be launched from H–6
bombers, capable of achieving speeds up to Mach 3 to 3.5; operating at a range of 5,500 kilometers (km) (3,417 miles (mi))
and a height of 95,140 feet (18 mi); and returning to an airbase.118

dkrause on DSKHT7XVN1PROD with USCCPLA Training and Exercises
The PLA conducts exercises and training to enhance warfighting
competencies, integrate new weapon systems and tactics, develop
and refine integrated joint operations command structures and concepts, evaluate crew and platform proficiencies, and demonstrate
China’s ability to project power in Asia and beyond, among otherobjectives.
Implementing President Xi’s emphasis on real-combat militarytraining was a top priority for all large-scale PLA military exercises in 2015.119 The Xi Administration frequently emphasizes theimportance of military training under realistic combat conditions.
The 2015 defense white paper states the PLA will begin to ‘‘intensify training’’ in complex scenarios and establish a ‘‘training supervision and inspection system, so as to incorporate real-combat requirements into training.’’ 120 The PLA’s military training appears
to be growing more complex as it increasingly emphasizes joint exercises between diverse combat arms types. According to Xinhua,
the PLA planned to conduct more than 100 joint exercises involving
more than 50 corps in 2015.121
Major military exercises from late 2014 to 2015 included the following:• From August to October, all four PLA services participated in
the Joint Action 2015 exercises, a series of live-fire drills reportedly involving more than 140,000 troops.122 Joint Action isdesigned to integrate all Chinese armed forces to operate together across the spectrum of war. The exercises took place inseveral simultaneous or overlapping phases in different regionsof the country, and emphasized testing troops’ ‘‘joint operations
using digitized commands and information.’’ 123• From July to September 2015, the PLA conducted the Firepower 2015 exercises, a series of cross-region base training exercises for artillery and air defense brigades.124 The Firepower
exercises are designed to link sensors to strike systems forjoint target engagement. Firepower 2015 subjected participating brigades to ‘‘red versus blue’’ combat simulations.* One* ‘‘Red versus blue’’ exercises in the U.S. military pit a ‘‘red’’ force that simulates a potential
foe’s capabilities against a ‘‘blue’’ force that simulates the capabilities of friendly forces. Chinese
media reports suggest that in Chinese red versus blue exercises, the red force represents friendly forces and the blue force represents an enemy force. Open Source Center, ‘‘CCTV–7: Jinan
Air Defense Unit Holds Ground-Air Confrontations in ‘Firepower-2015 Shandan D’ Drill,’’ August 9, 2015. ID: CHO2015081029855809; Open Source Center, ‘‘CCTV-Xinwen: Lanzhou MR
Units Hold Confrontations in ‘Firepower-2015 Qingtongxia C’ Exercise,’’ August 4, 2015. ID:
CHO2015080513756969; and Open Source Center, ‘‘People’s Liberation Army Daily: PRC Air
Force’s First Blue Team Makes Debut in Firepower-2015-Shandan A Exercise,’’ July 6, 2015.
ID: CHR2015070623165581; Open Source Center, ‘‘JFJB Photo: ‘Stride 2015-Zhurihe Military
Drill Kicks Off,’ ’’ June 2, 2015. ID: CHN2015060221884644.

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feature of these exercises has been the use of opposing force
electromagnetic warfare * operations by blue forces to train
PLA units to operate under conditions that simulate U.S. tactics.125 This raft of brigade-level exercises likely will increase
the ability of commanders at the brigade level and lower to innovate and take the initiative in combat, and reduce the tendency among front-line PLA commanders to push decisions up
the chain of command.126 The PLA will use Firepower 2015 toevaluate and rank all units to ensure the highest-performing
PLA units will be deployed at the front lines of future conflicts.127• China held the Stride 2015 military exercises from June to
September. Stride 2015 subjected 29 brigades to red versus
blue simulated combat drills at six training sites across China,
with most of the drills occurring in the Inner Mongolia Autonomous Region. According to a China Military Online report,
Stride 2015 emphasized ‘‘the commanders’ planning for combat
operations, command [and] control training, . . . ground-air coordination training, harmonious training between ‘new type’
forces [such as special operations forces] and traditional forces
and the transformation and application of new combat methods
and results.’’ 128 As the PLA develops its command and control
and joint operations capabilities in simulated combat, it will
become increasingly capable of integrating its evolving militaryforces to conduct large-scale military operations involving diverse combat arms types.
• In March, Chinese long-range bombers traversed the Bashi
Channel between Taiwan and the Philippines to conduct thefirst known PLA Air Force drill in the Western Pacific.129 The
planes involved were reportedly H–6K bombers, which can
carry long-range land attack cruise missiles capable of reaching Guam.130 The PLA Air Force conducted another drill
through the Bashi Channel in August, with ‘‘multiple types ofaircraft . . . reaching 1,000 kilometers [540 nm] beyond theFirst Island Chain,’’ according to Chinese state-run media outlet Xinhua.131 These drills provided pilots with maritime flight
experience and reflect the PLA Air Force’s growing role in support of the PLA’s strike missions into the second island
chain.132 China most likely intended these drills to develop its
far-seas power projection capabilities, and to demonstrate its
ability and intention to exert influence farther from the Chinese mainland.

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• In May 2015, the PLA Air Force for the first time successfully
airdropped heavy artillery into ‘‘enemy’’ rear areas during adrill.133 According to Chinese media, the artillery airdrop ‘‘indicates a major leap forward for [the PLA’s] airborne operation
capability.’’ 134 This capability could have applications in a
Taiwan conflict scenario.
* Electromagnetic warfare involves the use of focused energy, usually radio waves or laser
light, to confuse or disable an enemy’s electronics and protect the electronics of friendly forces.
Raytheon, ‘‘Electronic Warfare’’; Lockheed Martin, ‘‘Electronic Warfare.’’VerDate Sep 11 201409:25 Nov 12, 2015

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PLA Navy Sails through U.S. Arctic Waters
On September 2, five PLA Navy ships sailed through Alaska’s
Aleutian Island chain. This marked the first time the PLA operated in the Bering Sea, and the first time it operated in the
United States’ territorial sea (i.e., within 12 nm of U.S. territory)
during a far sea deployment without a U.S. port call. According
to U.S. defense officials, the PLA Navy flotilla (which included
three combat ships, a supply ship, and an amphibious ship) operated in accordance with international law as articulated in the
UN Convention on the Law of the Sea (UNCLOS), which allows
for ‘‘innocent passage’’ within the territorial sea, as well as ‘‘transit passage’’ through straits.135 The PLA Navy ships sailed
through the area following a military exercise with Russia in the
Sea of Japan.136
The PLA Navy’s transit was significant in part because, while
it was consistent with international law, it contravened China’s
unconventional policy on foreign militaries’ operations in its own
exclusive economic zone and territorial sea.137 China asserts thatit has the right to require foreign ships to obtain permission orprovide notification before conducting innocent passage, although
UNCLOS does not include such a provision.138 It is unclear
whether the PLA Navy’s transit through U.S. territory reflects a
shift in China’s long-standing policy.
The unprecedented transit came as China has indicated a
growing interest in the Arctic, particularly in opportunities for
new shipping routes and natural resource exploitation.139 U.S.
Pacific Command Commander Admiral Harry Harris testified toCongress that he believed the PLA Navy passed through the
Aleutian Islands in part to ‘‘demonstrate their capability to operate that far north.’’ 140 The timing of the transit coincided with
President Obama’s visit to Alaska, which included, among otherevents, a U.S.-led conference of global leaders (including from
China) and stakeholders in Arctic issues.141 When asked whether the PLA transit was timed to coincide with President Obama’s
visit, Adm. Harris replied, ‘‘I think it was coincidental, but I
don’t know that for a fact.’’ 142

China’s Global Security Activities in 2015
China’s global security engagement continued to expand in 2015,reflecting China’s maturing international security interests and the
PLA’s improving capacity to operate in unfamiliar environments
far from China’s shores.

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China Seeks Arrangements for Overseas Military Facility
In its 2015 defense white paper, China said its ‘‘growing strategicinterests’’ would require an expansion of overseas military engage-

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ment to safeguard its overseas interests.* 143 It is widely understood that China will use the PLA to protect these overseas interests, which include growing overseas expatriate populations andcommercial interests.144 The PLA Navy already operates routine
patrols of busy shipping lanes vulnerable to piracy in the Gulf ofAden † and has been involved in Chinese noncombatant evacuation
operations overseas. Moreover, China appears to be working to establish military facilities in strategically important parts of theworld, especially in the greater Indian Ocean region. These facilities would support logistical requirements and greatly assist the
PLA Navy in increasing its global presence.145
According to statements by Djibouti President Ismail Omar
Guelleh, the governments of China and Djibouti are in talks to establish a Chinese military facility in Djibouti.146 These negotiations
follow a 2014 defense cooperation agreement between Djibouti andChina that allowed PLA Navy ships to dock at the Port of Djibouti
and brought hundreds of millions of dollars in Chinese investment
to the country.147 To date, PLA Navy ships have visited the Portof Djibouti more than 50 times to resupply food, perishables, andwater.148 A permanent Chinese military facility could allow China
to offer its ships a more comprehensive set of resupply services inDjibouti while supporting China’s antipiracy operations in the Gulfof Aden. Moreover, Djibouti occupies a strategic position at theBab-el-Mandeb—a chokepoint for sea lines of communication between the Red Sea and Indian Ocean—through which travels alarge portion of hundreds of billions of dollars in trade between
China and the Middle East and Europe.149 A military foothold in
Djibouti would boost China’s power projection capabilities in anarea of the world crucial to China’s economic interests. The UnitedStates, France, and Japan each have a permanent military presence in Djibouti. The United States military’s Camp Lemonnier in
Djibouti is a hub for U.S. counterterrorism operations in Africa andthe Middle East.150
China may seek to establish military facilities elsewhere in theregion as well. Over the last few years, China has played a largerole in financing and constructing civilian port infrastructure in the
Indian Ocean, including the Port of Colombo and Port ofHambantota in Sri Lanka, and Gwadar Port in Pakistan.151 Furthermore, PLA Navy antipiracy task groups have made port calls
in at least 12 regional countries for resupply and replenishment
and military-to-military engagements.152 Chinese investments incommercial ports in the Indian Ocean and Chinese naval diplomacy
with countries in the region will likely improve the PLA Navy’s
ability to replenish using regional ports, and could lay the groundwork for future logistics hubs in the Indian Ocean.
* This reflects the PLA’s New Historic Mission to protect China’s expanding national interests.
In December 2004, then Chinese President Hu Jintao outlined four ‘‘New Historic Missions’’ for
the Chinese military. According to Daniel Hartnett, analyst at CNA Corporation, the missions
are ‘‘to ensure military support for continued Chinese Communist Party rule in Beijing; to defend China’s sovereignty, territorial integrity, and national security; to protect China’s expanding national interests; and to help ensure a peaceful global environment and promote mutual
development.’’ U.S.-China Economic and Security Review Commission, Hearing on China’s Military and Security Activities Abroad, written testimony of Daniel Hartnett, March 4, 2009.
† The Gulf of Aden is a gulf between the Horn of Africa and the south coast of the Arabian
Peninsula. It is a crossroads for trade between the Indian Ocean and Mediterranean Sea.

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China’s Submarine Deployments
In late 2013, China began its first known submarine deployment
to the Indian Ocean. Chinese officials have claimed these submarines support China’s antipiracy activities in the Indian
Ocean.153 The more likely purpose of these deployments, though, is
to collect intelligence on U.S., Indian, and other forces in the Indian Ocean; test and enhance the ability of China’s submarinecrews to operate for long durations at extended distances from the
Chinese mainland; prepare for potential crises and wartime operations in the Indian Ocean; and demonstrate China’s growing strategic interests in the region.154 According to Adm. Harris:
We’re seeing Chinese submarine deployments extend farther
and farther [from China], almost with every deployment. It
has become routine for Chinese submarines to travel to theHorn of Africa region and North Arabian Sea in conjunction with their counterpiracy task force operations. We areseeing their ballistic missile submarines travel in the Pacific at [longer] ranges, and of course all of those [deployments are] of concern.155
These deployments demonstrate China’s growing ability to conduct small-scale, long-distance naval operations for extended durations despite its lack of overseas military facilities. Moreover, these
deployments suggest Chinese submarine commanders and crews
are becoming familiar with the operating environment of the Indian and Pacific oceans. With the visit of a PLA Navy submarine
to the Port of Karachi, Pakistan, in May 2015, China has now conducted at least four submarine deployments in the Indian Ocean
region since December 2013.156 China’s submarine deployments in
the Indian Ocean include the following:• From December 2013 to February 2014, a SHANG-class nuclear attack submarine conducted China’s first known submarine patrol in the Indian Ocean.* 157

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• In September 2014, a Chinese SONG-class diesel-electric submarine † made a port call in Colombo, Sri Lanka.158 Anotherport call to Colombo by a Chinese submarine was reported in
October 2014.‡ 159 These visits highlight what have been generally positive relations between China and Sri Lanka in recent years, including contracts for billions of dollars in Chinese
investment in Sri Lanka. In February 2015, however, the* The SHANG nuclear attack submarine carries torpedoes (range of 15 nm) and YJ–82 antiship cruise missiles (20 nm) and will likely be equipped with the YJ–18 antiship cruise missile(290 nm) in coming years. The SHANG is designed for antisurface warfare and intelligence, surveillance, and reconnaissance operations, and likely will escort future nuclear deterrent patrols
and aircraft carrier task groups. U.S.-China Economic and Security Review Commission, 2014
Annual Report to Congress, November 2014, 301.
† The SONG’s weaponry, expected missile upgrades, and role in PLA Navy operations are
similar to those of the SHANG nuclear attack submarine. IHS Jane’s, ‘‘Jane’s Fighting Ships:
Song Class (Type 039/039G),’’ February 13, 2015; U.S.-China Economic and Security Review
Commission, 2014 Annual Report to Congress, November 2014, 301.
‡ Sources disagree about whether the October 2014 port call involved the same SONG-classsubmarine that visited Colombo in September, or a HAN-class nuclear attack submarine. Atul
Aneja, ‘‘China Says its Submarine Docked in Sri Lanka ‘for Replenishment,’ ’’ Hindu, November
28, 2014; Shihar Aneez and Ranga Sirilal, ‘‘Chinese Submarine Docks in Sri Lanka despite Indian Concerns,’’ Reuters, November 2, 2014.

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newly elected Sri Lankan government ruled out future Chinese
submarine visits and stopped work on the $1.5 billion Chinese
development of the Port of Colombo pending an investigation
into rumors of impropriety surrounding the contract.160 Although in June Sri Lanka outlined steps for the project to resume, this development suggests the new Sri Lankan government may be taking a more skeptical view of economic and security cooperation with China than did its predecessor.161• In April 2015, a Chinese submarine finished a two-month deployment to the Gulf of Aden. According to media reports, it
was a HAN-class nuclear attack submarine.* 162• In May 2015, a Chinese YUAN-class diesel-electric submarine
visited the Port of Karachi, Pakistan,163 one month after China
reportedly agreed to sell eight YUANs to Pakistan.† 164
PLA Navy Evacuates Citizens from Yemen
From March 29 to April 6, 2015, China conducted a noncombatant evacuation operation ‡ (NEO) in war-torn Yemen, marking thefirst Chinese NEO conducted exclusively by the PLA.165 China’s
Gulf of Aden antipiracy task force, consisting of two PLA Navy frigates and a replenishment ship, brought about 600 Chinese citizens
and more than 200 foreign nationals across the Gulf of Aden to theport of Djibouti. The PLA Navy conducted the evacuation without
encountering hostile forces. The Yemen operation was a significant
symbolic milestone as China works to build its reputation as a responsible global power.166 According to Deputy Chief of the PLA’s
General Staff Department Sun Jianguo, the Yemen NEO is an example of China’s ‘‘unique role in the effort to create a peaceful, stable, prosperous neighborhood and [provide] public services to address global problems and challenges.’’ 167
China has conducted more than a dozen NEOs since 2006, including NEOs in Chad, Haiti, Kyrgyzstan, Lebanon, the Solomon
Islands, Thailand, Timor-Leste, Tonga, Egypt, Libya, Japan, Iraq,
and Vietnam. These NEOs involved the evacuation of 59,600 Chinese nationals in total.168 Generally, Chinese civilian government
agencies—not the PLA—led these NEOs, usually by marshaling
commercial ships and aircraft.169 Significant recent Chinese noncombatant evacuation operations include the following:dkrause on DSKHT7XVN1PROD with USCC

• In 2011, the PLA Air Force and Navy deployed four cargo aircraft and one surface combatant, respectively, to support andprotect the Ministry of Foreign Affairs-led evacuation of 35,000
Chinese nationals from Libya. This marked the first use of* China’s aging HAN nuclear attack submarines have weaponry similar to the SONG dieselelectric submarine, but because China has already begun to decommission its older HAN boats
and probably will phase out this class as more modern submarines are incorporated into thefleet, the HAN nuclear attack submarine is unlikely to receive substantial armaments upgradesin the near future. IHS Jane’s, ‘‘Jane’s Fighting Ships: Han class (Type 091/091G),’’ February
13, 2015.
† The YUAN’s weaponry, likely missile upgrades, and role in PLA Navy operations are similar
to those of the SHANG nuclear attack submarine and SONG diesel-electric submarine. IHS
Jane’s, ‘‘Jane’s Fighting Ships: Yuan Class (Type 041),’’ February 13, 2015.
‡ Noncombatant evacuation operations involve the extraction of civilians from a foreign country amid a dangerous security situation.

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PLA military platforms in a Chinese NEO.170 China’s ministries of Commerce and Public Security, the Civil Aviation Administration of China, Chinese companies operating in Libya,
and Chinese shipping companies also participated in the evacuation and coordinated closely with the PLA.171• In May 2014, Chinese civilian government and embassy personnel worked with the Vietnamese government to coordinate
the evacuation of 3,553 Chinese nationals from Vietnam following violent anti-Chinese riots. Representatives of the stateowned Metallurgical Corporation of China—the employer ofmost of the evacuees and a target of the riots—also helped tocoordinate the evacuation. The Chinese government used chartered planes to evacuate the roughly 100 people injured in theriots and four chartered ships to evacuate the rest.172

dkrause on DSKHT7XVN1PROD with USCCThe Yemen NEO furthers China’s goal to develop NEO capabilities in far seas.173 The size and projected growth of China’s expatriate population and overseas economic assets motivates this mission. Chinese citizens made more than 100 million trips abroad in
2014, and will make 150 million trips abroad annually by 2020.174
According to Mathieu Duchâtel, senior researcher at the StockholmInternational Peace Research Institute, and Jonas Parello-Plesner,
former senior policy fellow at the European Council on Foreign Relations, more than five million Chinese nationals live abroad, many
working for one of the 20,000 Chinese companies operating overseas.175 China assesses protecting overseas Chinese citizens andeconomic assets will require greater expeditionary capabilities, andthe 2015 defense white paper suggests China will develop its NEO
capabilities by expanding the PLA Navy’s global presence and calling on the PLA, rather than civilian government organizations, torun future NEOs. Although the PLA Navy has demonstrated theability to conduct a NEO in a permissive environment, its limited
operational experience and planning capability and lack of overseas
military assets and bases may hamper its ability to extend its NEO
capabilities beyond the Asia Pacific and greater Indian Ocean regions and to operate in hostile environments. China will likely continue to acquire blue-water naval assets, seek new training and experience for its personnel, and cultivate port agreements in far seas
to overcome some of these deficiencies.

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China-Russia Security Relations in 2015
China and Russia continued to enhance cooperation in the security realm in 2015. This trend is likely to continue as Beijing
and Moscow seek areas of shared interest on which to alignwhile downplaying their growing competition in the economic
and foreign policy realms.
Joint Sea 2015
In the first phase of Joint Sea 2015 military exercise, which
took place from May 17 to May 21, two PLA Navy Type 054A
frigates and a Type 903 auxiliary replenishment oiler met five
Russian Navy ships for the first China-Russia joint exercise in
the Mediterranean Sea.176 The exercise featured navigation safety, underway replenishment, escort missions, and live fire training.177 The Chinese ships docked in the Russian Black Sea portof Novorossiysk several days before the exercises.178 China’s increasing military activity in the Mediterranean Sea indicates
Beijing’s interest in protecting regional trade routes, maintaining
its ability to conduct noncombatant evacuation operations in theregion, and demonstrating the increasingly global reach of its
military.179
The second phase of the exercise took place in the Sea ofJapan from August 20 to August 28 and was reported by Chinese and Russian press to be the largest-ever exercise between
the two countries.180 One Russian Navy deputy commander
noted that it was ‘‘unprecedented’’ in scope.181 The weeklong exercise, which involved 7 PLA Navy surface ships, 5 PLA Air
Force aircraft, and 200 Chinese marines,182 focused on ‘‘anti-sabotage, anti-submarine, anti-vessel and anti-aircraft defense’’ 183
and culminated in a joint amphibious landing drill,184 the PLA’s
first ever amphibious landing in a foreign country.185
China Purchases Russian S–400 Air and Missile Defense Systems

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China will purchase S–400 air and missile defense systems
from Russia, according to an April 2015 statement from the chief
executive officer of Russian arms exporter Rosoboronexport.
China signed a contract to purchase the S–400s in 2014.186 Analysts say the order likely includes four to six units, at a total costof $3 billion.187 The S–400 will extend the range of China’s surface-to-air missile force from 300 kilometers (approximately 186
miles) to 400 kilometers (approximately 249 miles)—enough tocover all of Taiwan, the Senkaku Islands in the East China Sea,and parts of the South China Sea 188—and feature an improved
ballistic missile defense capability over China’s existing surfaceto-air missile systems.189 China also is developing its own nextgeneration surface-to-air missile, the HQ–19, which likely will
have capabilities similar to the S–400.190

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China-Russia Security Relations in 2015—Continued
War Anniversary Parade in Moscow
On May 9, 102 Chinese soldiers marched in a military paradein Moscow to commemorate the anniversary of the end of WorldWar II.191 President Xi also attended the event. China was oneof only ten countries to send a delegation because many Western
leaders boycotted the parade over Russia’s actions in Ukraine.192
The participation of Chinese troops in the parade may signal
China’s growing, if temporary, security alignment with Russia aseach country deals with strained security relations with its respective neighbors.
China’s Global Arms Sales
China overtook Germany to become the third-largest arms exporter worldwide in 2015, according to a Stockholm International
Peace Research Institute study.193 Between the periods 2005–2009
and 2010–2015, China’s exports of major arms rose 143 percent
from $3.1 billion to $7.6 billion. China’s arms exports increasingly
include advanced weapons and platforms, such as jet fighters andmissile corvettes. The surge and growing complexity in China’s
arms exports reflect the maturation of China’s domestic defense industry after decades of significant Chinese government investment
in defense research and development, as well as China’s efforts tosecure foreign military technology through arms transfers and espionage.194 China is poised to continue growing its arms exports as
it increasingly offers low-cost alternatives to advanced platforms
formerly available only from the United States and Russia. Moreover, these mounting arms exports will support China’s militarymodernization program by defraying the costs of some of the country’s investments in its domestic defense industry.
In the past ten years, China has sold weapons to 48 countries,
all in Asia, Africa, or Latin America.195 Several countries, including Algeria, Argentina, Bangladesh, Burma (Myanmar), and Nigeria, have acquired major naval platforms from China. China also
has secured deals to supply several countries, including Pakistan,Venezuela, and Bangladesh, with jet fighter aircraft, and is likely
to pursue new jet fighter transfers in the near future.196 Major
Chinese arms export deals over the past several years have included the following:dkrause on DSKHT7XVN1PROD with USCC

• In March 2015, Pakistan agreed to purchase eight Chinese
YUAN-class submarines in a deal reportedly worth as much as$5 billion.197 The acquisition could support Pakistan’s efforts todevelop a sea-based nuclear deterrent.198 Pakistan’s YUANs
most likely would feature air-independent propulsion diesel engines, a standard feature of PLA Navy YUANs that increases
stealth and endurance.
• In June 2015, the Bangkok Post reported China had won a bid
to provide Thailand with three YUAN-class submarines at a

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cost of about $1 billion.199 Thailand reportedly chose the Chinese bid over bids from Germany and South Korea. Many analysts interpreted the deal as a signal that Thailand’s ruling
junta seeks closer security ties with China as its partnershipwith the United States falters.200 However, in July, Thailand’s
military leadership apparently shelved the deal, most likely
due to popular opposition to the allocation of funds to militaryacquisitions at the cost of social welfare and economic programs.201
U.S.-China Security Relations in 2015
U.S.-China relations were strained in 2015, with China’s continued aggressive behavior in the South China Sea and its ongoingcyber espionage against U.S. targets as the two major irritantsfrom Washington’s point of view.

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U.S.-China Tensions in the South China Sea
Even as China’s destabilizing actions in the South China Sea alienate U.S. allies and partners and challenge lawful air and maritime transit by the U.S. military, Beijing continues to insist that
the United States should not involve itself in issues related to theSouth China Sea.202 In 2015, China’s land reclamation activity on
seven land features increased tensions between Beijing and its
neighbors regarding disputes over the contested Spratly Islands.
(See Chapter 3, Section 2, ‘‘China and Southeast Asia,’’ for an indepth examination of China’s land reclamation and other activities
in the South China Sea.)
U.S.-China tensions in the South China Sea began to heighten
considerably in May 2015. On May 12, as more details of China’s
land reclamation in the South China Sea came to light, the WallStreet Journal reported that U.S. Secretary of Defense Ashton Carter was contemplating sending U.S. Navy surveillance aircraft andships within 12 nm of China’s land reclamation projects, citing‘‘growing momentum within the Pentagon and the White House fortaking concrete steps in order to send Beijing a signal that the recent buildup in the Spratlys went too far and needed to stop.’’ 203
On October 27, after much deliberation by the Obama Administration, a U.S. Navy guided missile destroyer conducted a freedom ofnavigation patrol within 12 nm of Subi reef, an artificial island created by China from a low-tide elevation,* appearing to signal that
the United States does not consider Subi Reef to have a territorialsea.204
Starting in May and continuing through the summer, the U.S.
Navy more regularly publicized its air patrols near the land reclamation projects. On May 20, a CNN reporter accompanied thecrew of a U.S. Navy P–8A Poseidon surveillance plane that flew
from Clark Air Base in the Philippines to airspace near some of
China’s land reclamation projects. Over the course of the flight, the* According to UNCLOS, low-tide elevations, which are submerged at high tide, may not generate a territorial sea unless they are located within the territorial sea of another island or
mainland coastline. UN Convention on the Law of the Sea, ‘‘Part 2: Territorial Sea and Contiguous Zone.’’ See also Gregory Poling, ‘‘Carter on the South China Sea: Committed and (Mostly)
Clear,’’ Center for Strategic and International Studies Asia, Maritime Transparency Initiative,
June 3, 2015.

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PLA Navy ordered the crew of the Poseidon to leave the airspaceeight times.205 CNN reported the P–8 crew had been flying such
missions for months and were accustomed to similar warnings, butthey noted the warnings had become more frequent and aggressive
as China’s land reclamation projects progressed. That same month,a U.S. defense official said U.S. Navy surveillance missions near
China’s land reclamation projects occur on an almost-daily basis.206
In July, Commander of the U.S. Pacific Fleet Admiral Scott Swift
told reporters he had been present on one such flight, noting thatthe missions were ‘‘positive and structured,’’ and ‘‘normalized.’’ 207
Publicizing U.S. naval patrols and surveillance flights near China’s reclaimed land features in the South China Sea appears to bepart of a growing effort by the United States both to impose
reputational costs on China and to reassure allies, partners, andfriends in the region as China’s land reclamation and construction
activities continue. In his keynote speech at the 2015 Shangri-La
Dialogue,* Secretary Carter asked for ‘‘a lasting halt’’ to land reclamation in the South China Sea and harshly criticized China’s
land reclamation, saying, ‘‘Turning an underwater rock into an airfield simply does not afford the rights of sovereignty or permit restrictions on international air or maritime transit.’’ 208 He also reaffirmed the United States’ right and intention to ‘‘fly, sail, and operate wherever international law allows,’’ 209 a statement President
Obama repeated in a joint press conference during President Xi’s
first ever state visit to the United States in September.210
At the time of the writing of this Report, U.S. pressure on China
to cease further land reclamation and military facilities construction appears to have largely been ineffective. In August, China’s
foreign minister announced China’s land reclamation ‘‘has alreadystopped,’’ in an attempt to assuage concerns as consensus wasbuilding between the United States and Southeast Asian countries
to call for a lasting halt to all land reclamation in the South China
Sea.211 The Chinese foreign minister’s assertion was false, however; although the land reclamation phase appears to be nearing
completion, China continues to build, expand, and upgrade infrastructure on these reclaimed sites.212 During the September state
visit, President Xi again sought to allay concerns, stating ‘‘China
does not intend to pursue militarization’’ 213 of the artificial islands.
Absent greater specificity about what constitutes ‘‘militarization,’’and given the existing military infrastructure on China’s reclaimed
features, President Xi’s pledge seems similarly disingenuous.
Memoranda of Understanding on U.S.-China Maritime Encounters

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After several close encounters between the U.S. and Chinese
militaries in and above the South China Sea in 2013 and 2014,†* The Shangri-La Dialogue is a high-profile meeting of regional defense leaders held annuallyin Singapore.
† In December 2013, a PLA Navy ship executed unsafe maneuvers 300 feet from a U.S. Navy
ship in the South China Sea, nearly resulting in a collision. On four occasions between Marchand August 2014, PLA Air Force planes engaged in dangerous and aggressive maneuvers
against U.S. Navy aircraft over international waters in the South China Sea. Josh Chin, ‘‘Chinese Intercepts of U.S. Aircraft: Rogue Pilots or Realpolitik?’’ China Real Time Report (WallStreet Journal blog), August 26, 2014; Tom Cohen, ‘‘ ‘Aggressive’ Chinese Fighter Jet Flies Dangerously Close to U.S. Military Plane,’’ CNN, August 24, 2014; Scott Neuman, ‘‘Photo Releasedof Chinese Fighter That Buzzed U.S. Navy Plane,’’ National Public Radio, August 23, 2014; andVerDate Sep 11 201409:25 Nov 12, 2015

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DOD and the Chinese Ministry of Defense completed negotiations
on two voluntary memoranda of understanding (MOUs) on ‘‘Rulesof Safety of Air and Maritime Encounters’’ and ‘‘Notification ofMajor Military Activities’’ in November 2014.
The ‘‘Rules’’ MOU seeks to avoid miscalculations and misunderstandings in encounters between U.S. and Chinese surface ships byestablishing best practices for unplanned encounters.* 214 During
the September 2015 state visit, the two countries announced an
air-to-air annex to the ‘‘Rules’’ MOU.† 215 The ‘‘Notifications’’ MOU
aims to increase transparency between the two militaries by providing best practices for regularly sharing information about security-related policy developments in each country and by establishing a mechanism to encourage the two militaries to invite eachother to observe unilateral, bilateral, and multilateral exercises.216
At the September state visit, the two sides announced an annex
providing rules for an emergency military hotline as well.217
The extent to which the Chinese and U.S. militaries have followed the MOU guidance in their interactions is unclear. According
to September 2015 testimony to Congress by Adm. Harris, U.S. Pacific Command has ‘‘seen very few dangerous activities by the Chinese’’ since August 2014.218 Days later, U.S. National Security Adviser Susan Rice also asserted that ‘‘[w]e’ve seen a marked improvement in operational safety since we signed [the MOUs].’’ 219
One day after Ms. Rice’s statement, however, the Wall Street Journal reported that on September 15, 2015, two Chinese fighter jets
flew within 500 feet of a U.S. Air Force reconnaissance plane approximately 80 miles from China’s coast in the Yellow Sea. U.S. defense officials referred to the intercept as ‘‘unsafe,’’ but were hopeful that it was an isolated incident, noting ‘‘improvements’’ in the
behavior of PLA pilots since last year.220
Chinese Cyber Espionage Continues to Damage Relations

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China’s unabated use of cyber espionage continues to erode trust
between Washington and Beijing. Of particular concern to the U.S.
government and business community is Chinese cyber-enabled economic espionage. Chinese economic espionage not only disadvantages the U.S. economy, but also can have an impact in the security realm when targeting defense contractors and sensitive techJohn Harper, ‘‘Hagel Calls Chinese Actions against USS Cowpens ‘Irresponsible,’ ’’ Stars andStripes, December 19, 2013.
* This MOU follows a similar nonbinding agreement signed in 2014, the ‘‘Code on Unplanned
Encounters at Sea’’ between China, the United States, and 19 other Pacific countries. Neitherof these agreements addresses China’s policy of requiring prior permission for foreign intelligence gathering and military activity in its exclusive economic zone, contrary to internationallaw. Referring to the 2014 code, a senior PLA Navy official stated that ‘‘whether or where orwhen these rules apply’’ had not been decided. Similarly, the ‘‘Rules’’ MOU allows each country
their own interpretation, stating ‘‘this Memorandum is made without prejudice to either side’s
policy perspective on military activities in the exclusive economic zone.’’ Jeremy Page, ‘‘China
Won’t Necessarily Observe New Conduct Code for Navies,’’ Wall Street Journal, April 23, 2014;
U.S. Department of Defense and Chinese Ministry of National Defense, Memorandum of Understanding between the United States of America Department of Defense and the People’s Republicof China’s Ministry of Defense on Notification of Major Military Activities Confidence Building
Measures Mechanism, November 4, 2014, 4; and Peter Dutton and Andrew Erickson, ‘‘When
Eagle Meets Dragon: Managing Risk in Maritime East Asia,’’ Real Clear Defense, March 25,
2015.
† During the state visit, the two countries also announced they would pursue a parallel‘‘Rules’’ MOU for the U.S. and Chinese coast guards. White House Office of the Press Secretary,‘‘Fact Sheet: Chinese President Xi Jinping’s State Visit to the United States,’’ September 25,
2015.

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nologies with military applications. A January 2015 internal DOD
report found the U.S. defense industry to be vulnerable to cyber espionage, asserting there were ‘‘significant vulnerabilities on nearly
every [DOD] acquisition program that underwent cybersecurity[operational test and evaluation] in [fiscal year] 2014.’’ 221 (For an
in-depth discussion of China’s cyber-enabled economic espionage
activities, see Chapter 1, Section 4, ‘‘Commercial Cyber Espionage
and Barriers to Digital Trade in China.’’)Chinese cyber espionage against the United States government isalso of concern. Perhaps the most notable evidence of China’s growing espionage against the U.S. government came in 2015 with therevelation that the personal information of more than 22 million
Americans as well as millions of sensitive and classified documents
had been exfiltrated from the U.S. Office of Personnel Management
via a massive cyber espionage campaign.222 Several observers, including the U.S. Director of National Intelligence James Clapper,
have suggested the Chinese government was behind the campaign.223 At the time of the writing of this Report, the U.S. government had not publicly attributed the espionage campaign to China.
In addition, China is developing capabilities to conduct offensive
cyber operations—which are separate from cyber espionage—
against U.S. military or civilian systems.* An updated edition of
one of China’s most authoritative resources on military strategy,
The Science of Military Strategy, acknowledges for the first timethe existence of offensive cyber forces within China’s military,
something Beijing had previously denied.† As noted earlier, China’s
2015 defense white paper refers to the cyber realm as one of two‘‘new commanding heights in strategic competition.’’ 224 According
to U.S. defense officials, the United States and China are negotiating an agreement that neither side will conduct offensive cyber
operations against each other’s civilian critical infrastructure inpeacetime.225

Select U.S.-China Security-Related Visits andExchanges in 2015

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Presidents Obama and Xi Hold a Summit: As noted earlier,President Xi Jinping made his first ever state visit to the UnitedStates in September 2015. During the visit, the two countries
announced several agreements and cooperative efforts, the mostprominent related to climate change and cyber-enabled economic
espionage. In addition to the expanded military MOU noted previously, other security and foreign policy announcements included commitments to: advance counterterrorism cooperation(particularly on countering improvised explosive devices); expand* For an assessment of China’s offensive cyber warfare capabilities and how they might interact with U.S. forces and systems in a conflict, see Evan Heginbotham et al., ‘‘The U.S.-China
Military Scorecard: Forces, Geography, and the Evolving Balance of Power 1996–2017,’’ RAND
Corporation, September 2015, 259–282.
† The updated Science of Military Strategy was published in Chinese in 2013, but had not beentranslated into English until early 2015. Shane Harris, ‘‘China Reveals Its Cyberwar Secrets,’’
Daily Beast, March 18, 2015.

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Select U.S.-China Security-Related Visits andExchanges in 2015—Continued
humanitarian assistance and disaster relief cooperation; establish an annual bilateral dialogue on nuclear security; and maintain cooperation in support of reconstruction and economic development in Afghanistan.226
U.S.-China Strategic and Economic Dialogue: At the seventhround of the Strategic and Economic Dialogue talks held in
Washington on June 23–24, 2015, participants discussed over
100 issues, but accomplished little on the ‘‘Strategic Track,’’ likely due to impasses over the South China Sea and cybersecurity.227
Central Military Commission Vice Chairman Fan Changlong Visits the United States: General Fan spent six days in the UnitedStates in June 2015, visiting the U.S. aircraft carrier Ronald
Reagan in San Francisco, a Boeing factory in Seattle, and the
U.S. Army Base at Fort Hood before arriving in Washington, DC,
for meetings with Pentagon and State Department officials.228
During his visit, the two sides established an Army-to-Army Dialogue.229 China’s land reclamation in the South China Sea was aprominent discussion topic, although it appears little progress
was made to address either side’s concerns.230 General Fan invited Secretary Carter and Adm. Harry Harris to visit China before the end of the year.231 General Fan visited Cuba immediately after his trip to the United States.232
Joint Antipiracy Exercises in the Gulf of Aden: The U.S. and Chinese navies participated in their third annual joint antipiracy exercise in the Gulf of Aden in December 2014. The two-day exercise involved a U.S. Navy guided-missile destroyer, at least two
PLA Navy ships, and more than 700 personnel. The exercise included combined visit, board, search, and seizure operations (toinclude the landing of a PLA Navy helicopter on the U.S. ship),and communications exchanges, among other activities.233 Captain Doug Stuffle, commander of U.S. Navy Destroyer Squadron
1, said, ‘‘These bilateral exercises help us establish clear paths
for communication; they encourage transparency of trust, help us
mitigate risk, and allow us to demonstrate cooperative efforts in
the international community to help us work together to deal
with transnational threats. In the end, we look to create a peaceful, stable and secure maritime domain.’’ 234 The PLA, which has
been undertaking antipiracy patrols in the Gulf of Aden since
December 2008, began its 21st escort task force in August
2015.235
Joint Exercise in the South China Sea: In April, the U.S. Seventh Fleet flagship Blue Ridge and a PLA Navy landing craft
conducted joint drills in uncontested waters of the South China
Sea. The first part of the exercise focused on improving communication at sea; the second part focused on search and rescue.236
Other Military Exercises: The U.S. and Chinese militaries participated in several multilateral exercises together in 2015. In
January, a combined U.S., Chinese, and Thai military engineer

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Select U.S.-China Security-Related Visits andExchanges in 2015—Continued
force built a school in Thailand as part of the multilateral Cobra
Gold exercise.237 In May, China and Malaysia led the fourth Association of Southeast Asian Nations Regional Forum Disaster
Relief Exercise, which included the United States and 24 otherparticipants and simulated a typhoon impacting Malaysia.238 In
June, China participated for the first time in ‘‘Exercise Khaan
Quest,’’ a 25-country peacekeeping drill led by Mongolia and theUnited States.239 From August to September, the United States,
China, and Australia conducted their second trilateral ‘‘Kowari’’
exercise, during which a small number of troops from each country participated in wilderness training in a remote area near
Darwin, Australia.240 From August to October, China, theUnited States, and the United Kingdom sent small numbers oftroops to participate in New Zealand’s ‘‘Tropic Twilight’’ humanitarian drill, which involved infrastructure construction and upgrades for schools and clinics at outlying Cook Islands atolls.241
Port Visits: The Blue Ridge visited Zhanjiang in April. There, theBlue Ridge hosted ship tours for Chinese military personnel, andits crew received reciprocal PLA Navy ship tours. Specific detailsof the ship visits were not publicized.242 In addition, the U.S.
guided missile destroyer Stethem visited Qingdao in July. The
July port visit also involved planning for a future search and rescue exercise at sea.243
Quarterly Video Teleconferences between Naval Chiefs: Startingin April 2015, former U.S. Chief of Naval Operations Admiral
Jonathan Greenert and his Chinese counterpart Admiral Wu
Shengli, Commander in Chief of the PLA Navy, began conducting quarterly video teleconference calls to discuss a range ofissues in the military-to-military relationship. During a July call,
Adm. Wu invited then incoming (now acting) Chief of Naval Operations Admiral John Richardson to visit China.244
Other Exchanges: 27 military-to-military exchanges were plannedfor 2015, according to DOD’s annual report to Congress on China’s military for 2015.* At the time of the writing of this Report,
approximately half of these exchanges appear to have occurred.
In addition to the aforementioned exchanges, the following took
place: U.S. Army Pacific Commander General Vincent K. Brooks
visited Beijing and Haikou to meet with PLA leaders; 245 defense
officials held the annual Defense Policy Coordination Talks andAsia-Pacific Security Dialogue in Washington, DC; 246 PLA Navyand PLA Air Force academic delegations visited the UnitedStates; 247 a U.S. National Defense University delegation visitedthe Shenyang Military Area Command; 248 and defense officials
conducted the 10th U.S.-China Disaster Management Exchange,
among other exchanges.249* These were to include 4 high-level visits, 11 institutionalized exchanges, 5 academic exchanges, and 7 functional exchanges. U.S. Department of Defense, Annual Report to Congress:
Military and Security Developments Involving the People’s Republic of China 2015, May 2015,75.

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Conclusions• Three years after coming to power, Chinese President Xi Jinping
has made significant progress consolidating control over China’s
national security and foreign policy apparatus. Two areas of particular focus for the Xi Administration are strengthening thestate’s power over national security matters (as exemplified inthree new and proposed laws governing national security) andemphasizing ‘‘peripheral diplomacy’’ with China’s neighbors (asexemplified in the One Belt, One Road initiative).
• U.S.-China security relations continued to deteriorate in 2015.
China’s aggressive behavior in the South China Sea and its
unremitting cyber espionage against the United States were thekey drivers of growing distrust. Further, the Chinese military’s
continued emphasis on developing antiaccess/area denial capabilities makes clear that China seeks the capability to limit the
U.S. military’s freedom of movement in the Western Pacific.
• China’s military modernization program continues to bear fruit,
particularly as new naval and air force platforms and capabilities
come online. In particular, new developments in China’s naval
modernization increase its ability to deploy troops and equipment
in contingencies in the East and South China seas and those involving islands held by Taiwan. Moreover, the continued production of surface combatants, along with advances in submarine
and aircraft carrier programs, supports China’s ability to project
force in its near seas.
• China in 2015 continued to take steps to bolster its position inits dispute with Japan over islands and adjacent waters in the
East China Sea by constructing 16 structures to facilitate natural gas exploitation near disputed waters; conducting near-daily
patrols of contested waters and airspace; and enhancing the PLA
Air Force’s presence in the East China Sea with the establishment of regular oversea training flights far from China’s coast
and a first-ever transit flight through Japan’s Miyako Strait.
• The rapid growth of China’s arms exports during the last ten
years reflects the maturation of China’s domestic defense industry. In the coming years, Chinese arms, including advanced systems such as jet fighters, will increasingly compete with U.S. andRussian arms on the global market.

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• China’s noncombatant evacuation operations, far seas submarine
deployments, and interest in establishing an overseas militaryfacility reflect its willingness to use military resources to defend
its growing overseas assets. China’s global security activities
likely will increase as the population of Chinese nationals overseas grows along with Chinese overseas economic activity.
• As a result of China’s comprehensive and rapid military modernization, the regional balance of power between China, on the
one hand, and the United States and its allies and associates on
the other, continues to shift in China’s direction.

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 1
1. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 231–238; U.S.-China Economic and Security Review
Commission, 2013 Annual Report to Congress, November 2013, 207–212.
2. Shi Yinhong, ‘‘China’s Complicated Foreign Policy,’’ European Council on
Foreign Relations, March 31, 2015; Michael Swaine, ‘‘Xi Jinping’s Address to theCentral Conference on Work Relating to Foreign Affairs: Assessing and Advancing
Major-Power Diplomacy with Chinese Characteristics,’’ China Leadership Monitor
46 (March 2, 2015): 12–15; Zheng Wang, ‘‘China’s Alternative Foreign Policy,’’ Diplomat (Japan), January 30, 2015; and Mercator Institute for China Studies, ‘‘China’s
Shadow Foreign Policy: Parallel Structures Challenge Established International
Order,’’ October 28, 2014.
3. Xinjiang Academy of Social Sciences’ Institute for Central Asia, discussion
with Commission, July 27, 2015; Scott Kennedy and David A. Parker, ‘‘Building China’s ‘One Belt, One Road,’ ’’ Center for Strategic and International Studies, April 3,
2015; and Michael D. Swaine, ‘‘Chinese Views and Commentary on the ‘One Belt,
One Road’ Initiative,’’ China Leadership Monitor 47:1 (July 14, 2015).
4. Scott Kennedy and David A. Parker, ‘‘Building China’s ‘One Belt, One
Road,’ ’’ Center for Strategic and International Studies, April 3, 2015; Michael
Swaine, ‘‘Chinese Views and Commentary on the ‘One Belt, One Road’ Initiative,’’
China Leadership Monitor 47 (July 14, 2015): 3–9.
5. Michael D. Swaine, ‘‘Xi Jinping’s Address to the Central Conference on Work
Relating to Foreign Affairs: Assessing and Advancing Major-Power Diplomacy with
Chinese Characteristics,’’ China Leadership Monitor 46 (March 2, 2015): 1; Li
Xiaokun et al., ‘‘Diplomacy to Focus on Neighborhood,’’ China Daily, January 2,
2014.
6. Michael D. Swaine, ‘‘Chinese Views and Commentary on Periphery Diplomacy,’’ China Leadership Monitor 44 (July 28, 2014): 2.
7. Edward Wong, ‘‘China Approves Sweeping Security Law, Bolstering Communist Rule,’’ New York Times, July 1, 2015.
8. Austin Ramzy, ‘‘What You Need to Know about China’s Draft Cybersecurity
Law,’’ Sinosphere (New York Times blog), July 9, 2015.
9. Zunyou Zhou, ‘‘China’s Draft Counterterrorism Law,’’ China Brief, 15:14(July 17, 2015).
10. U.S.-China Economic and Security Review Commission, ‘‘Beijing Expands
Control with Sweeping New Security Law,’’ Monthly Analysis of U.S.-China Trade
Data, July 7, 2015; National People’s Congress, Cyber-security Law (Draft), China
Law Translate, July 6, 2015; Edward Wong, ‘‘Security Law Suggests a Broadeningof China’s Core Interests,’’ New York Times, July 2, 2015; and Michael Martina,‘‘China Draft Counterterror Law Strikes Fear in Foreign Tech Firms,’’ Reuters, February 27, 2015.
11. Cheng Li, ‘‘Promoting ‘Young Guards’: The Recent High Turnover in the PLA
Leadership (Part I: Purges and Reshuffles),’’ China Leadership Monitor 48:1 (August
3, 2015).
12. Xinhua (Chinese Edition), ‘‘Xi Jinping: Explanation Related to the Decisionof the CCP Central Committee on Several Problems of Fully Deepening Reform,’’
November 15, 2013, translated in Joel Wuthnow, ‘‘Decoding China’s New ‘National
Security Commission,’ ’’ Center for Naval Analyses, November 2013, 2.
13. Chen Xiangyang, ‘‘Xi’s Speech a Rallying Call for National Security,’’ ChinaUS Focus, April 30, 2014; Shen Dingli, ‘‘Framing China’s National Security,’’ ChinaUS Focus, April 23, 2014; and Shannon Tiezzi, ‘‘China’s National Security Commission Holds First Meeting,’’ Diplomat (Japan), April 16, 2014.
14. China’s State Council Information Office, China’s Military Strategy, May2015.
15. M. Taylor Fravel, ‘‘China’s New Military Strategy: ‘Winning Informationized
Local Wars,’ ’’ China Brief, June 23, 2015.
16. China’s State Council Information Office, China’s Military Strategy, May
2015.
17. China’s State Council Information Office, China’s Military Strategy, May
2015.
18. China’s State Council Information Office, China’s Military Strategy, May
2015.
19. Kevin Pollpeter et al., ‘‘China Dream, Space Dream: China’s Progress inSpace Technologies and Implications for the United States,’’ University of California,
San Diego Institute on Global Conflict and Cooperation for the U.S.-China Economic
and Security Review Commission, March 2, 2015, 7–8.

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20. China’s State Council Information Office, China’s Military Strategy, May
2015.
21. Cheng Li, ‘‘Promoting ‘Young Guards’: The Recent High Turnover in the PLA
Leadership (Part I: Purges and Reshuffles),’’ China Leadership Monitor 48:1 (August
3, 2015); Xinhua (Chinese edition), ‘‘Xi Jinping: Explanation Related to the Decisionof the CCP Central Committee on Several Problems of Fully Deepening Reform,’’
November 15, 2013, translated in Joel Wuthnow, ‘‘Decoding China’s New ‘National
Security Commission,’ ’’ Center for Naval Analyses, November 2013, 2.
22. Xinhua (English edition), ‘‘Defense Ministry Spokesperson on China’s Air Defense Identification Zone,’’ December 3, 2013.
23. Andy Zhou, ‘‘China’s Maritime Disputes: Trouble to the South, but the East
Stays Quiet,’’ East-West Institute, June 11, 2015; Open Source Center, ‘‘ChinaJapan: Beijing, Tokyo Moving Guardedly to Stabilize Ties,’’ April 29, 2015. ID: CHN
2015042974725056; and Shannon Tiezzi, ‘‘A China- Japan Breakthrough,’’ Diplomat(Japan), November 7, 2014.
24. Kyodo News (Japan), ‘‘Japan Protest Chinese Gas Development After Confirming Flares,’’ September 16, 2015.
25. Japan Ministry of Foreign Affairs, The Current Status of China’s UnilateralDevelopment of Natural Resources in the East China Sea, July 22, 2015.
26. Washington Post, ‘‘Japan Warns China Making New Platform in East China
Sea,’’ July 12, 2015.
27. James Hardy and Sean O’Connor, ‘‘Imagery Shows Heliport on China’s Nanji
Islands,’’ IHS Jane’s, January 22, 2015.
28. Ting Shi, ‘‘China Building Base Near Isles Disputed with Japan, Kyodo
Says,’’ Bloomberg Businessweek, December 21, 2014.
29. Open Source Center, ‘‘China-Japan: Reported Air, Maritime Activity near
Senkaku Islands January to March 2015,’’ July 24, 2015. ID: JPO2015072434190220;
Open Source Center, ‘‘China-Japan: Reported Air, Maritime, Activity near Senkaku
Islands April to June 2015,’’ August 4, 2015. ID: JPR2015080446434021.
30. Isabel Reynolds, ‘‘Chasing Chinese Planes 400 Times a Year Is Wearing out
Japan’s Top Guns,’’ Bloomberg Businessweek, March 5, 2015.
31. Open Source Center, ‘‘China-Japan: Reported Air, Maritime Activity near
Senkaku Islands January to March 2015,’’ July 24, 2015. ID: JPO2015072434190220.
32. Xinhua (English edition), ‘‘China Air Force in West Pacific Drill,’’ May 21,
2015.
33. Willy Lam, ‘‘Commander-in-Chief Xi Jinping Raises the Bar on PLA ‘Combat
Readiness,’ ’’ China Brief, January 18, 2013.
34. Jeremy Page, ‘‘China Anticorruption Campaign Targets Party ‘Cliques,’ ’’Wall Street Journal, March 2, 2015.
35. Michael S. Chase et al., ‘‘China’s Incomplete Military Transformation: Assessing the Weaknesses of the People’s Liberation Army,’’ RAND Corporation, February 2015, 49.
36. Michael S. Chase et al., ‘‘China’s Incomplete Military Transformation: Assessing the Weaknesses of the People’s Liberation Army,’’ RAND Corporation, February 2015, 49.
37. Ben Blanchard and Megha Rajagopalan, ‘‘Chinese Military’s Ability to Wage
War Eroded by Graft, its Generals Warn,’’ Reuters, August 18, 2014; Jane Perlez,‘‘Corruption in Military Poses a Test for China,’’ New York Times, November 14,
2012; and John Garnaut, ‘‘Rotting from Within,’’ Foreign Policy, April 16, 2012.
38. Reuters, ‘‘China’s Military Warns about Corruption on Key Anniversary,’’
April 17, 2015.
39. Dennis J. Blasko, ‘‘Corruption in China’s Military: One of Many Problems,’’
War on the Rocks, February 16, 2015.
40. Dennis J. Blasko, ‘‘Corruption in China’s Military: One of Many Problems,’’
War on the Rocks, February 16, 2015.
41. Dennis J. Blasko, ‘‘Corruption in China’s Military: One of Many Problems,’’
War on the Rocks, February 16, 2015; James Mulvenon and Leigh Ann Ragland,‘‘The Only Honest Man? General Liu Yuan Calls out PLA Corruption,’’ Hoover Institution, April 30, 2012.
42. Reuters, ‘‘China’s Top Military Body to Take over Army Auditing Office,’’ November 6, 2014.
43. Josh Chin, ‘‘Chinese General Who Faced Graft Inquiry Dies of Cancer,’’ WallStreet Journal, March 15, 2015.
44. Te-Ping Chen, ‘‘China Names More Generals in Anticorruption Campaign,’’
Wall Street Journal, March 2, 2015.
45. Chris Buckley, ‘‘Ex-Military Leader in China Is Subject of Graft Inquiry,’’
New York Times, July 30, 2015.
46. China Daily, ‘‘Scores of PLA Officers Punished,’’ January 30, 2015.

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47. Megha Rajagopalan, ‘‘China to Parade High-Tech Weaponry in Signal ofStrength, and Shop Window,’’ Reuters, August 28, 2015.
48. Andrew Erickson, ‘‘Missile March: China Parade Projects Patriotism at
Home, Aims for Awe Abroad,’’ China Real Time Report (Wall Street Journal blog),
September 3, 2015.
49. Megha Rajagopalan, ‘‘China to Parade High-Tech Weaponry in Signal ofStrength, and Shop Window,’’ Reuters, August 28, 2015.
50. Xinhua (English edition), ‘‘Full Text: Xi’s Speech at Commemoration of 70th
Anniversary of War Victory,’’ September 3, 2015.
51. Xinhua (English edition), ‘‘Xinhua Insight: China Announces Troop Cut
Ahead of its First War Victory Parade,’’ September 3, 2015.
52. Xinhua (English edition), ‘‘Full Text: Xi’s Speech at Commemoration of 70th
Anniversary of War Victory,’’ September 3, 2015.
53. Dean Cheng, ‘‘Chinese Military Parade Sends Multiple Signals,’’ Daily Signal, September 8, 2015.
54. Katie Hunt, ‘‘China to Narrow Gap with U.S. by Increasing Military Spending,’’ CNN, March 5, 2015.
55. Trading Economics, ‘‘China Inflation Rate,’’ March 6, 2015; Craig Caffrey,‘‘China’s Defense Budget More than Doubles Since 2008,’’ IHS Jane’s Defense Weekly, March 4, 2015.
56. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 49.
57. Craig Caffrey, ‘‘China’s Defense Budget More than Doubles since 2008,’’ IHS
Jane’s Defense Weekly, March 4, 2015; Andrew Erickson and Adam Liff, ‘‘The Budget This Time: Taking the Measure of China’s Defense Spending,’’ Asan Forum,
March–April 2014.
58. Andrew Erickson and Adam Liff, ‘‘Demystifying China’s Defense Spending:Less Mysterious in the Aggregate,’’ China Quarterly, December 2013.
59. Andrew Erickson and Adam Liff, ‘‘China’s Military Spending Swells Again
despite Domestic Headwinds,’’ Wall Street Journal, March 5, 2015; Adam Liff
(Postdoctoral Fellow, Princeton University’s Woodrow Wilson School and AssistantProfessor, Indiana University), interview with Commission staff, May 27, 2014; Andrew Erickson and Adam Liff, ‘‘The Budget This Time: Taking the Measure of China’s Defense Spending,’’ Asan Forum, March–April 2014; U.S.-China Economic andSecurity Review Commission, Hearing on China’s Military Modernization and its
Implications for the United States, written testimony of Andrew Erickson, January
30, 2014; and Andrew Erickson and Adam Liff, ‘‘China’s Military Development, beyond the Numbers,’’ Diplomat (Japan), March 12, 2013.
60. Richard D. Fisher, ‘‘China Launches Fourth Type 071 LPD,’’ IHS Jane’s Defense Weekly, January 22, 2015.
61. Sam LaGrone, ‘‘China Sends Uninvited Spy Ship to RIMPAC,’’ USNI News,
July 18, 2014.
62. Jeffrey Lin and P.W. Singer, ‘‘China’s Submarine Hunting Plane Has a
Giant Stinger,’’ Popular Science, February 24, 2015.
63. Stratfor, ‘‘China: Sub Fleet Grows, Still in U.S. Wake,’’ March 7, 2015.
64. Jeffrey Lin and P.W. Singer, ‘‘China’s Submarine Hunting Plane Has a
Giant Stinger,’’ Popular Science, February 24, 2015.
65. IHS Jane’s, ‘‘Jane’s Fighting Ships: Jiangkai II (Type 054A Class),’’ July 23,
2015.
66. Ridzwan Rahmat, ‘‘China Commissions Type 054A Frigate into East Sea
Fleet,’’ IHS Jane’s Defense Weekly, January 20, 2015.
67. Morgan Clemens, Gabe Collins, and Kristen Gunness, ‘‘The Type 054/054A
Frigate Series: China’s Most Produced and Deployed Large Modern Surface Combatant,’’ China SignPost, August 2, 2015; IHS Jane’s, ‘‘Jane’s World Navies: China,’’
June 17, 2015; Ridzwan Rahmat, ‘‘China Commissions Type 054A Frigate into East
Sea Fleet,’’ IHS Jane’s Defense Weekly, January 20, 2015; and Gabe Collins, Morgan
Clemens, and Kristen Gunness, ‘‘The Type 054/054A Frigate Series: China’s All-Purpose Surface Combatant,’’ University of California Institute on Global Conflict andCooperation, January 2014.
68. Andrew Tate, ‘‘China Commissions Second Type 052D DDG, Pushes ahead
with Frigate, Corvette Launches,’’ IHS Jane’s Defense Weekly, July 21, 2015.
69. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 14.
70. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 305.
71. Andrew Tate, ‘‘China Commissions Second Type 052D DDG, Pushes ahead
with Frigate, Corvette Launches,’’ IHS Jane’s Defense Weekly, July 21, 2015.

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72. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 13.
73. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 10.
74. Sam LaGrone, ‘‘China Commissions Second Advanced Destroyer,’’ USNI
News, July 23, 2015.
75. Jeffrey Lin and P.W. Singer, ‘‘Chinese Aircraft Carrier’s Fighters Go Operational?’’ Popular Science, January 8, 2015.
76. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 303.
77. Zachary Keck, ‘‘Leaked Report Reveals China Is Building New Aircraft Carrier,’’ National Interest, July 30, 2015; Bear Lee, ‘‘China’s First Self-Built Carrier
Likely Nuclear-Powered,’’ Focus Taiwan, July 30, 2015.
78. Andrew S. Erickson and Gabe Collins, ‘‘China Carrier Demon Module Highlights Surging Navy,’’ National Interest, August 6, 2013; Peter W. Singer and Jeffrey
Lin, ‘‘About those Chinese Aircraft Carrier Pics: What We Know and What We Can
Guess,’’ Defense One, August 5, 2013; U.S. Office of Naval Intelligence, unclassified
interview with Commission staff, Washington, DC, June 2013; and U.S. Departmentof Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2013, May 2013, 6.
79. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 303.
80. Zhao Lei, ‘‘Navy to Get 3 New Nuclear Subs,’’ China Daily, April 3, 2015.
81. Kris Osborn, ‘‘China Unveils Three New Nuclear-Powered Attack Submarines,’’ Defensetech, April 3, 2015.
82. Jeffrey Lin and P.W. Singer, ‘‘New Chinese Submarine Simulator Provides
Clues to Future Naval Power,’’ Popular Science, May 11, 2015.
83. U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and its Implications for the United States, written testimonyof Jesse Karotkin, January 30, 2014.
84. IHS Jane’s, ‘‘Jane’s World Navies: China,’’ June 17, 2015; Want China Times(Taiwan), ‘‘Details of China’s New AIP Submarine Technology Revealed,’’ May 7,
2015.
85. Andrew Tate, ‘‘China Launches Third Type 903A,’’ IHS Jane’s Navy International, June 11, 2015; Want China Times (Taiwan), ‘‘PLA’s 5th ‘Super Nanny’Type 903A Replenishment Ship Launched,’’ June 10, 2015.
86. U.S.-China Economic and Security Review Commission, 2013 Annual Reportto Congress, November 2013, 215.
87. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 305.
88. Tsai Hao-hsiang, ‘‘Semi-Submersible Donghaidao Deployed with PLA’s S
China Sea Fleet,’’ Want China Times (Taiwan), July 15, 2015; Mike Yeo, ‘‘China
Commissions First MLP-Like Logistics Ship, Headed for South Sea Fleet,’’ USNI
News, July 14, 2015.
89. Mike Yeo, ‘‘China Commissions First MLP-Like Logistics Ship, Headed forSouth Sea Fleet,’’ USNI News, July 14, 2015.
90. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 59.
91. Franz-Stefan Gady, ‘‘China Just Doubled the Size of its Amphibious Mechanized Infantry Divisions,’’ Diplomat (Japan), January 9, 2015; Want China Times(Taiwan), ‘‘PLA Doubles Size of Amphibious Mechanized Infantry Division,’’ January
1, 2015.
92. Richard D. Fisher, ‘‘China Launches Fourth Type 071 LPD,’’ IHS Jane’s Defense Weekly, January 22, 2015.
93. Kyle Mizokami, ‘‘Five Ships of the Chinese Navy You Really Ought to Know
About,’’ War Is Boring, December 14, 2013.
94. Richard D. Fisher, ‘‘China Launches Fourth Type 071 LPD,’’ IHS Jane’s Defense Weekly, January 22, 2015.
95. Want China Times (Taiwan), ‘‘Zubr-Class LCAC to Power Up PLA Navy,’’
May 22, 2015; Jeffrey Lin and P.W. Singer, ‘‘Mission from Crimea: 2nd Zubr Hovercraft Delivered to China,’’ Popular Science, March 27, 2014.
96. Want China Times (Taiwan), ‘‘Has China Already Commissioned Zubr Landing Craft Fleet?’’ January 21, 2015.
97. Richard D. Fisher, ‘‘LHD Model Hints at Potential Chinese Requirements,’’
IHS Jane’s Defense Weekly, April 23, 2015.
98. Kyodo News International, ‘‘China Building 1st Amphibious Assault Ship in
Shanghai,’’ August 26, 2013; U.S. Department of Defense, Annual Report to Con-VerDate Sep 11 201409:25 Nov 12, 2015

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gress: Military and Security Developments Involving the People’s Republic of China
2013, 2013, 39.
99. Richard D. Fisher, ‘‘LHD Model Hints at Potential Chinese Requirements,’’
IHS Jane’s Defense Weekly, April 23, 2015.
100. Wendell Minnick, ‘‘Seaplane Could Advance Chinese SCS Claims,’’ Defense
News, March 28, 2015.
101. Greg Waldron, ‘‘AVIC Builds Forward Fuselage of First AG600 Amphibian,’’Flightglobal, March 20, 2015.
102. Wendell Minnick, ‘‘Seaplane Could Advance Chinese SCS Claims,’’ Defense
News, March 28, 2015.
103. Jeffrey Lin and P.W. Singer, ‘‘China Flies its Largest Ever Drone: The Divine Eagle,’’ Popular Science, February 6, 2015.
104. Jeffrey Lin and P.W. Singer, ‘‘China Flies its Largest Ever Drone: The Divine Eagle,’’ Popular Science, February 6, 2015.
105. Richard D. Fisher, ‘‘China’s KJ–500 AEW&C Platform ‘Enters Service,’ ’’ IHS
Jane’s Defense Weekly, March 23, 2015; Thomas Newdick, ‘‘Wow, China Has a Lotof Different Early-Warning Planes,’’ Medium, March 16, 2015.
106. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 313.
107. Andrew Erickson, ‘‘Chinese Air- and Space-Based ISR,’’ in Peter Dutton, Andrew Erickson, and Ryan Martinson, eds., China’s Near Seas Combat Capabilities,
Naval War College, 2014, 90–95.
108. Mike Yeo, ‘‘First Chinese Il-78 Tanker Seen at PLAAF Base,’’ IHS Jane’s Defense Weekly, November 3, 2014; SinoDefence, ‘‘Transport/Tanker Aircraft.’’
109. Mike Yeo, ‘‘First Chinese Il-78 Tanker Seen at PLAAF base,’’ IHS Jane’s Defense Weekly, November 3, 2014; Jeffrey Lin and P.W. Singer, ‘‘Finally, a Modern
Chinese Aerial Tanker,’’ Popular Science, April 2, 2014; Stratfor, ‘‘China Develops
Its Strategic Airlift Capability,’’ January 29, 2013.
110. Kyle Mizokami, ‘‘Five Planes of the Chinese Air Force You Really Ought toKnow About,’’ War is Boring, December 19, 2013; Stratfor, ‘‘China Develops Its Strategic Airlift Capability,’’ January 29, 2013.
111. Gabriel Collins, Michael McGauvran, and Timothy White, ‘‘Trends in Chinese Aerial Refueling Capacity for Maritime Purposes,’’ in Andrew S. Erickson andLyle J. Goldstein, eds., Chinese Aerospace Power: Evolving Maritime Roles, Naval
Institute Press, 2011, 194–195, 199; Michael D. Swaine et al., ‘‘China’s Military andthe U.S.-Japan Alliance in 2030: A Strategic Net Assessment,’’ Carnegie Endowment
for International Peace, 2013, 53.
112. Jeffrey Lin and P.W. Singer, ‘‘6th J–20 Stealth Fighter Rolls out, More to
Soon Follow,’’ Popular Science, December 23, 2014.
113. Richard D. Fisher, ‘‘Analysis: End of Year Surge for Chengdu J–20 Fighter
Program,’’ IHS Jane’s Defense Weekly, January 6, 2015.
114. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 11–12.
115. Jeffrey Lin and P.W. Singer, ‘‘The J–11D Surprise: China Upgrades Russian
Flanker Fighters on its Own,’’ Popular Science, May 4, 2015.
116. Richard D. Fisher, ‘‘Images Show J–11D Variant with Possible New Radar,’’IHS Jane’s Defense Weekly, May 5, 2015.
117. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 310.
118. Open Source Center, ‘‘WCT: News of Hypersonic Drone Could Be Xi’s ‘Gift’
To Obama: Duowei,’’ September 21, 2015. ID: CHR2015092136042192.
119. China Military Online (Chinese edition), ‘‘China: General Staff Department
Announces 29 Brigades to Take Part in Cross-Region Drills in 2015,’’ February 4,
2015. ID: CHR2015020548234136.
120. China’s State Council Information Office, China’s Military Strategy, May
2015.
121. Xinhua (English edition), ‘‘China Ramps Up Joint Military Exercises,’’ August 10, 2015.
122. Ting Shi, ‘‘China Stages Live Military Drills Code Named ‘Joint Action-2015’that Involve over 140,000 Troops,’’ Bloomberg, August 11, 2015.
123. China Military Online, ‘‘China Ramps Up Joint Military Exercises,’’ August
10, 2015; China Military Online, ‘‘A Live-Fire Military Drill Kicks Off in E. China,’’
August 11, 2015.
124. China Military Online, ‘‘Five Highlights of Firepower-2015 Qingtongxia Military Exercises,’’ July 7, 2015.
125. Open Source Center, ‘‘People’s Liberation Army Daily: PRC Air Force’s FirstBlue Team Makes Debut in Firepower-2015-Shandan A Exercise,’’ July 6, 2015. ID:
CHR2015070623165581.

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267126. Open Source Center, ‘‘China Expands Cross-Region Training to Artillery, Air
Defense Brigades in ‘Firepower-2014,’ ’’ April 22, 2015. ID: CHL2015042248214971;
Michael S. Chase et al., ‘‘China’s Incomplete Military Transformation: Assessing the
Weaknesses of the People’s Liberation Army,’’ RAND Corporation, February 2015,
50.
127. Open Source Center, ‘‘China Expands Cross-Region Training to Artillery, Air
Defense Brigades in ‘Firepower-2014,’ ’’ April 22, 2015. ID: CHL2015042248214971.
128. Open Source Center, ‘‘China: General Staff Department Announces 29 Brigades to Take Part in Cross-Region Drills in 2015,’’ February 4, 2015. ID: CHR2015
020548234136.
129. Ankit Panda, ‘‘China’s Air Force Conducts Exercise between Taiwan and thePhilippines,’’ Diplomat (Japan), March 31, 2015; Li Jing, ‘‘Chinese Air Force Conducts First Drill in Western Pacific,’’ South China Morning Post, March 31, 2015;
and Xinhua (English edition), ‘‘China Air Force Completes Drill in West Pacific,’’
March 30, 2015.
130. Want China Times (Taiwan), ‘‘PLA H–6 Bombers Conduct First Drill inWestern Pacific,’’ April 1, 2015; U.S.-China Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 312.
131. Xinhua (English edition), ‘‘China Air Force Conducts West Pacific Drill,’’ August 14, 2015.
132. Andrew S. Erickson, ‘‘Beijing’s Aerospace Revolution: Short-Range Opportunities and Long-Range Challenges,’’ in Andrew S. Erickson and Lyle J. Goldstein,eds., Chinese Aerospace Power: Evolving Maritime Roles, Naval Institute Press, 2011,10.
133. Open Source Center, ‘‘China: PLA Activities Report, 1–15 May 2015,’’ ID:
CHR2015052666803207.
134. Open Source Center, ‘‘PLA Airborne Force Is Trained to Airdrop Heavy Artillery,’’ May 11, 2015. ID: CHN2015051374802412.
135. Senate Armed Services Committee, Hearing on Maritime Security Strategy
in the Asia-Pacific Region, testimony of Harry Harris, September 17, 2015; Jeremy
Page and Gordon Lubold, ‘‘Chinese Navy Ships Came Within 12 Nautical Miles of
U.S. Coast,’’ Wall Street Journal, September 4, 2015.
136. Sam LaGrone, ‘‘Chinese Warships Made ‘Innocent Passage’ through U.S.
Territorial Waters off Alaska,’’ USNI News, September 3, 2014.
137. Jeremy Page and Gordon Lubold, ‘‘Chinese Navy Ships Came within 12 Nautical Miles of U.S. Coast,’’ Wall Street Journal, September 4, 2015.
138. Raul Pedrozo, ‘‘Preserving Navigational Rights and Freedoms: The Right to
Conduct Military Activities in China’s Exclusive Economic Zone,’’ Chinese Journalof International Law (2010): 9–29.
139. Caitlin Campbell, ‘‘China and the Arctic: Objectives and Obstacles,’’ U.S.China Economic and Security Review Commission, April 13, 2012; Matthew Willis
and Duncan Depledge, ‘‘How We Learned to Stop Wondering about China’s Arctic
Ambitions: Understanding China’s Admission to the Arctic Council, 2004–2013,’’ The
Arctic Institute Center for Circumpolar Studies, September 22, 2014; Marc
Lanteigne, ‘‘China’s Emerging Arctic Strategies: Economics and Institutions,’’ University of Iceland Institute for International Affairs Center for Arctic Policy Studies,
2014, 32–40; and Linda Jakobson, ‘‘China and the Arctic: What’s the Fuss?’’ Interpreter (Blog), May 15, 2013.
140. Senate Armed Services Committee, Hearing on Maritime Security Strategy
in the Asia-Pacific Region, testimony of Harry Harris, September 17, 2015.
141. U.S. Department of State, The Conference on Global Leadership in the Arctic:
Cooperation, Innovation, Engagement, and Resilience (GLACIER), July 23, 2015;
U.S. Department of State, GLACIER Heads of Delegation, August 29, 2015.
142. Senate Armed Services Committee, Hearing on Maritime Security Strategy
in the Asia-Pacific Region, testimony of Harry Harris, September 17, 2015.
143. Caitlin Campbell, ‘‘Highlights from China’s New Defense White Paper, ‘China’s Military Strategy,’ ’’ U.S.-China Economic and Security Review Commission,
June 1, 2015; Chun Han Wong, ‘‘China to Expand Naval Operations amid Growing
Tensions with U.S.,’’ Wall Street Journal, May 26, 2015; and China’s State Council
Information Office, China’s Military Strategy, May 2015.
144. Chun Han Wong, ‘‘China to Expand Naval Operations amid Growing Tensions with U.S.,’’ Wall Street Journal, May 26, 2015; Christopher D. Yung and Ross
Rustici, ‘‘ ‘Not an Idea We Have to Shun’: Chinese Overseas Basing Requirementsin the 21st Century,’’ Institute for National Strategic Studies, October 2014, 1.
145. Christopher D. Yung, ‘‘Burying China’s ‘String of Pearls,’ ’’ Diplomat, January 22, 2015; Christopher D. Yung and Ross Rustici, ‘‘ ‘Not an Idea We Have to
Shun’: Chinese Overseas Basing Requirements in the 21st Century,’’ National Defense University, October 2014, 2.

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268146. Gabe Collins and Andrew Erickson, ‘‘Djibouti Likely to Become China’s First
Indian Ocean Outpost,’’ China SignPost, July 11, 2015; Agence France-Presse,‘‘Horn of Africa’s Djibouti Dreams of Becoming ‘New Dubai’,’’ May 24, 2015.
147. John Lee, ‘‘China Comes to Djibouti,’’ Foreign Affairs, April 23, 2015; All Africa, ‘‘Djibouti and China Sign a Security and Defense Agreement,’’ February 27,
2014.
148. Gabe Collins and Andrew Erickson, ‘‘Djibouti Likely to Become China’s First
Indian Ocean Outpost,’’ China SignPost, July 11, 2015.
149. European Commission, ‘‘European Union, Trade in Goods with China;’’
Minghao Zhao, ‘‘China’s Arab March,’’ CNBC, June 26, 2014.
150. Con Coughlin, ‘‘China Deal Threatens Only American Military Base in Africa,’’ Telegraph, July 21, 2015.
151. Anusha Ondaatije, ‘‘Sri Lanka Opens $500 Million Port Terminal Built by
China,’’ Bloomberg, August 5, 2013; Gwadar Port Authority, Chairman’s Message;and Sri Lanka Ports Authority, ‘‘Development of Port in Hambantota.’’152. U.S.-China Economic and Security Review Commission, Hearing on China
and the Middle East, testimony of Andrew Erickson, June 6, 2013.
153. Chinese Ministry of National Defense, Defense Ministry’s Regular Press Conference, September 25, 2014.
154. Matthew Southerland and Iacob Koch-Weser, ‘‘China-India Relations: Tensions Persist Despite Growing Cooperation,’’ U.S.-China Economic and Security Review Commission, December 22, 2014, 5.
155. U.S. Senate Armed Services Committee, Hearing on Maritime Strategy in the
Asia-Pacific Region, testimony of Harry Harris, September 17, 2015.
156. James Hardy and Sean O’Connor, ‘‘IMINT Confirms Type 041 Visit to Karachi,’’ IHS Jane’s, July 8, 2015.
157. Matthew Southerland and Iacob Koch-Weser, ‘‘China-India Relations: Tensions Persist Despite Growing Cooperation,’’ U.S.-China Economic and Security Review Commission, December 22, 2014, 5.
158. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 255.
159. Atul Aneja, ‘‘China Says its Submarine Docked in Sri Lanka ‘for Replenishment,’ ’’ Hindu, November 28, 2014; Shihar Aneez and Ranga Sirilal, ‘‘Chinese Submarine Docks in Sri Lanka Despite Indian Concerns,’’ Reuters, November 2, 2014.
160. Ben Blanchard, ‘‘Sri Lanka Concerned by China Loans, Rules out Submarine
Visits,’’ Reuters, February 28, 2015.
161. Chartered Institute of Building, ‘‘Sri Lanka Says Chinese-Funded Port CityMay Go Ahead Sfter All,’’ Global Construction Review, June 19, 2015.
162. Lawrence Chung, ‘‘China’s Nuclear Sub Missions in Gulf of Aden ‘Could
Cause Unease among Neighbors,’ ’’ South China Morning Post, April 27, 2015.
163. James Hardy and Sean O’Connor, ‘‘IMINT Confirms Type 041 Visit to Karachi,’’ IHS Jane’s, July 8, 2015.
164. Qasim Nauman and Jeremy Page, ‘‘Pakistan to Buy Eight Chinese Submarines,’’ Wall Street Journal, April 2, 2015.
165. Open Source Center, ‘‘Xinhua: China Evacuates Last Batch of Citizens from
Yemen,’’ April 6, 2015. ID: CHR2015040663755863; Ben Blanchard, ‘‘China Evacuates Foreign Nationals from Yemen in Unprecedented Move,’’ Reuters, April 3, 2015.
166. Te-Ping Chen, ‘‘China Aids Nepal in Humanitarian, Diplomatic Push,’’ WallStreet Journal, April 28, 2015.
167. Sun Jianguo, ‘‘Strengthening Regional Order in the Asia-Pacific: Towards
More Active Conflict Resolution and Cooperation’’ (IISS Shangri-La Dialogue, Singapore, May 30, 2015).
168. Open Source Center, ‘‘Xinhua: Backgrounder: China’s Major Overseas Evacuations in Recent Years,’’ March 30, 2015. ID: CHR2015033045746266; Mathieu
Duchâtel and Bates Gill, ‘‘Overseas Citizen Protection: A Growing Challenge for
China,’’ Stockholm International Peace Research Institute, February 2012; andXinhua (English edition), ‘‘China Completes Evacuation of Nationals in Kyrgyzstan,’’June 17, 2010.
169. Open Source Center, ‘‘Xinhua: Backgrounder: China’s Major Overseas Evacuations in Recent Years,’’ March 30, 2015. ID: CHR2015033045746266.
170. Andrew S. Erickson and Gabriel B. Collins, ‘‘China Dispatches Warship toProtect Libya Evacuation Mission,’’ China SignPost, February 24, 2011, 1.
171. Michael Chase, ‘‘The PLA Prepares for Future Non-Combatant Evacuation
Operations,’’ China Brief, February 15, 2013; U.S.-China Economic and Security Review Commission, 2011 Annual Report to Congress, November 2011, 162–163; andAndrew Erickson and Gabe Collins, ‘‘Implications of China’s Military Evacuation of
Citizens from Libya,’’ China Brief, March 10, 2011.

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269172. Jethro Mullen, ‘‘Chinese Ships Reach Vietnam to Extract Thousands of Citizens after Deadly Attacks,’’ CNN, May 19, 2014; Xinhua (English edition), ‘‘Chinese
Ships Ferrying Evacuees Home from Vietnamese Port,’’ May 19, 2014.
173. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 43.
174. Keira Lu Huang, ‘‘ ‘Not Enough’ Consular Officers to Serve Chinese Nationals, Foreign Ministry Says,’’ South China Morning Post, May 19, 2014.
175. Jonas Parello-Plesner and Mathieu Duchâtel, China’s Strong Arm: Protecting
Citizens and Assets Abroad, Abingdon, UK: Routledge for The International Institute for Strategic Studies, May 2015, 20; Josh Chin, ‘‘As China’s Global Footprint
Grows, So Do Risks for Chinese Abroad,’’ Wall Street Journal, July 27, 2015; andKeira Lu Huang, ‘‘ ‘Not Enough’ Consular Officers to Serve Chinese Nationals, Foreign Ministry Says,’’ South China Morning Post, May 19, 2014.
176. Franz-Stefan Gady, ‘‘China and Russia Conclude Naval Drill in Mediterranean,’’ Diplomat (Japan), May 22, 2015.
177. People’s Daily (English edition), ‘‘Magnificent View of China-Russia Joint
Naval Drill in Mediterranean,’’ May 21, 2015.
178. Christopher Harress, ‘‘Russia and China Begin Mediterranean Military Exercises with Black Sea Port Visit,’’ International Business Times, May 11, 2015.
179. Magnus Nordenman, ‘‘Why the Chinese Navy Is in the Mediterranean,’’USNI News, May 14, 2015.
180. Sam LaGrone, ‘‘Largest Chinese, Russian Joint Pacific Naval Exercise Kicks
Off This Week,’’ USNI News, August 17, 2015.
181. Anthony Halpin, ‘‘Russia, China Start Joint Naval Drills of ‘Unprecedented’
Scale,’’ Bloomberg, August 20, 2015.
182. China Military Online, ‘‘Russia, China to Exercise Water-Free Joint Landing
Operation,’’ August 24, 2015; Xinhua (English edition), ‘‘Chinese Warships Leave for
Sea of Japan for Joint Drills with Russia,’’ August 16, 2015.
183. Russia Times, ‘‘Russia, China Kick off Active Phase of Sea of Japan Naval
Drills,’’ August 23, 2015.
184. China Military Online, ‘‘Russia, China to Exercise Water-Free Joint Landing
Operation,’’ August 24, 2015.
185. Open Source Center, ‘‘China: PLA Activities Report, 16–31 August 2015,’’
September 11, 2015. ID: CHR2015091156760732.
186. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, May 2015, 36.
187. Wendell Minnick, ‘‘S–400 Strengthens China’s Hand in the Skies,’’ Defense
News, April 18, 2015.
188. Wendell Minnick, ‘‘China’s New Jet, Radar Complicate U.S. Posture,’’ Defense News, July 6, 2013; Wendell Minnick, ‘‘Time Running out for Taiwan if Russia
Releases S–400 SAM,’’ Defense News, May 25, 2013.
189. Zackary Keck, ‘‘Putin Approves Sale of S–400 to China,’’ Diplomat (Japan),April 11, 2014.
190. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2014, June 2014, 10.
191. Jeremy Page, ‘‘China Parades Closer Ties in Moscow,’’ Wall Street Journal,
May 8, 2015.
192. Reuters, ‘‘China Invites Russian Troops to March in War Parade,’’ May 11,
2015; and Jeremy Page, ‘‘China Parades Closer Ties in Moscow,’’ Wall Street Journal, May 8, 2015.
193. Robert Wall and Doug Cameron, ‘‘China Overtakes Germany as World’s
Third-Largest Arms Exporter,’’ Wall Street Journal, March 15, 2015; Pieter D.
Wezeman and Siemon T. Wezeman, ‘‘Trends in International Arms Transfers, 2014,’’Stockholm International Peace Research Institute, March 2015, 1.
194. Edward Wong and Nicola Clark, ‘‘China’s Arms Industry Makes Global Inroads,’’ New York Times, October 20, 2013; Amy Chang, ‘‘Indigenous Weapons Development in China’s Military Modernization,’’ U.S.-China Economic and Security
Review Commission, April 5, 2012.
195. Stockholm International Peace Research Institute, ‘‘Importer/Exporter TIV
Tables: China.’’
196. Kyle Mizokami, ‘‘A Look at China’s Growing International Arms Trade,’’USNI News, May 7, 2015.
197. Farhan Bokhari and Charles Clover, ‘‘Pakistan Nears Deal to Buy 8 Chinese
Submarines,’’ Financial Times, April 1, 2015.
198. Jeffrey Lin and P.W. Singer, ‘‘New Chinese Submarines to Pakistan,’’ Popular Science, April 7, 2015.
199. Wassana Nanuam, ‘‘Chinese Win Bid to Supply Subs to Navy,’’ Bangkok
Post, June 26, 2015.

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270
200. Wendell Minnick, ‘‘Thai Chinese Sub Buy Challenges US Pivot,’’ Defense
News, July 12, 2015; Wall Street Journal, ‘‘Thailand Tilts away from the U.S.,’’ June30, 2015.
201. Open Source Center, ‘‘Thailand: Fallout over Uighur Deportations, Cost
Shelves PRC Sub Deal,’’ July 20, 2015. ID: SER2015072056515450.
202. Elizabeth Shim, ‘‘South China Sea Issue Not of U.S. Concern, Says Chinese
Politician,’’ UPI, September 11, 2015; Wall Street Journal, ‘‘Q&A: China’s Ambassador to the U.S. on the South China Sea, Trade, and Security,’’ May 29, 2015;
Xinhua (English edition), ‘‘Chinese Defense Concerned about U.S. Moves in theSouth China Sea,’’ July 30, 2015; and People’s Liberation Army Academy of Military
Science, discussion with Commission, Beijing, China, July 22, 2015.
203. Adam Entous, Gordon Lubold, and Julian E. Barnes, ‘‘U.S. Military Proposes
Challenge to China Sea Claims,’’ Wall Street Journal, May 12, 2015.
204. Demetri Savastopulo and Charles Clover, ‘‘China Accuses US Navy of Illegal
Incursion in South China Sea,’’ Financial Times, October 27, 2015; Dan De Luceand Paul Mcleary, ‘‘In South China Sea, a Tougher U.S. Stance,’’ Foreign Policy(Blog), October 2, 2015; and Austin Wright, Philip Ewing, and Bryan Bender,‘‘Obama Team, Military at Odds over South China Sea,’’ Politico, July 31, 2015.
205. CNN, ‘‘Behind the Scenes: A Secret Navy Flight over China’s Military Buildup,’’ May 26, 2015.
206. Helene Cooper and Jane Perlez, ‘‘U.S. Flies over a Chinese Project at Sea,
and Beijing Objects,’’ New York Times, May 22, 2015; CNN, ‘‘High Stakes Surveillance over the South China Sea,’’ May 20, 2015.
207. James Pearson and Ben Blanchard, ‘‘U.S. Admiral Says His South China
Sea Surveillance Flight ‘Routine,’ ’’ Reuters, July 20, 2015.
208. U.S. Department of Defense, IISS Shangri-La Dialogue: ‘A Regional Security
Architecture Where Everyone Rises,’ May 30, 2015.
209. U.S. Department of Defense, IISS Shangri-La Dialogue: ‘A Regional Security
Architecture Where Everyone Rises,’ May 30, 2015.
210. White House Office of the Press Secretary, ‘‘Remarks by President Obama
and President Xi Jinping of the People’s Republic of China in Joint Press Conference,’’ September 25, 2015.
211. Bonnie Glaser, ‘‘Beijing’s Assurances Unpersuasive: A COC Can’t Wait,’’
Asia Maritime Transparency Initiative, August 5, 2015.
212. U.S. Department of Defense, Asia-Pacific Maritime Security Strategy, July
2015, 16.
213. White House Office of the Press Secretary, ‘‘Remarks by President Obama
and President Xi Jinping of the People’s Republic of China in Joint Press Conference,’’ September 25, 2015.
214. U.S. Department of Defense, Memorandum of Understanding between the
Department of Defense of the United States of America and the Ministry of National
Defense of the People’s Republic of China Regarding the Rules of Behavior for Safetyof Air and Maritime Encounters, November 9, 2014.
215. U.S. Department of Defense and Chinese Ministry of National Defense, Supplement to the Memorandum of Understanding on the Rules of Behavior for Safetyof Air and Maritime Encounters between the Department of Defense of the UnitedStates of America and the Ministry of Defense of the People’s Republic of China, September 18, 2015.
216. U.S. Department of Defense, Memorandum of Understanding between the
United States of America Department of Defense and the People’s Republic of China’s
Ministry of Defense on Notification of Major Military Activities Confidence Building
Measures Mechanism, November 4, 2014.
217. U.S. Department of Defense and Chinese Ministry of National Defense,
Annex III: Military Crisis Mechanism for Use of the Defense Telephone Link.
218. Senate Armed Services Committee, Hearing on Maritime Security Strategy
in the Asia-Pacific Region, testimony of Harry Harris, September 17, 2015.
219. White House Office of the Press Secretary, ‘‘National Security Advisor Susan
E. Rice’s as Prepared Remarks on the U.S.-China Relationship at George Washington University,’’ September 21, 2015.
220. Gordon Lubold, ‘‘Two Chinese Fighters Make ‘Unsafe’ Interception with U.S.
Spy Plane,’’ Wall Street Journal, September 22, 2015.
221. Director, Operational Test and Evaluation, Director, Operational Test and
Evaluation FY 2014 Annual Report, January 2015, 336.
222. Mike Levine and Jack Date, ‘‘22 Million Affected by OPM Hack, Officials
Say,’’ ABC News, July 9, 2015.
223. Jim Sciutto, ‘‘Director of National Intelligence Blames China for OPM Hack,’’
CNN, June 25, 2015.

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271224. China’s State Council Information Office, China’s Military Strategy, May
2015.
225. David E. Sanger, ‘‘U.S. and China Seek Arms Deal for Cyberspace,’’ New
York Times, September 19, 2015; Patrick Tucker, ‘‘White House: No Cyber Attack
Pact with China, For Now,’’ Defense One, September 22, 2015.
226. White House Office of the Press Secretary, ‘‘Fact Sheet: President Xi
Jinping’s State Visit to the United States,’’ September 25, 2015.
227. David Dollar and Wei Wang, ‘‘S&ED: Chinese and American Media Tell Two
Tales,’’ Brookings Institution, June 29, 2015; Felicia Schwartz, ‘‘U.S., China Conclude Annual Talks amid Tensions,’’ Wall Street Journal, June 24, 2015.
228. Agence France-Presse, ‘‘Pentagon: Top Chinese Officer Visits U.S.,’’ June 11,2015.
229. Zhao Shengnan, ‘‘Top Military Officer will Visit Pentagon for High-Level
Talks,’’ China Daily, June 11, 2015.
230. U.S. Department of Defense, Carter, Chinese Official Discuss Military Relationship, June 11, 2015; Franz Stefan-Gady, ‘‘Pentagon Asks China to Stop Island
Building in South China Sea (Again),’’ Diplomat (Japan), June 13, 2015.
231. Xinhua (English edition), ‘‘U.S. Defense Chief Invited to Visit China This
Year,’’ June 13, 2015.
232. Michael Voss, ‘‘China’s General Fan Visits Cuba, Drives Military Exchanges,’’ CCTV, June 15, 2015.
233. U.S. Navy, US, China Conduct Anti-Piracy Exercise, December 12, 2014;
KPBS News, ‘‘Why Is a Chinese Military Helicopter Landing on a U.S. Ship?
(Video),’’ December 16, 2014; and U.S. Navy, US, China Conduct Anti-Piracy Exercise, December 12, 2014.
234. U.S. Navy, US, China Conduct Anti-Piracy Exercise, December 12, 2014.
235. China Military Online, ‘‘21st Chinese Naval Taskforce Leaves for Gulf ofAden,’’ August 5, 2015.
236. CRI English, ‘‘Joint Military Drill Held between Chinese and U.S. Navies,’’
April 26, 2015.
237. James Marchetti, ‘‘Thai, Chinese, U.S. Engineers Building School in Thai
Village,’’ U.S. State Department Bureau of International Information Programs,
January 27, 2015.
238. ASEAN Regional Forum Disaster Relief Exercises 2015, ‘‘Direx 2015.’’239. Ankit Panda, ‘‘A First: China Sends Troops to US-Mongolia-Led Khaan
Quest Exercise,’’ Diplomat (Japan), June 23, 2015.
240. Australian Army, ‘‘Exercise Kowari Survival Phase Begins,’’ August 20,
2015; Xinhua (English version), ‘‘China, Australia, U.S. to begin Trilateral Military
Exercise,’’ August 27, 2015.
241. China Military Online, ‘‘China’s PLA to Debut in New Zealand-led Pacific
Military Drill,’’ August 28, 2015.
242. Megan Eckstein, ‘‘USS Blue Ridge Pulls into Zhanjiang, China,’’ USNI News,
April 20, 2015; U.S. Navy, USS Stethem Visits Qingdao to Promote Cooperation with
PLA(N), August 4, 2015.
243. U.S. Navy, USS Stethem Visits Qingdao to Promote Cooperation with
PLA(N), August 4, 2015.
244. Christopher P. Cavas, ‘‘New CNO Richardson Invited to China,’’ Defense
News, August 25, 2015; Xinhua (English edition), ‘‘China, US Vow to Further Exchange of Navies,’’ August 26, 2015.
245. U.S. Embassy Beijing, ‘‘Commander of USARPAC General Vincent K. Brooks
Visits Beijing and Haikou to Meet with Key Chinese PLA Leaders and Observe US/
China Military Exchange,’’ January 21, 2015.
246. Department of Defense News, ‘‘U.S., China Announce Defense Talks,’’ January 29, 2015; Department of Defense News, ‘‘U.S., China Conduct Asia-Pacific Security Dialogue,’’ March 11, 2015.
247. U.S. State Department Bureau of International Information Programs, ‘‘U.S
Navy Hosts Chinese Officers for Exchange Visit,’’ February 6, 2015; China Military
Online, ‘‘Navy Captain Delegation’s U.S. Tour Receives Compliments,’’ February 9,
2015; and Brandon Bridges, ‘‘LEAP Supports International Visits to AU,’’ Maxwell
Air Force Base, May 14, 2015.
248. China Military Online, ‘‘U.S. Military Capstone Delegation Visits PLA
Shenyang MAC,’’ March 27, 2015.
249. Angela E. Kershner, ‘‘Disaster Management Exchange 2015 Concludes in
China,’’ U.S. Army, January 26, 2015.

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SECTION 2: CHINA’S SPACE AND
COUNTERSPACE PROGRAMSIntroduction
China has become one of the top space powers in the world after
decades of high prioritization and steady investment from its leaders, indigenous research and development, and a significant effort
to buy or otherwise appropriate technologies from foreign sources,
especially the United States. China’s aspirations are driven by its
assessment that space power enables the country’s military modernization and would allow it to challenge U.S. information superiority during a conflict. As the Commission has documented in previous reports, China has asserted sovereignty over much of theEast and South China seas, as well as Taiwan, and is engaged ina course of aggressive conduct to enforce those claims against its
neighbors. Among other purposes, China’s space and counterspace
programs are designed to support its conduct as part of its
antiaccess/area denial * strategy to prevent or impede U.S. intervention in a potential conflict. China also believes that space power
drives the country’s economic and technological advancement andprovides the Chinese Communist Party (CCP) with significant domestic political legitimacy and international prestige. Although
China’s space capabilities still generally lag behind those of theUnited States and Russia, its space program is expanding and accelerating rapidly as many other countries’ programs proceed withdwindling resources and limited goals.
China’s rise as a space power has important national security implications for the United States, which relies on its own space capabilities to assess and monitor current and emerging threats to national security and project military power globally. Within this context, this section will examine China’s space and counterspace programs, including key organizations involved in the programs; space
power’s contribution to China’s national power; China’s development of a robust and comprehensive array of counterspace capabilities; China’s rapid space-based C4ISR † modernization; China’s
progress in space launch, human spaceflight, and lunar exploration; and U.S.-China space cooperation. The statements and assessments presented in this section are based on the Commission’s
February 2015 hearing on China’s space and counterspace programs, unclassified briefings by U.S. and foreign government offi-

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* According to the U.S. Department of Defense, ‘‘antiaccess’’ actions are intended to slow deployment of an adversary’s forces into a theater or cause them to operate at distances farther
from the conflict than they would prefer. ‘‘Area denial’’ actions affect maneuvers within a theater, and are intended to impede an adversary’s operations within areas where friendly forces
cannot or will not prevent access. U.S. Department of Defense, Air Sea Battle: Service Collaboration to Address Anti-Access & Area Denial Challenges, May 2013, 2.
† C4ISR refers to command, control, communications, computers, intelligence, surveillance,and reconnaissance.

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cials, consultations with nongovernmental experts on China andspace issues, the Commission’s July 2015 fact-finding trip to China,
and open source research and analysis.
Key Organizations Involved in China’s Space and Counterspace Programs
China’s space program involves a wide network of entities spanning its political, military, defense industry, and commercial sectors. Unlike the United States, China does not have distinctly separate military and civilian space programs. CCP leaders provide policy guidance and authorize allocations of resources for the program,and various organizations within the People’s Liberation Army
(PLA) execute space policy and oversee the space research, development, and acquisition process. China’s military also exercises control over the majority of China’s space assets and space operations.
Although China conducts civilian space activities, such as scientific research and exploration, and Chinese civilian agencies provide input into space policy and space research, development, andacquisition requirements, China does not have an official civilian
space program.1 Tate Nurkin, managing director of research andthought leadership at IHS Jane’s Aerospace, Defense and Security,
explained to the Commission:
China’s space program does not have structures in placethat make meaningful divisions between military and civil
programs, and those technologies acquired and systems developed for ostensibly civil purposes can be applied—and
most frequently are—for military purposes. This dynamic
indicates that China’s space program is also a critical element in the country’s ongoing military modernization program.2
Under this nebulous framework, even China’s ostensibly civilian
projects, such as human spaceflight, directly support the development of PLA space, counterspace, and conventional capabilities.3
Moreover, although any country’s satellites are capable of contributing to its military operations, the PLA during wartime would
probably take direct command over all Chinese satellites.

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Central Special Committee
One important coordinating body for China’s major strategic research and development (R&D) projects is the Central Special Committee, which reports to the CCP Politburo Standing Committee,
Central Military Commission,* and State Council.† Established in
the early 1960s and led through the decades by some of China’s top
political leaders,‡ the Central Special Committee brings together* China’s Central Military Commission is the country’s top military decision-making body.
Congressional-Executive Commission on China, China’s State Organizational Structure.
† China’s State Council, headed by Premier Li Keqiang, presides over China’s ministries, commissions, and direct offices. It is responsible for executing laws, supervising the government bureaucracy, and carrying out the administrative functions of the Chinese government. Congressional-Executive Commission on China, China’s State Organizational Structure.
‡ The Committee has been chaired by Zhou Enlai, Hua Guofeng, Deng Xiaoping, Li Peng, Zhu
Rongji, and Wen Jiabao, indicating today it is likely chaired by Li Keqiang. Tai Ming Cheung,‘‘The Special One: The Central Special Committee and the Structure, Process, and Leadership
Continued

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civilian and military leaders and technical experts on an ad hoc
basis to evaluate and provide recommendations on strategic dualuse high-technology programs—almost certainly including China’s
space launch, human spaceflight, and lunar programs. The committee may play a role in important military science and technology projects as well. Although the Central Special Committee
today is a government—rather than party—institution, and lacks
the broad decision-making authority it had in the 1960s and 1970s,
it still signifies China’s state-led, top-down policy approach toscience and technology development and its focus on large-scale
projects.4
Leading Small Groups
China has established several leading small groups to help forge
institutional consensus regarding its space policies and to provide
high-level coordination among the array of political, military, defense industry, and commercial organizations involved. China reportedly has formed leading small groups for human spaceflight,
lunar exploration, Earth observation satellites, and heavy-liftlaunch vehicles.5 These groups, which are formalized fora rather
than institutions, are composed of representatives from relevant organizations selected on a project-specific basis, and are led by top
CCP officials.
Ministry of Science and Technology
The Ministry of Science and Technology (MOST), which is directly subordinate to the State Council, formulates and promulgates major long-term strategies for the development of science andtechnology. MOST’s national R&D strategy for the 2006–2020 period, the Medium-to-Long-Term Plan for the Development of Scienceand Technology, coordinates state-funded R&D efforts across government, military, and commercial spheres and places heavy emphasis on funding basic research that affects multiple fields. Concerning China’s space program, the strategy updates and accelerates the pursuit of space R&D objectives established in the State
High-Technology Development Plan of 1986 (also known as the 863
Program), which set China’s space development on its current trajectory. The strategy for 2006–2020 identifies and funds 13 unclassified technology megaprojects, including a high-definition Earthobservation system and human spaceflight and lunar probes. It
also reportedly identifies and funds three classified programs,
which many analysts believe to be a laser project exploring inertial
confinement fusion, the Beidou satellite navigation system, and a
hypersonic glide vehicle program.6

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State Administration of Science, Technology, and Industry
for National Defense
The State Administration of Science, Technology, and Industry
for National Defense (SASTIND), which is subordinate to the StateCouncil’s Ministry of Industry and Information Technology, exerof the Chinese Defense and Strategic Dual-Use Science, Technology and Industrial Triangle’’(Conference on the Structure, Process, and Leadership of the Chinese Science and Technology
System, San Diego, CA, July 16–17, 2012).

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cises administrative authority over China’s defense industrial enterprises and serves as an intermediary among China’s military,defense industry (including its space industry), government ministries, research facilities, and other stakeholders. In this capacity,
SASTIND organizes and coordinates space R&D, approves spacecontracts, and develops standards for the space industry. SASTIND
also directly manages China’s lunar exploration program.7
China National Space Administration
The China National Space Administration (CNSA), which is subordinate to SASTIND and is led by the SASTIND director, is asmall organization that is responsible for China’s relations with external parties on non-commercial and non-military space-related
matters. In this capacity, CNSA coordinates and executes international agreements and other aspects of China’s international cooperation efforts in space.8 Since 2014, CNSA has engaged with thespace programs of a range of countries, including Algeria, Germany, India, Italy, the Netherlands, Russia, Sudan, and Turkmenistan, as well as the European Union.9
Although CNSA often is incorrectly referred to as China’s equivalent of the U.S. National Aeronautics and Space Administration(NASA), it does not have a direct role in overseeing China’s spacepolicy; space research, development, and acquisition process; spaceassets; or space operations.10
General Staff Department
The General Staff Department serves as the PLA’s headquarters.* As such, it develops short- and long-term requirements
for space and counterspace technologies based on guidance fromthe Central Military Commission and the PLA services. The General Staff Department is also the focal point for China’s space warfare operations and planning. The department houses operations,
intelligence, and electronic warfare elements—among other capabilities—to assist the PLA in carrying out its functions.11

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General Armaments Department
The General Armaments Department is responsible for supplying
and maintaining the PLA’s weapons systems and managing important weapons testing centers and research centers. As such, it oversees the research, development, and acquisition process for China’s
satellites, launch vehicles, and counterspace weapons and manages
large national-level engineering projects, such as China’s humanspaceflight program. The General Armaments Department, throughsubordinate entities, is also responsible for the day-to-day operations of the majority of China’s military and civilian space activities.12 Additionally, the department is believed to advise the Central Military Commission on space and counterspace issues via its
Science and Technology Committee’s expert groups.13* Directly subordinate to the Central Military Commission, the highest command organ in
China’s military, are four General Departments: the General Staff Department, the General Political Department, the General Logistics Department, and the General Armaments Department.
The General Departments are responsible for executing Central Military Commission policies
and conducting the day-to-day administration of China’s military.

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The China Satellite Launch, Tracking, and Control General(CLTC), which is subordinate to the General Armaments Department, is the entity responsible for managing China’s spacelaunches and the telemetry, tracking, and control functions for its
spacecraft systems.* In this capacity, the CLTC runs a significant
portion of the General Armament Department’s land-based space
infrastructure, including its launch centers, control centers, telemetry and tracking stations, and naval space tracking vessels. In addition, the CLTC designs and manufactures space launch and telemetry, tracking, and control equipment, constructs China’s landbased space infrastructure, and handles space launch and telemetry, tracking, and control functions for foreign customers of China’s space industry.14
Space Launch Centers

dkrause on DSKHT7XVN1PROD with USCCThe CLTC has four launch centers—Jiuquan, Xichang, Taiyuan,
and Wenchang—each of which launches military, civilian, and commercial spacecraft. Jiuquan Space Launch Center, which became
operational in 1960, is China’s oldest and largest launch facility.
From Jiuquan, China launches many of its intelligence, surveillance, and reconnaissance (ISR) satellites and all spacecraft involved in its human spaceflight program.15 Xichang Launch Center
is China’s most active facility and the only one capable of conducting launches to geosynchronous Earth orbit.† From Xichang,
China primarily launches most of the country’s commercial satellites as well as government-owned communications satellites.16
Taiyuan Satellite Launch Center is China’s least active launch site.
From Taiyuan, China primarily launches meteorological, Earth resource, and scientific satellites. The PLA also conducts test
launches of its ballistic missiles from the complex.17
In late 2014, China opened the Wenchang Satellite Launch Center on Hainan Island, the southernmost province of China. Once
full operations begin, Wenchang will launch all of China’s future
ISR satellites and manned spacecraft. According to Kevin Pollpeter,
deputy director of the Study of Innovation and Technology in China
Project at the University of California Institute on Global Conflictand Cooperation, ‘‘the launch center’s closer proximity to the equator than China’s three other launch centers can increase launch
payloads by 10–15 percent and satellite life by two to three years,
a factor important for developing the country’s commercial launchmarket. Launches will also be directed over the ocean, which will
permit debris from launches to land safely out to sea.’’ 18* Telemetry, tracking, and control is the process of monitoring spacecraft systems, transmitting the status of those systems to the control segment on the ground, and receiving and processing instructions from the control segment.
† Geosynchronous Earth orbit can be achieved at about 22,000–23,000 miles above the Equator. The highest orbital band within geosynchronous Earth orbit in frequent use is known as‘‘geostationary Earth orbit.’’ At this altitude, satellites move at the same speed as the Earth’s
rotation, enabling them to cover large geographic areas. Satellites in geostationary Earth orbit
are used primarily for early-warning missile and nuclear test monitoring, electronic intelligence,commercial communications, and satellite television and radio.

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Figure 1: China’s Space Launch Centers

Source: Economist, ‘‘Space: Ready for Launch: China’s Secretive Space Program Takes a Step
into the Open,’’ January 8, 2015.

Space operations require a substantial amount of support fromland-based infrastructure. Most of this support is provided by two
CLTC-managed control centers: (1) the Xi’an Satellite Telemetry
and Control Center, China’s main facility for controlling satellites
and managing satellite data; and (2) the Beijing Aerospace Flight
Control Center, China’s main facility for controlling China’s humanand lunar missions.19
The Xi’an and Beijing control centers rely on a network of 10–
20 telemetry and tracking stations positioned throughout China.
The stations, which act as middlemen to relay information between
China’s spacecraft and the control centers, can only communicate
with spacecraft when they are directly overhead. The centers thus
are unable to maintain constant communication with spacecraftthat travel beyond the area visible from China’s territory. To help
alleviate these coverage limits, the CLTC has built telemetry and

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278
tracking stations in Namibia, Pakistan, and Chile, and leases access to stations in Kenya and Australia.* China is constructing asixth overseas telemetry and tracking station in Argentina, a reported investment of over $300 million, in exchange for providing
Argentina a share of the antenna’s usage time and access to imagery from its surveillance satellites.20 Additionally, the CLTC operates as many as six Yuanwang naval space tracking vessels,
which serve as mobile telemetry and tracking stations. The
Yuanwang ships have provided critical C4ISR support to China’s
intercontinental ballistic missile tests and some of its humanspaceflight missions.21
Defense Industrial Organizations
The China Aerospace Science and Technology Corporation(CASC) and China Aerospace Science and Industry Corporation(CASIC) are the primary state-owned defense industrial enterprises that support the General Armament Department in the research, development, and manufacturing of space and counterspacetechnologies and systems. Formed in 1999 out of a single entity,
the Chinese Aerospace Corporation, these two conglomerates were
established to inject competition into China’s aerospace industry—a move the country’s leaders hoped would spur the industry to become more efficient, more innovative, and less of a financial burden
on the central and local governments.22 Since the division, CASC
and CASIC have demonstrated advancements in these areas,
though their progress has resulted from improvements to internal
processes rather than from expanded competition, as the two conglomerates have largely focused on different product areas with little overlap.23
China Aerospace Science and Technology Corporation

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CASC plans and oversees the development, production, and testing of space launch vehicles, manned spacecraft, space stations,deep space exploration spacecraft, and ballistic missiles. It alsoheavily invests in satellite applications, information technology,
and other industries to which space technology is applicable. CASC
employed over 170,000 individuals in 2012, the latest year forwhich statistics are available. The corporation comprises 8 large research and production academies,† 14 specialized firms, and 12
companies publicly listed in either China or Hong Kong, and ishome to 11 defense science and technology (S&T) laboratories, anational engineering laboratory, and 5 engineering research centers.24 Two subordinate organizations are particularly important toChina’s space activities:* China previously operated a telemetry and tracking station in Tawara Atoll, Kirabati, butclosed the station in 2003 when Kirabati recognized Taiwan. Jane’s Space Systems and Industry, ‘‘XSCC-Xian Satellite Control Center’’; Brian Harvey, China in Space: The Great Leap Forward, Springer, 2013, 65.
† The term ‘‘Academy’’ for these subordinate organizations should not be taken literally, as
Gao Ruofei, Executive Vice President of the China Great Wall Industry Corporation, informed
the Commission during its July 2015 trip to China. Instead, these should be characterized as‘‘research, development, and manufacturing entities.’’ Gao Ruofei, China Great Wall Industry
Corporation, briefing to Commission, Beijing, China, July 22, 2015.

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279• The China Academy of Space Technology, one of CASC’s eight
academies,* is responsible for the development and productionof satellites and spacecraft. The Academy developed many ofChina’s high-profile space projects, including the Shenzhou series of manned spacecraft, the Chang’e lunar orbiter, and the
Tiangong-1 space laboratory. It also designs many of China’s
C4ISR satellites and plays a role in the formation of China’s
national space technology development plans. The Academy
employs over 10,000 people.25• The China Great Wall Industry Corporation is one of CASC’s
14 specialized firms and serves as its commercial representative for launch services and satellite systems. In this capacity,
the corporation is responsible for international marketing, contracting, and export management. It is China’s sole commercial
entity engaged in these functions. Once contracted, the corporation conducts these commercial launches in conjunction
with other CASC and PLA entities. The corporation also engages in international space cooperation efforts and provides
products and services for a wide range of civilian applications
that nominally utilize space technology, including satellite
technology, information technology products, electronic products, and real estate.26 China Great Wall Industry Corporation
was placed under U.S. sanctions in 1991, 1993, 2004 (twice),and 2006 for exporting missile technology to Pakistan and
Iran, with the last of the sanctions lifted in 2008 following thecompany’s establishment of an internal compliance program
based on U.S. training.27 In a briefing to the Commission during its trip to Beijing in July 2015, the corporation’s executives
emphasized the implementation of this program and the company’s promise to never engage in the import and export ofmissiles and their associated products.28
China Aerospace Science and Industry Corporation

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CASIC is China’s largest missile designer and manufacturer. As
such, the organization plans and oversees the development, production, and testing of China’s direct-ascent antisatellite assets andoperationally responsive launch capability, including the associatedroad-mobile launchers and small satellites. CASIC employed morethan 135,000 workers in 2013, the latest year for which statistics
are available. It comprises five academies, two scientific researchand production bases, six companies publicly listed in either China
or Hong Kong, and over 570 enterprises and institutes.29* The other seven academies are the Academy of Launch Vehicle Technology, the Academy of
Aerospace Solid Propulsion Technology, the Academy of Aerospace Propulsion Technology, theSichuan Academy of Aerospace Technology, the Academy of Spaceflight Technology, the Academy of Aerospace Electronics Technology, and the Academy of Aerospace Dynamics.

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Figure 2: Select Military Organizations Involved in China’s Space Program

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Source: Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies
and Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation,
March 2, 2015), 96–106; Eric Hagt, ‘‘Integrating China’s New Aerospace Power in the Maritime
Realm,’’ in Andrew S. Erickson and Lyle J. Goldstein, eds., Chinese Aerospace Power: Evolving
Maritime Roles, Naval Institute Press, 2011, 386.

281
Figure 3: Select Civil and Defense Industry Organizations Involved in
China’s Space Program

Source: Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies
and Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation,
March 2, 2015), 96–106; Eric Hagt, ‘‘Integrating China’s New Aerospace Power in the Maritime
Realm,’’ in Andrew S. Erickson and Lyle J. Goldstein, eds., Chinese Aerospace Power: Evolving
Maritime Roles, Naval Institute Press, 2011, 386.

Space Power’s Contribution to China’s National Power
Military Contributions* In Chinese military doctrine, ‘‘informationization’’ refers to the application of advanced information technology to military operations.

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In the early 1980s, China set out to transform its military froma large infantry-based army designed to fight protracted wars intoa smaller, well-trained, and ‘‘informationized’’ force.* China accelerated this effort in 2004, when the PLA formally institutionalized
the concept of ‘‘informationization.’’ 30 Since then, the PLA has
based its ‘‘preparations for military struggle’’ on the strategy of‘‘winning local wars under the conditions of informationization,’’ ac-282

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cording to authoritative PLA documents.* 31 This requires China tonarrow the technology gap between the PLA and the world’s mostadvanced militaries through a focus on information technology andon developing and procuring new, high-tech communications anddata fusion systems for battle space management and for longrange, accurate weapons. At the operational level, PLA writings
identify information superiority as the key factor in all antiaccess/area denial tasks, which includes the fielding of an integrated air
defense and the coordination and synchronization of strikes against
an adversary’s forces. According to China’s most recent Science ofCampaigns, an authoritative document on PLA campaigns published by China’s National Defense University, ‘‘the struggle for . . .
information superiority has infiltrated into each campaign phase. . . and become a decisive condition for seizing the battlefield initiative.’’ 32
PLA strategists and analysts recognize that space forces are crucial to the PLA’s transformation into an informationized force aswell as its ability to achieve information superiority during a conflict. According to Dean Cheng, senior research fellow for Chinesepolitical and security affairs at the Heritage Foundation, these PLA
analysts have specifically noted that ‘‘more and more essential data
. . . is gathered from or transits through satellites.’’ They assessthat space systems now provide a majority of battlefield communication, battlefield surveillance and reconnaissance, weather condition assessment, and precision guidance functions, rendering‘‘space dominance’’ an essential component of realizing ‘‘information
dominance.’’ 33 The PLA has accordingly developed space capabilities in pursuit of achieving these and other functions, including
ISR, ballistic missile warning, space launch detection and characterization, environmental monitoring, satellite communication, andposition, navigation, and timing.
• Intelligence, Surveillance, and Reconnaissance. Space-based
systems can monitor areas of interest to help provide China’s
political and military leaders with information on an adversary’s location, disposition, and intent; assist in tracking, targeting, and engaging an adversary’s forces; and provide ameans to conduct battle damage assessment. They also canprovide situational awareness and warning of attack.
• Ballistic Missile Warning. Space-based systems, in conjunction
with ground-based systems and operators, can provide China’s
political and military leaders with timely warning and characterization of foreign ballistic missile events and nuclear detonations to support threat/non-threat determination and followon decision making.
• Space Launch Detection and Characterization. Space-based
systems, in conjunction with ground-based systems, can provide information necessary to assess both foreign and domestic
space launches. Launch detection data can be used to evaluate
events that could directly or indirectly threaten China’s space* China’s most recent defense white paper, published in 2015, updated this term slightly to‘‘winning informationized local wars.’’ China Information Office of the State Council, China’s
Military Strategy, May 26, 2015, 3.

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assets so the PLA can achieve timely warning and take appropriate countermeasures. This capability also can support analysis of China’s domestic space launches.
• Environmental Monitoring. Space-based systems can provide
data on meteorological, oceanographic, and space environmental factors that affect PLA operations. Additionally, spacecapabilities can provide data to assist the development of forecasts, alerts, and warnings regarding factors in the space environment that may negatively impact China’s space assets,
space operations, and their terrestrial users. Imagery capabilities can provide Chinese planners with current information on
sub-surface, surface, and air conditions, allowing PLA commanders to avoid adverse environmental conditions or take advantage of other conditions to enhance operations. Such monitoring also can support intelligence preparation of the operational environment by providing PLA analysts with information necessary to assess potential adversary courses of action.
• Satellite Communications. Satellite communications can provide the PLA with the ability to establish or augment telecommunications in operating areas that lack suitable land infrastructure. Potential PLA applications of satellite communication technology include providing instant global connection
between deployed forces and the Central Military Commission,transmitting critical intelligence between echelons of command, and tying sensors to weapons systems.
• Positioning, Navigation, and Timing (PNT). Space-based PNTassets can provide information PLA forces can use to more effectively plan, coordinate, and execute operations. Precise andreliable PNT information is essential to the performance of virtually every modern Chinese weapon system.34 The PLA canapply precision timing to synchronize operations and conductattacks from stand-off distances, thereby allowing Chinese
forces to avoid threat areas and defend against opposing naval
forces from a position as far as possible from the Chinese coast.
Analysis of authoritative Chinese documents indicates Beijing believes space superiority would be critical to almost every component of its military operations (particularly long-range precision
strikes) during a potential Taiwan Strait conflict and against theUnited States and other potential adversaries in the region.35 In
2009, then PLA Air Force Commander and current Vice Chairmanof the Central Military Commission Xu Qiliang said space had become a ‘‘new commanding height for international strategic competition’’ and having control of air and space ‘‘means having controlof the ground, oceans, and the electromagnetic space, which alsomeans having the strategic initiative in one’s hands.’’ 36 China’s
2015 defense white paper * affirms the importance of space in China’s strategic calculus:* Defense white papers—China’s most authoritative statements on national security—are published by the State Council’s Information Office and approved by the Central Military Commission, Ministry of National Defense, and State Council. Beijing primarily uses these documents
as a public relations tool to help ease deepening international concern over China’s militarymodernization and answer calls for greater transparency.

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Outer space has become a commanding height in international strategic competition. Countries concerned are developing their space forces and instruments, and the firstsigns of weaponization of outer space have appeared. . . .
China will keep abreast of the dynamics of outer space,deal with security threats and challenges in that domain,and secure its space assets to serve its national economic
and social development, and maintain outer space security.37
The PLA also is pursuing a robust and comprehensive array ofcounterspace capabilities. China has not published an officially endorsed document describing its counterspace strategy and doctrine
and likely is still developing its tactics, techniques, and procedures.
Since the early 2000s, however, PLA doctrinal publications andmilitary writings on space warfare * and China’s demonstrated anddevelopmental counterspace capabilities indicate China’s programis primarily designed to deter U.S. strikes against China’s space assets, deny space superiority to the United States, and attack U.S.
satellites.38 These purposes are likely driven by three security-related assessments:• The PLA assesses that obtaining and demonstrating the ability
to damage or destroy the satellites an adversary considers essential to its national security and military operations could
deter that adversary from attacking China’s space assets, potentially in the event of a conflict arising from China’s coercive
actions in its near seas. According to a PLA writing on spacedeterrence, ‘‘it is necessary to display one’s own power to theenemy so that they perceive the deterrent force, and also to getthem to realize that this force is capable of creating loss or consequences that would be difficult for them to accept.’’ 39 Moreover, China’s military strategists perceive counterspace capabilities to be a more credible and flexible deterrent than nuclear and conventional capabilities, as the threshold for the useof counterspace capabilities is lower because it would not involve a significant loss of life.40• Beijing recognizes that its satellites are vital for its commercial
and civil sectors and that disruptions to these systems—evenfor short durations—could contribute to internal instability byharming China’s economy and government operations.41• The PLA assesses U.S. satellites are critical to the UnitedStates’ ability to sustain combat operations globally. PLA analysis of U.S. military operations states that ‘‘destroying or capturing satellites and other sensors . . . will deprive an opponentof initiative on the battlefield and [make it difficult] for themto bring their precision-guided weapons into full play.’’ 42 In another study, the PLA estimated that the United States developed a comprehensive surveillance system comprising approximately 50 satellites as well as unmanned aerial vehicles and* PLA doctrinal publications and military writings on space warfare include the following: theScience of Service Strategy (2013 and 2005 editions), the Lecture on Space Operations (2012),
the Science of Campaigns (2006), and ‘‘Developing the Theory of Strategic Deterrence with Chinese Characteristics’’ in China Military Science (2004).

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aircraft during its participation in the North Atlantic Treaty
Organization campaign in Kosovo. The same study estimates
space systems provided 70 percent of U.S. battlefield communications during the campaign, 80 percent of its battlefield surveillance and reconnaissance, and 100 percent of its meteorological data, and did so 24/7 through all weather conditions.43
Economic and Commercial Contributions
Senior Chinese government and aerospace officials publicly tout
the economic and commercial benefits of China’s space program,highlighting four areas in particular: market creation and spin-off
technologies, satellite application technologies, commercial launchservices, and satellite exports.44

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Market Creation and Spin-off Technologies
Chinese analysts assess that China’s space program has had atransformative impact on the country’s national economy. In theirview, the demand created by large, complex space projects involving numerous government and commercial entities and utilizing awide range of technologies can spur advancement in areas such as
computers, microelectronics, precision manufacturing, automatic
control, new energy, and new materials. Moreover, they assess that
China’s space program provides demand for skilled labor and expanded science and engineering educational programs. These analysts point to the U.S. Apollo program as the best example of thetransformative impact a national space program can have on acountry’s economy.45
Beijing has taken a concentrated and hands-on approach to ensuring its space program realizes similar effects, and Chinese analysts point to numerous benefits it has provided. In their view, Chinese investments in space technologies have their most profound
impact on high-technology development, with each dollar invested
estimated to yield $10 in gross domestic product growth. Furthermore, 80 percent of 1,000 new materials developed domestically are
identified in one analysis as having resulted from research in spacetechnology. More than 2,000 space-based technological achievements have reportedly been transferred to various sectors of China’s national economy, and nearly 1,000 space industry products
have been converted for civilian use. Chinese analysts highlightthat China’s human spaceflight program—which involves over
3,000 commercial enterprises—has been particularly important toChina’s technological progress in electronics, new materials, andautomatic control.46
China’s efforts to introduce spin-off technologies (that is, technologies originally developed for the space industry that also canbe applied to commercial and civilian applications) are led by eightindustrial parks known as ‘‘aerospace bases.’’ These bases—locatedin Beijing, Chengdu, Hainan, Inner Mongolia, Shanghai, Shenzhen,
Tianjin, and Xi’an—are the products of partnerships between thespace industry and their respective provincial governments. The
bases manufacture space industry products and then attempt to leverage the industry’s capabilities in space technologies to build civilian products. These civilian products involve technologies in

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areas identified by the central government as strategic emerging
industries, including high-end manufacturing equipment, alternative energy, new materials, alternative energy automobiles, andnew-generation information technologies.47

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Satellite Application Technologies
Chinese analysts emphasize the importance of China’s space program in the development of satellite application technologies—that
is, supplementary products that build upon the information provided by space technologies to add value for consumers. In theirview, China’s space program has facilitated the development ofthese technologies in three primary areas. First, it has led to thedevelopment of satellite communications applications such as satellite television and telecommunication services. Second, China haslaunched several lines of Earth observation satellites that provide
remote sensing data, which have been used for functions such as
agricultural use monitoring, environmental protection, and municipal planning. Many of China’s civil-government agencies are dependent on this data. Third, the program has facilitated the development of satellite navigation products such as receivers for China’s Beidou constellation. The Beidou system could further stimulate innovation in mobile Internet applications for consumers andin other areas of consumer, civil, or commercial application that require PNT data. In August 2015, Alibaba, a private Chinese firm,and China North Industries Corporation, a Chinese state-owned
defense conglomerate, formed a joint venture worth roughly $310
million to ‘‘build applications and technology to support and workwith the [Beidou] system.’’ 48
Commercial Launch Services
Commercial launches provide China’s space industry with revenues, opportunities to measure the quality of its products and services against international competitors, and synergies through integration with its military space sector. Despite these ostensible benefits, China has struggled to develop its commercial space launchcapabilities and realize desired growth in market share. According
to Beijing, these shortfalls are the result of U.S. export controls,
which since 1999 have prohibited U.S.-manufactured satellites andsatellites containing U.S.-manufactured components from being
launched by China as well as the purchase by China of these
items.49 These laws have progressed through several iterations, as
explained in July 2014 by a firm specializing in international tradelaw:
Originally all satellites, whether military, commercial, or
remote-sensing, were subject to controls under Cat. XV ofthe U.S. Munitions List in the International Traffic in
Arms Regulations (ITAR). In the early 1990s most commercial satellites were moved to the Export Administration
Regulations (EAR) of the Department of Commerce. Then,after some violations associated with launches in China,
Congress passed legislation transferring all satellites backto ITAR. Those controls have been in place since March 15,
1999.50

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dkrause on DSKHT7XVN1PROD with USCCThe Obama Administration changed satellite export control rules
further in November 2014, moving many commercial satellite andsatellite technology exports back to EAR jurisdiction, meaning they
can now be approved for export or for launch on foreign rockets,
unlike under the ITAR regime. Exports to China, however, alongwith North Korea and any state sponsor of terrorism, are stillbanned under EAR based on the FY13 National Defense Authorization Act, which permitted this rule change but included a specificclause to ensure controls remained in place for these countries.51
In addition to exports, China is still blocked from offering launchservices for U.S.-made satellites or any satellites with U.S.-madecomponents, as launches of satellites on foreign rockets are seen as‘‘permanent exports.’’ 52
Despite the obstacles posed by U.S. export control regulations,
China is marketing its launch services to Europe and the developing world, aiming to capture 15 percent of the global launch services market by 2015. While China achieved this objective withroughly 19 and 26 percent market share in 2011 and 2012, respectively, it only held 11 percent in 2013, the last year for which data
is available.* 53 Executives at the China Great Wall Industry Corporation, China’s sole commercial satellite and launch services provider, stressed the continued impact of these obstacles in a briefing
to the Commission during its trip to Beijing in July 2015, statingthat although the company’s products and practices are ‘‘just as
good’’ as those of U.S., European, and Russian providers, it is unable to compete in the ‘‘whole market’’ due to U.S. export controls.54
China launched a Chinese-made satellite for Nigeria in 2007, thefirst such launch for a foreign client since 1999. In 2011, China
launched a satellite for European satellite communications provider
Eutelsat, its first launch of an entirely foreign-made satellite for a
foreign client since 1999. Since these initial launches, China has
provided launch services for Chinese-made satellites to Bolivia, Nigeria, Pakistan, and Venezuela, and has signed contracts for additional launches for Belarus, Laos, Sri Lanka, and Venezuela. For
foreign-made satellites, China has provided launch services to Argentina, Ecuador, Indonesia, Luxembourg, and Turkey and signed
contracts for future launch services with Algeria, Belarus, Congo,
Laos, and Sri Lanka.55
Figures on the cost of Chinese launches are scarce. According to
one source, however, the costs were in one case lower than thoseof Arianespace, the leading European launch company.56 A spokesperson for the China Great Wall Industry Corporation, which handles the contracting of China’s commercial launch services, predicted that going forward its launches will be offered at the same
price level as those of U.S. company SpaceX, an emerging low-costleader in the field.57 Previously, officials from China’s space industry had stated that they could not beat SpaceX’s price.58 China’s* These figures include launches of Chinese government satellites and satellites owned bystate-owned enterprises. If these are excluded, China’s market share is lower, but still only surpasses 15 percent in 2011 and 2012. Additionally, data sources on the commercial launch market differ slightly; this assessment uses the highest totals reported. If the lower totals are used,
China’s market share still surpasses the 15 percent target in 2011 and 2012, while falling shortof this number the other years. For complete market share data see: Kevin Pollpeter, China
Dream, Space Dream: China’s Progress in Space Technologies and Implications for the UnitedStates (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation, March 2, 2015), 21–22.

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integration of its commercial and military launch infrastructures is
expected to provide cost-saving effects as well, as it provides both
sectors with synergies in economies of scale, ‘‘experience effects’’such as increased reliability and fewer failures, and the ability toutilize modular designs.* 59
Satellite Exports
In an attempt to increase its share of the global satellite market,
China has focused on exporting commercial satellites to developing
countries. Beyond valuing the revenues provided by satellite exports, China views the selection by international buyers of its satellites over Western-made ones as another indicator of the overall
strength of its space industry.60 As a relatively late entrant to thecommercial satellite field, China set the goal of capturing 10 percent of this market by 2015.61 Although data on all global commercial satellite sales are not available, China’s share of geosynchronous Earth orbit satellite contracts, which represent the vast majority of commercial satellites,62 increased from 2007 to 2013 but
only achieved 10 percent in 2011 and 2012.63
China also likely values commercial satellite exports because
these domestic-made satellites help increase demand for Chinese
launch services, as they lack U.S.-made components and are thus
free of restrictions that would otherwise prevent their launch on
Chinese rockets.
China has exported communication satellites to Bolivia, Nigeria,
Pakistan, and Venezuela and an imagery satellite to Venezuela.
Moreover, China has signed contracts to provide communications
satellites to Belarus, Laos, and Sri Lanka and an additional remotesensing satellite to Venezuela. In the face of stiff competition frominternational satellite builders, Beijing probably relied on a combination of technology transfer and preferential financing to securethese deals.64
Political and Diplomatic Benefits

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Like other space powers, China uses its space program to enhance its international prestige and influence. Analysis of authoritative Chinese documents indicates Beijing believes successful
space activities, particularly human spaceflight, provide importantgeo-strategic benefits, such as bolstering China’s international
image, promoting a role for China on the world stage commensurate with what it sees as its growing international status, and increasing China’s ability to influence international policy generally
and international space policy specifically.65 For example, as China
moves from a regional to global PNT service provider, Beijing could
use the Beidou system as leverage to obtain more influence over
PNT-related decisions in international and regional organizations
such as the International Telecommunications Union,66 the International Committee on Global Navigation Satellite Systems, theAsia-Pacific Economic Cooperation forum, and the International
Civil Aviation Organization.
* Modular designs are constructed using an approach that divides a product into parts thatcan be connected or combined in different ways.

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The CCP also uses China’s space program to rally public support,a move indicative of the party’s larger strategy to legitimize itself
by convincing the Chinese people it is delivering economic growth
and a better quality of life while restoring China to its ‘‘rightful’’place as a world leader following the country’s so-called ‘‘century of
humiliation’’ from the mid-19th to the mid-20th centuries. Mr.
Pollpeter explains:
The CCP is now communist in name only, and its continued legitimacy is predicated on delivering economic andnationalistic benefits in an informal social contract with its
citizens: the CCP agrees to increase the standard of living
and develop China into an internationally respected country, and the people agree not to rebel. By developing a robust space program and participating in high-profile activities such as human spaceflight and lunar exploration, the
CCP can demonstrate that it is the best provider of material benefits to the Chinese people and the best organization
to propel China to its rightful place in world affairs.67
China collaborates with other countries on a range of bilateraland multilateral space activities, including satellite development,
space exploration, human spaceflight, space object surveillance andidentification, and space R&D.68 Many of these engagements aredesigned to facilitate China’s acquisition of new technologies fromtechnologically-advanced states and to promote the export of China’s space technologies to states with space programs lagging behind its own.69 Others are intended to help China achieve a levelof space situational awareness that enables the PLA’s offensive anddefense space missions and supports China’s orbital debris detection, mitigation plans, and operations.

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Asia Pacific Space Cooperation Organization (APSCO)
With its headquarters located in Beijing, APSCO is China’s primary entity for multilateral cooperation on space. China led thefounding of the formal, membership-only organization in 2008 as a
successor to the Asia-Pacific Multilateral Cooperation in SpaceTechnology and Applications organization.70 Aside from China,
APSCO has seven other member countries,* all of which have lessadvanced space programs than that of China. APSCO members
hold conferences, engage in joint training efforts, and cooperate on
multilateral research and development projects.† 71 These efforts
allow China to position itself as a purveyor of space technology andexpertise to lesser-developed states; China has, for example, donated ground systems and will provide remote sensing data toother member countries.‡ 72 China’s leaders also likely use Beijing’s* APSCO’s member countries are China, Bangladesh, Iran, Mongolia, Pakistan, Peru, Thailand, and Turkey. Indonesia is a signatory state but not yet a full member. Asia-Pacific Space
Cooperation Organization, ‘‘APSCO Member States’’; APSCO, ‘‘Convention of the Asia-PacificSpace Cooperation Organization,’’ October 28, 2005.
† Ongoing multilateral research and development projects in APSCO include a remote sensing
data sharing platform, earth observation and communications satellites, a space observation network, and satellite navigation technology. APSCO, ‘‘Programs.’’‡ These donations have included a data broadcasting system for China’s Fengyun meteorological satellites to several member countries and a receiving station for remote sensing data to
Thailand. Remote sensing data from China’s Gaofen, Ziyuan, Fengyun, and Haiyang satellites
Continued

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central role in APSCO to promote the export of its space technology
and services in order to gain support for its space goals in the Asia
Pacific region, as well as to obtain supplementary data and geographic coverage for its space situational awareness efforts.
China-Brazil Cooperation
China and Brazil have cultivated a strong cooperative relationship in space-related endeavors, particularly through joint satellite
development and space launches. China and Brazil signed theirfirst space cooperation agreement in 1984, and four years later embarked on the $300 million China-Brazil Earth Resources Satellites
project to jointly develop two advanced remote sensing satellites.73
Both countries contributed technologies for the service and payload
modules of these satellites. China and Brazil extended the program
and launched three additional satellites between 1999 and 2014,74
with a sixth satellite slated for launch in 2016.75 In addition toserving China’s environmental and scientific missions, the satellites likely have provided the PLA with enhanced resolution ofterrestrial strategic targets.76 The project also probably helped Beijing lay the groundwork for its most advanced Earth observation
satellite, the Gaofen series, which has military applications (see‘‘Space-based C4ISR Capabilities’’ later in this section for more details on this satellite series).77

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China-Russia Cooperation
Despite a break in cooperation between 1958 and 1997, China
maintains a long-running comprehensive space relationship with
Russia, its oldest space partner. In 1997, China and Russia established a space cooperation subcommittee within their bilateralprime ministers’ dialogue, which resulted in the opening of a Chinese space program office in Russia and a corresponding Russian
office in China, as well as collaboration on a range of humanspaceflight and space exploration activities.78 Future cooperative
activities in space could include joint rocket engine development
and a joint Russia-China space station, or Russia’s participation in
China’s future space station, planned for completion around 2022.79
Through its space cooperation with Russia, China is able to gain
valuable knowledge from one of the world’s top space powers to advance its own space technology development, particularly in thearea of launch vehicles—a technology critical for China’s spacebased C4ISR and counterspace capabilities. China also uses its
space relationship with Russia to increase the geographic reach ofits satellite coverage. In 2014, China and Russia signed agreements
on expanding cooperation of their respective satellite navigation
systems, Beidou and the Global Navigation Satellite System(GLONASS), to include building monitoring stations in each other’scountries.
will be provided to member countries. Kevin Pollpeter, China Dream, Space Dream: China’s
Progress in Space Technologies and Implications for the United States (Prepared for the U.S.China Economic and Security Review Commission by the University of California Institute on
Global Conflict and Cooperation, March 2, 2015), 24–25.

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China-Ukraine Cooperation
China cooperates with Ukraine on a range of space issues. From2001 to 2015, the two countries followed three consecutive five-year
programs guiding their cooperation on large-scale space projects.80
Under the 2006 to 2010 program, China and Ukraine collaborated
on 29 long-term projects, including remote sensing satellites, space
weather satellites, and space rocketry. In 2012 China and Ukraine
agreed to collaborate on more than 50 additional joint projects inthe areas of Earth observation and rocket and satellite technology
development, including the Ionosat space system, marking a significant increase in space cooperation over previous years.* The
two countries continue to discuss potential opportunities for spacecollaboration; future joint ventures could include engine manufacturing projects and exploratory missions to the Moon and Mars.81
In March 2015 Ukraine’s ambassador to China stated his expectation that a fourth five-year program would be approved later in theyear, suggesting that bilateral space cooperation has proceeded despite the ongoing conflict in Ukraine.82
China likely applies technical expertise gained from Ukraine inits development of next-generation launch vehicles. Ukraine, aformer Soviet republic, inherited a wealth of knowledge in ballistic
missiles and launch vehicles from the Soviet Union when it dissolved in 1991.83
China-Europe Cooperation
Joint space cooperation between China and Europe is thriving,
particularly in the areas of space science, space exploration, andhuman spaceflight. As long as conditions remain ripe for collaboration, China and Europe will remain motivated to cooperate in orderto advance their domestic agendas: China generally seeks access to
Europe’s advanced space technology to improve its own space capabilities, while Europe seeks greater cooperation primarily in order
to compensate for the reduced funding of the European Space
Agency and to facilitate greater economic ties between China andEurope.84
In the mid- to late-2000s, China extracted important gains fromthe relationship through its early co-development work on Europe’s
Galileo satellite navigation network, resulting in the most divisive
point in bilateral space relations to date. Europe had initially invited China to participate in the project in order to draw more
funding, expand Galileo’s access to the Chinese market, and distance itself from the United States for political reasons. Europe declined China’s continued participation in the project, however, primarily due to concerns over the dual-use nature of satellite navigation and questions regarding China’s plans for its own Beidou satellite navigation system.† The project likely provided Beijing with* Ionosat is a type of Earth observation satellite in the Earth’s ionosphere designed primarily
for scientific purposes, disaster relief, and space weather monitoring. Yuzhnoye Design Office,‘‘Ionosat.’’† The European Space Agency provided the additional rationale that legal restrictions prohibited China’s involvement, following Galileo’s change from public-private funding to public only.
Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation, March 2,2015), 28–30.

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essential technology and experience needed for the development ofBeidou.85 Beidou satellites even use frequencies previously allocated to Galileo, which EU and Chinese diplomats jointly negotiated for in the early 2000s.86
China-Venezuela Cooperation
China and Venezuela have a robust space partnership. In 2005,
the two countries signed a memorandum of understanding on spacetechnology cooperation and established a special joint subcommittee on technology, industry, and space. Since then, China
has built and launched two satellites for Venezuela, the Venesat1 communications satellite in 2008 and the VRSS–1 remote sensing
satellite in 2012. China also is helping Venezuela build small satellites, supplying Venezuela’s space industry with Chinese technology, and training Venezuelan engineers.87
China’s Counterspace Program
China is pursuing a broad and robust array of counterspace capabilities, which includes direct-ascent antisatellite missiles, co-orbital antisatellite systems, computer network operations, groundbased satellite jammers, and directed energy weapons. China’s nuclear arsenal also provides an inherent antisatellite capability.
During a conflict, China likely would employ a combination of‘‘hard attacks,’’ which use kinetic methods to cause permanent andirreversible destruction of a satellite or to ground support infrastructure, and ‘‘soft attacks,’’ which use nonkinetic methods to temporarily affect the functionality of a satellite or ground systems.
PLA writings suggest Beijing prefers soft attacks to hard attacks
because they are less likely to escalate a conflict, are less likely tobroaden a conflict to include other countries, do not create debris
that could damage its own satellites, and offer Beijing plausible
deniability. However, Beijing almost certainly would conduct hard
attacks in response to an adversary’s kinetic strikes on China’s satellites or when Beijing determined a crisis had progressed to thepoint where destructive attacks were needed and that it could accept reciprocal retaliation from or an escalation by an adversary.88

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Direct-Ascent Antisatellite Missiles
China has tested two direct-ascent antisatellite missiles: the SC–
19 and the larger DN–2. Direct-ascent antisatellite missiles are designed to disable or destroy a satellite or spacecraft using one ofseveral possible kill mechanisms, such as a kinetic kill vehicle.*
The missiles typically are launched against pre-selected targets, as
they must either wait for the target satellite to pass overhead within a certain distance from the launch site, or target a stationary
satellite within range of the launch site. Unlike co-orbital antisatellite systems (discussed later in this section), direct-ascent antisatellite missiles do not establish a persistent presence in space, enter
into long-term orbits, or loiter to await commands to engage a target.89* A kinetic kill vehicle is a maneuverable platform with the ability to detect, track, and undergo guidance to a target and destroy it through the force of a direct collision.

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China destroyed an aging Chinese weather satellite using its
SC–19 direct-ascent antisatellite missile in January 2007 following
two non-destructive tests of the missile in 2005 and 2006. The 2007
test demonstrated China’s ability to strike satellites in low Earthorbit, where the majority of the United States’ approximately 549
satellites reside, including about 30 military and intelligence satellites. During a discussion of the test in 2015, General John
Hyten, commander of U.S. Air Force Space Command, said: ‘‘It wasa significant wakeup call to our entire military . . . until that singular event, I don’t think the broader military realized that thatis something [we will] have to worry about.’’ 90 If China began series production of the SC–19 after the successful 2007 test, China
could already have sufficient numbers of the missile to attack all
U.S. military and intelligence satellites in low Earth orbit.
China conducted additional SC–19 tests in 2010, 2013, and 2014.
In each test, the SC–19 intercepted a mock warhead launched bya ballistic missile rather than a satellite. The targets were not in
orbit, so any debris generated by the interceptions quickly fell backto Earth.91 Although China has called these tests ‘‘land-based missile interception tests,’’ 92 available evidence suggests they were indeed antisatellite tests. Regarding the most recent test in 2014, Assistant Secretary of State for Arms Control, Verification, and Compliance Frank Rose said, ‘‘Despite China’s claims that this was not
an [antisatellite] test; let me assure you the United States has highconfidence in its assessment, that the event was indeed an [antisatellite] test.’’ 93
The non-debris-generating nature of the tests suggests China
may have gained a better appreciation of the diplomatic costs of debris-generating antisatellite tests as well as the long-term consequences of such tests for China’s own space assets. China received worldwide criticism for creating more than 3,400 pieces ofdebris during its 2007 antisatellite test, and this debris continues
to threaten the space systems and astronauts of all nations, including China. More than half of the debris could still be in orbit in
2027.94 Not all experts agree, however: according to Mr. Cheng,
China may have avoided debris-generating tests since 2007 forother reasons such as changes to its testing needs, and evidence
linking the shift to the previous diplomatic response is lacking.95
In May 2013, China fired its new DN–2 rocket into nearly geosynchronous Earth orbit, marking the highest known suborbital
launch since the U.S. Gravity Probe A in 1976 and China’s highest
known suborbital launch to date. Beijing claims the launch waspart of a high-altitude scientific experiment; however, available
data suggests China was testing the ballistic missile component of
a new high-altitude antisatellite capability. The nature of the test
indicates China is developing an antisatellite capability to target
satellites in medium Earth orbit, highly elliptical Earth orbit, andgeosynchronous Earth orbit.96 Although the DN–2 is technically capable of reaching U.S. Global Positioning System (GPS) satellites,
it would likely be better suited for strikes on U.S. ISR satellites.* 97* There are over 30 GPS satellites in orbit, distributed across multiple planes, and many morethan the four required for a ‘‘position fix’’ are overhead at any given time. Numerous successful
direct-ascent antisatellite missle attacks would thus be required to achieve results of military
Continued

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Based on China’s research, development, and acquisition timelines
for previous ballistic missile and antisatellite programs, China
could operationally deploy the DN–2 in the 2020–2025 timeframe.
Table 1:

Summary of Direct-Ascent Antisatellite Tests

Date

Orbital
DebrisMissileNotes

July 2005

No

SC–19

Rocket test

February 2006

No

SC–19

Failed intercept and destruction of anorbital target

January 2007

Yes

SC–19

Successful intercept and destruction of anorbital target

January 2010

No

SC–19

Successful intercept and destruction of asuborbital target

January 2013

No

SC–19

Successful intercept and destruction of asuborbital target

May 2013

No

DN–2

Rocket test

July 2014

No

SC–19

Successful intercept and destruction of asuborbital target

Sources: Commission analysis and judgments based on the following sources: U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving thePeople’s Republic of China 2015, April 2015, 14; Frank Rose (Assistant Secretary of State, Bureau of Arms Control, Verification, and Compliance), ‘‘Written Remarks Delivered to the Federation of American Scientists’’ (Washington, DC, February 20, 2015); U.S.-China Economic
and Security Review Commission, Hearing on China’s Space and Counterspace Programs, written testimony of Richard Fisher, February 18, 2015; U.S.-China Economic and Security Review
Commission, Hearing on China’s Space and Counterspace Programs, written testimony of
Kevin Pollpeter, February 18, 2015; Bill Gertz, ‘‘Stratcom: China Continuing to Weaponize
Space with Latest Anti-Satellite Missile Shot,’’ Washington Free Beacon, August 13, 2014;
Brian Weeden, ‘‘Through a Glass, Darkly: Chinese, American, and Russian Anti-Satellite Testing in Space’’ Secure World Foundation, March 17, 2014; Brian Weeden, ‘‘Anti-Satellite Tests
in Space—The Case of China,’’ Secure World Foundation, August 16, 2013; Craig Murray,‘‘China Missile Launch May Have Tested Part of a New Antisatellite Capability,’’ U.S.-China
Economic and Security Review Commission, May 22, 2013; Xinhua, ‘‘China Carries out LandBased Mid-Course Missile Interception Test,’’ January 28, 2013; Greg Kulacki, ‘‘Is January
Chinese ASAT Testing Month?’’ Union of Concerned Scientists, January 4, 2013; and Xinhua(English ed.), ‘‘China Conducts Test on Ground-Based Midcourse Missile Interception,’’ January
11, 2010.

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Co-orbital Antisatellite Systems
Co-orbital antisatellite systems have not been a significant concern for the United States since the collapse of the Soviet Union.
However, China’s recent space activities indicate that it is developing co-orbital antisatellite systems to target U.S. space assets.
These systems consist of a satellite armed with a weapon such as
an explosive charge, fragmentation device, kinetic energy weapon,
laser, radio frequency weapon, jammer, or robotic arm. Once a coorbital satellite is close enough to a target satellite, the co-orbital
satellite can deploy its weapon to interfere with, disable, or destroy
the target satellite. Co-orbital satellites also may intentionallycrash into the target satellite.98
utility. ISR satellites, by contrast, are relatively few in number and are thus somewhat more
vulnerable, although the changing velocity and altitude inherent to their highly elliptical orbit
would complicate targeting. Brian Weeden, ‘‘Through a Glass, Darkly: Chinese, American, andRussian Anti-Satellite Testing in Space,’’ Secure World Foundation, March 17, 2014.

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Co-orbital antisatellite systems provide several advantages overcurrent direct-ascent antisatellite missiles, including their ability to
be used to target satellites in every orbital regime, generate lessdebris, conduct attacks without geographic limitations, and limit
escalation, as many co-orbital attack options are reversible andoffer plausible deniability. Additionally, co-orbital satellites would
pose significant warning challenges for the U.S. Intelligence Community because they could be launched into orbit long before an attack.99
Since 2008, China has tested increasingly complex space proximity capabilities. Although these capabilities have legitimate applications for China’s manned space program, the dual-use natureof the technology and China’s secrecy surrounding the tests suggest
China also is using the tests to develop co-orbital counterspacetechnologies.
• During a manned space mission in September 2008, China’s
Shenzhou 7 spacecraft deployed the BX–1, a miniature imaging satellite, which then positioned itself into an orbit aroundthe spacecraft. The activities of the BX–1 may have been designed to test a dual-use on-orbit inspection capability for future inspector satellites. In addition to aiding China withmaintenance of its satellites, inspector satellites could approach U.S. satellites in orbit to collect detailed images and intelligence on them. Moreover, at one point the BX–1 passed
within 45 kilometers of the International Space Station, apparently without prior notification, suggesting it may have been
simulating a co-orbital antisatellite attack.100

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• In June 2010, China launched the SJ–12 satellite. Over the
next two months, the satellite conducted a series of maneuvers
and came within proximity of the SJ–6F, an older Chinese satellite that was placed into orbit in 2008. The activities of theSJ–12 may have been designed to test a co-orbital antisatellite
capability, such as on-orbit jamming. Moreover, during its maneuvers, the SJ–12 apparently bumped the SJ–6F, causing it
to drift slightly from its orbital regime. This activity suggests
China also could have used the test to demonstrate the ability
to move a target satellite out of its intended position by hitting
it or attaching to it.101• In July 2013, China launched a rocket carrying the CX–3, SY–
7, and SJ–15 satellites, one of which was equipped with arobotic arm for grabbing or capturing items in space. Once all
three were in orbit, the satellite with the robotic arm grappled
one of the other satellites, which was acting as a target satellite.102 The satellite with the robotic arm then changed orbits
and came within proximity of a separate satellite, the SJ–7, anolder Chinese satellite that was orbited in 2005.103 Roboticarms can be used for civilian missions such as satellite repair,space station construction, and orbital debris removal; theyalso can attach to a target satellite to perform various antisatellite missions.104

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296
Computer Network Operations
Chinese military doctrine and the integration of computer network
operations, electronic warfare, and counterspace reflected in certain
Chinese military organizations and research programs indicate the
PLA during a conflict would attempt to conduct computer network
attacks against U.S. satellites and the ground-based facilities thatinteract with U.S. satellites.105 According to one Chinese author:
A military satellite cannot connect with the Internet. Therefore, some people think ‘‘hackers’’ cannot attack a satellite’scommand and control [system]. But in actuality, the microwave antenna of the satellite control is open, so one canintercept satellite information through technological means
and seize the satellite’s command and control [system].
Using this as a springboard to invade the enemy’s independent network systems is entirely possible.106
If executed successfully, such attacks could significantly threaten
U.S. information superiority, particularly if they are conductedagainst satellites with sensitive military and intelligence functions.
For example, access to a satellite’s controls could allow an attacker
to damage or destroy the satellite; deny, degrade, or manipulate its
transmissions; or access its capabilities or the information, such asimagery, that can be gained through its sensors.
Chinese hackers likely have been responsible for several computer network operations against U.S. space assets, though the
U.S. government has not publicly attributed any of them to China.
If responsible, China likely used these intrusions to demonstrate
and test its ability to conduct future computer network attacks andto perform network surveillance.
• In October 2007 and July 2008, cyber actors attacked theLandsat-7, a remote sensing satellite operated by the U.S. Geological Survey, resulting in 12 or more minutes of interferenceon each occasion. The attackers did not achieve the ability tocommand the satellite.107• In June and October 2008, cyber actors attacked the Terra
Earth Observation System satellite, a remote sensing satellite
operated by NASA, resulting in two or more minutes of interference on the first occasion and nine or more minutes of interference on the second occasion. In both cases, the responsible
parties achieved all steps required to command the satellite
but did not issue commands.108• In September 2014, cyber actors hacked into the National
Oceanographic and Atmospheric Administration’s (NOAA) satellite information and weather service systems, which are usedby the U.S. military and a host of U.S. government agencies.
NOAA stopped the transmission of satellite images to the National Weather Service for two days while it responded to theintrusion and ‘‘sealed off data vital to disaster planning, aviation, shipping, and scores of other crucial uses,’’ according toa U.S. media report citing a discussion with NOAA officials.109
The U.S. government has not publicly attributed the attack to
any country or actors; however, then Congressman Frank Wolf
stated, ‘‘NOAA told me it was a hack and it was China.’’ 110

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Moreover, China’s large-scale, state-sponsored theft of intellectual property and proprietary information through cyber espionage
has enabled future space and counterspace operations by fillingknowledge gaps in China’s space R&D, providing insight into U.S.
space plans and capabilities, and helping to identify vulnerabilities
in U.S. space systems.
In May 2015, Pennsylvania State University disclosed that two
separate groups of cyber actors had been sifting through the computers of its engineering school for more than two years. The University is also home to a separate lab that specializes in aerospaceissues and works primarily for the U.S. military. Although the lab’s
networks are reportedly separate from those of the engineeringschool, the length of the breach raises the possibility that the hackers may have entered the lab’s networks as well, according to asource familiar with the U.S. government investigation of the intrusions, as cited in a U.S. media article. This source also allegedthat China sponsored at least one of the groups, while the other isbelieved to be state-sponsored as well.111
Earlier in June 2014, Crowdstrike, a private U.S. cybersecurity
firm, published a report providing detailed technical information
regarding the activities of a Chinese cyber threat group, which
Crowdstrike refers to as ‘‘Putter Panda.’’ According to the report,
the group supports China’s space surveillance mission and is subordinate to the Third Department of the PLA General Staff Department, widely believed to be China’s premier organization responsible for signals intelligence collection and analysis. Crowdstrikeassesses that Putter Panda since 2007 has targeted ‘‘government,
defense, research, and technology sectors in the United States, withspecific targeting of space, aerospace, and communications.’’ 112
Moreover, Mandiant, a U.S. cybersecurity firm, has responded tomultiple incidents in which at least six distinct China-based threat
actors have compromised aerospace and defense companies both in
the United States and other countries. These threat groups, which
Mandiant assesses most likely are associated with the Chinese government, have targeted the sector since at least 2006, and frequently steal sensitive data from their victims. Stolen files include
human resources records, internal business communications, marketing and sales documents, and test results and other product information pertaining to the development and operation of missile
systems and military and civilian satellite technology for both communications and location tracking.113
Ground-Based Satellite Jammers
Since the mid-2000s, China has acquired a number of foreign andindigenous ground-based satellite jammers, which are designed todisrupt an adversary’s communications with a satellite by overpowering the signals being sent to or from it. The PLA could employ
jammers to degrade or deny U.S. military systems’ access to GPS
and most satellite communications bands if they are operating
within a few hundred kilometers of China.114 GPS is particularly
easy to jam because the signals are weak; as a result, even lowpower jammers can deny or degrade the acquisition of a GPS signal
over long distances. Although China’s employment strategy for its
ground-based jammers is unknown, Mr. Pollpeter posits that ‘‘given

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the relatively small size and long range of GPS jammers, [thestrategy] could consist of [placing] a series of vehicle-mounted
jammers . . . at intervals within the theater of operations to provide
overlapping jamming zones.’’ 115
Directed Energy Weapons
China has been committing substantial resources to R&D for directed energy weapons, including those that could be used for antisatellite missions, since at least the 1990s. Directed energy weapons can deliver concentrated energy, atomic, or subatomic particles
along a line-of-sight trajectory at or near the speed of light to damage or destroy equipment, facilities, and personnel.
By 2006, China had at least one ground-based laser designed todamage or blind imaging satellites.116 At low energies, lasers canblind or damage a satellite’s optical sensors; at high energies, lasers can cause physical damage to satellites.
In 2006, China fired a high-powered laser at a U.S. satellite, resulting in a temporary degradation to the satellite’s functionality.
Although it is unclear whether China fired the laser to determine
the location of the satellite * or to ‘‘dazzle’’ it, China’s test demonstrated a significant new capability that it almost certainly has
continued to develop and improve over the last nine years.117
Additionally, China is researching radio frequency weapons,
which are designed to damage or destroy electronic components ofsatellites by either overheating or short-circuiting them. Radio frequency weapons can be surface-based, space-based, or employed on
missiles; they are thus useful in achieving a wide spectrum of effects against satellites in all orbits.118 Although China’s progress inthis area is unknown, such weapons could feasibly be deployed in
the next five to ten years.
Nuclear Weapons

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China’s nuclear arsenal provides an inherent antisatellite capability, as China could detonate a nuclear warhead in low Earthorbit using a ballistic missile. The electromagnetic pulse generated
by the blast would destroy unshielded satellites † that are in lineof sight of the explosion, and the resulting persistent radiation environment would slowly damage unshielded satellites in low Earthorbit as they pass through the area. Although the blast would not
directly affect satellites in higher orbits, the radiation could impede
their communications with ground stations. China likely would
only consider using nuclear weapons in space during an ongoing
nuclear war, given that the detonation would also affect China’s
satellites as well as those of other countries.119* Satellite laser ranging is used to precisely determine a satellite’s location by measuring the
distance from a ground station to a satellite based on the time an ultra-short laser pulse fired
from the ground takes to reach and be reflected back from the satellite. Yousaf Butt, ‘‘Satellite
Laser Ranging in China,’’ Union of Concerned Scientists Technical Working Paper, January 8,
2007.
† Physical shielding using sheets of aluminum, sometimes supported by other materials, reduces the risk to satellites of damage from micrometeoroid and orbital debris impact. Colin
Schultz, ‘‘How Do You Shield Astronauts and Satellites from Deadly Micrometeorites?’’ Smithsonian.com, June 28, 2013.

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China’s Space-Based C4ISR Modernization
China’s initial C4ISR modernization efforts focused on developinga robust and secure terrestrial network of fiber optic cables, mobile
radios, datalinks, and microwave systems. In the mid-2000s, however, China shifted the emphasis of its C4ISR modernization program to expanding and enhancing the country’s space-based infrastructure. China had approximately 142 operational satellites inorbit as of September 1, 2015, compared to about 10 in 2000 and
35 in 2008.* Approximately 95 of these satellites are owned and operated by Chinese defense organizations, including the PLA, theMinistry of Defense, and various entities under the state-owned
space industry conglomerates.120

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Intelligence, Surveillance, and Reconnaissance
China is fielding sophisticated satellites that feature electro-optical (EO), synthetic aperture radar (SAR), and electronic reconnaissance (ELINT) sensors. EO sensors passively detect light images ofmaritime and ground-based targets. Although EO sensors canachieve the highest resolution of these types, they are adversely affected by poor weather conditions and cannot image at night. SAR
sensors use a microwave transmission to create images of maritime
and ground-based targets. They tend to have lower resolution thanEO sensors but can image during night or day and in all weather
conditions. ELINT sensors detect electronic signal emissions andthen determine emitter locations.121
Combining these varying capabilities is crucial for locating andtracking a moving target. A study by authors affiliated with the
PLA Navy Aerospace Engineering Academy illustrates the importance of integrating the information obtained from ISR satellites
for long-range antiship ballistic missile (ASBM) strikes:
During the process of planning [to use] the fire power of an
ASBM, [there is a need] for obtaining reliable target intelligence information for guiding the missile attack. This
could be achieved by integrating EO imaging satellites,
SAR imaging satellites, ELINT satellites, naval ocean surveillance satellites, mapping resource satellites, and highly
accurate commercial remote sensing satellite imagery,which could be purchased on the international market.
Through the integration of the data obtained via a numberof different satellites, and with the addition of processing
and data fusion, [one could] guarantee missile guidance requirements for all types of target information for a longrange ASBM strike.122
China’s major military-relevant ISR satellites are the Yaogan,
Shijian, Gaofen, and Haiyang, each of which is examined in detailin the following paragraphs. China also has a large number of imaging and remote sensing satellites that are owned and operated
by civilian or commercial entities. Given the PLA’s central role inthe development, launch, and operations of all of China’s satellites,* For comparison, the United States has approximately 549 active satellites in orbit and Russia has approximately 131 active satellites in orbit. Union of Concerned Scientists, ‘‘UCS Satellite Database.’’

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these civilian and commercial satellites likely contribute to the
PLA’s C4ISR efforts whenever it is technically and logistically feasible for them to be so utilized,123 and they would probably be directly subordinate to the PLA during a crisis or conflict.
Yaogan Satellites
The Yaogan series of satellites, the first of which was launchedin 2006, serves as the core component of China’s maritime ISR architecture. Chinese state-run press claims the satellites are used to
conduct scientific experiments and carry out land surveys, among
other functions.124 Because the series is owned and operated by the
PLA, however, it likely is used primarily for broad area maritime
surveillance in support of the PLA’s efforts to detect, track, andtarget foreign ships, such as U.S. carrier strike groups. China todate has launched 37 Yaogan satellites,125 including EO, SAR, and
ELINT variants.126
Shijian Satellites
China’s Shijian series of satellites, the first of which waslaunched in 1971, is owned and operated by China’s Academy ofSpace Technology. The Shijian satellites have a variety of configurations and missions. Although some have been used for strictly civilian purposes, such as crop breeding,* many appear to be military
ISR satellites based on their suspected payloads, their orbital characteristics, and the secrecy surrounding their launches. Some
Shijian satellites likely feature ELINT sensors used by the PLA for
broad area maritime surveillance. Others probably are equippedwith infrared sensors to detect ballistic missile launches in support
of a future early warning system.127 According to Mr. Pollpeter, thedevelopment of such a system could indicate a change in China’s
nuclear posture:
The deployment of a space-based ballistic missile early
warning system may also signal a change in China’s nuclear doctrine from ‘‘no first use’’ to ‘‘launch on warning.’’
China’s current nuclear force doctrine relies on retaliating
only after a nuclear first strike from an opponent. A‘‘launch on warning’’ system would make China’s nuclear
force more survivable since China would have warning thatan attack is imminent, but would also present the possibility for false warnings, which could be catastrophicallydestabilizing during a conventional conflict.128

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Gaofen Satellites
The Gaofen series of EO/SAR satellites, the first of which waslaunched in 2013, features China’s first high-definition satellite
and first satellite capable of sub-meter resolution; the series also
* According to Mr. Pollpeter, ‘‘the Shijian-8 was the world’s first satellite devoted to crop
breeding. Seeds were placed in the satellite and then exposed to the higher radiation levels ofspace in the hopes that genetic mutations [might] occur. The seeds were then removed from thesatellite after it returned to Earth and grown.’’ Kevin Pollpeter, China Dream, Space Dream:
China’s Progress in Space Technologies and Implications for the United States (Prepared for the
U.S.-China Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 77.

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incorporates several design innovations. According to Beijing, theGaofen-1 ‘‘has been used in land resource investigation, mineral resource management, atmospheric and water environment quality
monitoring, and natural disaster emergency response and monitoring,’’ and its imagery has supported ‘‘tens of national ministries
and agencies, local governments, research institutions, universities,
enterprises and organizations in China.’’ 129 China also employed
the Gaofen-1 to assist in the search for missing Malaysian airliner
MH370 in 2014, demonstrating its ability to conduct broad maritime surveillance that could be useful for the PLA. China launched
the second Gaofen in 2014 and two more in 2015, and is expectedto launch as many as four more by 2016.130
Haiyang Satellites
The Haiyang series of satellites, the first of which was launchedin 2002, is owned and operated by the State Oceanic Administration. The series primarily supports China’s civilian and scientificorganizations involved in monitoring the characteristics of theocean environment, including pollution, topography, wind fields,
surface temperatures, and currents. The fact that the State Oceanographic Administration oversees China’s maritime law enforcement organizations, however, suggests these satellites also play arole in monitoring and enforcing China’s maritime claims in the
East and South China seas. Indeed, in 2012 a Chinese official said
future Haiyang satellites will be used to monitor the disputed
Senkaku Islands and Scarborough Reef. To date, China haslaunched three Haiyang satellites (two of which are operational)
and plans to launch five more by 2020.131

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Remote Sensing Commercial Satellites and Microsatellites
China launched the four-satellite Jilin-1 constellation in October
2015. These have been described as the country’s first ‘‘self-developed’’ remote sensing satellites intended for commercial use andwere reportedly developed by a company subordinate to a research
institution of the Chinese Academy of Sciences.132
Since 2000, China has launched at least 28 microsatellites*, including Chuangxin/Banxing, Fengniao, Naxing, Tiantuo, andXinyan types, most of which belong to civil users.133 China
launched Tiantuo-2, which carries four video cameras for datatransmission and live tracking of moving objects on Earth, in September 2014.134 Most recently, China reportedly launched 20
microsatellites assembled by universities and research institutes in
September 2015.135 Although their small size often limits their capabilities, microsatellites are significantly cheaper and easier to develop and manufacture than larger satellites that serve similarfunctions. Microsatellites also have lower observable signatures
than larger satellites, making them harder for an adversary to
track in space.136* ‘‘Microsatellites’’ are satellites with a mass between 10 and 100 kilograms. Kevin Pollpeter,
China Dream, Space Dream: China’s Progress in Space Technologies and Implications for theUnited States (Prepared for the U.S.-China Economic and Security Review Commission by the
University of California Institute on Global Conflict and Cooperation, March 2, 2015), 23.

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Positioning, Navigation, and Timing
In December 2012, China’s Beidou regional satellite navigation
system * became fully operational. Using 19 satellites and a network of ground stations, Beidou provides subscribers, including the
PLA, with 24-hour regional position, navigation, and timing (PNT)
services. Unlike other PNT systems, Beidou offers a short message
service that can accommodate up to 120 Chinese characters pertransmission. Beidou reportedly provides positioning accuracies of
10 meters or better, depending on the location, for civilian users.
In comparison, GPS has 31 satellites and can provide positioning
accuracies of several meters, depending on the location, for civilian
users.† China intends to construct thousands of additional groundstations and launch additional satellites to improve Beidou’s positional accuracies within China.137
Beijing plans to expand the Beidou constellation from 19 to 35
satellites by 2020 in order to provide global coverage. If successful,
China will become the third country in the world after the UnitedStates and Russia to field an independent global satellite navigation system. China launched its 18th and 19th Beidou satellites in
July 2015.138
China’s Satellite Navigation Office has emphasized Beidou’s importance to the PLA and to China’s commercial interests, stating
the system meets the ‘‘demands of China’s national security, economic development, technological advances and social progress . . .
safeguard[s] [China’s] national interests . . . enhance[s] [China’s]
comprehensive national strength . . . promote[s] the development of[China’s] satellite navigation industry . . . make[s] contributions tohuman civilization and social development . . . [and] serve[s] theworld and benefit[s] mankind.’’ 139
Although Beidou has a wide and growing range of civilian applications that will benefit China’s economic development,‡ China developed its indigenous PNT system primarily for military purposes.
Prior to the deployment of Beidou, most PLA units used GPS for
positioning and maneuver and most PLA precision weapon systems
used GPS for guidance. The PLA has considered this dependence
on a foreign PNT system to be a strategic vulnerability since atleast the mid-1980s. These fears were exacerbated during the
1995–1996 Taiwan Strait Crisis. According to a retired PLA general, the PLA concluded that an unexpected disruption to GPS
caused the PLA to lose track of some of the ballistic missiles it
fired into the Taiwan Strait during the crisis. He then said that ‘‘itwas a great shame for the PLA . . . an unforgettable humiliation.
That’s how we made up our mind to develop our own global [satellite] navigation and positioning system, no matter how huge thecost. Beidou is a must for us. We learned it the hard way.’’ 140
The PLA in the early 2000s began to gradually incorporate
Beidou into its ground, air, and naval forces, and by the late 2000s* The regional Beidou system, which China refers to as Beidou-2, grew out of an earlier satellite constellation, known as Beidou-1. Beidou-1 provided limited position, navigation, and timing services in China and a small portion of East Asia but served primarily as a developmental
platform for future projects.
† Beidou and GPS provide higher positional accuracies for the PLA and U.S. military, respectively.
‡ Civilian applications include road transport, aviation, shipping and rail transport, science,
surveying and mapping, geophysics, telecommunications, financial services, and social activities.

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was using Beidou for positioning and maneuvering, friendly force
tracking,* and secure communications. Public information about
China’s incorporation of Beidou into its weapons systems is scarce,
but China almost certainly is equipping its ballistic and cruise missiles to operate with both GPS and Beidou. If this is true, PLA
operators could switch to Beidou to guide a missile to its target
if GPS were (1) denied by the United States during a conflict or(2) deemed unusable by PLA commanders due to operational security concerns. Additionally, the availability of Beidou would allow
China to attack an adversary’s access to GPS without disrupting
the PLA’s own capabilities.141
China is attempting to make the Beidou system more prevalent
in its domestic economy in order to compete with GPS, which dominates 95 percent of market share for satellite navigation products
in China due to its earlier introduction, better known brand name,superior accuracy, and cheaper receiver costs. By 2020, China aims
to gain 70–80 percent of the domestic satellite navigation market,
which is estimated to reach $65 billion. To achieve this goal, China
has announced several measures to encourage or force its citizens
to adopt Beidou, including the requirement that, in order to receive
transportation certificates, all new heavy trucks manufactured inany of nine Chinese provinces must be equipped with Beidou. Already more than 50,000 Chinese fishing boats—many of which aresupporting China’s efforts to advance its maritime claims—havebeen equipped with the system.142
Beijing has also taken several steps to promote Beidou to countries throughout Asia, where it currently occupies only 1 percent of
the market, and to position the service to break into the global
PNT market in 2020.
• China released the technical specifications of Beidou’s open signal to allow for the production of ground receivers and offers
free Beidou service for civilian and commercial users throughout Asia.143• China has reached agreements with Brunei, Laos, Pakistan,
and Thailand to provide Beidou for government and militarycustomers at heavily subsidized costs. These agreements include provisions allowing Beijing to build satellite ground stations in each country; the stations will be used to increase
Beidou’s range and signal strength.144 China already has built
three ground stations in Thailand, and plans to build morethan 220 additional stations in the country. According to a senior Chinese industry official involved in the development ofBeidou stations in Thailand, ‘‘with these stations, Beidou could
better service local customers and will be able to graduallysqueeze GPS’s market share.’’ 145 China ultimately aims tobuild a vast network of ground stations throughout Asia.
• China reportedly is pursuing various cooperative arrangements
involving Beidou with other countries, including Israel, Malaysia, Mexico, North Korea, Russia, Singapore, and Sweden.146* Beidou provides automatic position reporting back to PLA command and control centers, allowing the PLA to constantly monitor the location of PLA units as well as Beidou-equipped Chinese fishing boats. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, 2015, 22.

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Additionally, according to official Chinese press citing an interview with the spokesperson for Beidou, ‘‘the Beidou satellite
navigation system will tap into opportunities brought by theBelt and Road Initiative,* and will engender further cooperation with other satellites. . . . During the process, China will
step up cooperation with researchers working with other satellite navigation systems.’’ 147• In November 2014, Beidou won approval from a United Nations’ maritime body that sets standards on international shipping, joining GPS and Russia’s GLONASS as the only navigational systems recognized for operations at sea. This formal
recognition could help to further promote Beidou’s use aroundthe world by boosting brand awareness and signaling that
Beidou can achieve its stated accuracy.148

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Communications
China in 2000 began launching dedicated military communications satellites to provide secure voice and data communications for
PLA users. Today, the PLA operates at least four communications
satellites: Chinasat-1A, Chinasat-2A, Chinasat-20A, and Chinasat22A. To meet bandwidth or geographic requirements or add resilience, the PLA could leverage communications satellites owned by
China’s civilian agencies or Chinese-controlled telecommunications
corporations, as well as communication satellites owned by international corporations.149
China’s commercial communications satellites include theApstar-7, which is owned and operated by a Hong Kong-based subsidiary of the state-controlled China Satellite Communication Company. From 2012 to 2014, the U.S. Department of Defense (DOD)
leased the Apstar-7’s services to satisfy satellite communications
requirements from U.S. Africa Command.150 Following media andCongressional scrutiny of the deal, however, DOD did not renew
the lease for 2015. According to Doug Loverro, DOD’s deputy assistant secretary for Space Policy: ‘‘Working with [the Office of theSecretary of Defense], U.S. Africa Command has made significant
progress over the last year in moving DOD [satellite communication] leases from the Chinese Apstar system to other commercial
satellite providers in the region. We have already transitioned over
75 percent of the Apstar bandwidth to other satellites, and our intent is to be completely transitioned by May of [2014].’’ 151
China plans to launch the world’s first experimental quantum
communications † satellite in 2016. This technology could eventu* China’s Silk Road Economic Belt initiative is aimed at enhancing economic and cultural integration between China and Central Asia. The land-based Silk Road Economic Belt has a maritime counterpart, the ‘‘21st Century Maritime Silk Road,’’ which will run from China’s coast
through Southeast Asia and the Indian Ocean to Africa and the Mediterranean Sea. Together,
they are commonly referred to as the ‘‘One Belt, One Road’’ initiative. For more information on
the initiative, see Chapter 3, Section 1, ‘‘China and Central Asia.’’† Quantum communications, a subset of quantum information science, refers to the transmission of a quantum state (i.e., using quantum data rather than bits) from one place to another. A quantum communication network’s key characteristic is its use of the quantum key distribution method which is, in theory, unbreakable—any attempt to intercept the encryption key
would alter the physical status of the data (otherwise in a state of ‘‘superposition,’’ existing in
two states at the same time) and trigger an alert to the communicators. Quantum communication has thus far been limited to short distances due to the technological difficulty in maintaining the quantum data’s fragile state over a long distance. Giuseppe Vallone et al., ‘‘Experimental

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ally enable the PLA to instantaneously send, receive, and decipher
messages around the world using a virtually unbreakable encryption key to provide secure electronic transmission of sensitive information.152
China also has announced plans to launch its first communications satellite that uses electric propulsion around 2020, following
previous demonstrations of this technology by the Unites States,
Russia, Europe, and Japan.153 By using electric-powered engines
instead of chemical propellant, such satellites will allow China tolaunch larger payloads at a fraction of the cost of traditional
launch vehicles and improve communications satellites’ lifespanfrom 15 to 20 years. The main drawback of this technology will be
the longer time required to bring a satellite into orbit—up to eightmonths instead of several weeks.154 According to a deputy chief designer of China’s communications satellites at the China Academyof Space Technology, the technology will also be important for future manned spaceflight missions, including China’s future spacestation around 2022.155 The PLA could eventually use the technology to launch more advanced remote sensing ISR satellites intohigh Earth orbit, as well as for military missions in deep space.156
China’s network of military communication satellites will be assisted by its Tianlian data relay satellite constellation, which wascompleted in 2012. As China orbits relay-capable satellites,* theTianlian constellation will reduce the time the PLA must wait toreceive data from its ISR satellites and thus enhance its ability toprovide near-real-time ISR data to locate, track, and target U.S.
ships operating in the Western Pacific. Without a data relay system, Chinese satellites must wait until they come into view ofground stations in China before sending ISR data, potentially causing a time lag of up to several hours and thus reducing the PLA’s
ability to receive time-sensitive intelligence on mobile targets.157
Mr. Pollpeter explains:dkrause on DSKHT7XVN1PROD with USCC

A remote sensing satellite at an altitude of 600 [km], suchas China’s Yaogan series, can communicate with groundstations at a range of around 2,800 km. Beyond this range,
they must retain their data until they come in range of aground station. With the use of data relay satellites operating in geosynchronous [Earth] orbit above ISR satellites,an ISR satellite can transmit its data to a data relay satellite, which will then transmit the data to a ground station. In this way, time-sensitive data and communications
can be immediately downloaded to a ground station forprocessing. They can also be used to assist with data transmission from launch vehicles to ground stations and cantransfer data between aircraft, space tracking ships, andother craft.158
Satellite Quantum Communications,’’ Physical Review Letters 15:4 (July 20, 2015): 1; Yu Dawei,‘‘In China, Quantum Communications Comes of Age,’’ Caixin, February 6, 2015; Stephen Chen,‘‘China to Launch Hack-Proof Quantum Communication Network in 2016,’’ South China Morning Post (Hong Kong), November 4, 2014; and Michael A. Nielsen and Isaac L. Chuang, Quantum Computation and Quantum Information, Cambridge University Press, 2000, 14.
* The number of China’s current ISR satellites that are relay-capable is unknown. However,China almost certainly will add this capability to all of its future ISR satellites.

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China’s Space Launch Capabilities
Since approximately 2000, China has significantly enhanced its
ability to launch military, civilian, and commercial satellites. China
conducted 83 known space launches from 2010 to 2014, only 10
fewer than the United States during this period (see Table 2).159
This growth is expected to continue as China expands and improves its ground-based space infrastructure and launch vehicles.
Table 2:Chinese versus U.S. Space Launches, 2010–2014
2010

2011

2012

2013

2014

Chinese Launches(Satellites Deployed)

15 (20)19 (18)19 (25)14 (17)16 (19)U.S. Launches(Satellites Deployed)

15 (41)19 (39)16 (35)20 (85)23 (110)dkrause on DSKHT7XVN1PROD with USCC

Note: Estimates of the number of space launches and satellites deployed vary by source due
to a number of judgment decisions involved in the calculations, such as how to determine theownership of a satellite company belonging to a certain country, whether to count objects as
satellites or as space junk, and whether to include small satellites that can separate from an
object already in orbit. For the number of new Chinese satellites deployed since 2010 by type,see U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, May 8, 2015, 70.
Source: Jonathan McDowell (Astrophysicist, Harvard-Smithsonian Center for Astrophysics),
interview with Commission staff, June 17, 2015.

China has eight Long March (LM) liquid-fuel space launch vehicles that provide lift capacities ranging from light- to heavy-lift andthe capability to deploy payloads at altitudes ranging from low
Earth orbit to geosynchronous Earth orbit. These vehicles consistof the LM–2C, LM–2D, LM–2F, LM–3A, LM–3B, LM–3C, LM–4B,
and LM–4C. China has conducted more than 205 launches since its
first rocket flew in 1970.160
In tandem with efforts to upgrade its current launch vehicles,
China is developing a new generation of liquid-fuel rockets designed to meet the country’s future launch requirements. Once
operational, this new generation—which will consist of the LM–5,
LM–6, and LM–7—will substantially increase China’s payload capacity while offering improved reliability, increased flexibility, andreduced costs.161 China conducted the debut launch of the LM–6,
reportedly using a safer and more efficient liquid propellant, in
September 2015. The rocket carried 20 microsatellites and will primarily be used to launch microsatellites in the future, according tostate-run media.162
The LM–5 will be one of the largest and most powerful spacelaunch vehicles in the world and will more than double the size of
payloads China can launch into low Earth orbit and geosynchronous Earth orbit. Although China publicly advertises the LM–5 asbeneficial to its human spaceflight program, the rocket likely will
also launch advanced C4ISR satellites, space station modules, andpotentially reusable orbital vehicles that could be used for counterspace and ISR missions. The first LM–5 launch, which has been repeatedly delayed by manufacturing issues, could occur by the endof 2015.163

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China also is conducting preliminary research on a super-heavylift launcher—the LM–9—that could be used to send large payloads, such as a manned lunar lander, to the Moon; the LM–9 also
would be capable of launching into deep outer space. According toa senior rocket engineer at the China Aerospace Science and Technology Corporation, which is responsible for producing China’s LM
series, ‘‘estimates show the LM–5 will have to use four launches tofulfill a manned mission to the Moon while the LM–9 will need
only one.’’ 164
In addition to these liquid-fuel launch vehicles, China is developing at least three types of solid-fuel rockets: the LM–11, theKuaizhou, and the Feitian. China successfully conducted the inaugural launch of the LM–11, the largest of the developmental solidfuel rockets, in September 2015.165 China has tested the smaller
Kuaizhou rocket twice, most recently in November 2014, and revealed the existence of the similarly-sized Feitian at China’s
Zhuhai Airshow in November 2014.166 Solid-fuel rockets lack the
payload capacity of liquid-fuel rockets but are cheaper to manufacture, simpler to operate, and can be released with less preparation.
Furthermore, the launchers are transportable or ‘‘road-mobile,’’meaning they do not rely on fixed launch structures and are thus
less vulnerable to attack. China likely is developing these newsolid-fuel launch vehicles to put microsatellites into orbit on short
notice. Such a capability would allow the PLA to rapidly replace oraugment its satellite deployments in the event of any disruption incoverage during a conflict.167
China debuted the Yuanzheng-1, described by a Chinese staterun media outlet as an ‘‘independent aircraft’’ or ‘‘space shuttlebus’’ that is ‘‘installed on [a] carrier rocket with the ability of sending one or more spacecraft into different orbits in space,’’ in March2015.168 The spacecraft, more accurately described as a type of potentially reusable orbital transfer vehicle (termed a ‘‘space tug’’ ifreusable or an ‘‘upper stage’’ if expendable),* 169 uses a small thrustengine with a 6.5-hour lifetime and will be utilized with Long
March-3A, 3B, and 3C vehicles primarily to insert Beidou satellites
into medium Earth orbit and geostationary Earth orbit. In both the
March 2015 launch and a second in July 2015, Yuanzheng-1 wasused to successfully deploy Beidou satellites. As it can reportedlytransfer multiple spacecraft into separate orbits, the vehicle has
the potential to improve the efficiency of China’s space launches.170
China’s Civilian Space Activities

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Although it lacks a designated civilian space program, China
since the mid-1990s has incrementally developed a series of ambitious space exploration programs, ostensibly for civilian purposes,with high-level backing and sustained financial support. China already has achieved milestones that few other countries havereached, including sending a manned mission to space and conducting a soft landing of a spacecraft on the Moon. However, China* An orbital transfer vehicle (OTV) is defined as ‘‘a propulsion system used to transfer a payload from one orbital location to another—as, for example, from low Earth orbit to geostationary
Earth orbit. Orbital transfer vehicles can be expendable or reusable . . . a reusable OTV is sometimes called a space tug.’’ Joseph Angelo, Dictionary of Space Technology, Routledge, 2013, 286.

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is still largely catching up to the two premier space powers, theUnited States and Russia, which accomplished these feats decadesago. Nonetheless, China has made rapid progress in developing its
space capabilities—exceeding regional rival space programs such as
those belonging to Japan and India—and is gradually closing thetechnological gap with the United States and Russia.171
Nearly all of the technologies used in China’s civilian space activities also have military applications and are therefore dual-purpose, as is the case with other countries’ space programs. Alanna
Krolikowski, Princeton-Harvard China and the World Program
postdoctoral fellow at Harvard University, explained to the Commission:
Particular items of commercial space hardware can be
repurposed for defense applications with only minor modifications. These items include entire systems, such as
launch vehicles, which can launch both civil-commercial
and defense payloads. They also include sub-systems, suchas sensors and robotic arms on spacecraft, which can insome measure be applied or adapted to intelligence or
counterspace missions. Finally, dual-use technologies also
include many smaller components, such as radiation-hardened electronic elements.172

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Human Spaceflight
China’s human spaceflight program is one of the country’s largest and most technologically-advanced projects, involving some
3,000 organizations and several hundred thousand personnel.173
China is only the third country behind the United States and Russia to have independently launched a human into space.
China’s human spaceflight program consists of three phases. In
phase one (1992–2005), China launched several unmanned
Shenzhou spacecraft to develop technologies necessary for its firstmanned spaceflights in 2003 and 2005. In phase two (2005–2013),
China conducted both manned and unmanned docking maneuvers
between the Shenzhou spacecraft and the Tiangong-1 space lab. In
phase three, scheduled for completion by 2022, China plans tolaunch a permanent manned space station into orbit.174• China has conducted 10 Shenzhou missions and plans to conduct the 11th in 2016. The Shenzhou spacecraft, which was designed by the China Academy of Space Technology, weighs approximately 7.8 tons and measures about 8.86 meters inlength, and is able to support up to three people for up toseven days. It consists of three sections: an orbital module, adescent module, and a propulsion module.175• China launched the Tiangong-1 space lab into orbit in 2011.
The lab, which was developed by the China Academy of SpaceTechnology, weighs approximately 8.5 tons and has an areaof about 15 cubic meters, allowing it to hold up to three
astronauts. China is expected to launch the follow-on to
the Tiangong-1, the Tiangong-2, in 2016.176 Following the
Tiangong labs, China plans to launch a permanent manned
space station in several phases beginning with an experimental

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309‘‘core module’’ in 2018. Two additional modules are scheduled
for launch in 2020 and 2022.177 At 60 tons, the space station
will be similar in size to the United States’ first space station,
Skylab, which was launched in the 1970s; it will be muchsmaller than the approximately 450-ton International Space
Station, which is operated by the United States and Russia.178
China expects to complete its space station launch around2022, while the International Space Station is currently scheduled to complete its mission and be deorbited in 2024, potentially leaving China with the world’s only active space station.179
Table 3:China’s Human Spaceflight Missions

Spacecraft

Launch Date

Flight Time

PurposeShenzhou-1

November 20, 1999

21 hours

Test

Shenzhou-2

January 10, 2001

7 daysTest

Shenzhou-3

March 25, 2002

8 daysTest

Shenzhou-4

December 30, 2002

7 daysTest

Shenzhou-5

October 15, 2003

21 hours

Manned (1 crew)

Shenzhou-6

October 12, 2005

4+ daysManned (2 crew)

Shenzhou-7 September 25, 2008

2+ daysManned (3 crew);
Extravehicular activity

Tiangong-1

September 29, 2011 36 months (ongoing)

Prototype space lab

Shenzhou-8

November 1, 201116 days

Unmanned docking

Shenzhou-9

June 16, 201214 daysManned (3 crew) docking

Shenzhou-10

June 11, 201315 daysManned (3 crew) docking

Source: Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies
and Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation,
March 2, 2015), 46.

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Lunar Exploration Program
China’s space experts proposed a lunar exploration program in
1991, and Beijing approved the first lunar orbiting mission in
2004.180 According to the State Administration of Science, Technology, and Industry for National Defense, the program is a ‘‘major
strategic decision by the CCP Central Committee, State Council,
and Central Military Commission taking a broad look at [China’s]
overall modernization and construction by grasping the world’s
large [science and technology (S&T)] events and promoting [China’s] space enterprise development, promoting [China’s] S&T advancement and innovation, and improving [China’s] comprehensive
national power.’’ 181
China’s lunar exploration program consists of three phases involving the Chang’e spacecraft and several lunar landing vehicles.

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310• In phase one (2004–2007), the Chang’e-1 and the Chang’e-2
spacecraft orbited the Moon to map the lunar surface. The missions also tested China’s ability to control objects in deep
space.
• In phase two (2007–2014), the Chang’e-3 spacecraft landed a
lunar vehicle on the Moon. The vehicle deployed a rover, designated ‘‘Jade Rabbit,’’ * to study the lunar surface and analyze
its soil. Jade Rabbit has far exceeded its expected lifespan ofthree months; after mechanical failures throughout the mission, the rover was still communicating with Earth as of July
2015 despite being unable to move.182 With the successful
landing of the Chang’e-3, China became only the third country
behind the former Soviet Union and the United States to conduct a soft landing on the Moon and the first to do so since1976. Later in the second phase, China employed the Chang’e5 spacecraft to test technologies required to retrieve and returna lunar sample to Earth.183• In phase three, China plans to send a rover to the Moon andbring it back to Earth after it collects soil samples. The mission, scheduled for 2017, will use the Chang’e-6 spacecraft andbe launched from China’s new Wenchang launch center on
Hainan Island.184• In a potential fourth phase, China announced in September
2015 that it would send the Chang’e-4 spacecraft—originallydesigned as a backup for Chang’e-3—to land on the moon’s‘‘dark side’’ before 2020, which China would be the first nationto accomplish. The stated objective of this mission is to study
geological conditions on the dark side, which could eventuallylead to the placement of a radio telescope for use by astronomers.† 185
Jeffrey Plescia, the chairman of NASA’s Lunar Exploration Analysis Group, compared the lunar programs of China and the UnitedStates:dkrause on DSKHT7XVN1PROD with USCC

China has had a well-developed, focused plan, and they areusing incremental steps to [carry out] lunar exploration. I
would guess that, given the pieces they have tested, [they]
have a high probability of success [in phase three]. . . . They
are demonstrating that they have the technical capability[to conduct] the most sophisticated deep-space activities.
They have a program, and they can keep to the scheduleand accomplish mission goals on time. [By comparison] theUnited States has been floundering around for decades, trying to figure out what to do.186* Jade Rabbit is equipped with a set of cameras to analyze the lunar surface and a robotic
arm to gather samples of lunar soil. It has less than 16 percent of the mass of NASA’s Marsrovers. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies
and Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation,
March 2, 2015), 58–59.
† The far side or ‘‘dark side’’ of the moon is an ideal location for sensitive instruments, as radiotransmissions from Earth are unable to reach it. Associated Press, ‘‘China Sets Its Space Exploration Sights on the Dark Side of the Moon,’’ September 14, 2015.

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Although China’s lunar program is motivated primarily by prestige and scientific objectives, China also may seek to use the program to exploit the Moon’s natural resources. Chinese analysts
have noted that the Moon contains large amounts of 14 elementsin particular, including iron, titanium, and uranium, that could be
useful for economic development. Helium-3—of which the Moon has
1–5 million tons—appears to be of specific interest to the analysts,
who estimate that 100 tons of the element could supply all of the
Earth’s energy requirements for one year, and that the revenue derived would make the endeavor economically feasible.187 Importantly, exploitation of helium-3 for energy production would require
the design and production of a commercially-viable nuclear fusion
reactor, a technology not yet demonstrated by any nation. Should
fusion power become available, however, helium-3 provides themost promising fuel and is almost entirely unavailable on earth.188
Beijing has not approved a plan to send humans to the Moon. In
its 2011 white paper on space, however, Beijing acknowledged it is‘‘researching the critical technologies for manned lunar exploration,’’ and it began a feasibility study that same year for amanned mission to the Moon with a potential launch date of 2020,
2025, or 2030.189
Mars Exploration
Although Beijing has not approved a mission to Mars, top Chinese scientists have expressed interest in a Mars exploration program,190 and China’s defense industry and the Chinese Academy of
Sciences are conducting studies on the feasibility of landing arobotic rover on the planet.191 Moreover, the China Aerospace
Science and Technology Corporation’s debut of a full-size Marsrover model at the 2014 Zhuhai Airshow suggests China has begun
preliminary research into the necessary technology for such a mission.192

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U.S.-China Space Cooperation
Limited U.S.-China space cooperation began in the late 1970s,
when the two countries signed a space exchange agreement and amemorandum of understanding on space technology cooperation.193
U.S.-China cooperative space activities increased between 1990 and
1999, when the United States looked to China for satellite launchservices. Following the loss of the space shuttle Challenger in 1986,
which effectively ended the United States’ plan to launch future
military and commercial satellites aboard space shuttles, theUnited States faced a shortage of satellite launch facilities andbegan contracting launches out to other countries, including China.
During this period, China launched a total of 19 U.S.-manufactured
commercial satellites. Cooperation ended in 1999 when Congress
passed a law prohibiting the launch of U.S. satellites by China, following revelations that several U.S. companies involved in the Chinese launches had illegally transferred potentially sensitive military information to China and that China had stolen classified information on advanced U.S. nuclear weapons technology.194
Since this decision, aside from limited instances of cooperation,
U.S.-China space relations have stagnated due to ongoing U.S. gov-

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ernment concerns about China’s efforts to illicitly procure U.S.
space technology.* Washington also remains wary of China’s intentions as a growing space power, particularly with respect to China’s
lack of transparency regarding its intentions in space and China’s
focus on developing counterspace capabilities to restrict U.S. freedom of movement in space.
Despite tensions in the U.S.-China space relationship, eventsprior to 2011 suggested new momentum in bilateral space cooperation. The United States and China held several high-level visitsfrom 2004 to 2010: the administrator of the China National Space
Administration visited NASA in 2004, and the NASA administrator
visited the Agency in 2006 and 2010.195 A joint statement produced
during President Obama’s visit to China in 2009 expressed that‘‘China and the United States look forward to expanding discussions on space science cooperation and starting a dialogue onhuman spaceflight and space exploration.’’ 196 In January 2011 theObama Administration also invited a Chinese delegation to visit
NASA headquarters and other NASA facilities later that year to reciprocate for the NASA administrator’s ‘‘productive’’ 2010 visit toChina.197
In November 2011, however, Congress, based on concerns regarding China’s efforts to illegally acquire U.S. space technologies,
passed a prohibition against NASA conducting a range of activities
with China. The law states:
None of the funds available by this Act may be used for the
National Aeronautics and Space Administration (NASA) or
the Office of Science and Technology Policy (OSTP) to develop, design, plan, promulgate, implement, or execute a bilateral policy, program, order, or contract of any kind toparticipate, collaborate, or coordinate bilaterally in any
way with China or any Chinese-owned company unlesssuch activities are specifically authorized by a law enacted
after the date of enactment of this Act.198
The law further applies this limitation to ‘‘any funds used to effectuate the hosting of official Chinese visitors at facilities belonging to or utilized by NASA.’’ It only allows for NASA to engage in‘‘activities which NASA or OSTP have certified pose no risk of resulting in technology transfer, data, or other information with national security or economic security implications to China or a Chinese-owned company,’’ requiring the certification to be submitted toCongress 14 days beforehand.199 Language added in 2013 requiresthat these activities also ‘‘not involve knowing interactions with officials who have been determined by the United States to have direct involvement with violations of human rights.’’ 200 Under thislaw, NASA’s administrator has still been able to meet with Chinesecounterparts in China and in official multilateral settings, and visits by Chinese nationals to NASA facilities are permitted if certified and presented to Congress as required.201 The law has notably disallowed participation by Chinese astronauts in missions to* Among China’s most effective methods for acquiring sensitive U.S. technology are cyber espionage; witting and unwitting collection by Chinese students, scholars, and scientists; joint ventures; and foreign cooperation. For more information on the subject, see the U.S.-China Economic and Security Review Commission, 2014 Report to Congress, November 2014, 294–299.

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313
the International Space Station, though China’s noninvolvement in
the program predates 2011.* 202 Additionally, a ban mistakenly
placed by NASA officials on Chinese scientists’ participation at aninternational NASA conference in 2013 was misattributed to thelaw.203 China’s pursuit of enhanced bilateral space cooperation has
included efforts to persuade the United States to lift these restrictions, with a 2013 commentary in state-run PLA Daily specificallycalling for the removal of the ‘‘ ‘Wolf Clause’ † that bans China-U.S.
space cooperation,’’ terming it ‘‘a huge roadblock in terms of bilateral cooperation and mutual benefits.’’ 204

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Bilateral Space Activities beyond NASA
Although the recent Congressional regulations place strict limitations on collaboration between NASA and the Chinese space industry, the United States and China since 2012 have expanded theircooperation on space activities that do not involve NASA.
• In 2012, the U.S. Geological Survey of the Department of theInterior agreed to provide imagery from its two Landsat satellites to the Center for Earth Observation and Digital Earthof the Chinese Academy of Sciences, apparently continuing
China’s use of Landsat imagery since 1986. Importantly, in2008 current and archived Landsat imagery going back to 1972
had also become available online for free to users who registerwith the U.S. Geological Survey. These satellites image theEarth continuously and cover each point on Earth once every
16 days, and the Chinese Academy of Science reportedly uses
this imagery for its research on Chinese environmental andland-use issues. Although the Landsat imagery is not sufficient
to support time-sensitive military operations, the PLA could
use it for map making and broad area analysis of trends in terrestrial infrastructure.205• In 2014, the Space Studies Board of the U.S. National Academy of Sciences’ National Research Council and the National
Space Science Center of the Chinese Academy of Sciences held
the first ‘‘Forum for New Leaders in Space Science.’’ The goalsof the forum are to: (1) ‘‘identify and highlight the researchachievements of the best and brightest young scientists currently working at the frontiers of their respective disciplines’’;(2) ‘‘build informal bridges between the space-science communities in China and the United States’’; and (3) ‘‘enhance thediffusion of insights gained from participation in the Forum tothe larger space-science communities in China and the UnitedStates.’’ 206 Despite its collaborative spirit, the forum maypresent opportunities for Chinese participants to collect information, whether wittingly or unwittingly, on sensitive U.S.
technology on behalf of the Chinese government and military.
* In August 2015 a Houston company announced it had negotiated an agreement to carry a
Chinese DNA experiment on the International Space Station, but as a commercial deal involving
a U.S. business rather than a U.S. government entity, the law does not apply. Leonard David,‘‘US-China Space Freeze May Thaw with Historic New Experiment,’’ Space.com, August 21,
2015; and Eric Berger, ‘‘For the First Time Chinese Research to Fly on NASA’s Space Station,’’
Houston Chronicle, August 3, 2015.
† The commentary referred to the initiation of the November 2011 National Defense Authorization Act clause by then Congressman Frank Wolf.

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314
• In late 2014, Beijing asked the U.S. Air Force to send warningsof potential satellite collisions directly to China’s space operators. In the past, such information was routed from the U.S.
Air Force to the U.S. State Department, passed to China’s
Ministry of Foreign Affairs, and finally conveyed to China’s
space operators—a lengthy sequence. Mr. Cheng, assessing the
likely reasons for this step, stated:[The PLA] is most likely acting . . . to remove an unnecessary link in the chain of information, especially importantsince conjunction data is perishable. . . . [Additionally,
China] may be [attempting] to double-check [its] own data:
What are the Americans seeing that [it is] not? This may
be partly a matter of [image] resolution, and partly a possible source of intelligence. There was a brouhaha a few
years back where [the United States was] reporting in [its]space catalogs European satellites that the Europeans denied existed.207
Moreover, in late June 2015, the United States and China held
the seventh round of the Strategic and Economic Dialogue in
Washington, DC. The U.S. State Department spokesperson announced that the dialogue produced several areas for further spacecooperation between the State Department and China:• The United States and China stated their intention to ‘‘establish regular bilateral government-to-government consultations
on civil space cooperation.’’ As an inaugural step in these consultations, the two countries held the first ‘‘U.S.-China Civil
Space Cooperation Dialogue’’ in China in September 2015. At
this meeting U.S. and Chinese officials exchanged information
on space policies and on national plans related to space exploration, and discussed cooperation opportunities related to spacedebris, satellite collision avoidance, civil Earth observation,
space sciences, space weather, and civil satellite navigation
systems.208 As stated in the June announcement, the two countries additionally plan to hold ‘‘exchanges on space security
matters under the framework of the U.S.-China Security Dialogue before the next meeting of the Security Dialogue.’’• The two sides reaffirmed that avoiding orbital collisions serves
their common interest in exploring and using outer space forpeaceful purposes, noting that further consultation is neededon the process for resolving an ‘‘orbital close approach’’ andthat such a consultation should aim to ensure timely resolution
to reduce the probability of accidental collisions. The two countries determined to ‘‘continue bilateral government-to-government consultations on satellite collision avoidance and thelong-term sustainability of outer space activities as part of the
U.S.-China Civil Space Cooperation Dialogue.’’• The two sides determined to undertake, among other projects,
a joint project in ‘‘space security’’ within the East Asia Summit, the Association of Southeast Asian Nations Regional
Forum, or another multilateral framework in the Asia-Pacificregion, as part of their larger goal to ‘‘enhance communicationand coordination’’ within these fora.209

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U.S.-China Space Endeavors: Risks vs. Rewards
Although the United States and China continue to pursue opportunities to collaborate on space endeavors, such cooperation is notwithout its potential hazards. Mr. Cheng advised the Senate Committee on Commerce, Science, Technology, and Transportation that
the United States should proceed with caution as it considers expanding space cooperation with China:
While the United States should not avoid cooperation withany country out of fear, at the same time, it is vital thatcooperation occur with full understanding and awarenessof whom we are cooperating with, and that such cooperation serve American interests. In the case of [China], thecombination of an opaque Chinese space management
structure, a heavy military role in what has been observed,
and an asymmetric set of capabilities and interests raisefundamental questions about the potential benefits from cooperation between the two countries in this vital arena.
To this end, it is essential to recognize a few key characteristics of China’s space program. First, that China possesses
a significant space capability in its own right, and therefore is not necessarily in need of cooperation with theUnited States. Too often, there is an assumption that
[China] is still in the early stages of space development,
and that we are doing them a favor by cooperating withthem. Second, that the Chinese space program is closely
tied to the [PLA]. . . . Therefore, any cooperation with
[China] in terms of space must mean interacting, at somelevel, with the PLA. Third, that the Chinese space program
has enjoyed high-level political support, is a source of national pride, and is therefore not likely to be easily swayed
or influenced by the United States, or any other foreign
actor. These three issues, in combination, suggest that any
effort at cooperation between the United States and [China]
will confront serious obstacles, and entail significant
risks.210
Other observers have suggested it is possible for the UnitedStates to improve space cooperation with China while also protecting U.S. security interests and supporting the U.S. space program’s development. In his testimony to the Commission, Philip
Saunders, director of the Center for the Study of Chinese Military
Affairs of the Institute for National Strategic Studies at the National Defense University, argued, ‘‘there are other areas such as
many scientific applications and manned space flight where theUnited States can share information and experiences without compromising national security and can benefit from growing Chinese
investments in space capabilities and China’s potential contributions to international space cooperation.’’ 211

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Implications of China’s Space and Counterspace Programsfor the United States
China’s improving space capabilities are challenging U.S. superiority in the information and space domains. A senior official at the
PLA’s Academy of Military Science underscored China’s ambition
to rival the world’s top space powers following China’s 2007 antisatellite test: ‘‘[If there is going to be] a space superpower, it’s notgoing to be alone. . . . It will have company.’’ 212 In 2013, Central
Military Commission Chairman and Chinese President Xi Jinping
said ‘‘the dream of space flight is an important part of the strong
country dream’’ and ‘‘the space dream is an important componentof realizing the Chinese people’s mighty dream of national rejuvenation.’’ 213
Space activities are critical to the United States’ technologicaladvancement, scientific discovery, security, and economic growth.
As outlined in the Obama Administration’s 2010 National Space
Policy, the utilization of space has transformed every aspect of U.S.
society, and the benefits of space permeate daily life in the UnitedStates:Satellites contribute to increased transparency and stability
among nations and provide a vital communications path
for avoiding potential conflicts. Space systems increase ourknowledge in many scientific fields, and life on Earth is far
better as a result. The utilization of space has created newmarkets; helped save lives by warning us of natural disasters, expediting search and rescue operations, and making
recovery efforts faster and more effective; made agriculture
and natural resource management more efficient and sustainable; expanded our frontiers; and provided global access to advanced medicine, weather forecasting, geospatial
information, financial operations, broadband and othercommunications, and scores of other activities worldwide.
Space systems allow people and governments around theworld to see with clarity, communicate with certainty, navigate with accuracy, and operate with assurance.214

dkrause on DSKHT7XVN1PROD with USCCSpace capabilities also have enhanced U.S. security and havebeen a key element of warfighting for more than 30 years—to theextent that U.S. national security is now dependent on the spacedomain. According to the joint DOD–Intelligence Community National Security Space Strategy, published in 2011:
Space capabilities provide the United States and our allies
unprecedented advantages in national decision-making,military operations, and homeland security. Space systems
provide national security decision-makers with unfetteredglobal access and create a decision advantage by enablinga rapid and tailored response to global challenges. Moreover, space systems are vital to monitoring strategic andmilitary developments as well as supporting treaty monitoring and arms control verification. Space systems are also
critical in our ability to respond to natural and man-madedisasters and monitor long-term environmental trends.215

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dkrause on DSKHT7XVN1PROD with USCCThe United States’ sustained success in integrating space capabilities into its military operations has encouraged China to pursue
a broad and robust array of counterspace capabilities to deny, degrade, deceive, disrupt, or destroy U.S. space systems and theirsupporting infrastructure. This program includes direct-ascentantisatellite missiles, computer network operations, ground-based
satellite jammers, and directed energy weapons. China also appears to be developing co-orbital antisatellite systems, which havenot been a significant concern for the United States since the fallof the Soviet Union.
China already has demonstrated its ability to strike U.S. satellites in low Earth orbit. As China’s developmental counterspacecapabilities become operational, China will be able to hold at risk
U.S. national security satellites in every orbital regime. According
to General Hyten, commander of U.S. Air Force Space Command,the loss of U.S. space capabilities would send the U.S. military‘‘back to World War Two . . . back to industrial age warfare.’’ 216
Beijing also recognizes that command, control, communications,computers, intelligence, surveillance, and reconnaissance (C4ISR)
modernization is central to its ‘‘preparation for military struggle’’and is rapidly expanding its space-based C4ISR assets accordingly.
China currently has approximately 142 operational satellites inorbit, more than 97 percent of which have been launched since2000 and 75 percent since 2008. In addition to serving China’s economic goals, this modernization program is designed to improve the
PLA’s ability to command and control its forces; monitor global
events and track the military activities of the United States andother potential adversaries; and increase the range at which Beijing can use conventional missile systems to place U.S. ships, aircraft, and bases at risk.
China’s current system of C4ISR satellites likely allows the PLA
to detect and monitor U.S. air and naval activity out to the second
island chain * with sufficient accuracy and timeliness to (1) assess
U.S. military force posture, and (2) cue land-, maritime-, and airbased collection assets for higher fidelity and time-sensitive tracking and targeting of U.S. military assets. As China continues tofield additional C4ISR satellites, the country’s space-based ISR coverage almost certainly will become more accurate, responsive, andtimely and could ultimately extend beyond the second island chain
into the eastern Pacific Ocean and Indian Ocean.217 Nevertheless,the U.S. Office of Naval Intelligence points out that building a complete picture of all activities—which would rely heavily on additional space-based C4ISR—could remain a ‘‘formidable challenge’’
for China due to the sheer size of these areas:
Just to characterize activities in the ‘‘near seas,’’ China
must build a picture covering nearly 875,000 square nau* The first island chain refers to a line of islands running through the Kurile Islands, Japanand the Ryukyu Islands, Taiwan, the Philippines, Borneo, and Natuna Besar. The second island
chain is farther east, running through the Kurile Islands, Japan, the Bonin Islands, the Mariana Islands, and the Caroline Islands. PLA strategists and academics have long asserted theUnited States relies primarily on the first island chain and the second island chain to strategically ‘‘encircle’’ or ‘‘contain’’ China and prevent the PLA Navy from operating freely in the Western Pacific. Open Source Center, ‘‘PRC Article Surveys China’s Naval Rivals, Challenges,’’ January 6, 2012. ID: CPP20120109671003; Bernard D. Cole, The Great Wall at Sea (Second Edition),
Naval Institute Press, 2010, 174–176.

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318
tical miles (sqnm) of water- and air-space. The Philippine
Sea—a key interdiction area in the event of a conflict overTaiwan or in the South China Sea—expands the battlespace by another 1.5 million sqnm. In this vast space, navies and coast guards from seven regional countries as well
as several globally-deploying nations combine with tens of
thousands of fishing boats, cargo ships, oil tankers, andother commercial vessels.218
In a 2015 report sponsored by the Commission, the RAND Corporation notes that the cyber infrastructure contributing to China’s
maritime domain awareness could at times be limited by technicalchallenges associated with integrating so many new technologies
and complex systems, as well as by poor coordination among intelligence organizations, operators, and decision makers:
Another potential weakness for China . . . may exist in theneed to integrate all the PLA’s disparate ISR capabilities
and incorporate them into the targeting process. Indeed,shortcomings in China’s C4ISR capabilities, which could be
both organizational and technological, could hamper the
speed, reduce the reliability, or otherwise diminish the effectiveness of the PLA’s over-the-horizon targeting capabilities. Problems with the potential to limit the effectiveness ofChinese C4ISR and targeting could include not only technical challenges associated with integrating such a varietyof new technologies and complex systems but also procedural weaknesses, such as insufficient coordination among
numerous intelligence organizations, operators, and higherlevel decision makers.219
Furthermore, although China’s space-based C4ISR modernization
enhances the PLA’s operational capabilities, it also increases PLA
vulnerabilities to U.S. deception, degradation, and denial capabilities.220
In addition to the implications it poses for U.S. military interests, the rapid expansion of China’s space industry could also haveeconomic consequences for the United States.
First, China’s persistent global marketing of its commercial satellite and space launch services has the potential to cut into U.S.
market share in these areas, though it has had little effect on established satellite manufacturers or the international launch market thus far. Although China’s current effort focuses on growing its
satellite exports to lower-income buyers, it almost certainly will
eventually expand to higher-end markets, following a business plan
similar to that of Chinese telecommunications giant Huawei. China’s launch service costs compare favorably with those of Arianespace, the major European provider, and may match those ofSpaceX, the low-cost leading U.S. private firm, as described earlier.
In addition, according to one former European space executive,
China has broken into the launch services market by offering
prices at as low as three-quarters of the launches’ cost, suggesting
heavy government assistance on top of low initial costs will enable
China to successfully compete for broader market share in the future. Furthermore, China often packages its satellite exports andlaunch services together, and also reaps cost and experience bene-

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319
fits from blending its civilian and military space infrastructure,
which is expected to provide additional competitive advantages. An
executive for U.S. company SpaceX, which has led a resurgence in
U.S. commercial launch market share after U.S. organizations werepriced out of the market until recently, stated in 2013 that thecompany views China as its main competition. However, in a July
2015 meeting with the Commission, the China Great Wall Industry
Corporation asserted that it is unable to compete with Westerncounterparts due to U.S. export controls, indicating that obstacles
remain despite China’s cost advantages.221
Second, China’s designation of the Beidou satellite navigation
system—planned to provide global service by 2020—as ‘‘national infrastructure,’’ and introduction of preferential policies to promote
its place in China’s domestic satellite navigation market, will directly impact the market share of GPS and related products within
China.222 While GPS usage provides no revenues to the UnitedStates, Beidou is also intended to foster development in downstream industries such as mobile internet applications, which may
affect U.S. firms’ market share in these industries.223
Third, U.S. International Trafficking in Arms Regulations(ITAR), altered by the FY13 National Defense Authorization Act tono longer include exports of many satellites and satellite technologies but still in force for China, have prompted many European
countries and their industries to pursue ‘‘ITAR-free’’ exports inorder to reach the Chinese market—by definition necessitating theexclusion of U.S. technologies from these products. Mr. Nurkin testified to the Commission that ‘‘concern over U.S. export controls on
space-related items and confusion over which items are on the listof banned items for export and, importantly, which ones will be in
the future, has led international industry, especially the European
space industry, which has far less severe export guidelines forspace technologies, to endeavor to design ITAR-free solutions, effectively cutting out U.S. based suppliers of ITAR-restricted items
from international supply chains.’’ 224 Mr. Nurkin suggested thatexport control reform should ‘‘focus on increasing protection on asmall number of systems and technologies that the United States
is and should be unwilling to offer on the open market’’ instead of
focusing on the many technologies that China probably already has
access to from foreign partners, particularly Europe.225 In May
2015, General James Cartwright, former vice chairman of the Joint
Chiefs of Staff, and the Honorable Sean O’Keefe, former NASA administrator, reiterated that U.S. ITAR regulations are not currently in line with the pace of technological innovation and are
therefore in need of reform in order to protect the U.S. space industry’s global competitiveness.226
China’s thriving space programs have important political implications as well, most importantly in their potential to present a future challenge to the United States’ position as a leading space
power. China’s human spaceflight program may be repeating manyof the same accomplishments the United States achieved in the
1970s, but it also is tempering U.S. superiority in civilian space capabilities and lessening U.S. influence in the international spacecommunity. Roger Handberg, professor at the University of Central
Florida, testified to the Commission that ‘‘psychologically, momen-

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tum appears to be moving in China’s favor with the possibility ofactually moving ahead of the United States over the next two decades.’’ 227 China is gaining sway among lesser space nations by
sharing space technologies, supplying training and financing for developing satellites, and providing launch services. Beijing’s push
into new space markets could undermine U.S. efforts to prevent
countries from obtaining certain dual-use space technologies. China
is developing capabilities that could allow it to compete in sending
humans and other payloads to the Moon and beyond, even as theUnited States now depends on Russian launch vehicles and sites
to send humans into space.228
China’s new space station, slated for completion in 2022 while
the deorbiting of the International Space Station is scheduled for2024, will provide Beijing greater prestige in the international system and expand its growing space presence—concurrent with declining U.S. influence in space. Not only will China have the only
space station in orbit, but it also will have the ability to choose its
partners and determine the countries with which it will share technologies and experimental data. In this sense, the space station
likely will serve as a diplomatic tool China can leverage to executeits broader foreign policy goals. Meanwhile, given current Congressional restrictions on U.S.-China space cooperation, the UnitedStates would not participate in China’s space station program barring changes to annual appropriations legislation. For the first timein decades, the United States could be without a constant humanpresence in space.
Conclusions• China has become one of the top space powers in the world after
decades of high prioritization and steady investment from China’s leaders, indigenous research and development, and a significant effort to buy or otherwise appropriate technologies from foreign sources, especially the United States. Although China’s
space capabilities still generally lag behind those of the UnitedStates and Russia, its space program is expanding and accelerating rapidly as many other nations’ programs proceed withdwindling resources and limited goals.

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• China’s aspirations in space are driven by its judgment thatspace power enables the country’s military modernization, drives
its economic and technological advancements, allows it to challenge U.S. information superiority during a conflict, and provides
the Chinese Communist Party with significant domestic legitimacy and international prestige.
• China’s space program involves a wide network of entities spanning its political, military, defense industry, and commercial sectors. Unlike the United States, China does not have distinctly
separate military and civilian space programs. Under this nebulous framework, even ostensibly civilian projects, such as China’s
human spaceflight missions, directly support the development ofPeople’s Liberation Army (PLA) space, counterspace, and conventional capabilities. Moreover, Chinese civilian and commercial
satellites likely contribute to the PLA’s command, control, com-

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munications, computers, intelligence, surveillance, and reconnaissance (C4ISR) efforts whenever it is technically and logisticallyfeasible for them to be so utilized, and they would probably bedirectly subordinate to the PLA during a crisis or conflict. Given
the PLA’s central role in all of China’s space activities, U.S. cooperation with China on space issues could mean supporting the
PLA’s space and counterspace capabilities.
• China likely has capitalized on international cooperation to acquire the bulk of the technology and expertise needed for mostof its space programs. China probably will continue to pursue
close cooperation with international partners to overcome specifictechnical challenges and to meet its research and development
objectives and launch timelines.
• Chinese analysts perceive that China’s advances in space technology have become an important driver for the country’s economic growth. Satellite and launch service sales provide China’s
defense industry with a growing source of revenue. Technology
spin-offs offer competitive advantages in certain sectors, such as
satellite navigation products. Exports of space technology-based
products pose challenges to the United States not only due to thenon-market-based nature of China’s economy, but also due tomilitary and security concerns.
• As China’s developmental counterspace capabilities become operational, China will be able to hold at risk U.S. national security
satellites in every orbital regime.
• China is testing increasingly complex co-orbital proximity capabilities. Although it may not develop or operationally deploy allof these co-orbital technologies for counterspace missions, China
is setting a strong foundation for future co-orbital antisatellite
systems that could include jammers, robotic arms, kinetic kill vehicles, and lasers.
• China is in the midst of an extensive space-based C4ISR modernization program that is improving the PLA’s ability to command and control its forces; monitor global events and track regional military activities; and strike U.S. ships, aircraft, andbases operating as far away as Guam. As China continues tofield additional intelligence, surveillance, and reconnaissance(ISR) satellites, its space-based ISR coverage almost certainly
will become more accurate, responsive, and timely and could ultimately extend beyond the second island chain into the eastern
Pacific Ocean and the Indian Ocean.

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• China’s rise as a major space power challenges decades of U.S.
dominance in space—an arena in which the United States has
substantial military, civilian, and commercial interests.

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 2
1. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Tate Nurkin, February 18,
2015; Mark Stokes and Dean Cheng, China’s Evolving Space Capabilities: Implications for U.S. Interests (Prepared for the U.S.-China Economic and Security Review
Commission by the Project 2049 Institute, April 26, 2012), 10; and U.S.-China Economic and Security Review Commission, Hearing on the Implications of China’s
Military and Civil Space Program, written testimony of Scott Pace, May 11, 2011.
2. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Tate Nurkin, February 18,
2015.
3. Mark Stokes and Dean Cheng, China’s Evolving Space Capabilities: Implications for U.S. Interests (Prepared for the U.S.-China Economic and Security Review
Commission by the Project 2049 Institute, April 26, 2012), 16.
4. Tai Ming Cheung (Director, University of California Institute on Global Conflict and Cooperation), interview with Commission staff, October 1, 2015; Tai Ming
Cheung, ‘‘The Human Dimension in Chinese Defense Science, Technology, and Innovation: An Overview,’’ in Tai Ming Cheung and Kevin Pollpeter, eds., The Human
Dimension of China’s Defense Science, Technology, and Innovation System, University of California Institute on Global Conflict and Cooperation, 2015, 19; Tai Ming
Cheung, ‘‘Introduction,’’ in Tai Ming Cheung, ed., Forging China’s Military Might:
A New Framework for Assessing Innovation, Johns Hopkins University Press, 2014,
10; U.S.-China Economic and Security Review Commission, 2014 Annual Report,
November 2014, 293; Tai Ming Cheung, ed., China’s Emergence as a Defense Technological Power, Routledge, 2013, 51; Tai Ming Cheung, ‘‘The Special One: The Central Special Committee and the Structure, Process, and Leadership of the Chinese
Defense and Strategic Dual-Use Science, Technology and Industrial Triangle’’ (Conference on the Structure, Process, and Leadership of the Chinese Science and Technology System, San Diego, CA, July 16–17, 2012); Evan A. Feigenbaum, China’s
Techno-Warriors: National Security and Strategic Competition from the Nuclear toInformation Age, Stanford University Press, 2003, 53; and People’s Daily, ‘‘Reason
for China’s Development of Manned Spacecraft,’’ January 17, 2003.
5. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Alanna Krolikowski, February 18, 2015.
6. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Alanna Krolikowski, February 18, 2015; Michael Raska, ‘‘Scientific Innovation and China’s Military Modernization,’’ Diplomat, September 3, 2013; James McGregor, ‘‘China’s Drive for ‘Indigenous Innovation’: A Web of Industrial Policies,’’ U.S. Chamber of Commerce
Global Regulatory Cooperation Project, July 27, 2010, 40–41; and Cong Cao, Richard
Suttmeier, and Dennis Simon, ‘‘China’s 15-Year Science and Technology Plan,’’American Institute of Physics, 2006.
7. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Alanna Krolikowski, February 18, 2015; and Mark Stokes, ‘‘China’s Evolving Space and Missile Industry:
Seeking Innovation in Long-Range Precision Strike,’’ in Tai Ming Cheung, Forging
China’s Military Might: A New Framework for Assessing Innovation, Johns Hopkins
University Press, 2014, 246.
8. China National Space Administration, ‘‘Organization and Function’’; U.S.China Economic and Security Review Commission, Hearing on China’s Space andCounterspace Programs, written testimony of Tate Nurkin, February 18, 2015; Richard A. Bitzinger et al. ‘‘Locating China’s Place in the Global Defense Economy,’’ in
Tai Ming Cheung, ed., Forging China’s Military Might, Johns Hopkins University
Press, 2014, 194; and Dean Cheng, ‘‘Prospects for U.S.-China Space Cooperation:
Testimony before the United States Senate Committee on Commerce, Science, andTransportation,’’ Heritage Foundation, April 9, 2014.
9. China National Space Agency website, ‘‘International Cooperation and Exchange.’’ Staff translation.
10. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Tate Nurkin, February 18,
2015.
11. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Alanna Krolikowski, February 18, 2015; U.S.-China Economic and Security Review Commission, Hearing on
China’s Space and Counterspace Programs, written testimony of Mark Stokes, February 18, 2015; and Mark Stokes, ‘‘China’s Evolving Space and Missile Industry:

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323
Seeking Innovation in Long-Range Precision Strike,’’ in Tai Ming Cheung, Forging
China’s Military Might: A New Framework for Assessing Innovation, Johns Hopkins
University Press, 2014, 244–245.
12. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Alanna Krolikowski, February 18, 2015; U.S.-China Economic and Security Review Commission, Hearing on
China’s Space and Counterspace Programs, written testimony of Mark Stokes, February 18, 2015.
13. Kevin Pollpeter (Deputy Director, Study of Innovation and Technology inChina Project, Institute on Global Conflict and Cooperation, University of California), interview with Commission staff, May 28, 2015; Eric Hagt, ‘‘The Science andTechnology Committee,’’ in Tai Ming Cheung, ed., Forging China’s Military Might,
Johns Hopkins University Press, 2014, 68.
14. China Great Wall Industry Corporation, ‘‘Launch Services Management,’’
2015; China Great Wall Industry Corporation, ‘‘Partners,’’ 2015; Kevin Pollpeter,
China Dream, Space Dream: China’s Progress in Space Technologies and Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict andCooperation, March 2, 2015), 96; Emma Glez and Xin Dingding, ‘‘Argentina Approves Satellite Station,’’ China Daily, February 27, 2015; Stacey Salamone, ‘‘China’s Strategy in Space,’’ Springer, 2013, 21; Natalie Apostolou, ‘‘Australia’s FirstSpace Park Launched: WA Set to Track Space Stations Swedish Style,’’ The Register, May 16, 2012; and Mark A. Stokes with Dean Cheng, China’s Evolving SpaceCapabilities: Implications for U.S. Interests (Prepared for the U.S.-China Economic
and Security Review Commission by the Project 2049 Institute), April 26, 2012, 17.
15. Jane’s Space Systems and Industry, ‘‘Jiuquan Satellite Launch Center’’; U.S.
Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 14.
16. Jane’s Space Systems and Industry, ‘‘Xichang Satellite Launch Center’’; U.S.
Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 14.
17. Jane’s Space Systems and Industry, ‘‘Taiyuan Satellite Launch Center’’; U.S.
Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 14.
18. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 97–98.
19. Jane’s Space Systems and Industry, ‘‘XSCC-Xian Satellite Control Center’’;Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and Implications for the United States (Prepared for the U.S.-China Economic
and Security Review Commission by the University of California Institute on Global
Conflict and Cooperation, March 2, 2015), 96–98.
20. China Great Wall Industry Corporation, ‘‘Launch Services Management.’’
Staff translation; Kevin Pollpeter (Deputy Director, Study of Innovation and Technology in China Project, University of California Institute on Global Conflict andCooperation), interview with Commission staff, March 9, 2015; Emma Glez and Xin
Dingding, ‘‘Argentina Approves Satellite Station,’’ China Daily, February 27, 2015;
Richard Fisher, ‘‘Analysis: China Looks to Break into Latin American Market via
Argentina,’’ IHS Jane’s Defense Weekly, February 10, 2015; National Aeronautics
and Space Administration, ‘‘Near Earth Network,’’ October 3, 2014; Natalie
Apostolou, ‘‘Australia’s First Space Park Launched: WA Set to Track Space Stations
Swedish Style,’’ Register, May 16, 2012; and Jeremy Page, ‘‘China, U.S. Use Same
Tracking Base,’’ Wall Street Journal, November 17, 2011.
21. Jane’s Space Systems and Industry, ‘‘XSCC-Xian Satellite Control Center’’;Tang Jianhui, Xiao Jian, and Wei Long, ‘‘Yuanwang Survey Fleet Completes Annual
Monitoring and Control Mission Successfully,’’ People’s Daily (Chinese edition), January 30, 2015. Staff translation; Andrew Erickson and Amy Chang, ‘‘China’s Navigation in Space,’’ Proceedings, U.S. Naval Institute, April 2012; and Brian Harvey,
China’s Space Program: From Conception to Manned Space Flight, Springer, 2004,
185–187.
22. China Aerospace Science and Industry Corporation, ‘‘Corporation Profile.’’Staff translation; Mark Stokes, ‘‘China’s Evolving Space and Missile Industry: Seeking Innovation in Long-Range Precision Strike,’’ in Tai Ming Cheung, Forging China’s Military Might: A New Framework for Assessing Innovation, Johns Hopkins
University Press, 2014, 246; and Evan Medeiros et al., ‘‘A New Direction for China’s
Defense Industry,’’ RAND Corporation, 2005, 40.

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23. Tai Ming Cheung (Director, University of California Institute on Global Conflict and Cooperation), interview with Commission staff, July 17, 2015; Kevin
Pollpeter (Deputy Director, Study of Innovation and Technology in China Project,
University of California Institute on Global Conflict and Cooperation), interview
with Commission staff, July 17, 2015.
24. China Aerospace Science and Technology Corporation, ‘‘Company Introduction.’’ Staff translation; Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and Implications for the United States (Prepared for the
U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation, March 2, 2015), 102.
25. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Alanna Krolikowski, February 18, 2015; Kevin Pollpeter, China Dream, Space Dream: China’s Progress inSpace Technologies and Implications for the United States (Prepared for the U.S.China Economic and Security Review Commission by the University of California
Institute on Global Conflict and Cooperation, March 2, 2015), 103; and Mark Stokes,‘‘China’s Evolving Space and Missile Industry: Seeking Innovation in Long-Range
Precision Strike,’’ in Tai Ming Cheung, Forging China’s Military Might: A New
Framework for Assessing Innovation, Johns Hopkins University Press, 2014, 257.
26. Gao Ruofei, China Great Wall Industry Corporation, briefing to Commission,
Beijing, China, July 22, 2015; China Great Wall Industry Corporation, ‘‘Launch
Services Management.’’ Staff translation; Mark Stokes, ‘‘China’s Evolving Space andMissile Industry: Seeking Innovation in Long-Range Precision Strike,’’ in Tai Ming
Cheung, Forging China’s Military Might: A New Framework for Assessing Innovation, Johns Hopkins University Press, 2014, 256; Nuclear Threat Initiative, ‘‘China
Great Wall Industry Corporation,’’ October 5, 2012; and Mark Stokes and Dean
Cheng, China’s Evolving Space Capabilities: Implications for U.S. Interests (Prepared
for the U.S.-China Economic and Security Review Commission by the Project 2049
Institute, April 26, 2012), 17.
27. Shirley A. Kan, ‘‘China and Proliferation of Weapons of Mass Destruction
and Missiles: Policy Issues,’’ Congressional Research Service, January 5, 2015, 54,
57, 62, 65.
28. China Great Wall Industry Corporation, briefing to Commission, Beijing,
China, July 22, 2015.
29. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 105–106; Mark Stokes, ‘‘China’s
Evolving Space and Missile Industry: Seeking Innovation in Long-Range Precision
Strike,’’ in Tai Ming Cheung, Forging China’s Military Might: A New Framework
for Assessing Innovation, Johns Hopkins University Press, 2014, 252.
30. U.S. Department of Defense, Annual Report on the Military Power of the People’s Republic of China 2009, 2009, 11.
31. For example, see China Information Office of the State Council, China’s National Defense in 2010, March 2011, 7.
32. China National Defense University, Science of Campaigns, 2012; Department of Defense, briefing to Commission, Washington, DC, May 11, 2015.
33. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Dean Cheng, February 18,
2015.
34. Bree Feng, ‘‘A Step Forward for Beidou, China’s Satellite Navigation System,’’ New York Times, December 4, 2014; Kevin Pollpeter, China Dream, SpaceDream: China’s Progress in Space Technologies and Implications for the UnitedStates (Prepared for the U.S.-China Economic and Security Review Commission by
the University of California Institute on Global Conflict and Cooperation, March 2,2015), 73; and Minnie Chan, ‘‘ ‘Unforgettable Humiliation’ Led to Development of
GPS Equivalent,’’ South China Morning Post (Hong Kong), November 13, 2009.
35. Commission analysis and judgments based on the following sources: U.S.China Economic and Security Review Commission, Hearing on China’s Space andCounterspace Programs, written testimony of Richard Fisher, February 18, 2015;
U.S.-China Economic and Security Review Commission, Hearing on China’s Space
and Counterspace Programs, written testimony of Kevin Pollpeter, February 18,
2015; U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Dean Cheng, February 18,
2015; Craig Murray, ‘‘China Missile Launch May Have Tested Part of a New Antisatellite Capability,’’ U.S.-China Economic and Security Review Commission, May
22, 2013; China Information Office of the State Council, The Diversified Employmentof China’s Armed Forces, April 16, 2013; Dean Cheng, ‘‘China’s Military Role in

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Space,’’ Strategic Studies Quarterly (Spring 2012); China Information Office of theState Council, China’s Space Activities in 2011, December 29, 2011; U.S.-China Economic and Security Review Commission, Hearing on ‘‘The Implications of China’s
Military and Civil Space Programs,’’ written testimony of Dean Cheng, May 11,
2011; Michael Chase, ‘‘Defense and Deterrence in China’s Military Strategy,’’ China
Brief, March 25, 2011; Gregory Kulacki, ‘‘Anti-Satellite Technology in Chinese OpenSource Publications,’’ Union of Concerned Scientists, July 1, 2009; Open Source Center, Analysis: China’s Space Strategy—Views of PRC Academic Community, September 19, 2008. OSC ID: FEA20080922777119; Larry Wortzel, ‘‘The Chinese People’s
Liberation Army and Space Warfare,’’ American Enterprise Institute, October 17,
2007; and Kevin Pollpeter, ‘‘The Chinese Vision Of Space Military Operations’’ inJames Mulvenon and David Finkelstein, eds., China’s Revolution in Doctrinal Affairs: Emerging Trends in the Operational Art of the Chinese People’s Liberation
Army, RAND Corporation and the Center for Naval Analysis, 2006).
36. PLA Daily (English edition), ‘‘Flying with Force and Vigor in the Sky of the
New Century—Central Military Commission Member and PLA Air Force Commander Xu Qiliang Answers Reporter’s Questions in an Interview,’’ November 1,
2009.
37. China Information Office of the State Council, China’s Military Strategy,
May 2015.
38. Commission analysis and judgments based on the following sources: U.S.China Economic and Security Review Commission, Hearing on China’s Space andCounterspace Programs, written testimony of Richard Fisher, February 18, 2015;
U.S.-China Economic and Security Review Commission, Hearing on China’s Space
and Counterspace Programs, written testimony of Kevin Pollpeter, February 18,
2015; U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Dean Cheng, February 18,
2015; Craig Murray, China Missile Launch May Have Tested Part of a New Antisatellite Capability (U.S.-China Economic and Security Review Commission, May 22,2013); China Information Office of the State Council, The Diversified Employmentof China’s Armed Forces, April 16, 2013; Dean Cheng, ‘‘China’s Military Role inSpace,’’ Strategic Studies Quarterly (Spring 2012); China Information Office of theState Council, China’s Space Activities in 2011, December 29, 2011; U.S.-China Economic and Security Review Commission, Hearing on The Implications of China’s
Military and Civil Space Programs, written testimony of Dean Cheng, May 11,
2011; Michael Chase, ‘‘Defense and Deterrence in China’s Military Strategy,’’ China
Brief, March 25, 2011; Gregory Kulacki, ‘‘Anti-Satellite Technology in Chinese OpenSource Publications,’’ Union of Concerned Scientists, July 1, 2009; Open Source Center, Analysis: China’s Space Strategy—Views of PRC Academic Community, September 19, 2008. OSC ID: FEA20080922777119; Larry Wortzel, ‘‘The Chinese People’s
Liberation Army and Space Warfare,’’ American Enterprise Institute, October 17,
2007; and Kevin Pollpeter, ‘‘The Chinese Vision Of Space Military Operations’’ inJames Mulvenon and David Finkelstein, eds., China’s Revolution in Doctrinal Affairs: Emerging Trends in the Operational Art of the Chinese People’s Liberation
Army, RAND Corporation and the Center for Naval Analysis, 2006.
39. Department of Defense, briefing to Commission, Washington, DC, May 11,
2015.
40. Commission analysis and judgments based on the following sources: Official,
U.S. Department of Defense, unclassified interview with Commission staff, May 8,
2015; Michael Chase, ‘‘Defense and Deterrence in China’s Military Strategy,’’ China
Brief, March 25, 2011; Gregory Kulacki, ‘‘Anti-Satellite Technology in Chinese OpenSource Publications,’’ Union of Concerned Scientists, July 1, 2009; Open Source Center, Analysis: China’s Space Strategy—Views of PRC Academic Community, September 19, 2008. OSC ID: FEA20080922777119; Zhang Yuliang, ed., The Science ofCampaigns, National Defense University Press, 2006; and Zhou Peng and Wen
Enbing, ‘‘Developing the Theory of Strategic Deterrence with Chinese Characteristics,’’ China Military Science 3 (2004).
41. Commission analysis and judgments based on the following sources: China
Information Office of the State Council, China’s Military Strategy, May 2015; Official, U.S. Department of Defense, unclassified interview with Commission staff, May
8, 2015; Zhu Junqing, ‘‘Commentary: Preaching of ‘China Military Threat’ Makes
U.S. a Butt,’’ Xinhua, March 6, 2015; Gregory Kulacki, ‘‘An Authoritative Source on
China’s Military Space Strategy,’’ Union of Concerned Scientists, March 2014, 4; andMichael Chase, ‘‘Defense and Deterrence in China’s Military Strategy,’’ China Brief,
March 25, 2011.
42. Quoted in U.S. Department of Defense, Annual Report to Congress: Military
and Security Developments Involving the People’s Republic of China 2015, April
2015, 15.

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43. Jiang Lianju, Space Operations Teaching Materials, Academy of Military
Sciences Press, 2013, 65, quoted in U.S.-China Economic and Security Review Commission, Hearing on China’s Space and Counterspace Programs, written testimonyof Dean Cheng, February 18, 2015.
44. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Alanna Krolikowski, February 18, 2015.
45. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 19–20; and U.S.-China Economic and Security Review Commission, Hearing on China’s Space andCounterspace Programs, written testimony of Joan Johnson-Freese, February 18,
2015.
46. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 20.
47. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 19–20.
48. Paul Mozur, ‘‘Alibaba Joins Forces with Chinese Arms Maker,’’ New YorkTimes, August 19, 2015; Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and Implications for the United States (Prepared for the
U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation, March 2, 2015), 21, 62, 65–66,
101.
49. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 21, 62, 65–66, 78, 101; U.S.China Economic and Security Review Commission, Hearing on China’s Space andCounterspace Programs, written testimony of Alanna Krolikowski, February 18, 2015.
50. Bruce H. Leeds, ‘‘Export Controls on Satellites—the Changes Are (Almost)Done,’’ Braumiller Law Group, PLLC, July 17, 2014.
51. U.S. Department of Commerce Bureau of Industry and Security, Export Control Reform: Spacecraft/Satellites, November 14, 2014; U.S. Department of Commerce
Office of Space Commercialization, Revised Satellite Export Control Rules Published,
May 13, 2014.
52. Paula L. Geisz, ‘‘U.S. Export Control Laws and Regulations, National Aeronautics and Space Administration Office of International and Interagency Relations,n.d.
53. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 21–22.
54. China Great Wall Industry Corporation, briefing to Commission, Beijing,
China, July 22, 2015.
55. Kevin Pollpeter (Deputy Director, Study of Innovation and Technology inChina Project, Institute on Global Conflict and Cooperation, University of California), interview with Commission staff, July 18, 2015; Kevin Pollpeter, China
Dream, Space Dream: China’s Progress in Space Technologies and Implications for
the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation,
March 2, 2015), 23.
56. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 23–24; Alex Knapp, ‘‘Europe’s
Arianespace Claims 60% of the Commercial Launch Market,’’ Forbes, September 8,
2014.
57. Deputy General Manager, Launch Services Division (China Great Wall Industry Corporation), interview with Commission staff, November 12, 2014.
58. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 113.

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59. Amy Svitak, ‘‘Arianespace to ESA: We Need Help,’’ Aviation Week, February
11, 2014; Tim Fernholz, ‘‘SpaceX Just Made Rocket Launches Affordable. Here’s
How It Could Make Them Downright Cheap,’’ Quartz, December 4, 2013; and Peter
B. de Selding, ‘‘SpaceX Challenge Has Arianespace Rethinking Pricing Policies,’’
Space News, November 25, 2013.
60. Kevin Pollpeter (Deputy Director, Study of Innovation and Technology inChina Project, Institute on Global Conflict and Cooperation, University of California), interview with Commission staff, May 28, 2015; Kevin Pollpeter, China
Dream, Space Dream: China’s Progress in Space Technologies and Implications for
the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation,
March 2, 2015), 21.
61. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 21–22.
62. Kevin Pollpeter (Deputy Director, Study of Innovation and Technology inChina Project, Institute on Global Conflict and Cooperation, University of California), interview with Commission staff, May 28, 2015.
63. Assessment based on data from Satellite Industry Association, State of theSatellite Industry Reports, 2008–2014.
64. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 21–22; U.S.-China Economic
and Security Review Commission, Hearing on China’s Space and Counterspace Programs, written testimony of Alanna Krolikowski, February 18, 2015.
65. Zhao Weibin, ‘‘Sino-U.S. Competition and Cooperation in Outer Space,’’
China-U.S. Focus, July 9, 2014; China Information Office of the State Council, China’s Space Activities in 2011, December 29, 2011; Deng Ningfeng, ed., Dream About
the Milky Way Fulfilled, China Astronautics Press, 2004, 41.
66. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 115.
67. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 24.
68. China Information Office of the State Council, China’s Space Activities in
2011, December 29, 2011.
69. U.S.-China Economic and Security Review Commission, Hearing on ‘‘China’s
Space and Counterspace Programs,’’ written testimony of Tate Nurkin, February 18,
2015.
70. APSCO, ‘‘Initialization Stage of APSCO’’; and U.S.-China Economic and Security Review Commission, Hearing on the Implications of China’s Military andCivil Space Programs, written testimony of James Clay Moltz, May 11, 2011.
71. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 24–25; U.S.-China Economic
and Security Review Commission, Hearing on the Implications of China’s Military
and Civil Space Programs, written testimony of James Clay Moltz, May 11, 2011.
72. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 24–25; U.S.-China Economic
and Security Review Commission, Hearing on The Implications of China’s Military
and Civil Space Programs, written testimony of James Clay Moltz, May 11, 2011.
73. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 25–26.
74. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 24–25.

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75. Stephen Clark, ‘‘Chinese-Brazilian Earth Observation Satellite Launched,’’Spaceflight Now, December 7, 2014.
76. U.S. Department of Defense, Annual Report on the Military Power of the People’s Republic of China 2000, June 2000, 11.
77. Commission analysis and judgments based on the following sources: U.S. Department of Defense, Annual Report on the Military Power of the People’s Republicof China 2006, June 2006, 32; U.S. Department of Defense, Annual Report on the
Military Power of the People’s Republic of China 2000, June 2000, 11.
78. China Information Office of the State Council, China’s Space Activities in
2011, December 29, 2011; Wei Long, ‘‘Sino-Russo Space Committee Meets,’’ Space
Daily, May 31, 2000.
79. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 27.
80. Embassy of Ukraine to the People’s Republic of China, ‘‘Scientific and Technical Cooperation between Ukraine and China’’; China Information Office of theState Council, China’s Space Activities in 2011, December 29, 2011.
81. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 28.
82. Ren Qi, ‘‘Ukraine Looking to Boost Ties with China,’’ China Daily, March 9,
2015.
83. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 28.
84. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), v.
85. Nicola Casarini, ‘‘China in Space: How Europe and the United States Can
Align Their Views and Boost Cooperation,’’ Wilson Center, February 2015, 2; David
Lague, ‘‘In Satellite Tech Race, China Hitched a Ride from Europe,’’ Reuters, December 22, 2013.
86. House of Lords European Union Committee, Stars and Dragons: The EU
and China, written evidence by Nicola Casarini, April 2009.
87. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 35.
88. Commission analysis and judgments based on the following sources: Official,
U.S. Department of Defense, unclassified interview with Commission staff, May 8,
2015; U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Phillip Saunders, February
18, 2015; China’s Information Office of the State Council, The Diversified Employment of China’s Armed Forces, April 16, 2013; China’s Information Office of theState Council, China’s Space Activities in 2011, December 29, 2011; Lonnie Henley,‘‘Evolving Chinese Concepts of War Control and Escalation Management,’’ in Michael Swaine et al., eds., Assessing the Threat: The Chinese Military and Taiwan’s
Security, Carnegie Endowment for International Peace, 2007; and Peng Guangqian
and Yao Youzhi, eds., The Science of Military Strategy, Military Science Publishing,2005).
89. Brian Weeden, ‘‘Anti-Satellite Tests in Space—The Case of China,’’ Secure
World Foundation, August 29, 2013; David Wright, Laura Grego, and Lisbeth
Gronlund, The Physics of Space Security: A Reference Manual, American Academyof Arts and Sciences, 2005, 135–138.
90. General John Hyten, quoted in David Martin, ‘‘The Battle Above,’’ 60 Minutes, April 26, 2015.
91. Commission analysis and judgments based on the following sources: U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 14; Frank Rose
(Assistant Secretary of State, Bureau of Arms Control, Verification, and Compliance), ‘‘Written Remarks Delivered to the Federation of American Scientists’’ (Washington, DC, February 20, 2015); U.S.-China Economic and Security Review Commission, Hearing on China’s Space and Counterspace Programs, written testimony ofRichard Fisher, February 18, 2015; U.S.-China Economic and Security Review Com-

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mission, Hearing on China’s Space and Counterspace Programs, written testimonyof Kevin Pollpeter, February 18, 2015; Bill Gertz, ‘‘Stratcom: China Continuing to
Weaponize Space with Latest Anti-Satellite Missile Shot,’’ Washington Free Beacon,
August 13, 2014; Brian Weeden, ‘‘Through a Glass, Darkly: Chinese, American, andRussian Anti-Satellite Testing in Space,’’ Secure World Foundation, March 17, 2014;
Brian Weeden, ‘‘Anti-Satellite Tests in Space—The Case of China,’’ Secure WorldFoundation, August 16, 2013; Craig Murray, ‘‘China Missile Launch May Have Tested Part of a New Antisatellite Capability,’’ U.S.-China Economic and Security Review Commission, May 22, 2013; Xinhua (English edition), ‘‘China Carries out LandBased Mid-Course Missile Interception Test,’’ January 28, 2013; Gregory Kulacki,‘‘Is January Chinese ASAT Testing Month?’’ All Things Nuclear, January 4, 2013;
and Xinhua (English edition), ‘‘China Conducts Test on Ground-Based Midcourse
Missile Interception,’’ January 11, 2010.
92. Xinhua (English edition), ‘‘China Carries out Land-Based Mid-Course Missile
Interception Test,’’ January 28, 2013; Xinhua (English edition), ‘‘China Conducts
Test on Ground-Based Midcourse Missile Interception,’’ January 11, 2010.
93. Frank Rose (Assistant Secretary of State, Bureau of Arms Control, Verification, and Compliance), ‘‘Written Remarks Delivered to the Federation of American
Scientists’’ (Washington, DC, February 20, 2015).
94. Commission analysis and judgments based on the following sources: Official,
U.S. Department of Defense, unclassified interview with Commission staff, May 8,
2015; Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on
Global Conflict and Cooperation, March 2, 2015), 87.
95. Dean Cheng (Senior Research Fellow, Asian Studies Center, Heritage Foundation), interview with Commission staff, September 25, 2015.
96. Commission analysis and judgments based on the following sources: U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 14; Brian Weeden,‘‘Through a Glass, Darkly: Chinese, American, and Russian Anti-Satellite Testing inSpace,’’ Secure World Foundation, March 17, 2014; and Craig Murray, ‘‘China Missile Launch May Have Tested Part of a New Antisatellite Capability,’’ U.S.-China
Economic and Security Review Commission, May 22, 2013.
97. Brian Weeden, ‘‘Through a Glass, Darkly: Chinese, American, and Russian
Anti-Satellite Testing in Space,’’ Secure World Foundation, March 17, 2014.
98. Brian Weeden, ‘‘Anti-Satellite Tests in Space—The Case of China,’’ Secure
World Foundation, August 16, 2013; David Wright, Laura Grego, and Lisbeth
Gronlund, The Physics of Space Security: A Reference Manual, American Academyof Arts and Sciences, 2005, 135–138.
99. Official, U.S. Department of Defense, unclassified interview with Commission staff, May 8, 2015; Brian Weeden, ‘‘Anti-Satellite Tests in Space—The Case of
China,’’ Secure World Foundation, August 29, 2013; and David Wright, Laura
Grego, and Lisbeth Gronlund, The Physics of Space Security: A Reference Manual,
American Academy of Arts and Sciences, 2005, 135–138.
100. Commission analysis and judgments based on the following sources: Kevin
Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and
Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflictand Cooperation, March 2, 2015), 51–52; U.S.-China Economic and Security Review
Commission, Hearing on ‘‘China’s Space and Counterspace Programs,’’ written testimony of Richard Fisher, February 18, 2015; Brian Weeden, ‘‘China’s BX–1 Microsatellite: A Litmus Test for Space Weaponization,’’ Space Review, October 20, 2008; andRichard Fisher, ‘‘Closer Look: Shenzhou-7’s Close Pass by the International Space
Station,’’ International Assessment and Strategy Center, October 9, 2008.
101. Commission analysis and judgments based on the following sources: Kevin
Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and
Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflictand Cooperation, March 2, 2015), 93; U.S.-China Economic and Security Review
Commission, Hearing on China’s Space and Counterspace Programs, written testimony of Dean Cheng, February 18, 2015; Brian Weeden, ‘‘Through a Glass, Darkly:
Chinese, American, and Russian Anti-Satellite Testing in Space,’’ Secure WorldFoundation, March 17, 2014, 17; Jeremy Hsu, ‘‘Chinese Satellites Bump During Secret Maneuvers,’’ Space.com, September 3, 2010; Brian Weeden, ‘‘Dancing in the
Dark: The Orbital Rendezvous of the SJ–12 and SJ–06F,’’ Space Review, August 30,
2010; and David Wright, Laura Grego, and Lisbeth Gronlund, The Physics of Space

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Security: A Reference Manual, American Academy of Arts and Sciences, 2005, 135–
138.
102. Kevin Pollpeter, ‘‘China’s Space Robotic Arm Programs,’’ University of California Institute on Global Conflict and Cooperation, October 2013; Marcia S. Smith,‘‘Surprise Chinese Satellite Maneuvers Mystify Western Experts,’’ Space Policy Online, August 19, 2013.
103. Commission analysis and judgments based on the following sources: Kevin
Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and
Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflictand Cooperation, March 2, 2015), 93; U.S.-China Economic and Security Review
Commission, Hearing on China’s Space and Counterspace Programs, written testimony of Dean Cheng, February 18, 2015; Brian Weeden, ‘‘Through a Glass, Darkly:
Chinese, American, and Russian Anti-Satellite Testing in Space,’’ Secure WorldFoundation, March 17, 2014, 17; Jeremy Hsu, ‘‘Chinese Satellites Bump During Secret Maneuvers,’’ Space.com, September 3, 2010; Brian Weeden, ‘‘Dancing in the
Dark: The Orbital Rendezvous of the SJ–12 and SJ–06F,’’ Space Review, August 30,
2010; and David Wright, Laura Grego, and Lisbeth Gronlund, The Physics of Space
Security: A Reference Manual, American Academy of Arts and Sciences, 2005, 135–138.
104. Kevin Pollpeter, ‘‘China’s Space Robotic Arm Programs,’’ University of California Institute on Global Conflict and Cooperation, October 2013.
105. Commission analysis and judgments based on the following source: U.S.China Economic and Security Review Commission, Hearing on China’s Space andCounterspace Programs, written testimony of Dean Cheng, February 18, 2015; Bryan
Kreskel, Patton Adams, and George Bakos, ‘‘Occupying the High Ground: Chinese
Capabilities for Computer Network Operations and Cyber Espionage,’’ U.S.-China
Economic and Security Review Commission, March 7, 2012, 48; and Chang Xianqi,
Military Astronautics (2nd ed.), National Defense Industries Press, 2005, 59–71.
Open Source Center translation. ID: CPP20091231572001.
106. Qi Xianfeng, ‘‘Study on the Protection of Space Information Systems,’’ Journal of the Academy of Equipment Command and Technology, 2007, 62, quoted in
Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and Implications for the United States (Prepared for the U.S.-China Economic
and Security Review Commission by the University of California Institute on Global
Conflict and Cooperation, March 2, 2015), 17.
107. U.S. Air Force, briefing to Commission, Washington, DC, May 12, 2011.
108. U.S. Air Force, briefing to Commission, Washington, DC, May 12, 2011.
109. Mary Flaherty, Jason Samenow, and Lisa Rein, ‘‘Chinese Hack U.S. Weather
Systems, Satellite Network,’’ Washington Post, November 12, 2014.
110. Mary Flaherty, Jason Samenow, and Lisa Rein, ‘‘Chinese Hack U.S. Weather
Systems, Satellite Network,’’ Washington Post, November 12, 2014.
111. Michael Riley, ‘‘Chinese Hackers Force Penn State to Unplug Engineering
Computers,’’ Bloomberg, May 15, 2015.
112. Crowdstrike Intelligence Report, Putter Panda, June 2014, 4, 5.
113. Mandiant intelligence analysts, interview with Commission staff, June 17,2015.
114. U.S. Department of Defense and U.S. Department of State, Risk Assessmentof United States Space Export Control Policy, March 2012, section 4.3; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2011, 2011, 11.
115. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 92.
116. U.S. Department of Defense, Annual Report to Congress: Military Power of
the People’s Republic of China 2006, 2006, 35.
117. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Richard Fisher, February
18, 2015; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2012, 2012, 9.
118. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 91.
119. Kevin Pollpeter (Deputy Director, Study of Innovation and Technology inChina Project, Institute on Global Conflict and Cooperation, University of California), interview with Commission staff, September 22, 2015; Official, U.S. Depart-

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331
ment of Defense, unclassified interview with Commission staff, May 8, 2015; Kevin
Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and
Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflictand Cooperation, March 2, 2015), 92; and David Wright, Laura Grego, and Lisbeth
Gronlund, The Physics of Space Security: A Reference Manual, American Academyof Arts and Sciences, 2005, 135–138.
120. Union of Concerned Scientists, ‘‘UCS Satellite Database.’’121. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), vii-viii, 63; Mark Stokes and
Ian Easton, ‘‘China’s Space Capabilities and the U.S.,’’ in Lowell Ditmer and
Maochun Yu, eds., ‘‘Routledge Handbook of Chinese Security,’’ Routledge, 2015, 353;
G.M. Koretsky, J.F. Nicoll, and M.S. Taylor, ‘‘A Tutorial on Electro-Optical/Infared(EO/IR) Theory and Systems,’’ Institute of Defense Analyses, January 2013, 18, 23;
and Ian Easton and Mark Stokes, ‘‘China’s Electronic Intelligence Satellite Developments: Implications for U.S. Air and Naval Operations,’’ Project 2049 Institute, February 23, 2011, 1–2.
122. Pan Changpeng, Gu Wenjin, and Chen Jie, ‘‘An Analysis on the Capabilities
of Military Satellites to Support an ASBM in Offense and Defense Operations,’’
Winged Missiles Journal, 5 (2006): 12, quoted in Ian Easton and Mark Stokes, ‘‘China’s Electronic Intelligence Satellite Developments: Implications for U.S. Air andNaval Operations,’’ Project 2049 Institute, February 23, 2011, 7.
123. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Tate Nurkin, February 18,
2015.
124. Xinhua (English edition), ‘‘China Launches Remote-Sensing Satellite,’’ August 9, 2014.
125. Rui C. Barbosa, ‘‘Long March 4C Lofts Yaogan Weixing-25 Mission,’’ NASASpaceflight.com, December 10, 2014; Kevin Pollpeter, China Dream, Space Dream:
China’s Progress in Space Technologies and Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation, March 2, 2015), 63.
126. Commission analysis and judgments based on the following sources: Andrew
Tate, ‘‘China Launches Latest Yaogan-Series Satellite,’’ IHS Jane’s Defense Weekly,
September 1, 2015; Kevin Pollpeter, China Dream, Space Dream: China’s Progressin Space Technologies and Implications for the United States (Prepared for the U.S.China Economic and Security Review Commission by the University of California
Institute on Global Conflict and Cooperation, March 2, 2015), 63; Rui C. Barbosa,‘‘Chinese Long March 4B Launches Yaogan Weixing-26,’’ NASA Spaceflight.com,
December 26, 2014; Rui C. Barbosa, ‘‘Long March 4C Lofts Yaogan Weixing-25 Mission,’’ NASA Spaceflight.com, December 10, 2014; Jane’s Space Systems and Industry, ‘‘Yaogan Series’’; Andrew Erickson, ‘‘Chinese Air- and Space-Based ISR:
Integrating Aerospace Combat Capabilities over the Near Seas,’’ in Peter Dutton,
Andrew Erickson, and Ryan Martinson, eds., China’s Near Seas Combat Capabilities, Naval War College, February 2014, 97–102; S. Chandrashekar and Soma
Perumal, ‘‘China’s Constellation of Yaogan Satellites and the ASBM,’’ International
Strategic and Security Studies Program, National Institute of Advanced Studies,
January 22, 2014; and Kevin Pollpeter, ‘‘Controlling the Information Domain: Space,
Cyber, and Electronic Warfare,’’ in Ashley J. Tellis and Travis Tanner, eds., Strategic Asia 2012–2013: China’s Military Challenge, National Bureau of Asian Research, 2012, 167–171.
127. Commission analysis and judgments based on the following sources: Jane’sSpace Systems and Industry, ‘‘Shijian Series’’; U.S.-China Economic and Security
Review Commission, Hearing on China’s Space and Counterspace Programs, written
testimony of Tate Nurkin, February 18, 2015; Andrew Tate, ‘‘China Launches Latestof Military, ‘Experimental,’ Satellites,’’ IHS Jane’s, September 28, 2014; Rui Barbosa,‘‘China Launches Another Secretive Shijian-11 Mission,’’ NASA Spaceflight.com,
September 28, 2014; Rui Barbosa, ‘‘Chinese Long March 4B Lofts Shijian-16 Satellite,’’ NASA Spaceflight.com, October 25, 2013; and Ian Easton and Mark Stokes,‘‘China’s Electronic Intelligence Satellite Developments: Implications for U.S. Air
and Naval Operations,’’ Project 2049 Institute, February 23, 2011, 4, 11, 12.
128. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 112.

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332129. China National Space Agency brief, quoted in Kevin Pollpeter, China Dream,
Space Dream: China’s Progress in Space Technologies and Implications for theUnited States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation,
March 2, 2015), 64.
130. Rui C. Barbosa, ‘‘China Lofts Gaofen 9 Via Long March 2D,’’ NASASpaceflight.com, September 14, 2015; Tomasz Nowakowski, ‘‘China Launches Gaofen8 Earth Observing Satellite,’’ SpaceFlight Insider, June 29, 2015; Jane’s Space Systems and Industry, ‘‘Gaofen Series’’; U.S. Department of Defense, Annual Report toCongress: Military and Security Developments Involving the People’s Republic ofChina, May 2015, 13; and Collin Skockik, ‘‘China Launches Gaofen-2 Satellite,’’SpaceFlight Insider, August 19, 2014.
131. Commission analysis and judgments based on the following sources: Jane’sSpace Systems and Industry, ‘‘Haiyang Series’’; Jiang Xingwei and Lin Mingsen,
Ocean Observation from Haiyang Satellites: 2012–2014, China’s National Satellite
Ocean Application Service, 2014; and Wang Qian, ‘‘Nation to Upgrade Maritime
Surveillance Network by 2020,’’ China Daily (U.S. edition), September 6, 2012.
132. Peter B. de Selding, ‘‘China Launches High-Resolution Commercial Imaging
Satellite,’’ Space News, October 7, 2015; Chinese Academy of Sciences, China to
Launch Jilin-1 Satellite in Oct., August 5, 2015.
133. Union of Concerned Scientists, ‘‘UCS Satellite Database’’; Kevin Pollpeter,
China Dream, Space Dream: China’s Progress in Space Technologies and Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict andCooperation, March 2, 2015), 76–77; Mark Stokes and Dean Cheng, China’s Evolving Space Capabilities: Implications for U.S. Interests (Prepared for the U.S.-China
Economic and Security Review Commission by the Project 2049 Institute, April 16,2012), 37; and Andrew S. Erickson, ‘‘Microsatellites: A Bellweather of Chinese Aerospace Progress?’’ in Lisa Parks and James Schwoch, eds., Down to Earth: Satellite
Technologies, Industries, and Cultures, Rutgers University Press, 2012, 254–279.
134. Andrew Tate, ‘‘China Launches Latest of Military, ‘Experimental’ Satellites,
IHS Jane’s, September 28, 2014.
135. Jeffrey Lin and P.W. Singer, ‘‘LM–6 Rocket’s First Launch Brings 20 Satellites into Space,’’ Popular Science, September 24, 2015; Richard D. Fisher, ‘‘China
Launches Dual-Use Long March-6 SLV,’’ IHS Jane’s Defense Weekly, September 22,
2015; Stephen Clark, ‘‘Debut Launch of Long March 6 Deploys 20 Satellites,’’ Spaceflight Now, September 20, 2015; and Xinhua (English edition), ‘‘China Focus: China’s New Carrier Rocket Succeeds in 1st Trip,’’ September 20, 2015.
136. Mark Stokes and Dean Cheng, ‘‘China’s Evolving Space Capabilities: Implications for U.S. Interests,’’ Project 2049 Institute, April 26, 2012, 37–39.
137. An Lu, ‘‘China Launches 2 Satellites for Independent Navigation System,’’Xinhua, July 26, 2015; People’s Daily Online (English edition), ‘‘Beidou System Aimsfor ‘Centimeters’ Accuracy,’’ May 20, 2015; David Martin, ‘‘The Battle Above,’’ 60
Minutes, April 26, 2015; Kevin Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and Implications for the United States (Prepared for the
U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation, March 2, 2015), 71–73; Geoff
Wade, ‘‘Beidou, China’s New Satellite Navigation System,’’ Flagpost, February 26,
2015; and Ordnance Knowledge, ‘‘ ‘Beidou,’ China’s Pride,’’ August 1, 2012. OSC ID:
CPP20121016680010.
138. An Lu, ‘‘China Launches 2 Satellites for Independent Navigation System,’’Xinhua, July 26, 2015; Xinhua, ‘‘China to Launch Three or Four More Beidou Satellites This Year,’’ April 1, 2015; and Kevin Wong, ‘‘China Pursues Global Satellite
Navigation Capabilities with Expanded Beidou-2/Compass Constellation,’’ IHS
Jane’s Defense Weekly, March 31, 2015.
139. China Satellite Navigation Office, Report on the Development of Beidou Navigation Satellite System, December 26, 2012.
140. Minnie Chan, ‘‘ ‘Unforgettable Humiliation’ Led to Development of GPS
Equivalent,’’ South China Morning Post (Hong Kong), November 13, 2009.
141. Commission analysis and judgments based on the following sources: Kevin
McCauley, ‘‘Putting Precision in Operations: Beidou Satellite Navigation System,’’
China Brief, August 22, 2014; Andrew Erickson, ‘‘China’s Air- and Space-Based ISR:
Integrating Aerospace Combat Capabilities over the Near Seas,’’ in Peter Dutton,
Andrew Erickson, and Ryan Martinson, eds., China’s Near Seas Combat Capabilities, Naval War College, February 2014, 103–106.
142. Bree Feng, ‘‘A Step Forward for Beidou, China’s Satellite Navigation System,’’ New York Times, December 4, 2014; Xinhua, ‘‘China Promotes Beidou Tech

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on Transport Vehicles,’’ January 14, 2013; and Xinhua, ‘‘China Eyes Greater Market
Share for its GPS Rival,’’ December 27, 2012.
143. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2014, 2014, 11; Beidou
Navigation Satellite System, ‘‘The Anniversary of Beidou ASEAN Tour, Beidou Appeared on ASEAN Expo Again,’’ 2014; Cang Wei, ‘‘Beidou System Poised to Spread
Wings,’’ China Daily, October 24, 2014; and Gao Bao, ‘‘Beidou Navigation System
Gives Boost to Battle Against Terrorism in Xinjiang,’’ China Daily, September 5,
2014.
144. Geoff Wade, ‘‘Beidou, China’s New Satellite Navigation System,’’ Flagpost,
February 26, 2015; China Aerospace News, ‘‘Pakistan to Become Fifth Asian Nation
Employing Beidou Satellite Navigation System,’’ May 22, 2013. OSC ID: CHO2013
071608611379; and Stephen Chen, ‘‘Thailand Is Beidou Navigation Network’s First
Overseas Client,’’ South China Morning Post (Hong Kong), April 4, 2013.
145. Li Xiang, Zhou Lihua, and Liu Kun, ‘‘Beidou Reaches New Heights,’’ China
Daily, September 19, 2014.
146. Geoff Wade, ‘‘Beidou, China’s New Satellite Navigation System,’’ Flagpost,
February 26, 2015.
147. People’s Daily Online (English edition), ‘‘Beidou System Aims for ‘Centimeters’ Accuracy,’’ May 20, 2015.
148. Bree Feng, ‘‘A Step Forward for Beidou, China’s Satellite Navigation System,’’ New York Times, December 4, 2014.
149. Commission analysis and judgments based on the following sources: Unionof Concerned Scientists, ‘‘UCS Satellite Database’’; Kevin Pollpeter, China Dream,
Space Dream: China’s Progress in Space Technologies and Implications for theUnited States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation,
March 2, 2015), 74–75, 119–120; Ian Easton and Mark Stokes, ‘‘China’s ElectronicIntelligence (ELINT) Satellite Developments,’’ Project 2049 Institute, February 2011,
10; and SinoDefense, ‘‘FengHuo 1 (ChinaSat 22/A) Tactical Communications Satellite,’’ September 26, 2008.
150. Senate Committee on Armed Services Subcommittee on Strategic Forces,
Hearing on Military Space Programs, written testimony of Douglas Loverro, Deputy
Assistant Secretary of Defense for Space Policy, April 24, 2013.
151. Senate Committee on Armed Services Subcommittee on Strategic Forces,
Military Space Programs and Views on DOD Usage of the Electromagnetic Spectrum, written testimony of Douglas Loverro, Deputy Assistant Secretary of Defense
for Space Policy, March 12, 2014.
152. Yu Dawei, ‘‘In China, Quantum Communications Comes of Age,’’ Caixin,
February 6, 2015; Stephen Chen, ‘‘China to Launch Hack-Proof Quantum Communication Network in 2016,’’ South China Morning Post (Hong Kong), November 4,
2014.
153. People’s Daily, ‘‘China to Launch Its First Electric Satellite Around 2020,’’
June 12, 2015.
154. Peter B. de Selding, ‘‘Airbus Charges Ahead with Electric Propulsion,’’ Space
News, April 7, 2015; Stephen Clark, ‘‘Boeing’s First Two All-Electric Satellites
Ready for Launch,’’ Spaceflight Now, March 1, 2015.
155. Xinhua (English edition), ‘‘Electric Thrusters Propels China’s Interstellar
Ambitions,’’ June 8, 2015.
156. Zhao Lei, ‘‘Electrically Propelled Satellite Being Planned,’’ China Daily, June17, 2015.
157. Commission analysis and judgments based on the following sources: Kevin
Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and
Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflictand Cooperation, March 2, 2015), 74–75; Zhang Xiaoxia, ‘‘Relay Satellites: The Satellite of Satellites—An Interview of Experts on Developing and Building China’s
Relay Satellite System,’’ China Military News, July 28, 2012. Open Source Centertranslation. ID: CPP20120831090004; and Xinhua, ‘‘China Launches 3rd Satellite in
its Global Data Relay Network,’’ July 26, 2012.
158. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 108.
159. Jonathan McDowell, ‘‘China Satellite Update: 2014,’’ Jonathan’s Space Report, May 2015; Jonathan McDowell (Astrophysicist, Harvard-Smithsonian Center
for Astrophysics), interview with Commission staff, May 12, 2015.

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334160. China Great Wall Industry Corporation, briefing to Commission, Beijing,
China, July 22, 2015; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April
2015, 69; and Kevin Pollpeter, China Dream, Space Dream: China’s Progress inSpace Technologies and Implications for the United States (Prepared for the U.S.China Economic and Security Review Commission by the University of California
Institute on Global Conflict and Cooperation, March 2, 2015), 78–85.
161. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 83; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving thePeople’s Republic of China 2014, June 2014, 11.
162. Jeffrey Lin and P.W. Singer, ‘‘LM–6 Rocket’s First Launch Brings 20 Satellites into Space,’’ Popular Science, September 24, 2015; Richard D. Fisher, ‘‘China
Launches Dual-Use Long March-6 SLV,’’ IHS Jane’s Defense Weekly, September 22,
2015; Stephen Clark, ‘‘Debut Launch of Long March 6 Deploys 20 Satellites,’’ Spaceflight Now, September 20, 2015; and Xinhua (English edition), ‘‘China Focus: China’s New Carrier Rocket Succeeds in 1st Trip,’’ September 20, 2015.
163. Commission judgments and analysis based on the following sources: U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 69–70; Xinhua(English edition), ‘‘China to Launch Chang’e-5 Around 2017,’’ March 4, 2015; Jeffrey
Lin and P.W. Singer, ‘‘China Is Building One of the Largest Space Launch Vehicles,
Popular Science, December 11, 2014; U.S. Department of Defense, Annual Report toCongress: Military and Security Developments Involving the People’s Republic ofChina 2014, June 2014, 11; and U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China
2012, 2012, 9.
164. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 81; Zhao Lei, ‘‘New Rocket on
Drawing Board,’’ China Daily, December 8, 2014; and Bradley Perret, ‘‘ChineseSuper-Heavy Launcher Designs Exceed Saturn V,’’ Aviation Week and Space Technology, September 30, 2013.
165. Tomasz Nowakowski, ‘‘China Successfully Debuts Its Long March 11 Rocket,’’Spaceflight Insider, September 26, 2015.
166. Rui C. Barbosa, ‘‘China Launches Kuaizhou-2 in Second Launch within 24
Hours,’’ NASA Spaceflight.com, November 21, 2014; Cornelius Weening, Airshow
China 2014: Land Systems Front and Center at Zhuhai,’’ IHS Jane’s 360, November
9, 2014.
167. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2014, June 2014, 10–11;
Mark Stokes and Dean Cheng, ‘‘China’s Evolving Space Capabilities: Implications
for U.S. Interests,’’ Project 2049 Institute, April 26, 2012, 37–39.
168. Xinhua (English edition), ‘‘China Launches 2 Satellites for Independent
Navigation System,’’ July 26, 2015; Xinhua (English edition), ‘‘China to LaunchFirst ‘Space Shuttle Bus’ this Year,’’ March 3, 2015.
169. Rui C. Barbosa, ‘‘Long March 3C in Secretive Launch with New Upper
Stage,’’ NASA Spaceflight.com, March 30, 2015; Jeffrey Lin and P.W. Singer, ‘‘The
Little Space Tug That Can,’’ Popular Science, March 27, 2014; and Joseph Angelo,
Dictionary of Space Technology, Routledge, 2013, 286.
170. Xinhua, China Launches 2 Satellites for Independent Navigation System,
July 26, 2015; Rui C. Barbosa, ‘‘Long March 3C in Secretive Launch with New
Upper Stage,’’ NASA Spaceflight.com, March 30, 2015.
171. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Roger Handberg, February
18, 2015.
172. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Alanna Krolikowski, February 18, 2015.
173. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 45.
174. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China

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Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 45; China Daily, ‘‘China Expects to Complete Space Station by 2023,’’ September 24, 2013; Xinhua, ‘‘Shenzhou10 Mission Marks Staged Success of China’s Manned Space Programs: Vice Premier,’’ June 26, 2013; and People’s Daily, ‘‘3 Phases of China’s Manned Space Program,’’ June 17, 2013.
175. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 46, 48; Buzz Aldrin, ‘‘Why the
U.S. Should Partner with China in Space,’’ June 11, 2015.
176. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 47–48.
177. Xinhua (English edition), ‘‘China’s Space Station to be Established around2022,’’ September 10, 2014; Irene Klotz, ‘‘China Unveils Space Station Research
Plans,’’ Space News, November 12, 2013.
178. National Aeronautics and Space Administration, About the Space Station:
Facts and Figures, September 28, 2015; and Gregory Kulacki, ‘‘Why China is Building a Space Station,’’ Union of Concerned Scientists, June 13, 2012, 11.
179. National Aeronautics and Space Administration, Space Station 2024 Extension Expands Economic and Research Horizons, January 27, 2014; Xinhua (English
edition), ‘‘China’s Space Station to Be Established around 2022,’’ September 10,
2014; Joan Johnson-Freese, ‘‘A Long March into Space,’’ Cairo Review of Global Affairs, February 10, 2013.
180. China National Space Agency, ‘‘Chang’e Program: China’s Lunar Exploration
Program.’’181. State Administration for Science, Technology, and Industry for National Defense, ‘Lunar Exploration Dream’ Upholds the ‘China Dream’, quoted in Kevin
Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and
Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflictand Cooperation, March 2, 2015), 53.
182. Xinhua, ‘‘Yutu Lunar Rover Update: Unable to Move but Still Working toCollect Data,’’ June 5, 2015. Staff translation.
183. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 53–60; Leonard Davis, ‘‘China
Moon Landing: ‘Jade Rabbit’ Basks in Lunar Bay of Rainbows,’’ Space.com, December 14, 2013.
184. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China, April 2015, 13–14; Annual Report to Congress: Military and Security Developments Involving the People’s
Republic of China 2015, April 2015, 13–14; and Kevin Pollpeter, China Dream,
Space Dream: China’s Progress in Space Technologies and Implications for theUnited States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflict and Cooperation,
March 2, 2015), 53–60.
185. Associated Press, ‘‘China Sets Its Space Exploration Sights on the Dark Sideof the Moon,’’ September 14, 2015; and Shen Lu, Katie Hunt and Tiffany Ap, ‘‘China
to Explore ‘Dark Side’ of the Moon,’’ CNN, September 10, 2015.
186. Quoted in Leonard Davis, ‘‘China Has Big Plans to Explore the Moon andMars,’’ Space.com, December 3, 2014.
187. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 54–55.
188. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 54–55; European Space Agency,
Helium-3 Mining on the Lunar Surface; and Mark Williams, ‘‘Mining the Moon: Lab
Experiments Suggest that Future Fusion Reactors Could Use Helium-3 Gatheredfrom the Moon,’’ MIT Technology Review, August 23, 2007.

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189. Bradley Perrett, ‘‘Precision Innovation,’’ Aviation Week and Space Technology
173: 1 (2011): 54; China Information Office of the State Council, China’s Space Activities in 2011, December 29, 2011.
190. Yu Fei, ‘‘China Exclusive: Mars: China’s Next Goal?’’ Xinhua (English edition), September 25, 2014.
191. Jeff Foust, ‘‘China’s Mars Exploration Program Facing Delays,’’ Space News,
April 1, 2015.
192. Stephen Chen, ‘‘China Unveils First Mars Rover and Exploration System of
Red Planet,’’ South China Morning Post (Hong Kong), November 10, 2014.
193. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 35–40; Brian Harvey, China’s
Space Program: From Conception to Manned Space Flight, Springer, 2004, 69, 191.
194. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 35–40; Brian Harvey, China’s
Space Program: From Conception to Manned Space Flight, Springer, 2004, 69, 191;
and House of Representatives Select Committee On U.S. National Security And
Military/Commercial Concerns With The People’s Republic Of China, U.S.-National
Security and Military/Commercial Concerns with the People’s Republic of China,
1999.
195. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 36–37.
196. White House, Joint Press Statement by President Obama and President Huof China, November 17, 2009.
197. White House, U.S.-China Joint Statement, January 19, 2011.
198. U.S. Congress, Consolidated and Further Continuing Appropriations Act,
2012, 2012.
199. U.S. Congress, Consolidated and Further Continuing Appropriations Act,
2012, 2012.
200. U.S. Congress, Consolidated and Further Continuing Appropriations Act,
2013, 2013.
201. Frank Morring, Jr., ‘‘NASA, China Meet on Possible Cooperation,’’ Aviation
Week, January 16, 2014; Jeff Foust, ‘‘NASA Administrator Visited China Last
Month,’’ Space News, December 3, 2014; and Ledyard King, ‘‘Lawmaker: NASABroke Law with Visits by China Officials,’’ USA Today, March 7, 2013.
202. David McKenzie, ‘‘Chinese Astronaut Calls for Cooperation, Access to International Space Station,’’ CNN, May 29, 2015; Gregory Kulacki, ‘‘US and China NeedContact, not Cold War,’’ Nature 474 (June 23, 2011): 445; and Tariq Malik, ‘‘China
Has Not Been Invited to Join International Space Station, NASA Says,’’ Space.com,
June 28, 2010.
203. Ian Sample, ‘‘NASA Admits Mistake over Chinese Scientists’ Conference
Ban,’’ Guardian, October 11, 2013.
204. Lin Xiaochun, ‘‘Who Is Blocking China-U.S. Space Cooperation?’’ China Military Online, October 12, 2013.
205. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 39–40; Holly M. Miller et al.,‘‘Users, Uses, and Value of Landsat Imagery—Results from the 2012 Survey ofUsers,’’ U.S. Geological Service, 2013, 1–2.
206. Space Studies Board of U.S. National Academy of Sciences’ National Research Council, Forum for New Leaders in Space Science.
207. Quoted in Colin Clark, ‘‘China Reaches out to U.S. for Space Data: Air ForceSpace Commander,’’ Breaking Defense, December 8, 2014.
208. U.S. Department of State, The First Meeting of the U.S.-China Space Dialogue, September 28, 2015.
209. U.S. Department of State, U.S.-China Strategic and Economic Dialogue Outcomes of the Strategic Track, June 24, 2015.
210. Quoted in Dean Cheng, ‘‘Prospects for U.S.-China Space Cooperation,’’ Heritage Foundation, April 9, 2014.
211. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Philip Saunders, February
18, 2015.

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337
212. Quoted in Anthony Mastalir, ‘‘The PRC Challenge to U.S. Space Assets,’’ in
Andrew Erickson and Lyle Goldstein, eds., Chinese Aerospace Power: Evolving Maritime Roles, Naval Institute Press, 2011, 85.
213. China News, ‘‘Xi Jinping: ‘Space to Earth Communications’ Encourages China’s Dream of Spaceflight,’’ June 25, 2013; China Space News, ‘‘The Space Dreamand the China Dream,’’ July 31, 2013.
214. Office of the President of the United States, National Space Policy of theUnited States of America, June 28, 2010, 1.
215. U.S. Department of Defense and Office of the Director of National Intelligence, Space Security National Strategy, January 2011, i.
216. General John Hyten, quoted in David Martin, ‘‘The Battle Above,’’ 60 Minutes, April 26, 2015.
217. Commission analysis and judgments based on the following sources: Jane’sSpace Systems and Industry, ‘‘Yaogan Series’’; Kevin Pollpeter, China Dream, SpaceDream: China’s Progress in Space Technologies and Implications for the UnitedStates (Prepared for the U.S.-China Economic and Security Review Commission by
the University of California Institute on Global Conflict and Cooperation, March 2,2015), 64–65; Andrew Erickson, ‘‘Chinese Air- and Space-Based ISR: Integrating
Aerospace Combat Capabilities over the Near Seas,’’ in Peter Dutton, Andrew Erickson, and Ryan Martinson, eds., China’s Near Seas Combat Capabilities, Naval War
College, February 2014, 97–102; S. Chandrashekar and Soma Perumal, ‘‘China’s
Constellation of Yaogan Satellites and the ASBM,’’ International Strategic and Security Studies Program, National Institute of Advanced Studies, January 22, 2014; andKevin Pollpeter, ‘‘Controlling the Information Domain: Space, Cyber, and Electronic
Warfare,’’ in Ashley J. Tellis and Travis Tanner, eds., Strategic Asia 2012–2013:
China’s Military Challenge, National Bureau of Asian Research, 2012, 167–171.
218. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, 2015, 20–21.
219. Michael Chase et al., China’s Incomplete Military Transformation: Assessing
the Weaknesses of the People’s Liberation Army (Prepared for the U.S.-China Economic and Security Review Commission by the RAND Corporation, 2015), 116–117.
220. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 116.
221. China Great Wall Industry Corporation, briefing to Commission, Beijing,
China, July 22, 2015; Kevin Pollpeter (Deputy Director, Study of Innovation andTechnology in China Project, Institute on Global Conflict and Cooperation, University of California), interview with Commission staff, July 17, 2015; and Kevin
Pollpeter, China Dream, Space Dream: China’s Progress in Space Technologies and
Implications for the United States (Prepared for the U.S.-China Economic and Security Review Commission by the University of California Institute on Global Conflictand Cooperation, March 2, 2015), 112–113.
222. Kevin Pollpeter, China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States (Prepared for the U.S.-China
Economic and Security Review Commission by the University of California Instituteon Global Conflict and Cooperation, March 2, 2015), 113.
223. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Kevin Pollpeter, February
18, 2015; U.S.-China Economic and Security Review Commission, Hearing on China’s Space and Counterspace Programs, oral testimony of Alanna Krolikowski, February 18, 2015.
224. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Tate Nurkin, February 18,
2015.
225. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Tate Nurkin, February 18,
2015.
226. Center for Strategic and International Studies, event on ‘‘U.S. Strategy for
Civil and Military Space,’’ May 11, 2015.
227. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Roger Handberg, February
18, 2015.
228. U.S.-China Economic and Security Review Commission, Hearing on China’s
Space and Counterspace Programs, written testimony of Roger Handberg, February
18, 2015.

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SECTION 3: CHINA’S OFFENSIVEMISSILE FORCES
Introduction
China’s offensive missile forces are integral to its military modernization efforts and its objective of becoming a world-class military capable of projecting power and denying access by adversary
forces to China’s periphery. The People’s Liberation Army’s (PLA)
ambitions in this area were on display in September 2015 at China’s largest-ever military parade, which commemorated the 70th
anniversary of the end of World War II. Nine different classes ofballistic and cruise missiles were featured, some of which had
never before been publicly unveiled.* The parade highlighted thepace and sophistication of China’s missile modernization, and signaled to the world China’s seriousness about enhancing both its
nuclear and conventional missile capabilities and its ability to holdadversary forces at greater risk.
This section examines China’s modernizing missile forces, including several new methods and platforms for missile deployment. Although it includes a brief discussion of Chinese developments inlong-range surface-to-air missiles and other defensive measuresagainst adversary missiles, the focus is primarily on China’s offensive missile developments. The section discusses the drivers of China’s missile modernization; the capabilities and doctrines of its conventional and nuclear missile forces; selected emerging missile
technologies; and the challenge of C4ISR † and targeting. Finally,
it considers the implications of China’s missile force modernization
for the United States. This section draws on the Commission’sApril 2015 hearing on China’s offensive missiles; consultations withexperts on the Chinese military and international security affairs;
and open source research and analysis.
China’s Drive to Modernize the Second Artillery
Missile Warfare and the Second Artillery
The PLA’s Second Artillery has been responsible for China’s missile forces since its establishment in the 1960s—first as a solely nuclear force and since the 1990s as an increasingly lethal conventional missile force as well. Missile warfare is a key component of
PLA ‘‘joint firepower operations,’’ which combine strike aviation,
theater missiles, and long-range artillery. The chief objective of
these operations is to asymmetrically hold enemy assets at risk at

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* Missiles on display at the parade included the DF–10, DF–15B, DF–16, DF–21D, DF–26,
DF–5B, DF–31A, YJ–12, and YJ–83. Andrew Erickson, ‘‘Missile March: China Parade Projects
Patriotism at Home, Aims for Awe Abroad,’’ China Real Time Report (Wall Street Journal blog),
September 3, 2015.
† C4ISR stands for ‘‘command, control, communications, computers, intelligence, surveillance,and reconnaissance.’’(338)

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long range by weakening an adversary at key nodes—such as command and control and logistics hubs—to lay the groundwork for
air, sea, and information superiority in wartime. In particular, China’s theater missiles—those missiles with ranges meant to support
Pacific theater operations—create a more favorable environment
for subsequent PLA Air Force and PLA Navy operations. According
to PLA campaign theory, seizing the advantage in the air, maritime, and information domains are prerequisites for achieving operational objectives and terminating a military conflict on China’s
terms.1
China’s growing conventionally-armed missile inventory is taking
center stage in its strategic and warfighting calculus. The Second
Artillery provides China with a decisive operational advantage overregional militaries competing with China to defend maritime
claims in China’s ‘‘near seas,’’ * as China gains a superior ability
to hold its adversaries’ assets at risk.2 China’s long-range precision
strike capabilities also improve its ability to engage the U.S. military at longer distances from China’s coastline, eroding the UnitedStates’ ability to access the Western Pacific freely in the event of
a conflict.3
China has come to view a flexible, survivable, and lethal offensive missile force as a force multiplier in achieving its strategic objectives. The Second Artillery’s conventional missiles provide an increasingly robust deterrent against other military powers, and its
nuclear-armed missiles serve as a guarantor of state survival.
Moreover, as Mark Stokes, executive director of the Project 2049
Institute, testified to the Commission, ‘‘China’s long-range precision
strike capabilities . . . support the [Chinese Communist Party’s(CCP)] quest for legitimacy. The PLA functions as the armed wingof the CCP, and the Second Artillery is the party’s instrument forachieving strategic effects through direct targeting of enemy centers of gravity.’’ 4As the Second Artillery’s missions have expanded, so has its bureaucratic status within the PLA. The 2004 promotion of the Second Artillery commander, along with the commanders of the PLA
Air Force and PLA Navy, to membership on the Central MilitaryCommission, China’s top military decision-making body, reflects efforts to make PLA operations more ‘‘joint’’ and less ground-forcedominated. As a result the Second Artillery, like the PLA Air Forceand PLA Navy, has taken on an elevated bureaucratic stature in
the decade since its promotion to the Central Military Commission,5 and today it plays a key role in PLA planning and operations.6 In addition to providing a variety of ‘‘fire support’’ missions
for the PLA services, Second Artillery Doctrine also envisions thepossibility of implementing an ‘‘independent conventional missile
strike campaign’’ without significant coordination with the PLA
services.7 According to Andrew Erickson, associate professor at the
U.S. Naval War College, China’s upcoming military restructuring—outlined in 2013 and initiated by the 300,000-personnel troop cut
announced at the September 2015 military parade—will likely not
result in any demotion to the Second Artillery’s status.8* China’s ‘‘near seas’’ are the Bohai, Yellow Sea, East China Sea, and South China Sea regions.

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Context and Drivers of China’s Missile Force Development
In the 1990s, China’s military modernization efforts prioritizedcapabilities that could deter, delay, and deny the likely intervention of the United States military in a Taiwan contingency. This
sole strategic emphasis has since diversified. In 2004, Beijing
issued a directive to the PLA to prepare for nontraditional missions
beyond China’s immediate periphery, including humanitarian assistance/disaster relief, counterterrorism, and international peacekeeping operations. Such missions reflect China’s strategic interestin protecting its economic development and increasing its global
footprint. As the PLA’s operational fluency has improved, its naval,
air, and ground forces—all of which are increasingly armed withlong-range missiles or integrated with the Second Artillery’s missile operations—have begun to prepare for and familiarize themselves with operations beyond the Chinese mainland and near seas,demonstrating an improving ability to project power throughout
the Asia Pacific region and beyond.9
According to Mr. Stokes, the Second Artillery’s growth, modernization, and departure from its origins as a solely nuclear force
have proceeded and will continue to proceed in phases. Preparation
for a Taiwan contingency through the development and deployment of short-range ballistic missiles (SRBMs) with a 600 kilometer (372 mile) range along the Taiwan Strait from the late-1980s
to the mid-1990s constituted the first phase. A second phase has
been the expansion of SRBM ranges to 1,500–2,000 kilometers(932–1,242 miles) to develop a basic capability to strike longerrange targets on land and moving targets at sea. The next phase,
which Mr. Stokes anticipates China could reach by the end of 2015,is an extension of its conventional precision strike capability to arange of 3,000 kilometers (1,864 miles) and beyond.* Finally, China
could pursue an even greater extension of the Second Artillery’s
conventional precision strike capability to 8,000 kilometers (4,971
miles) and eventually a global conventional precision strike capability, which Mr. Stokes estimates could take place by 2020 and
2030, respectively.10
In the post-Cold War nuclear realm, China’s chief strategic concern has been the United States, particularly the U.S. nuclear arsenal and modernization of missile defenses. (For more information
on Chinese concerns about U.S. missile defenses, see ‘‘Increasing
the Penetrability of Adversary Missile Defenses,’’ later in this section.) Of note, China is surrounded by a number of nuclear-capablestates, many of which experience varying degrees of instability orenmity with each other. In South Asia, India and Pakistan are relatively recently-declared nuclear states with mutual deep-seatedtensions. In Northeast Asia, prospects for North Korea’s denuclearization appear increasingly unlikely,† while Japan’s recent
defense reforms have led China to raise concerns about Japan’s nuclear weapons potential.11 Finally, although Taiwan does not itself* The DF–26 intermediate range ballistic missile’s inclusion in China’s September 2015 military parade may represent the achievement of this phase; see ‘‘Ballistic Missiles: Antiship Missiles,’’ later in this section.
† For more information on the denuclearization issue in China-North Korea relations, see
U.S.-China Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 455–459.

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maintain nuclear weapons, China recognizes that a conflict with
Taiwan could involve the intervention of the nuclear-armed UnitedStates.12
Nuclear Strike: Doctrine and Capabilities
China’s nuclear strike capabilities have modernized only gradually in comparison to its conventional capabilities. Moreover, China’s nuclear doctrine remains largely unchanged since its establishment as a nuclear state in the 1960s. Although modern China’s
early leaders, especially Mao Zedong, appreciated the political utility of nuclear weapons as a deterrent, they did not view nuclear capability as a significant warfighting tool. This philosophy appears
to have guided the development of China’s nuclear doctrine as wellas the size of China’s nuclear arsenal, which is estimated to be ofmoderate size in comparison to other major declared nuclear statessuch as the United States and Russia.13 Nevertheless, China is improving its nuclear-armed missile capabilities and moderately increasing the size of its arsenal. Beijing does not release official data
about its nuclear arsenal and its pronouncements regarding its doctrine are limited and vague. Opacity in this area helps China maintain and strengthen strategic ambiguity, and, by extension, thevalue of its strategic arsenal.14

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China’s Nuclear Doctrine
Nuclear Deterrence
The chief roles of China’s nuclear arsenal are to deter an adversary from undertaking a nuclear first strike and to reduce the pressure on China to yield to an adversary’s demands, or desist fromaggression, under threat of nuclear attack.15 China’s nuclear deterrent is premised on the concept of assured retaliation, which is theidea that ‘‘a small number of survivable weapons would be enoughto accomplish deterrence by threatening retaliation and, thus, unacceptable damage on an adversary,’’ according to M. Taylor
Fravel, Associate Professor in the Department of Political Scienceat the Massachusetts Institute of Technology, and Evan S.
Medeiros, then Director for China, Taiwan, and Mongolian Affairs
at the U.S. National Security Council.* 16
As the PLA has increasingly incorporated the Second Artillery
into joint campaign planning, the Second Artillery’s nuclear missile
force is likely to be considered a backstop to support conventional
missions. In a conventional conflict, the PLA could fight with theconfidence that its nuclear weapons—and therefore the threat ofnuclear retaliation—could prevent the conflict from escalating too
far. In this sense, China believes the Second Artillery’s nuclear arsenal could constrain an adversary’s options in a conventional conflict, providing China with greater flexibility to conduct conven* Because China’s declarations on its nuclear policy are vague and kept to a minimum, thisassessment of China’s nuclear strategy does not necessarily represent China’s official views.
Furthermore, some scholars, such as Wu Riqiang, associate professor at the School of International Studies at Renmin University, disagree that assured retaliation is what drives China’s
nuclear deterrent. Wu Riqiang, ‘‘Remarks’’ (Chinese Thinking on Nuclear Weapons, Carnegie
Endowment for International Peace, Washington, DC, May 11, 2015); and Wu Riqiang, ‘‘Certainty of Uncertainty: Nuclear Strategy with Chinese Characteristics,’’ Journal of Strategic
Studies 36:4 (2013), 579–614.

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tional military operations.17 However, this belief could encourage
China to be more risk-acceptant during a crisis because it may notfear the prospect of escalating a conventional fight into the nuclear
realm as much as it otherwise would.18
Dr. Christopher Yeaw, founder and director of the Center for Assurance, Deterrence, Escalation, and Nonproliferation Science &Education, testified to the Commission that this doctrine has beenshifting.19 In an interview with Commission staff, he further explained:
I don’t believe China fears nuclear coercion from the UnitedStates as it did in the Cold War years, nor does it primarily fear a highly unlikely U.S. nuclear first strike—what China fears most is losing to the United States in a‘‘politically necessary’’ conventional conflict. I believe thisleads [China] to desire a way to deescalate the UnitedStates out of a high-intensity regional conflict, particularly
one in which the United States is imposing severe costs
from a purely conventional perspective and China’s victory
appears elusive or in grave doubt.20

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Potential Reconsideration of No-First-Use
China has long pledged a policy of ‘‘no-first-use’’ for its nuclear
weapons. As stated in Beijing’s most recent defense white paper:‘‘China has always pursued the policy of no first use of nuclear
weapons and adhered to a self-defensive nuclear strategy that isdefensive in nature. China will unconditionally not use or threaten
to use nuclear weapons against non-nuclear-weapon states or in
nuclear-weapon-free zones, and will never enter into a nuclear
arms race with any other country.’’ 21 China’s no-first-use pledge
appears designed to convey China’s preference for using nuclear
weapons for deterrence rather than warfighting purposes, as wellas its stated view that nuclear warfighting is strictly firewalledfrom conventional warfighting.22
It is unclear, however, under what circumstances China would
use nuclear weapons and what China would consider ‘‘first use.’’ As
a result, the outer bounds of the pledge have been under debate forsome time among outside observers.23 For example, although China’s 2013 defense white paper indicates China will use nuclear
weapons to respond to a nuclear attack but not a nuclear threat,
it does not articulate at what point China will consider a nuclear
threat to have ended and a nuclear attack to have begun.* 24 The
2013 Science of Military Strategy, an authoritative PLA doctrinal
source, indicates China will not wait to absorb a nuclear strike before launching a retaliatory nuclear strike of its own: ‘‘We can,under conditions confirming the enemy has launched nuclear missiles against us, before the enemy nuclear warheads have reachedtheir targets and effectively exploded, before they have caused us* China’s 2013 defense white paper differentiates between responses to a nuclear threat anda nuclear attack. A nuclear threat will prompt China’s nuclear missile force to ‘‘go into a higher
level of readiness, and get ready for a nuclear counterattack to deter the enemy from using nuclear weapons against China.’’ In response to a nuclear attack, however, ‘‘the nuclear missile
force of the [Second Artillery] will use nuclear missiles to launch a resolute counterattack either
independently or together with the nuclear forces of other services.’’ China’s Information Officeof the State Council, The Diversified Employment of China’s Armed Forces, April 2013.

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actual nuclear damage, quickly launch a nuclear missile retaliatory
strike.’’ 25
No-first-use has generated debate within China as well.26 In a2013 opinion piece, PLA Major General Yao Yunzhu of the Academy of Military Science, the PLA’s preeminent research institute,acknowledged speculation in Chinese media about a possible
change to no-first-use, attributing it to two concerns:• Ballistic missile defense systems developed by the UnitedStates and its allies ‘‘would be capable of intercepting retaliatory Chinese nuclear weapons launched after [China] has already been attacked, thus potentially negating the effectiveness of China’s nuclear arsenal as a deterrent.’’ 27• The United States’ increasingly advanced conventional capabilities could strike China’s nuclear arsenal and nullify China’s
no-first-use policy.28 Both Western and Chinese scholars havesuggested the threshold for China’s nuclear retaliation may not
be limited to a nuclear first strike, but could also include a
conventional threat to its own nuclear arsenal.29
The U.S. Department of Defense (DOD) has also identified additional areas of ambiguity in China’s no-first-use policy, including
whether demonstration strikes, high-altitude bursts,* or strikes onwhat China considers its territory would constitute a first use.30
Chinese and Western experts seem to agree China officially will
adhere to a no-first use policy, while allowing healthy debate about
the circumstances of its applicability in unofficial channels.31 The
policy considerations shaping Beijing’s decision–making regarding
when to use nuclear weapons are likely to remain unknown to the
public.32

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Potential Changes to Nuclear State of Alert
Due to China’s opacity about its nuclear program, the typicalstate of its nuclear forces is unclear to outsiders. Most analysts assume China keeps its nuclear warheads stored separately from its
missiles rather than continuously deploying a number of warheads
on missiles as done by France, Russia, the United Kingdom, andthe United States.† This ‘‘de-alerting’’ ‡ policy would be in line with
Beijing’s preference for highly centralized command and control
over its nuclear weapons but would leave room for vulnerability toa first strike: whereas it takes additional time to ready de-alerted* DOD is likely referring to a high-altitude nuclear explosion that creates an electromagnetic
pulse, which is an intense energy field that can overload or disrupt electrical systems such as
those used in critical civilian infrastructure. Non-nuclear means can also generate an electromagnetic pulse effect. U.S. Department of Defense, Department of Defense Dictionary of Military
and Associated Terms, November 8, 2010 (as amended through June 15, 2015), 103; and Clay
Wilson, ‘‘High Altitude Electromagnetic Pulse (HEMP) and High Power Microwave (HPM) Devices: Threat Assessments,’’ July 21, 2008, Congressional Research Service, Summary.
† This assumption about China’s nuclear policy is not unanimously held. Dr. Yeaw, for example, challenges the notion that China keeps the entirety of its forces de-alerted at all times,
given the immense lengths it has gone to in order to acquire a more survivable force. Christopher Yeaw (Director, Center for Assurance, Deterrence, Escalation, Nonproliferation Science& Education), interview with Commission staff, June 15, 2015.
‡ ‘‘De-alerting’’ generally refers to the adoption of measures that extend the amount of timerequired to launch a nuclear weapon once the order to launch is given. Storing warheads separately from delivery systems, as China does, is one of a range of possible de-alerting measures.
Andrew Brown and Jeffrey Lewis, ‘‘Reframing the Nuclear De-alerting Debate: Toward Maximizing Presidential Decision Time,’’ Nuclear Threat Initiative, December 11, 2013.

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nuclear weapons and launch them, nuclear weapons on ‘‘highalert’’ * could be launched within minutes of a launch order.33
Experts have debated the effect of de-alerting policies such as
China’s on strategic stability. Advocates of de-alerting express concerns about the risk of escalation, arguing that maintaining highalert status removes the option of preparation and deliberation
prior to firing a nuclear weapon. In their view, keeping nuclear
weapons de-alerted also minimizes the risk of their accidental use,
unauthorized use, and use due to miscalculation.34 Advocates ofhigh-alert status, however, reject the notion that a constant highstate of nuclear readiness is destabilizing. Rather, they argue, it
creates certainty for adversaries about the kind of response theyshould expect from a state maintaining nuclear weapons on highalert. Another argument in favor of high-alert status is that it provides the executive decision maker time to consider various responses during a crisis, knowing that nuclear weapons would beready for launch within minutes of the decision to fire them.35
In testimony to the Commission, James Acton, senior associate
and co-director of the Nuclear Policy Program at the Carnegie Endowment for International Peace, suggested China’s presumptive
de-alerting policy could change. As noted in the previous excerpt
from the 2013 Science of Military Strategy, evidence in doctrinal
writings indicates the PLA has considered the idea of a nuclear
launch in response to an incoming nuclear attack prior to the missiles actually reaching their targets, or ‘‘launch on warning.’’ Thissuggests Chinese nuclear forces would at least be alerted in theevent of a crisis. China’s stated interest in enhancing its strategic
early-warning capabilities also suggests an interest in launch on
warning: such capabilities, intended to provide China with the time
to react to an incoming threat, would be ‘‘of little value’’ to a dealerted force during a crisis, according to Dr. Acton.36 Finally, thepolicy would change if China decides to mate nuclear warheads to
its submarine-launched ballistic missiles (SLBMs)—a ‘‘potentiallyhuge shakeup for the Chinese forces for command and control.’’ 37
For more information on China’s SLBMs, see ‘‘SubmarineLaunched Ballistic Missiles,’’ later in this section.

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Nuclear Escalation Philosophy
Another factor that sheds light on how and when China might
employ nuclear weapons is its nuclear escalation philosophy—how
a state might use nuclear weapons to escalate or deescalate a conflict. Dr. Yeaw testified to the Commission that China views theuse of nuclear weapons not ‘‘in a warfighting fashion intended todefeat the adversary on the battlefield,’’ but ‘‘in the high-intensity
political management of an escalating and perhaps unsustainableconflict.’’ 38 According to this escalation philosophy, China would
punctuate non-nuclear operations with tactical- or theater-level nu* ‘‘High alert’’—often termed ‘‘hair-trigger alert’’ by critics—generally describes the status of
nuclear weapons ready for launch within minutes, or the shortest possible length of time, of alaunch order. Currently the United States and Russia maintain nuclear forces on high alert
while France and the United Kingdom maintain nuclear forces on ‘‘alert’’ but at a lower level;
the nuclear forces of China, India, North Korea, and Pakistan are believed to be de-alerted. Andrew Brown and Jeffrey Lewis, ‘‘Reframing the Nuclear De-alerting Debate: Toward Maximizing
Presidential Decision Time,’’ Nuclear Threat Initiative, December 11, 2013; and Hans M.
Kristensen and Matthew McKinzie, ‘‘Reducing Alert Rates of Nuclear Weapons,’’ United Nations
Institute for Disarmament Research, 2012, 1–8.

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clear strikes to seek deescalation on terms favorable to China. Unlike strategic nuclear weapons, which target an adversary’s homeland and population centers, tactical and theater nuclear weapons(also known as nonstrategic nuclear weapons) are designed for missions at shorter ranges, and usually carry lower-yield warheads.
Because their use does not invite overwhelming nuclear retaliationin the same way as would strategic nuclear strikes on a country’s
homeland, tactical and theater nuclear weapons are considered to
be a stronger deterrent and a more credible threat.39
Elbridge Colby, senior fellow at the Center for a New American
Security, elaborated on the impact of China’s burgeoning theater
nuclear force on the nuclear escalation dynamic between China andthe United States in testimony to the Commission:[China’s] ability to use nuclear weapons in more limited
and tailored ways will make China’s threats—explicit or
implicit—to use nuclear forces more credible. . . . This does
not mean that China will reach for the nuclear saber earlyor often. But a more sophisticated force will give China better options for how it might seek to use these weapons not
only, as in the past, as a desperate last resort, but also to
deter U.S. escalation of a conflict—escalation the UnitedStates might need to resort to if it is to prevail.40
A key implication of China’s approach for the United States, according to Dr. Yeaw, is that China ‘‘may escalate across the nuclear
threshold at a time and manner, and for a purpose, that we do not
expect.’’ 41

Note: DOD uses a mix of both Chinese and North Atlantic Treaty Organization (NATO) designators in the above graphic. See Table 2, ‘‘Ranges of China’s Nuclear Ballistic Missiles (Selected)’’ for a list of Chinese and NATO designators of ballistic missiles.
Source: Figure adapted from U.S. Department of Defense, Annual Report to Congress: Military
and Security Developments Involving the People’s Republic of China 2015, April 2015, 88.

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Figure 1: China’s Medium and Intercontinental Range Ballistic Missiles

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China’s Nuclear Strike Capabilities
China describes its nuclear force structure and composition as‘‘lean and effective,’’ though this guiding principle, like no-first-use,
is subject to variables that enhance China’s strategic ambiguity.
China does not release official data on its nuclear forces, but unofficial sources estimate China has approximately 250 nuclear warheads.* 42 As a result of Beijing’s pursuit of a more modern nuclear
force, China’s nuclear weapons are undergoing moderate quantitative increases.43 These increases are such that the chief limitation on China’s nuclear force development in the near future could
be China’s stockpile of fissile material (material capable of releasing nuclear energy) rather than its number of delivery vehicles.† 44
As it seeks to maintain an ‘‘effective’’ nuclear force guided by ano-first-use doctrine, China is pursuing a credible second-strike capability with an emphasis on survivability against an adversary’s
first strike. By diversifying its nuclear strike capabilities awayfrom liquid-fueled silo-based systems, China seeks to ensure its
ability to absorb a nuclear strike and retaliate in kind.45
Finally, China appears to be enhancing its theater nuclear force.
Such a development would facilitate the theater-range strikes envisioned in a regional de-escalatory nuclear doctrine, as describedearlier.‡ 46

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Road-Mobile Ballistic Missiles
According to the U.S. Defense Intelligence Agency, China’s nuclear arsenal consists of 50–60 intercontinental ballistic missiles(ICBMs).47 China’s silo-based, liquid-fueled DF–5 (12,000 kilometer/7,456 mile range) and longer-range DF–5A (13,000 kilometer/8,078 mile range) have formed the core of China’s nuclear arsenal since the early 1980s.48 With the deployment of the DF–31
in 2006 and DF–31A in 2007, the Second Artillery fielded a second
generation of road-mobile, solid-fueled ICBMs.49 The road mobilityof these missiles would make it more difficult for an adversary totarget them with a first strike. Solid-fueled missiles provide advantages over the liquid-fueled missiles of past generations because
they do not require lengthy fueling time and their fewer and morestable fueling elements enjoy greater safety and stability over long
periods of storage.50 While the range of the DF–31 at 7,200 kilometers (4,474 miles) does not quite reach the continental UnitedStates, the DF–31A has an estimated range of 11,200 kilometers(6,959 miles), giving it the ability to target almost all of the continental United States from launch areas in China.51 Beyond these* The Commission discussed other estimates on the size of China’s nuclear arsenal—some ashigh as 1,800, some as low as 100—in the 2012 Annual Report to Congress. U.S.-China Economic
and Security Review Commission, 2012 Annual Report to Congress, November 2012, 176–177.
† This view is not universally held. For example, in 2012, Mark B. Schneider, senior analyst
at the National Institute for Public Policy, testified to the Commission, ‘‘I do not think the availability of fissile material will be a significant constraint on China. . . . With the massive Chinese
nuclear energy program now underway, China should be able to produce as many nuclear weapons as needed.’’ U.S.-China Economic and Security Review Commission, Hearing on Developments in China’s Cyber and Nuclear Capabilities, written testimony of Mark B. Schneider,
March 26, 2012.
‡ The United States maintained a theater nuclear strike capability in the 1980s with its
ground-launched cruise missiles, but withdrew these missiles under the terms of the Intermediate Range Nuclear Forces Treaty. U.S.-China Economic and Security Review Commission,
Hearing on China’s Offensive Missile Forces, written testimony of Christopher Yeaw, April 1,
2015.

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established systems, a new generation of ICBMs is undergoing development in China, with a possible incorporation of survivabilityor penetrability-enhancing attributes such as: multiple reentry vehicles (whether independently-targetable or not), reentry maneuverability, greater accuracy, greater range, and overland mobility
by rail (as opposed to by road).52 These developments are discussedin ‘‘Increasing the Penetrability of Adversary Missile Defenses,’’later in this section.
China also deploys nuclear-armed intermediate-range ballistic
missiles (IRBMs) and medium-range ballistic missiles (MRBMs) forregional nuclear deterrence. These include the limited-mobility, liquid-fueled DF–3A IRBM, which is likely in the process of being
phased out by the Second Artillery, as well as the road-mobile,solid-fueled DF–21 and DF–21A MRBMs.* 53 Official commentaryduring China’s September 2015 military parade indicated that thenewer DF–26 IRBM, also road-mobile and solid-fueled, is nuclearcapable.54
Submarine-Launched Ballistic Missiles

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China is expected to deploy its first nuclear deterrence submarine patrols of the JIN-class (Type 094) nuclear-powered ballistic missile submarine (SSBN) by the end of 2015, marking its
first credible at-sea second-strike nuclear capability.† 55 The JIN
SSBN carries the nuclear JL–2 SLBM, which has a range of atleast 7,400 kilometers (4,598 miles), or far enough to strike thecontinental United States depending on the location of thelaunch.56 DOD has estimated the PLA Navy currently has three tofour operational JIN SSBNs, and up to five additional JIN SSBNs
will enter service by 2020.57 In contrast with the opacity of its
other nuclear capabilities, China openly touts the development of
the JIN/JL–2. PLA Navy Commander Admiral Wu Shengli wrote
in a CCP magazine, ‘‘This is a trump card that makes our motherland proud and our adversaries terrified. It is a strategic force symbolizing our great-power status and supporting national security.’’ 58
Some analysts have suggested China cannot rely upon the JIN
SSBN as a survivable second-strike capability, given its noisy
acoustic signature that lends itself to detection.59 China may seek
to improve on these deficiencies in its successor to the JIN SSBN
and JL–2 SLBM, the Type 096 SSBN and JL–2 follow-on SLBM
(official sources have confirmed the development of the submarine,
but not the missile).60* For a description of ballistic missile ranges, as defined by the U.S. Department of Defense,
see Table 1.
† The Commission’s 2014 Annual Report to Congress predicted China would deploy its firstnuclear deterrence submarine patrols in 2014, citing DOD and intelligence community assessments. DOD has since revised this timeline to ‘‘sometime in 2015,’’ which informs the Commission’s current assessment. An unconfirmed report from independent Hong Kong-based news outlet Ming Pao asserted in September 2015 that the first of these patrols had taken place. At thetime of the writing of this report, there had been no official confirmation that the patrol hadtaken place. Ming Pao, ‘‘First Armed Patrols of New Nuclear Submarine,’’ September 30, 2015.
Staff translation; and U.S. Department of Defense, Annual Report to Congress: Military Powerof the People’s Republic of China 2015, April 2015, 9.

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Air-Launched Land-Attack Cruise Missiles
Although not explicitly confirmed in official sources, China may
be developing a nuclear-capable air-launched cruise missile, theCJ–20, for use with a modernized version of China’s longtime primary bomber, the H–6. This variant, the H–6K, has the ability tocarry six land-attack cruise missiles (LACMs) and is equipped withpowerful turbofan engines, giving it extended range—potentiallyout to the second island chain, including Guam.* 61 The CJ–20 isan air-launched version of the currently fielded CJ–10 (also known
as the DH–10), a theater-range LACM that appears both conventional- and nuclear-capable.62 A nuclear-capable CJ–20 would indicate China is developing new, air-delivered theater nuclear strikecapabilities, in addition to its formidable ballistic missile theater
nuclear forces and the strategic nuclear strike capability it has
maintained since it became a nuclear state.
Conventional Strike: Doctrine and Capabilities
Conventional Missile Doctrine and Employment Concepts
The Second Artillery has since the mid-1990s added conventional
strike capabilities to an arsenal that previously had comprised only
nuclear ballistic missiles. The PLA has achieved ‘‘extraordinarily
rapid’’ growth in its conventional missile capability, according to
DOD. One decade ago, the Second Artillery only possessed the ability to target Taiwan, as well as a basic ability to strike targets
within the first island chain. Today, China is fielding and developing a wide range of conventional ballistic and cruise missiles tohold targets at risk throughout the region—even as far as the second island chain.63 No longer solely a nuclear force intended to be
employed in the most dire of circumstances, the Second Artillery
has taken on a mission of ‘‘dual deterrence, dual operations,’’ inwhich it is responsible for nuclear deterrence and nuclear counterstrikes, as well as conventional deterrence and conventional precision strikes.64

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Conventional Deterrence
According to Second Artillery doctrine, nuclear weapons serve as
the ultimate deterrent; however, conventional missiles, as less destructive weapons, have fewer restraints on their use from aninternational public opinion perspective and are therefore more
flexible instruments of deterrence and strike. The Second Artillery’s concept of deterrence includes elements of what Western political scientists understand as ‘‘compellence,’’ or the threat or use
of force to persuade an adversary to comply with demands.65 ‘‘Campaign deterrence’’ is defined in the chief Second Artillery doctrinal
publication as employing military activities in which units display* The first island chain refers to a line of islands running through the Kurile Islands, Japanand the Ryukyu Islands, Taiwan, the Philippines, Borneo, and Natuna Besar. The second island
chain is farther east, running through the Kurile Islands, Japan, the Bonin Islands, the Mariana Islands, and the Caroline Islands. PLA strategists and academics have long asserted theUnited States relies primarily on the first island chain and the second island chain to strategically ‘‘encircle’’ or ‘‘contain’’ China and prevent the PLA Navy from operating freely in the Western Pacific. Open Source Center, ‘‘PRC Article Surveys China’s Naval Rivals, Challenges,’’ January 6, 2012. ID: CPP20120109671003; Bernard D. Cole, The Great Wall at Sea (Second Edition),
Naval Institute Press, 2010, 174–176.

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the ability to demonstrate overwhelming force to accomplish strategic objectives and ‘‘force an enemy to accept our will or containan enemy’s hostile actions.’’ 66 Examples of these military activities
include using conventional missiles as a show of force to intimidate
the adversary or executing ‘‘surgical strikes’’ against important assets to coerce the adversary to yield to Chinese demands.67 In otherwords, whereas the United States uses ‘‘deterrence’’ to mean deterring aggression, China’s use of ‘‘deterrence’’ includes the concept ofdeterring resistance to demands.
Conventional Strike
Mr. Medeiros, then senior political scientist at the RAND Corporation, writes of PLA conventional missile operations:
The PLA emphasizes using conventional missiles to strikefirst, strike hard, strike precisely, and strike rapidly. The
aim of this approach is to ‘‘seize the initiative’’ and quickly
gain ‘‘campaign control’’ in order to speed up the process of
warfare leading to the adversary’s quick capitulation.68

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If deterrence fails, the Second Artillery would likely weaken key
enemy targets with network attack and electronic warfare before
launching conventional missile strikes.69 Potential targets for conventional missile strikes, which are outlined in authoritative publications, support this theme. These include C4ISR hubs, missile positions, military transportation and logistical hubs such as ports
and airfields, key military facilities, critical infrastructure, and carrier strike groups. These targets are both critical and vulnerable,
and would, if destroyed, severely impede the ability of adversary
forces to function and communicate smoothly.70 In a Taiwan scenario, for example, Chinese missile strikes on such targets could
suppress Taiwan air defenses as a precursor to PLA Air Force operations over the Taiwan Strait.71

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Figure 2: Select Conventional Strike Capabilities

Note: DOD uses a mix of both Chinese/Russian and NATO designators in the above graphic.
CSS–6 and CSS–7 are the NATO designators for the DF–15 and DF–11, respectively. CSS–5
refers to the DF–21 ballistic missile. FB–7 is the NATO designator for the PLA’s JH–7 fighter
bomber, and B–6 is the designator for the PLA’s H–6 bomber. See Table 3, ‘‘Ranges of China’s
Conventional Ballistic Missiles (Selected),’’ for a list of Chinese and NATO designators of ballistic missiles.
Source: U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 87.

Ballistic Missiles
The PLA’s significant investment in modernizing and diversifying its conventional ballistic missile forces beyond short-range

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Conventional Missile Capabilities
China’s initial development of its conventional missile forces focused heavily on the development of its SRBM force for Taiwan
contingencies. In the past decade, China’s development of longerrange missiles, pursuit of advanced missile technologies, and diversification of launch platforms have enabled it to hold at risk awider range of targets farther from its shores. The improved
stealth and warhead accuracy of China’s expanded range of systems and launch platforms would serve to strengthen the elementof surprise if these were used in a potential conflict.

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Taiwan missions has continued to bear fruit. The defining featuresof most ballistic missiles are an initial propulsion phase followed
by a ballistic trajectory through the atmosphere, reaching an apogee in space before traveling back into the atmosphere toward atarget on Earth’s surface.* DOD categorizes ballistic missiles byrange as follows:
Table 1:

Ballistic Missile Ranges Defined by U.S. Department of Defense
Ballistic Missile Type

Missile Range

Short-Range Ballistic Missile (SRBM)<1,000 kilometers(621 miles)

Medium-Range Ballistic Missile (MRBM)

1,000–3,000 kilometers(621–1,864 miles)

Intermediate-Range Ballistic Missile (IRBM)

3,000–5,500 kilometers(1,864–3,418 miles)

Intercontinental Ballistic Missile (ICBM)>5,500 kilometers(3,418 miles)

Source: U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 46; U.S. National Air andMissile Intelligence Center, Ballistic and Cruise Missile Threat, 2013, 9.

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The following discussion explains China’s SRBM, MRBM, and
IRBM capabilities in further detail. It also describes China’s wellknown antiship ballistic missile (ASBM) capability (given theirranges, China’s ASBMs are best categorized as MRBMs or IRBMs
under the DOD’s definitions). China’s ICBM force, along with certain MRBM and IRBM systems, are nuclear-armed; for more information on these weapons, see the discussion earlier in this section
on China’s nuclear strike capabilities.
Short Range Ballistic Missiles. China’s SRBM force consists
mostly of multiple variants of the DF–11 and DF–15 missiles. One
source details the remarkable growth of this force from 30 to 50
missiles in the mid-1990s to approximately 900 missiles in 2006.
To achieve this, the inventory grew at a rate of 50 to 100 missiles
per year.72 In 2015, China maintains ‘‘at least 1,200’’ SRBMs, according to DOD.† 73
The numerical growth rate of China’s SRBM force has slowed inrecent years as China focuses on qualitative improvements, replacing earlier generation missiles with newer variants that have improved ranges, accuracies, and payloads.74 The primary value ofthese missiles for the PLA would be their utility in a Taiwan contingency; indeed, a majority of China’s SRBMs are deployed along
the Taiwan Strait.75 However, the PLA could use the extendedrange variants of the DF–15 beyond the Taiwan Strait. If deployed
along China’s eastern coastline, for example, these missiles could
target U.S. and Japanese military facilities on Okinawa.76 Similarly, DOD assesses that the DF–16, China’s most recently fielded* Short-range ballistic missiles generally stay within the Earth’s atmosphere throughout thecourse of their flight.
† For further discussion on varying estimates of China’s current SRBM deployments, see
Chapter 3, Section 3, ‘‘Taiwan.’’

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SRBM, threatens not only Taiwan, but also other regional targets.* 77
Medium and Intermediate Range Ballistic Missiles. In ten years,
China has gone from possessing only a limited ability to reach targets east of Taiwan to developing the ability to conduct precision
strikes against land and naval targets within the first island chain.
This is enabled by China’s growing MRBM inventory and its
progress toward developing an IRBM capability.78
China fielded its first conventional MRBM, the DF–21C, in 2008.
Its maximum range of at least 1,750 kilometers (1,087 miles) allows China to strike a wide range of targets throughout the Western Pacific theater. According to Toshi Yoshihara, chair of Asia-Pacific Studies at the U.S. Naval War College, China’s currently modest inventory of DF–21Cs would limit the flexibility of its MRBM
employment in a conflict: ‘‘If the MRBM inventory remains relatively unchanged, then it can be inferred that the PLA intends toconcentrate the missiles against a few bases at the outset of a campaign. If, however, the Second Artillery fields a sizable DF–21C
missile force in the coming years, then the PLA may be preparing for a larger-scale undertaking involving more bases acrossJapan.’’ † 79
In addition, China’s DF–16, known to be an SRBM, appears tohave a medium-range variant as well. In testimony to the U.S.
Senate Armed Services Committee in 2015, Lieutenant General
Vincent Stewart, director of the U.S. Defense Intelligence Agency,
stated, ‘‘medium-range ballistic missiles, including the DF–16 . . .
will improve China’s ability to strike regional targets.’’ 80
The PLA is also developing a new conventional, road-mobile
IRBM with a range of up to 4,000 kilometers (2,485 miles) from the
Chinese coast. This range covers targets in the second island chain,such as U.S. bases on Guam, and could even include Northern Australia and Alaska.81 Although not confirmed by official U.S. government sources, some analysts attribute this program to a Chinesedesignator, DF–26, which is also capable of carrying nuclear warheads.82 Official commentary during China’s September 2015 military parade indicated that the DF–26, clearly road-mobile, has both
nuclear and conventional capabilities, fitting these descriptions.83
China’s advancements in theater-range conventional strike capabilities indicate the PLA’s interest in an ability to secure military
objectives beyond Taiwan. One of China’s earliest efforts at developing a conventional strike capability was its fielding of the DF–
25 MRBM in the 1980s. This missile had a reported mission of defending China’s Spratly Island outposts in the South China Sea.84
Unofficial sources have suggested this missile continues to be in* China also continues to manufacture new SRBMs with even shorter ranges than those of
the DF–11 and DF–15, including the (NATO-designated) CSS–9, CSS–14, CSS–X–16, and CSS–
X–15. As discussed in the Commission’s 2014 Annual Report to Congress, these missiles arelikely built to appeal to export markets, rather than for use by the PLA. U.S.-China Economic
and Security Review Commission, 2014 Annual Report to Congress, November 2014, 315–316;
Richard Fisher (Senior Fellow, International Assessment and Strategy Center), interview with
Commission staff, June 20, 2014; and U.S. National Air and Space Intelligence Center, Ballistic
and Cruise Missile Threat, 2013, 13.
† Current numbers of missiles and launchers are not publicly available in official sources.
However, naval analyst Jon Solomon in 2014 estimated China had a maximum of 40 DF–21C
missiles. Jon Solomon, ‘‘The Chinese DF–21 Arsenal: Part 2,’’ Information Dissemination Blog,
November 11, 2014.

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service and can also be armed with a nuclear warhead.85 As China
continues to seek to consolidate and secure its maritime claims in
the East and South China seas, theater-range strike capabilities
such as this missile would suggest an important Second Artilleryrole in a near seas maritime contingency beyond the Taiwan
Strait.86
Antiship Ballistic Missiles. China fielded the world’s first ASBM
in 2010, a variant of the DF–21 family of MRBMs known as the
DF–21D. Its range of at least 1,500 kilometers (932 miles) and maneuverable warhead give it the ability to strike moving adversary
ships east of Taiwan from secure sites on the Chinese mainland.
According to Mr. Erickson, China’s DF–21D capability means that‘‘in a crisis or combat situation, U.S. operators would have to drawa range ring for the DF–21D and then decide whether or not to risk
sending [carrier strike groups] into that range ring.’’ 87 Furthermore, because of the complex over-the-horizon targeting and maritime C4ISR required to successfully execute an ASBM strike, Professor Erickson argues the DF–21D is one element of a broader
program to track and target ships at sea (see ‘‘China’s C4ISR andTargeting Challenge,’’ later in this section).88
In written testimony to the Commission, Dennis Gormley, seniorlecturer at the University of Pittsburgh, raised additional technicalquestions regarding China’s deployment of the DF–21D such as‘‘whether or not China has truly mastered the terminal guidance
and maneuvering capability needed to successfully attack a moving aircraft carrier. Particularly demanding is the development ofsensors and warheads that can survive the rigors of atmosphere reentry, including high speeds and temperatures, without adversely
affecting required seeker and warhead performance.’’ 89 The abilityof the Second Artillery to strike its intended target is significant
because PLA doctrine appears to consider the possibility of using
the DF–21D for precision strikes as well as warning shots.90 In atense wartime situation an error in DF–21D targeting, therefore,
could mean the difference between deescalation and escalation.
Official commentary at China’s September 2015 military paradestated that the DF–26 also has an antiship variant, indicating it
has joined the DF–21D as an ASBM. The DF–26 represents aneven longer-range option, with a credited range of 3,000–4,000 kilometers (1,800–2,500 miles).91 According to Mr. Erickson, parading
both missiles indicates that they have been ‘‘tested carefully andaccepted into military service as operational hardware,’’ but ‘‘thereconnaissance strike complex [for an antiship capability] that supports them, by contrast, remains a work in progress.’’ 92 The additional range likely complicates the targeting challenge China already faces with the DF–21D.

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Cruise Missiles
Unlike ballistic missiles, which require propulsion at launch before entering a ballistic trajectory, cruise missiles are propelledby jet engines and fly at generally level flight paths to their targets. They can be described, as in one recent report, as ‘‘pilotless
airplanes’’ whose flights toward preplanned targets can be ad-

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justed en route with data from a variety of guidance and navigation systems.93 Because of their limited radar signature and lowaltitude flight, cruise missiles are very stealthy weapons. Manycruise missiles are also designed to execute terminal evasive maneuvers to defeat missile defenses. For these reasons, cruise missiles can be very difficult to detect and defend against, particularly
when part of a multi-axis attack of multiple cruise and ballistic
missiles.94
Cruise missiles also provide the employing force with operational
and planning flexibility. One aspect of their flexibility is that cruise
missiles can be placed aboard a variety of ground-, sea-, and airbased platforms. Moreover, according to the testimony of Lee Fuell,then technical director for force modernization and employment at
the U.S. Air Force’s National Air and Space Intelligence Center,‘‘These weapons are likely [intended] to reduce the burden on ballistic missile forces, as well as [to create] somewhat safer strike opportunities for Chinese aircrews, allowing them to engage frommuch longer distances and/or from advantageous locations of theirown choosing.’’ 95 These characteristics have led U.S. defense leadership to consider more closely the threat cruise missiles pose to
the homeland. In May 2015, Vice Chairman of the Joint Chiefs ofStaff Admiral James Winnefeld stated, ‘‘The element of surprise isnearly impossible with an ICBM attack, and we will always havetime to react. We can’t necessarily say the same thing for a cruise
missile attack. . . . [H]omeland cruise missile defense is shifting
above regional ballistic missile defense in my mind, as far as importance goes.’’ 96
While ballistic missiles are mostly categorized by range, cruise
missiles are categorized by intended mission and launch mode. The
two key types of cruise missiles are land-attack cruise missiles(LACMs) and antiship cruise missiles (ASCMs).
Land-Attack Cruise Missiles. The Second Artillery fielded theCJ–10, China’s first ground-launched LACM, in 2007–2008.97 Because of their stealth, accuracy, and route variation ability, LACMs
pose challenges to adversary air and missile defense systems inways that ballistic missiles do not. In addition to their ability toundertake radar-evading flight at low altitudes, the newest LACMs
include additional radar-evading features that make them evenmore difficult to detect. Moreover, salvos of multiple LACMs can bepreprogrammed to approach a target from multiple directions ortake circuitous routes toward the target—both methods of employment that have the effect of either overwhelming, evading, or confusing radar and air defenses.98 With a reported range of at least
1,500 kilometers (932 miles), the CJ–10 has the ability to hold U.S.
forces in Japan and South Korea at risk.99
In conjunction with developments in China’s bomber fleet, China’s development of the CJ–20, the air-launched version of the CJ–
10, enhances the lethality of China’s air-launched cruise missile arsenal. The H–6K variant of China’s bomber force, as mentioned
earlier in the discussion on China’s nuclear capabilities, has theability to carry six LACMs and a range potentially extending out
to the second island chain, including Guam.100 As described above,

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while not confirmed in official sources, there are some indications
that the CJ–20 is nuclear-capable.*
China probably is developing a LACM for deployment aboard future PLA Navy ships and submarines, which would give the PLA
Navy its first land-attack capability.101 A sea-based LACM would
diversify and potentially extend the range of China’s strike options
against U.S. facilities in the Indo-Pacific, particularly as the PLA
Navy gains proficiency in long-range surface and subsurface patrols.102
Antiship Cruise Missiles. As an integral part of the rapid development and extended reach of China’s PLA Navy in the past decade, China’s ASCM capabilities have advanced significantly. Because there are doubts regarding whether U.S. Navy shipboard systems could reliably and adequately defend against intense salvos ofChina’s advanced Russian-made and indigenous ASCMs, China’s
advancing ASCM technologies are reason for concern.103 In a June
speech, U.S. Deputy Secretary of Defense Robert Work raised thechallenge of defending U.S. ships and bases against adversary missiles in a cost-effective manner:
We dominated the guided munitions warfare regime for the
past 25 years. There’s no question about it: we have. But
now big state powers like China and Russia are rapidly
catching up. So this is going to require a fundamental rethinking of the way the joint force operates. . . . [A] demonstrated capability to win the emerging guided munitions
salvo competition . . . is job number one. This demonstrated
ability to win this competition will underwrite our conventional deterrence in the 21st century. . . .
We’re on the wrong end of the cost equation in this competition right now. We have been for some time. [We have been]using multi-[million]-dollar missiles . . . to defend surface
ships and fixed bases against relatively cheap ballistic andcruise missiles.104
The variety of launch platforms for China’s ASCMs, in addition
to the range and targeting improvements China continues to maketo its ASCM inventory, demonstrate China’s prioritization of its
antisurface warfare mission in its naval modernization efforts.
Each of the PLA Navy’s major surface combatants, for example, isequipped with ASCMs. As the PLA Navy has grown increasingly
confident operating its surface combatants farther afield from theMainland, it has also sought to ensure ASCM coverage closer to its
shores through a rapidly growing fleet of ASCM-equipped corvettes
and patrol vessels.105 These vessels and most other PLA Navy surface combatants carry the subsonic YJ–83 family of ASCMs, a system that has been in service with the PLA Navy since the 1990s.
Although missiles in the export versions of the YJ–83 have adver* Other air-launched LACMs include the YJ–63, reportedly deployed in 2004–2005, with a reported range of 200 kilometers (124 miles); and the KD–88. Although the advertised range ofthe KD–88 is at least 100 kilometers (62 miles), China may be developing a longer-range versionof this LACM. U.S. Department of Defense, Annual Report to Congress: Military and Security
Developments Involving the People’s Republic of China 2015, April 2015, 46; Dennis M. Gormley,
Andrew S. Erickson, and Jingdong Yuan, A Low-Visibility Force Multiplier: Assessing China’s
Cruise Missile Ambitions, National Defense University Press, 2014, 35.

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tised ranges of 65–100 nautical miles (74 miles–115 miles), the domestic versions of this system likely have much longer ranges.106
A more recent addition to China’s inventory of ship-launched
ASCMs is the 150 nautical mile (173 mile) range YJ–62, a missile
China began publicizing in the mid-2000s.107 China also uses
ASCMs for coastal defense, and has utilized a shore-based versionof the YJ–62 for this mission.108
In addition to their potential use in surface-to-surface engagements, some ASCMs can be submarine-launched. According to the
U.S. Navy’s Office of Naval Intelligence, the PLA Navy has been
increasingly equipping its submarines with modern ASCMs in thepast decade: ‘‘Given the rapid pace of acquisition, well over half ofChina’s nuclear and conventional attack submarines are now
ASCM-equipped, and by 2020, the vast majority of China’s submarine force will be armed with advanced, long-range ASCMs.’’ 109
The YJ–18 is a domestically developed and produced ASCM withconfirmed submarine- and surface-launched variants. According to
DOD, the YJ–18 would extend the ASCM range of China’s SONG,
YUAN, and SHANG submarines to a maximum of 290 nautical
miles (334 miles), which would significantly increase China’s
antiaccess/area denial * capabilities. Previous Chinese submarinelaunched ASCM ranges were 120 nautical miles (138 miles) for theRussian SS–N–27 launched from some of China’s KILO submarines, and 20 nautical miles (23 miles) for the YJ–82 launchedfrom SONG, YUAN, and SHANG submarines.110 The YJ–18’s
longer range will significantly expand the area U.S. forces mustmonitor for Chinese submarine activity. The YJ–18 is almost certainly capable of supersonic speeds during the terminal phase of its
flight, a feature that reduces the time shipborne defenses have toreact to an incoming threat (relative to subsonic missiles).111 Furthermore, missiles capable of achieving supersonic speeds are morechallenging to defeat with hard kill countermeasures. China has
fitted a surface-launched variant of the YJ–18 on its LUYANG III
DDGs, and likely will deploy the YJ–18 on its Type 095 nuclear attack submarine and Type 055 DDG, which are still under development.112 In addition, China probably will deploy a ground-launchedvariant of the YJ–18 to replace the YJ–62 ASCM in shore-based
missile units.
Finally, ASCMs are the centerpiece of China’s maritime strike
missions. PLA Navy Aviation fighter-bombers and bombers carry a
107 nautical mile (124 mile) range version of the YJ–83 family
ASCM. PLA Navy helicopters have been observed carrying ASCMs
as well, though it is unclear how widespread this practice is.113
Air-launched ASCMs appear to be an area of development for the
PLA Navy, as demonstrated by China’s continued upgrades to its
H–6 bomber. One improvement is an increase in the number of
ASCMs it can carry from two to four; another is the modification* According to the U.S. Department of Defense, ‘‘antiaccess’’ actions are intended to slow the
deployment of an adversary’s forces into a theater or cause them to operate at distances farther
from the conflict than they would prefer. ‘‘Area denial’’ actions affect maneuvers within a theater, and are intended to impede an adversary’s operations within areas where friendly forces
cannot or will not prevent access. China, however, uses the term ‘‘counterintervention,’’ reflecting its perception that such operations are reactive. U.S. Department of Defense, Military andSecurity Developments Involving the People’s Republic of China 2013, 2013, i, 32, 33; U.S. Department of Defense, Air-Sea Battle: Service Collaboration to Address Anti-Access & Area Denial
Challenges, May 2013, 2.

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of some H–6 bombers to serve as tankers, increasing the range ofthese aircraft. Most notably, China has developed the YJ–12 longrange, supersonic ASCM capable of being launched from the H–
6.114 The YJ–12’s long range (unofficial sources have estimated its
range to be 215 nautical miles (248 miles)) and ability to conduct
evasive approach and maneuvers toward its target pose immense
challenges for shipboard defenses, limiting the time a ship has toengage the incoming missile.115 As Robert Haddick, an expert on
Asia Pacific security, stated in testimony to the Commission in
2015:
The YJ–12 is the most dangerous antiship missile China
has produced thus far, posing an even greater risk to the
U.S. Navy’s surface forces in the Western Pacific than the
much-discussed DF–21D antiship ballistic missile. The arrival of the YJ–12 is just one more indication of how the
U.S. Navy is falling further behind in the missile competition against China, exposing flaws in operating concepts
that U.S. and allied commanders have relied on foryears.116
Taken together, the variety of platforms the PLA Navy has
equipped with ASCMs provides China with a multilayered area denial capability in its near seas and beyond. Professor Gormley,
along with co-authors Mr. Erickson and Jingdong Yuan, states ina study on Chinese cruise missiles: ‘‘ASCMs are increasingly poised
to challenge U.S. surface vessels, especially in situations where thequantity of missiles fired can overwhelm Aegis air defense systems
through saturation and multi-axis tactics. More advanced future
Chinese aircraft carriers might be used to bring ASCM- and
LACM-capable aircraft within range of U.S. targets.’’ 117 The U.S.
Navy is currently exploring advanced ship defense technologies,
such as electromagnetic railguns and directed energy weapons, that
could mitigate U.S. surface vulnerability to long-range, supersonicmissile strikes.118
China’s Missile Research and Development
The research and development (R&D) structure behind China’s
missile programs, which has grown in both scale and capacity todeliver innovative outputs in recent years, merits a brief description on its own. Key players in this structure include:

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• Top-level leadership in the Central Military Commission *and State Council,† which develop strategic requirements foraerospace technologies and determine whether each projectwill enter the crucial engineering R&D phase.119 On an ad
hoc basis, the Central Special Committee—reporting to the* China’s Central Military Commission is the country’s top military decision-making body.
Congressional-Executive Commission on China, China’s State Organizational Structure.
† China’s State Council, headed by Premier Li Keqiang, presides over China’s ministries, commissions, and direct offices. It is responsible for executing laws, supervising the government bureaucracy, and carrying out the administrative functions of the Chinese government. Congressional-Executive Commission on China, China’s State Organizational Structure.

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China’s Missile Research and Development—Continued
Politburo Standing Committee, Central Military Commission, and State Council and historically led by China’s top
political leaders—evaluates and provides recommendations
on certain strategic dual-use high-technology programs, potentially including military programs such as ballistic missiles as well.* 120• The PLA General Staff Department and PLA Second Artillery, which develop operational and technical requirements
for China’s missile programs. After approval by the Central
Military Commission and State Council, the Second Artillery
likely develops short- to long-term (e.g., 5- to 15 or moreyear) acquisition programs for missile systems.121• The PLA General Armaments Department, which oversees
the procurement process and approves contracts for these
programs’ four R&D stages: preliminary research, concept
development and program validation, engineering R&D, anddesign finalization.122• Research institutes within the General Armaments Department, the Second Artillery, the defense industry, or civilian
universities, which can all compete for preliminary researchcontracts.123 The Second Artillery handles concept development, and one of the academies within China’s two defense
industry conglomerates—the China Aerospace Science andIndustry Corporation and China Aerospace Science andTechnology Corporation—conducts engineering R&D, with a
Second Artillery unit embedded inside. Both the academy
and the embedded unit are involved in testing, which is required before a program can proceed to design finalization.† 124
A joint Central Military Commission and State Council standing office ultimately approves the finalized design.125 Overall,
the heavy involvement of senior Chinese leaders throughout theprocess indicates the pervasiveness of central leadership guidance and approval authority while the proliferation of actors involved demonstrates China’s commitment to pushing for increased civil-military integration.

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China’s missile R&D efforts have likely benefited from consistent funding increases concurrent with its growth in overall
military spending. China likely allocates at least 10 percent andpotentially up to 15 percent of its overall defense budget to R&D,
comparable to that of the United States, which has allocated* For more information regarding the Central Special Committee, see Chapter 2, Section 2,‘‘China’s Space and Counterspace Programs.’’† As with all defense conglomerates, the State Administration of Science, Technology, and Industry for National Defense, part of the State Council’s Ministry of Industry and Information
Technology, exercises administrative oversight over these companies. Mark Stokes, ‘‘China’s
Evolving Space and Missile Industry: Seeking Innovation in Long-Range Precision Strike,’’ in
Tai Ming Cheung, Forging China’s Military Might: A New Framework for Assessing Innovation,
Johns Hopkins University Press, 2014, 246.

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China’s Missile Research and Development—Continued
roughly 10–11 percent in recent years.* 126 Further, in step withother Chinese defense conglomerates, the two corporations each
now encompass numerous publicly-listed firms, enabling them toraise funds from multiple sources, including state funding, capital markets, and corporate activities.127 Yet persistent structural challenges may limit the impact of these large cash inflows:
China’s defense companies produce far lower revenues per worker than U.S. counterparts, and the civilian sector’s track record
shows marketization to be of limited benefit to the improvementof firms’ efficiency.128
In contrast to China’s first ballistic and cruise missile systems,
which relied on foreign technologies and expertise, today’s PLA
missile development is focused on conservative, incremental upgrades to existing missile variants.129 This indicates that China’s
missiles are at a low-to-medium level of innovation—one thatemphasizes incremental improvements to indigenous systems
originally based on foreign technology.130 However, as Mr.
Stokes states, China’s defense aerospace industry may now bepoised to deliver surprising breakthroughs in ‘‘disruptive technology’’ in some cases.131 The DF–21D ASBM, if demonstrated toperform as promised, would be the initial example of this newfound innovative capacity.132
Increasing the Penetrability of Adversary Missile Defenses
China has steadily developed its offensive missile forces over the
past two decades to pursue the capabilities necessary to fully execute its conventional and nuclear missions, but recognizes that adversary missile defenses pose a major challenge to the success ofthese operations. As a result, China is considering quantitative andqualitative measures to improve penetrability of adversary missile
defenses.

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Chinese Views on U.S. Missile Defense and Prompt Global
StrikeOfficial U.S. statements emphasize that its ballistic missile defense capabilities are intended to defend the U.S. homeland fromstates such as North Korea and Iran and do not threaten the efficacy of China’s strategic nuclear deterrent.133 Nevertheless, China
views these systems as a shield that could render its relatively limited nuclear arsenal impotent.134 As Christopher Twomey, asso* Using new methodology created by the University of California Institute on Global Conflictand Cooperation to measure Chinese defense R&D spending, these totals are revised upwardfrom the Commission’s 2014 Annual Report to Congress. As a ratio of China’s official defense
budget, the institute assesses that China’s defense R&D allocation in 2013, the latest year forwhich numbers are available, was 18.4 percent. However, as many items not in China’s official
defense budget contributed to this R&D spending measurement, a more accurate share relative
to China’s actual defense spending is likely 10–15 percent. Tai Ming Cheung (Director, University of California Institute on Global Conflict and Cooperation), interview with Commission staff,
June 12, 2015; Tai Ming Cheung, ‘‘How Much Does China Spend on Defense-Related Researchand Development’’ (2015 Workshop on Chinese Defense Science, Technology, and Innovation ina Period of Major Change, Washington, DC, February 9, 2015).

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ciate professor at the U.S. Naval Postgraduate School, testified to
the Commission, ‘‘There is a sense in Beijing that U.S. missile defense undermines a relatively stabilizing phenomenon of mutual
vulnerability between the U.S. and China. . . . Other Chinese [analysts] attack missile defense as a way to escape mutual vulnerability on the grounds that it is an attempt to achieve ‘absolute security’ for the United States. By implication, this means absoluteinsecurity for others, China included.’’ 135
The 2013 Science of Military Strategy indicates China views the
U.S. conventional prompt global strike program, envisioned to provide the United States the ability to conduct a precision strike anywhere on Earth within one hour, as a threat to China’s nuclear retaliatory capability as well.136
In addition to its views on the strategically destabilizing effectsof U.S. homeland missile defense, China has objected to the enhancement of U.S. theater missile defense in Asia.137 It has particularly criticized the U.S. sale of the Patriot anti-missile system
to Taiwan in the 1990s, as well as subsequent upgrades to the system.138 More recently, China has objected to the potential U.S. deployment of the Terminal High-Altitude Area Defense system toSouth Korea, despite U.S. assurances that it would be a purely defensive system aimed at North Korea.139 In a March 2015 press
conference, a Chinese Ministry of National Defense spokespersonstated: ‘‘We think [the deployment of a] missile defense system bysome countries in the Asia Pacific region is neither conducive tostrategic stability and mutual trust, nor to regional peace and stability. And we hope relevant countries can be prudent in taking actions.’’ 140 The nature of China’s objections to theater missile defense suggest that its broader opposition to missile defense systems
in general may be pretextual; theater missile defenses do not protect the homeland of another country from retaliatory attack andtherefore do not reduce the value of China’s nuclear arsenal, thestated reason for China’s general opposition to missile defense.
Theater missile defense does, however, reduce the value of China’s
missile inventory in support of its regional ambitions, a more likely
reason for its objections.

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Advancements in Warhead Delivery Systems and Penetrability
China’s views on U.S. missile defense strongly influence its development of technologies intended to counter, overwhelm, or defeat missile defenses. China continues to research and develop bothpassive and active countermeasures in an effort to ensure penetrability against adversary missile defenses. Passive countermeasures
include deploying chaff and decoys to confuse missile defenses andjamming missile defense radars and sensors to render them inoperable. Active countermeasures include more advanced technologies
such as kinetic ‘‘hit-to-kill’’ intercept and directed energy intercept
technologies, as well as early warning radar.141 These active countermeasure technologies, still under development by China, havemuch in common with those being developed under China’s
counterspace program. For more information, see Chapter 2, Section 2, ‘‘China’s Space and Counterspace Programs.’’

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Sheer numbers of missiles fired in salvos, in combination withthe deployment of other airborne threats, can overwhelm adversary
missile defenses and act as an aid to warhead penetration as
well.142 As Jeffrey Haworth, director of intelligence and security inthe missile defense component of U.S. Strategic Command, stated
at a 2015 conference on U.S. Army air and missile defense, ‘‘Regardless of whether we are talking about unmanned aerial systems, whether we’re talking about aircraft, whether we’re talking
about missile systems . . . there is more of everything. . . . There ismore of everything at every range; there is more of everything at
every capability; there is more of everything at every category of
threat.’’ 143 In short, as Professor Yoshihara testified, ‘‘quantity
matters.’’ Moreover, ‘‘targets that survived previous raids must be
struck again. In wartime, missiles could fall prey to malfunction,
outright misses, interception by enemy ballistic missile defense systems, and other low-tech methods by defenders to defeat the incoming missiles. Possessing adequate inventory to account for attritionis thus particularly crucial for ballistic missiles that can only be
used once.’’ 144

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Multiple Independently-Targetable Reentry Vehicles
In 2015, DOD confirmed that China’s DF–5 ICBMs have a multiple independently-targetable reentry vehicle (MIRV) capability.145
Rather than containing a single warhead per missile, a MIRVequipped missile allows for a payload of several miniaturized warheads, each of which can be targeted independently. The DF–5’s
characteristics—liquid-fueled and silo-based, with a long lead-time
required for fueling—make it less survivable and more susceptible
to adversary attack than its road-mobile counterpart, the DF–31
ICBM. Nevertheless, these elements, combined with the DF–5’s relatively large size, also provide the missile with greater ‘‘throw
weight,’’ or weight it is capable of launching to its target (currently
between 3,000 and 3,200 kilograms (6,614 and 7,055 pounds)).
China appears to have taken advantage of these characteristics of
the DF–5—a missile that can definitively reach the continental
United States—to deploy MIRVs in its strategic missile force, increasing its ability to penetrate adversary missile defenses and enhancing the credibility of its nuclear forces as a deterrent.146
Other systems in development may also be MIRV-equipped. The
DF–41, an ICBM currently in development with a reported rangeof 12,000 kilometers (7,456 miles), could also be capable of carrying
MIRVs.147 Additionally, in February, Admiral Cecil D. Haney, commander of U.S. Strategic Command, testified to the House Subcommittee on Strategic Forces that China is ‘‘[modernizing] its
strategic forces by . . . developing a follow-on mobile system capableof carrying multiple warheads.’’ 148 One U.S. media report interpreted this statement to refer to the DF–31B system reportedly indevelopment.149 U.S. and Chinese government sources have notconfirmed the program, but unofficial sources have suggested the
DF–31B could include multiple reentry vehicles.150 Finally, someanalysts have speculated that the JL–2 follow-on SLBM in development may be MIRV-capable as well.151

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Maneuverable Reentry Vehicles
China’s progress in developing maneuverable warheads suggests
it is also pursuing maneuverable reentry vehicle (MaRV) technology. Because MaRV-equipped warheads are capable of performing preplanned flight maneuvers during reentry, they are moredifficult to intercept and better able to penetrate adversary missile
defenses.152 One example of China’s progress in this area is its development of the DF–21D ASBM, which features a maneuverable
warhead.153 The ability of DF–21D sensors and warheads to survive atmospheric reentry remains uncertain, calling into question
its MaRV capability in the absence of successful tests against amoving target at sea.154 Nevertheless, the missile’s deployment
suggests the PLA finds some utility in this technology for its missile forces. Some Western analysts and media reports identify reentry maneuverability as a possible attribute of the ongoing DF–
41 and DF–26 and reported DF–31B missile programs as well.155

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Hypersonic Weapons
Three countries—the United States, China, and Russia—currently have programs underway to develop hypersonic weapons,
which can sustain flight in the Mach 5 to Mach 10 speed range(roughly 3,840 to 7,680 miles per hour) and theoretically strike any
target on earth in under one hour.* The very high speeds of theseweapons, combined with their maneuverability and ability to travel
at lower, radar-evading altitudes, would make them far less vulnerable than existing missiles to current missile defenses.156
Due to limited public information, high-confidence assessments ofChina’s hypersonic weapons program are not possible; however, itappears China’s hypersonic weapons program is in its developmental stages and is progressing rapidly.157 China’s research into
hypersonic weapons has likely focused on two types of propulsion:(1) a boost-glide weapon, which like a ballistic missile is launchedfrom a large rocket on a relatively flat trajectory that either neverleaves the atmosphere or reenters it quickly, before being released
and gliding unpowered to its target; or (2) a ‘‘supersonic combustion ramjet’’ or scramjet engine, efficient at hypersonic speeds,
which could also be activated after release from a rocket or evenlaunched by aircraft.158 According to one unconfirmed media
source, China reportedly conducted a fifth glide vehicle test in August 2015, potentially its second in 2015 following three tests in2014.159 Mr. Stokes estimates China may be able to field ahypersonic glide vehicle by 2020 and a scramjet-propelled cruise vehicle with global range before 2025.160
Scramjets would theoretically be slower than boost-glide vehicles,
operate at shorter ranges, and present a significant engineering
challenge, but would also be cheaper, more maneuverable, and, because of their non-ballistic flight profiles, potentially less prone to* While some ballistic missiles travel in this speed range already, they do not sustain thisspeed for the duration that these new weapons would. In general, a ‘‘hypersonic weapon’’ isviewed as one able to fly at hypersonic speeds for ‘‘significant distances’’ and a period of timemeasured in minutes, meaning it reaches its target—anywhere on Earth—in under one hour.
Harry Kazianis, ‘‘The Real Military Game-Changer: Hypersonic Weapons 101,’’ Lowy Institutefor International Policy Interpreter Blog, March 14, 2014; Robert Farley, ‘‘A Mach 5 Arms Race?
Welcome to Hypersonic Weapons 101,’’ National Interest, December 31, 2014.

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miscalculations arising from a conventional missile launch that
could be interpreted as a nuclear strike.161
Boost-glide vehicles are part of the same family of technologies
as the terminally guided reentry vehicles on China’s existing ballistic missiles. Therefore, given the relatively short ranges of China’s known glider tests—such as a test in 2014 with an apparent
range of 1,750 kilometers (1,087 miles), roughly the same range as
the DF–21D ASBM—Dr. Acton assessed that ‘‘it is possible, though
by no means certain, that the glider is essentially a ‘souped-up’
version of an existing type of terminally guided re-entry vehicle’’ atpresent.162 China likely faces significant engineering challenges indeveloping gliders with longer ranges of a few thousand kilometers
or more; another challenge will be to ensure the reception of navigation data given the high speeds of the gliders.163 While a 500–
2,000 kilometer (311–1,243 mile) total range for the glider in 2020
would be ‘‘ambitious but not unreasonable,’’ the existing glider
model likely could not simply be placed on an ICBM to achieveintercontinental range.164
Whether China arms its hypersonic weapons with a nuclear orconventional payload will hint at how China intends to incorporate
hypersonic weapons into PLA planning and operations.
• A nuclear payload could indicate the program is based on China’s efforts to assure retaliatory strike capabilities against adversary missile defenses. The National Air and Space Intelligence Center assesses the glide vehicle is associated with
China’s nuclear program, and 2015 saw no developments thatwould alter this assessment.165• A conventional payload, in conjunction with an intercontinental range, could indicate a growing role for very long-range
conventional weapons in PLA doctrine, according to Dr.
Acton.166 Hypersonic weapons are more effective at penetrating area missile defenses, such as those protecting the U.S.
homeland, than are regional point defenses,* suggesting thatshorter-range hypersonic weapons would likely not alter the regional balance of power in the Western Pacific.167

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• Alternatively, China may intend its hypersonic program forboth nuclear and conventional purposes, or may simply be following the United States in pushing the technological frontier
and is not yet certain which it will pursue.168* James Acton explained the distinction between area and regional defenses in testimony to
the Commission as follows: ‘‘In broad terms, defenses can be divided into area defenses, which
are capable of protecting large swathes of territory, and point defenses, which are capable ofprotecting particular targets or small clusters of targets. The Ground-Based Mid-Course Defense
system deployed in Alaska and California to protect the United States against a North Korean
ICBM by intercepting warheads as they pass through outer space is an example of an area defense. Patriot missiles, which are designed to intercept short-range missiles in their terminal
phase, are examples of point defenses.’’ U.S.-China Economic and Security Review Commission,
Hearing on China’s Offensive Missile Forces, written testimony of James Acton, April 1, 2015.

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China’s Developing Missile Defense Capabilities
China ramped up its ballistic missile defense development efforts following the United States’ withdrawal from the Anti-Ballistic Missile Treaty in 2002, culminating in several ballistic missile defense technology tests.* 169 China’s efforts in this area are
not entirely new. China began a ballistic missile defense research program soon after developing nuclear weapons in
1964,170 and maintained this research even after the UnitedStates and Soviet Union signed the treaty in 1972, despite China’s consistent rhetoric condemning ballistic missile defense systems during this time.171 Even after Deng Xiaoping reportedly
canceled the program in 1983 due to technical feasibility concerns, Chinese writings indicate this research continued.172 During the past decade, Beijing’s rhetoric aside, Chinese research
has increasingly included efforts to develop China’s own ballistic
missile defense systems in addition to existing efforts to develop
countermeasures to adversaries’ systems.173
Based on its intensifying research in this area, China is rapidly developing more robust missile defense capabilities to supplement its existing array of long-range surface-to-air missiles,
which provide only a limited capability against ballistic missiles.174 China has continued working to develop a kinetic energy
intercept capability for intercepts of ballistic missiles and otheraerospace vehicles at exo-atmospheric altitudes. For intercepts
within the upper atmosphere, China is developing a groundbased midcourse interceptor, conducting two successful tests in2010 and 2013.† China faces several remaining technical challenges in deploying an effective ballistic missile defense system:
developing the capacity to resist electronic attack, developing theability to respond to multiple warheads, and fielding a spacebased early warning system.175

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Reflecting on the United States’ experience with developing
the Ground-based Midcourse Defense System, Frank Rose, Assistant Secretary of State for Arms Control, Verification andCompliance, stated that the State Department expects a comparable system in development in China to ‘‘provide at most alimited defense of the Chinese homeland, which would notcounter the U.S. strategic deterrent and therefore would not undermine strategic stability.’’ 176* The United States announced its withdrawal from the Anti-Ballistic Missile Treaty on December 13, 2001, based on President Bush’s assessment that the Treaty hindered the UnitedStates’ ability to develop ways to defend against future terrorist or rogue-state missile attacks.
In the Bush Administration’s view the emergence of these new threats, in light of a more cooperative strategic relationship with Russia, necessitated the deployment of territorial defense systems specifically prohibited under the Treaty. George W. Bush, ‘‘Remarks by the President on
National Missile Defense, ABM Withdrawal’’ (Rose Garden, Washington, DC, December 13,2001); Office of the White House Press Secretary, ‘‘Announcement of Withdrawal from the ABM
Treaty,’’ December 13, 2001.
† China’s government publicly described another test conducted on July 23, 2014, as a ‘‘landbased missile interception test,’’ but the United States government assesses with ‘‘high confidence’’ that this was instead an anti-satellite missile test. Frank A. Rose, ‘‘Ballistic Missile Defense and Strategic Stability in East Asia’’ (Federation of American Scientists workshop, Washington, DC, February 20, 2015).

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China’s C4ISR and Targeting Challenge
ISR: Understanding the Battlespace and Obtaining Targeting Data for Precision Strike
To realize the full potential of its long-range precision strike capabilities, China requires detailed awareness of a potential battlespace as well as the ability to obtain targeting data at increasingly
far distances from the Chinese mainland. As Mr. Fuell of the National Air and Space Intelligence Center stated, ‘‘One key dependency inherent to missile warfare is targeting: effective and timely
target selection is an absolutely critical part of the kill chain. We
have little insight into this key phase, but it is quite possible that,as with overall joint integration, it may represent an overall structural weakness, and training at the unit level may not help addressit.’’ 177
The PLA’s primary strategic preoccupation, Taiwan, consists
mostly of stationary targets located across the Taiwan Strait. However, as China has sought to project power further from its shores
and developed missiles to engage targets at longer ranges, maritime C4ISR—understanding the activity taking place in waters andairspace off China’s coast and integrating this data into actionable
information for distribution to operational forces—has become anincreasingly critical component of PLA operations. The U.S. Officeof Naval Intelligence states that even building a detailed air andmaritime picture of China’s 875,000-square-nautical-mile ‘‘nearseas’’ is a daunting task; the addition of the Philippine Sea, a key
interdiction area in a Taiwan or South China Sea conflict, adds 1.5
million square nautical miles to the vast area China would need tomonitor.178 Moreover, a wide range of military, law enforcement,
and commercial shipping, fishing, and oil and natural gas vessels
operate in these waters, further complicating target discrimination
in a potential conflict.
It remains unclear whether China can obtain targeting data andpass it to missile launch units in a timely manner, particularly fortargets beyond the first island chain, according to DOD.179 However, China is engaged in an effort to improve its overall C4ISR capability.180 At present, China builds a maritime C4ISR picturefrom a variety of sources:

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Tactical reporting. China’s ability to track activities along its
coast originates from the PLA Navy’s initial operational emphasison coastal defense.181 As the PLA Navy has operated farther from
Chinese shores, China’s maritime law enforcement agencies havetaken up greater littoral-area responsibilities, mostly supplanting
the role of the navy in this area. Both naval and law enforcement
assets at sea directly report information to contribute to China’s
maritime C4ISR. However, this data is limited to the operatingareas and sensor ranges of these ships and aircraft.182
Ground-based radars. In addition to ground-based coastal radars
to monitor coastal areas, China is relying on more advanced
ground-based sensors to enable over-the-horizon surveillance, a necessity for the successful targeting of long-range missiles. China operates ground-based surface-wave and sky-wave radars, which can

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track targets at distances much farther than conventional radars
can—perhaps 1,600 nautical miles (1,841 miles) or more.183
Airborne ISR. A variety of airborne platforms contribute to China’s ability to discern air and maritime activity in its near seas andbeyond. A growing fleet of fixed-wing maritime patrol, airborne
early warning, and surveillance aircraft currently serve as the coreof China’s airborne ISR capability, but other airborne assets arealso poised to play a key role. Ongoing naval shipbuilding efforts
indicate prioritization of surface combatants capable of embarking
helicopters, a feature that will augment China’s over-the-horizon
targeting capability.184 Additionally, the PLA Navy is incorporating
unmanned aerial vehicles into its fleet for maritime ISR missions.
Unmanned aerial vehicles have a long loiter time and can provide
persistent surveillance beyond the ability of manned assets. Unmanned aerial vehicle sensors could support conventional SRBM
missions, and possibly MRBM, ASBM, and battle damage assessment missions as well.185 Furthermore, some developmental unmanned aerial vehicles, such as the Yilong, Sky Saber, and Lijian
platforms, will likely have the ability to integrate strike weapons,
although no testing or employment of such systems has yet been
revealed.186
Space-based ISR. A maturing space-based ISR infrastructure will
provide higher resolution for the PLA’s tracking of air and naval
activity out to the second island chain, as well as improve its ability to guide missiles to moving targets at sea. For more information
on China’s ISR satellites, see Chapter 2, Section 2, ‘‘China’s Space
and Counterspace Programs.’’ There are also indications the Second
Artillery is interested in using the near space region—the area between the atmosphere and space at 20–100 kilometers (12–62
miles) in altitude—for surveillance, communications relay, electronic warfare, and precision strike through the use of near spacevehicles.187
Data Fusion and Command and Control
Both data fusion and command and control are critical for thetimely passing of up- and down-echelon information—such as targeting data, battle damage assessments, and launch orders—that
inform missile operations.
In addition to collecting accurate targeting data, the PLA has the
additional challenge of fusing the data and disseminating it to Second Artillery missile launch units. Although an ideal scenario
would fuse data from all of China’s ISR sensors into a single display and disseminate it to all PLA units, this scenario requires far
more coordination and standardization across multiple units thanexists at this time.188
Command and control ensures that required information ispassed in a timely manner to the appropriate units, in order to lay
the groundwork for operational efforts such as missile launches. As
the PLA continues to strive toward joint operations, the difficultyof managing targeting information across multiple PLA services
and branches will grow significantly. Additionally, the relatively recent involvement of PLA services other than the Second Artillery
in missile employment will increase the complexity of the command

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and control of such missile launches. Nuclear weapons in particularhave a tightly centralized release authority running from China’s
Central Military Commission, of which Xi Jinping is the chairman,
directly to the Second Artillery. The pending deployment of submarine-launched and possible air-launched nuclear-armed missiles
introduces the PLA Navy and the PLA Air Force into nuclear
chains of command, potentially lengthening and complicating thedecision-making and launch process in a nuclear scenario.189
The limited public information about Beijing’s nuclear commandand control could make it more likely that an adversary’s actions
in a crisis could, in Beijing’s view, cross the nuclear threshold, even
if this was not the adversary’s intent. China so highly values its
nuclear command and control that the destruction or degradationof this function has been raised by outside analysts as a possible
trigger for its use of nuclear weapons.190 In an interview with Commission staff, Professor Twomey stated, ‘‘It assumes a lot to expect
the Chinese interpret an attack on their command and control systems in an intense crisis as solely a conventional attack. A significant loss of such capabilities might appear to Beijing to presage an
escalation across the strategic threshold [into the nuclear realm],
whatever U.S. intentions in that regard might have been.’’ 191
Second Artillery Training Developments
In conjunction with technical developments to China’s offensive
missile forces, the Second Artillery has focused on improving training to employ its relatively new capabilities to the fullest extent.
In line with PLA reforms under Xi Jinping that have emphasizedtraining under ‘‘realistic combat scenarios,’’ the Second Artillery in
the past three years has sought to ensure its training conditions
mirror those it would face in combat. As emphasized in official PLA
media, the Second Artillery has sought to shift training away from
scripted, predictable exercises by including features such as: uniquegeographic environments and extreme weather conditions, yearround training, long-range mobility operations, precision-strike
practice using live fire, deviation from prepared plans, ‘‘complex
electromagnetic environments,’’ and greater usage of maneuvers
and camouflage to increase survivability.192
Additionally, based on the PLA’s broader effort to master integrated joint operations, the Second Artillery has expanded training
in support of or in conjunction with the PLA Army, Navy, and Air
Force.193 Second Artillery units were involved in each of China’s
three large-scale military-wide exercises held in 2014: Stride, Joint
Action, and Firepower. DOD described these exercises, which involved multiple evolutions across all of China’s seven military regions, as a ‘‘significant milestone in the PLA’s long-term goal ofdeveloping into a modern, professional, and capable militaryforce.’’ 194 A July 2015 PLA Navy exercise also shed light on therole of the Second Artillery in a joint environment. Held in theSouth China Sea, the exercise reportedly involved over 100 naval
vessels and several Second Artillery launch battalions, in addition
to several PLA aircraft and information warfare forces. Official
Chinese press indicated the Second Artillery likely coordinatedwith the PLA Navy to suppress key targets on land as well as shiptargets at sea. Media reports also highlighted the PLA Navy’s suc-

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cess in antiship missile interception during the exercise.195 Finally,of note, press on the exercise indicates training was conducted in‘‘transporting and deploying whole units of onshore missile forces,’’suggesting the significance of logistics to the Second Artillery’s operations.196 As the Second Artillery has taken part in more multiservice exercises, it has also emphasized cross-region mobility andlogistics, necessary skills for the coordinated and timely movementof multiple PLA elements across China.197
Finally, the Second Artillery appears to be emphasizing the frequency of its training exercises, according to PLA media sources.198
As the PLA seeks to shift from a training cycle based on traditional
annual conscription schedules to a more continuous training cycle
emphasizing year-round readiness, the Second Artillery and otherservices will follow suit. The increasing professionalization of PLA
personnel and a growing corps of non-commissioned officers will
also contribute to the ability of the Second Artillery to maintainyear-round readiness.199

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Implications for the United States
The increasing numbers, diversity, survivability, lethality, andpenetrability of China’s offensive missile forces deeply and negatively affect U.S. security interests, particularly those related to its
military force structure and planning, regional alliance commitments, treaty obligations, and approach to deescalating potential
crises in the U.S.-China relationship. China’s growing offensive
missile capabilities are clearly intended to support its nuclear
threat posture and aggressive assertions of sovereignty in the Eastand South China seas, which the Commission documents in othersections of this Report. Unless the United States understands China’s evolving missile doctrine and growing capabilities and responds vigorously, it runs a growing risk of being unable to deter
deliberate aggression and reduce the risk of miscalculations that
could lead to an escalating armed conflict.
U.S. Military Force Structure and Planning
China’s offensive missile force can threaten increasingly large
portions of the Western Pacific—where the U.S. military has operated uncontested since the end of the Cold War—requiring significant alterations to U.S. military planning assumptions. China is
rapidly introducing to its ballistic and cruise missile inventories
weapons capable of hitting targets out to the first and second island chains, covering Guam as well the territory of U.S. allies.
Some of these weapons are able to target a widening diversity ofplatforms, including aircraft carriers. These developments strengthen China’s ability to carry out its antiaccess/area denial strategy inthe event of a conflict and complicate Washington’s efforts to promote and advance U.S. goals and objectives in Asia.
The United States faces both financial and strategic costs in defending against these new capabilities. Because it is so expensive
and technically challenging to defend against relatively low-priced
and high-impact missiles, a spending competition between additional Chinese offensive missiles and U.S. defensive systems would
not be favorable for the United States.200 To address this problem,
the United States is currently working to develop innovative and

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lower-cost-per-shot methods to defend against the missiles of potential adversaries, including China.201 Some U.S. defense analysts
have also called for the United States to reconsider its current force
structure’s emphasis on short-range aircraft, and instead emphasize the procurement of long-range stealth bombers that would
allow the United States to operate beyond the reach of advanced
Chinese missiles.202 Additionally, due to China’s heavy and growing reliance on C4ISR for the targeting and guidance of its missiles, solutions to disrupt networks that would support Chinese
missile and aerospace forces could be a realistic disabling option for
the United States in a conflict. Rear Admiral Jesse Wilson (U.S.
Navy), director of the Joint Integrated Air and Missile Defense Organization, stated in 2015, ‘‘We need to look left of launch . . . if I
can disrupt other [parts] of the adversary’s kill chain, I don’t haveto fire an SM–3, I don’t have to fire a Patriot, I don’t have to firea [Terminal High-Altitude Area Defense missile],’’ and, because of
the finite and limited number of U.S. interceptors, ‘‘I don’t have thenumbers to do it anyway.’’ 203 The United States, however, is similarly reliant on its sensors and communications networks for its
military operations, particularly those far from home—a potential
drawback to this approach. As Mr. Haddick testified, ‘‘In a potential conflict in East Asia, such an exchange of blows against bothsides’ ISR and command networks could favor the Chinese ‘hometeam’ which could have an easier task of restoring these functions
than would U.S. expeditionary forces.’’ 204
U.S. defense strategy, policy, planning, and budgeting must takethese stark realities into account. Specifically, U.S. planners mustevaluate the adequacy of U.S. national and theater missile defense
policies and capabilities, as well as U.S. offensive strike policies
and capabilities, to deter and deny the threat that emanates from
China’s evolving missile competencies.

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Alliance Management
The PLA’s growing inventory of theater-range missiles—both
conventional and nuclear—affect the strategic calculations of U.S.
allies in the region as they consider how to adjust their military
strategies to account for a rising China. According to Professor
Yoshihara, ‘‘For some time to come, the missile will be China’s bestanswer to U.S. forward presence, power projection, and security
commitments to treaty allies and friends.’’ 205 China’s increasing
ability to use its missile arsenal to threaten U.S. partners and allies supports its regional ambitions, improves its coercive ability,
weakens the value of deterrence efforts targeted against it, andwidens the range of possibilities that might draw the United States
into a conflict. The nascent theater nuclear missile capability
China appears to be developing could introduce uncertainty to U.S.
extended deterrence in Asia, as U.S. allies falling under the U.S.
nuclear umbrella likely will look to the United States for reassurance regarding the seriousness of its treaty commitments.* 206* For more information on the impact of China’s growing influence and military modernization
on U.S. alliances and security partnerships in Asia, see Chapter 3, Section 1, ‘‘China and Asia’s
Evolving Security Architecture,’’ of the Commission’s 2014 Annual Report to Congress.

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U.S. Treaty Obligations

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China’s missile force modernization has contributed to a U.S. policy debate regarding U.S. obligations as a signatory to the Intermediate Range Nuclear Forces (INF) Treaty.* The U.S. State Department confirmed in 2014 and 2015 that Russia had violated its
treaty obligations by testing a prohibited missile.207 Meanwhile
China, uninhibited by treaty obligations, has engaged in a relatively low-cost build-up of land-based theater-range missiles, giving it the ability to target a large portion of the Pacific theater.
These developments have raised questions about the modern-day
relevance of the INF Treaty for the United States.
Although most analysts seem to agree that completely abrogating
the INF Treaty would be an overreach,208 given its continuing benefits for the United States,† some have argued that modifications
should be made. Evan Braden Montgomery, senior fellow at theCenter for Strategic and Budgetary Assessments, has suggested altering the treaty so that ground-based theater-range missiles might
be permitted only in Asia. In testimony to the Commission, Dr.
Montgomery offered three benefits of this ‘‘Asia option’’: (1) it could
enable the U.S. deployment of ground-based missiles in the Western Pacific, enhancing deterrence and improving crisis stability as
China’s military becomes more powerful; (2) it could provide boththe United States and Russia bargaining leverage against China,
which currently has no incentive to accept any limits on its offensive missile forces; and (3) it could drive a wedge between China
and Russia, since Russian missile developments under such an‘‘Asia option’’ would very likely be aimed at China.209 Other analysts, skeptical that the United States would benefit from the opportunity to re-introduce ground-based theater-range missiles andconcerned that such a development would destabilize rather thanstabilize the strategic balance for the United States and its allies,
advocate for the maintenance of the status quo of the INF Treaty.210 As China continues to expand its intermediate-range missile
capabilities, and Russia determines whether to proceed in devel* Signed by the United States and Soviet Union in 1987, the INF Treaty required ‘‘destructionof both parties’ ground-launched ballistic and cruise missiles with ranges between 500 and 5,500
kilometers (310 and 3,418 miles), along with their launchers and associated support structuresand support equipment,’’ altogether eliminating 846 U.S. and 1846 Soviet missiles. Although titled a ‘‘Nuclear Forces’’ Treaty, INF’s prohibition of conventional systems is more relevant tothe current discussion—China’s buildup of conventional intermediate-range ballistic and cruise
missiles has been a driving force behind this debate in recent years. Amy F. Woolf, ‘‘RussianCompliance with the Intermediate Range Forces (INF) Treaty,’’ Congressional Research Service,
June 2, 2015, 8; U.S. Department of State, Treaty Between The United States Of America andThe Union Of Soviet Socialist Republics on the Elimination of Their Intermediate-Range andShorter-Range Missiles (INF Treaty), December 8, 1987.
† The treaty is regarded as both a keystone of U.S.-Russia security relations and an arms control success, having eliminated an entire class of weapons between the United States and Russia; this limited each nation’s nuclear missile arsenal to its strategic deterrent of ICBMs andremoved the need to compete in deploying INF-accountable systems. Moreover, the treaty is essential to NATO’s deterrence posture, preventing Russia, at least in legal terms, from deploying
inexpensive short- and medium-range ballistic and cruise missiles on its European border for
purposes of political coercion, as China has done on the Taiwan Strait. Evan Braden Montgomery, ‘‘China’s Missile Forces Are Growing: Is It Time to Modify the INF Treaty?’’ National
Interest, July 2, 2014; Steven Pifer, ‘‘Don’t Scrap the INF Treaty,’’ National Interest, June 9,2014; Elbridge Colby, ‘‘The Real Trouble with Russia: Moscow Might Have Violated the Intermediate-Range Nuclear Forces Treaty—Here’s How to Respond,’’ Foreign Affairs, April 7, 2014;
and Michael R. Gordon, ‘‘U.S. Says Russia Tested Missile, Despite Treaty,’’ New York Times,
January 29, 2014.

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oping weapons in violation of the treaty, this issue will likely continue to grow in importance.
Nuclear Strategy and Crisis Management
China’s development of long-range precision strike capabilities,
coupled with its assertion of sovereignty in its near seas, has resulted in a strategic environment susceptible to crisis instability.
According to Avery Goldstein, professor and director for the Centerfor the Study of Contemporary China at the University of Pennsylvania:
In a crisis, China or the United States might believe it valued what was at stake more than the other and would
therefore be willing to tolerate a higher level of risk. But because using conventional forces would only be the first stepin an unpredictable process subject to misperception,
missteps, and miscalculation, there is no guarantee thatbrinksmanship would end before it led to unanticipated nuclear catastrophe. . . . China, moreover, apparently believes
that nuclear deterrence opens the door to the safe use of
conventional force. Since both countries would fear a potential nuclear exchange, the Chinese seem to think that neither they nor the Americans would allow a military conflictto escalate too far.211
Since the end of the Cold War, the United States has not been
faced with an adversary capable of seriously contesting U.S. dominance of a battlespace, and has had little imperative to consider
how nuclear escalation could factor into a potential conflict.212 As
multiple witnesses testified at the Commission’s April hearing, theUnited States should consider carefully how to constrain and bringan end to hostilities in a limited conflict under the specter of nuclear escalation.213 As China continues to modernize its conventional and nuclear missile forces, these questions will only become
more pressing.

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Table 2:Ranges of China’s Nuclear Ballistic Missiles (Selected) *ChineseDesignatorand Missile TypeNATO
Designator

Deployment
Mode

Approximate
Maximum Rangein kilometers(miles)

DF–3A IRBM

CSS–2

Transportable

3,000 (1,864)

DF–4 ICBM

CSS–3

Transportable

5,500 (3,418)* The JL–1 SLBM was omitted from this chart because the Xia-class SSBN, the only Chinese
submarine on which the JL–1 has been deployed, is likely currently incapable of conducting
operational missions. DOD noted in 2010 that the Xia’s operational status was in question, andin 2015 omitted any mention of the Xia in discussing China’s SSBNs in its ‘‘Annual Report toCongress on Military and Security Developments Involving the People’s Republic of China.’’ U.S.
Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 9; U.S. Office of Naval Intelligence, The
PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 16; Kyle Mizokami,‘‘Asia’s Submarine Race,’’ US Naval Institute News, November 13, 2013; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2010, April 2010, 34; Bud C. Cole, The Great Wall at Sea, Naval Institute Press,
2010, 108; and Richard Halloran, ‘‘Is There a Plan Behind China’s Subs?’’ Taipei Times, May
2, 2007.

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Table 2:Ranges of China’s Nuclear Ballistic Missiles (Selected)—Continued

ChineseDesignatorand Missile TypeNATO
Designator

Deployment
Mode

Approximate
Maximum Rangein kilometers(miles)

DF–5A ICBM

CSS–4 Mod 2

Silo

13,000 (8,078)

DF–5B ICBM

CSS–4 Mod 3

Silo

13,000 (8,078)

DF–21 MRBM

CSS–5 Mod 1

Road Mobile

1,750 (1,087)

DF–21A MRBM

CSS–5 Mod 2

Road Mobile

1,750 (1,087)

DF–26 IRBM

Unknown

Road Mobile

3,000–4,000(1,800–2,500)

DF–31 ICBM

CSS–10 Mod 1

Road Mobile

7,000–7,200(4,349–4,474)

DF–31A ICBM

CSS–10 Mod 2

Road Mobile

11,000–12,000(6,834–7,455)

JL–2 SLBMCSS–NX–14

SSBN

7,000–7,400(4,349–4,597)

Note: China likely is in the process of phasing out the DF–3A IRBM.
Source: Commission judgments and estimates based on analysis by nongovernmental experts
on China’s military, consecutive versions of the annual DOD Report to Congress on Military
and Security Developments Involving the People’s Republic of China, the 2013 National Air andSpace Intelligence Center report on cruise and ballistic missiles, the 2015 U.S. Office of NavalIntelligence report on the PLA Navy, and U.S. and Asian media reporting.

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Table 3:Ranges of China’s Conventional Ballistic Missiles (Selected)

ChineseDesignatorand Missile TypeNATO
Designator

Deployment
Mode

Approximate
Maximum Rangein kilometers(miles)

DF–11 SRBM

CSS–7 Mod 1

Road Mobile

300 (186)

DF–11A SRBM

CSS–7 Mod 2

Road Mobile

600 (373)

DF–15 SRBM

CSS–6 Mod 1

Road Mobile

600 (373)

DF–15A SRBM

CSS–6 Mod 2

Road Mobile

850 (528)

DF–15B SRBM

CSS–6 Mod 3

Road Mobile

725 (450)

DF–16 SRBM

CSS–11 Mod 1

Road Mobile

1,000 (621)

DF–16 MRBM

Unknown

Road Mobile

1,200 (746)DF–21C MRBM

CSS–5 Mod 3

Road Mobile

1,750 (1,087)

DF–21D ASBM

CSS–5 Mod 5

Road Mobile

1,500 (932)

DF–26 IRBM/ASBM

Unknown

Road Mobile

3,000–4,000(1,800–2,500)

Source: Commission judgments and estimates based on analysis by nongovernmental experts
on China’s military, consecutive versions of the annual DOD Report to Congress on Military
and Security Developments Involving the People’s Republic of China, the 2013 National Air andSpace Intelligence Center report on cruise and ballistic missiles, the 2015 U.S. Office of NavalIntelligence report on the PLA Navy, and U.S. and Asian media reporting.

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Table 4:

Ranges of China’s Cruise Missiles (Selected)

ChineseDesignatorandMissile TypeNATO
or Export
Designators

LaunchPlatform

Approximate
Maximum Rangein kilometers
or nautical miles(nm) (miles)

KD–88 LACM

UnknownAir

100 kilometers (62)

YJ–63 LACM

C603

Air

200 kilometers (124)

CJ–10/DH–10
LACM

Unknown

Road-mobile

1,500–2,000 kilometers(932–1,242)

CJ–20 LACM

UnknownAir

1,500 kilometers (932)

YJ–83 ASCM
FamilyCSS–N–8, C802,
C802A

Ship, ground,and air

100 nm (115)

YJ–62 ASCM
FamilyC602

Ship and ground

150 nm (172)YJ–8 ASCM
FamilyCSS–N–4, C801

Ship, submarine,
and air

22 nm (26)

YJ–8A ASCM
FamilyC801A

Ship and air

65 nm[None; RussianExport to China]

SS–N–27B
ASCM

Submarine

120 nm (138)[None; RussianExport to China]

SS–N–22 ASCM

Ship

65–130 nm (75–150),
depending on variant

YJ–12 ASCM

Unknown

Air

215 nm (250)YJ–18 ASCM

CH–SS–NX–13

Submarine, ship

290 nm (334)

Source: Commission judgments and estimates based on analysis by nongovernmental experts
on China’s military, consecutive versions of the annual DOD Report to Congress on Military
and Security Developments Involving the People’s Republic of China, the 2013 National Air andSpace Intelligence Center report on cruise and ballistic missiles, the 2015 U.S. Office of NavalIntelligence report on the PLA Navy, and U.S. and Asian media reporting.

Conclusions

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• The chief roles of China’s nuclear arsenal are to deter an adversary from undertaking a nuclear first strike and to reduce thepressure on China to yield to an adversary’s demands, or desist
from aggression, under threat of nuclear attack. China’s belief
that its nuclear arsenal would deter an adversary from taking a
conventional fight into the nuclear realm could encourage it to be
more adventurous in its risk-taking during a crisis because it
may not sufficiently fear the prospect of nuclear escalation.
• China is secretive about the details of its official nuclear policy,
leading to uncertainty regarding key principles of its nuclear
weapons doctrine. Key elements of China’s nuclear policy, suchas its ‘‘no-first-use’’ pledge and presumptive de-alerting policy,
may be under reconsideration but are unlikely to change officially.

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• China appears to be pursuing a theater nuclear capability in addition to the strategic nuclear capability it has maintained since
it became a nuclear state in the 1960s. In a conflict, China’s maturing theater nuclear capability could provide it with the means
to flexibly employ nuclear weapons to deescalate or otherwise
shape the direction of conflict.
• China is pursuing a credible second-strike capability with an emphasis on survivability against an adversary’s first strike. By diversifying its nuclear strike capabilities away from solely landbased systems in silos, China seeks to ensure its ability to absorb
a nuclear strike and retaliate in kind. Examples of this diversification include road-mobile intercontinental ballistic missiles, submarine-launched ballistic missiles, and potentially airlaunched land-attack cruise missiles.
• China’s initial development of its conventional missile forces focused heavily on expanding its short-range ballistic missile force
for Taiwan contingencies. In the past decade, China’s development of longer-range missiles, pursuit of advanced missile technologies, and diversification of its launch platforms have enabled
it to hold at risk a wider range of targets farther from its shores.
• China is developing cruise missiles that are increasingly difficult
for the U.S. military to detect and defend against. The PLA has
fielded its first ground-launched land-attack cruise missile, andalso appears to be developing air-, ship-, and submarinelaunched cruise missiles with land-attack and antiship missions.
China is in the midst of improving the qualitative aspects of its
cruise missile technologies; in the meantime, the quantitative
strength of its cruise missiles poses a formidable challenge to existing U.S. Navy defenses.
• China recognizes that adversary missile defenses—particularly
the U.S. ballistic missile defense architecture—pose a major challenge to the success of its missile operations. As a result, China
is developing measures to improve its forces’ ability to penetrate
opposing missile defenses, such as multiple independently-targetable reentry vehicles, maneuverable reentry vehicles, and hypersonic weapons.
• To realize the full potential of its long-range precision strike capabilities, China requires detailed awareness of a potential
battlespace as well as the ability to obtain targeting data at increasingly far distances from the Chinese mainland. Effective
and timely target selection and information coordination is anarea the PLA continues to seek to improve.

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 3
1. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Mark Stokes, April 1, 2015; and Mark
A. Stokes, ‘‘The Chinese Joint Aerospace Campaign: Strategy, Doctrine, and ForceModernization,’’ in James Mulvenon and David Finkelstein, eds., China’s Revolution
in Doctrinal Affairs: Emerging Trends in the Operational Art of the Chinese People’s
Liberation Army, CNA Corporation, 2005, 243.
2. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Toshi Yoshihara, April 1, 2015.
3. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Mark Stokes, April 1, 2015.
4. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Mark Stokes, April 1, 2015.
5. Michael Chase (Senior Political Scientist, RAND Corporation), interview
with Commission staff, May 12, 2015; and James Mulvenon, ‘‘The King Is Dead!
Long Live the King! The CMC Leadership Transition from Jiang to Hu,’’ China
Leadership Monitor 13 (Winter 2005): 6.
6. Andrew S. Erickson, Michael S. Chase, ‘‘China’s Strategic Rocket Forces: Upgrading Hardware and Software (Part 2 of 2),’’ China Brief, July 17, 2014; and Andrew S. Erickson, Michael S. Chase, ‘‘China’s Strategic Rocket Force: Sharpening
the Sword (Part 1 of 2),’’ China Brief, July 3, 2014.
7. Ron Christman, ‘‘Conventional Missions for China’s Second Artillery Corps,’’Comparative Strategy 30 (2011), 207; and Evan Medeiros, ‘‘Minding the Gap’’: Assessing the Trajectory of the PLA’s Second Artillery,’’ in Roy Kamphausen and Andrew Scobell, Right Sizing the People’s Liberation Army: Exploring the Contours ofChina’s Military, U.S. Army Strategic Studies Institute, September 2007, 166–167.
8. Andrew S. Erickson, ‘‘Showtime: China Reveals Two ‘Carrier-Killer’ Missiles,’’ National Interest, September 3, 2015.
9. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 283.
10. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Mark Stokes, April 1, 2015; and Mark
Stokes, ‘‘The Second Artillery Force and the Future of Long-Range Precision Strike,’’in Ashley Tellis and Travis Tanner, eds., Strategic Asia 2012–2013: China’s Military
Challenge, National Bureau of Asian Research, October 2012, 143–146.
11. China’s Ministry of Foreign Affairs, Foreign Ministry Spokesperson Hua
Chunying’s Regular Press Conference, February 17, 2014. Staff translation.
12. U.S. Senate Armed Services Subcommittee on Strategic Forces, Hearing on
Regional Nuclear Dynamics, written testimony of Ashley Tellis, February 25, 2015;
and Michael Glosny, Christopher Twomey, and Ryan Jacobs, ‘‘U.S.-China Strategic
Dialogue, Phase VIII Report,’’ U.S. Naval Postgraduate School/Center on Contemporary Conflict/Defense Threat Reduction Agency, August 2014, 6–8.
13. U.S.-China Economic and Security Review Commission, Hearing on Developments in China’s Cyber and Nuclear Capabilities, written testimony of Phillip C.
Saunders, March 26, 2012.
14. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Christopher Yeaw, April 1, 2015; andM. Taylor Fravel and Evan S. Medeiros, ‘‘China’s Search for Assured Retaliation:
The Evolution of Chinese Nuclear Strategy and Force Structure,’’ International Security 35:2 (Fall 2010): 57–66.
15. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Christopher Twomey, April 1, 2015;
Michael Chase, ‘‘China’s Transition to a More Credible Nuclear Deterrent: Implications and Challenges for the United States,’’ Asia Policy 16 (July 2013): 77–85; andM. Taylor Fravel and Evan S. Medeiros, ‘‘China’s Search for Assured Retaliation:
The Evolution of Chinese Nuclear Strategy and Force Structure,’’ International Security 35:2 (Fall 2010): 58.
16. M. Taylor Fravel and Evan S. Medeiros, ‘‘China’s Search for Assured Retaliation: The Evolution of Chinese Nuclear Strategy and Force Structure,’’ International Security 35:2 (Fall 2010): 57–66.
17. Michael Chase, ‘‘China’s Transition to a More Credible Nuclear Deterrent:
Implications and Challenges for the United States,’’ Asia Policy 16 (July 2013): 79–
80; and Andrew S. Erickson, Michael S. Chase, ‘‘China’s Strategic Rocket Force: Upgrading Hardware and Software (Part 2 of 2),’’ China Brief 14:2 (July 17, 2014).
18. Avery Goldstein (Professor and Director of the Center for the Study of Contemporary China, University of Pennsylvania), interview with Commission staff,
June 8, 2015; and Avery Goldstein, ‘‘First Things First: The Pressing Danger of Cri-

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sis Instability in U.S. China Relations,’’ International Security 37:4 (Spring 2013):
65–66.
19. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of Christopher Yeaw, April 1, 2015.
20. Christopher Yeaw, (Director, Center for Assurance, Deterrence, Escalation,
and Nonproliferation Science & Education), interview with Commission staff, June
14, 2015.
21. China’s State Council Information Office, China’s Military Strategy, May
2015.
22. Avery Goldstein (Professor and Director of the Center for the Study of Contemporary China, University of Pennsylvania), interview with Commission staff,
June 8, 2015; and Xu Weidi, ‘‘Remarks’’ (Chinese Thinking on Nuclear Weapons,
Carnegie Endowment for International Peace, Washington, DC, May 11, 2015).
23. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of James Acton, April 1, 2015; Bates
Gill, James Mulvenon, and Mark Stokes, ‘‘The Chinese Second Artillery Corps:
Transition to Credible Deterrence,’’ in James C. Mulvenon and Andrew N.D. Yang,
The People’s Liberation Army as Organization, RAND Corporation, 2002, 516; andLarry Wortzel, ‘‘China’s Nuclear Forces: Operations, Training, Doctrine, CommandControl, and Campaign Planning,’’ U.S. Army War College Strategic Studies Institute, May 2007, 14–18.
24. China’s Information Office of the State Council, The Diversified Employmentof China’s Armed Forces, April 2013.
25. Gregory Kulacki, ‘‘The Chinese Military Updates China’s Nuclear Strategy,’’
Union of Concerned Scientists, March 2015, 4, citing PLA Academy of Military
Science, Science of Military Strategy, 2013; U.S.-China Economic and Security Review Commission, Hearing on China’s Offensive Missile Forces, written testimony of
Christopher Twomey, April 1, 2015; and U.S.-China Economic and Security Review
Commission, Hearing on China’s Offensive Missile Forces, written testimony ofJames Acton, April 1, 2015.
26. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of James Acton, April 1, 2015; and Michael Chase, ‘‘China’s Transition to a More Credible Nuclear Deterrent: Implications
and Challenges for the United States,’’ Asia Policy 16 (July 2013): 85–88.
27. Yao Yunzhu, ‘‘No First Use of Nuclear Weapons,’’ China Daily, April 25, 2013.
28. Yao Yunzhu, ‘‘No First Use of Nuclear Weapons,’’ China Daily, April 25, 2013.
29. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of James Acton, April 1, 2015; Rong Yu
and Peng Guangqian, ‘‘Nuclear No-First-Use Revisited,’’ China Security 5:1 (Winter2009): 81–90; and Evan S. Medeiros, ‘‘Minding the Gap: Assessing the Trajectory of
the PLA’s Second Artillery,’’ in Roy Kamphausen and Andrew Scobell, eds., Right
Sizing the People’s Liberation Army: Exploring the Contours of China’s Military,
U.S. Army War College Strategic Studies Institute, 2007, 157–158.
30. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2014, April 2014, 28.
31. Michael Chase (Senior Political Scientist, RAND Corporation), interview with
Commission staff, May 12, 2015; Xu Weidi, Wu Riqiang, and Li Bin, ‘‘Remarks,’’(Chinese Thinking on Nuclear Weapons, Carnegie Endowment for International
Peace, Washington, DC, May 11, 2015); Christopher Twomey (Associate Professor,
U.S. Naval Postgraduate School), interview with Commission staff, May 7, 2015;
and U.S.-China Economic and Security Review Commission, Hearing on China’s Offensive Missile Forces, oral testimony of James Acton, April 1, 2015.
32. Christopher Yeaw (Director, Center for Assurance, Deterrence, Escalation,
Nonproliferation Science & Education), interview with Commission staff, May 1,
2015; U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of Christopher Twomey, April 1, 2015; andOpen Source Center: Wei Fenghe and Zhang Haiyang, ‘‘Vigorously Push Forward
the Cause of Building the Strategic Missile Force—Thoughts Derived from Studying
and Implementing Chairman Xi’s Major Strategic Thinking on Building and Development of the Second Artillery,’’ Huojianbing Bao (Strategic Rocket Forces News),
January 4, 2014. ID: CHR2014021251519724.
33. Mark Stokes, ‘‘China’s Nuclear Warhead Storage and Handling System,’’
Project 2049 Institute, March 12, 2010, 2–3, 8; and Jeffery Lewis, ‘‘China’s Nuclear
Modernization: Surprise, Restraint, and Uncertainty,’’ in Ashley J. Tellis, Abraham
M. Denmark, and Travis Tanner, eds. Asia in the Second Nuclear Age, National Bureau of Asian Research, 2013, 76–77.
34. Gregory Kulacki, ‘‘NPT Brief: Keeping Chinese Nuclear Weapons off Hair
Trigger Alert,’’ All Things Nuclear (Union of Concerned Scientists blog), May 18,

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2015; Global Zero Commission on Nuclear Risk Reduction, De-Alerting and Stabilizing the World’s Nuclear Force Postures, April 2015; and Andrew Brown andJeffrey Lewis, ‘‘Reframing the Nuclear De-alerting Debate: Toward Maximizing
Presidential Decision Time,’’ Nuclear Threat Initiative, December 11, 2013.
35. Hunter Hustus, ‘‘Keeping ICBMs ‘On Alert’ Enhances Presidential DecisionMaking,’’ War on the Rocks, July 9, 2015; and Andrew Brown and Jeffrey Lewis,‘‘Reframing the Nuclear De-alerting Debate: Toward Maximizing Presidential Decision Time,’’ Nuclear Threat Initiative, December 11, 2013.
36. China’s State Council Information Office, China’s Military Strategy, May
2015; U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of James Acton, April 1, 2015.
37. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of James Acton, April 1, 2015.
38. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Christopher Yeaw, April 1, 2015.
39. Christopher Yeaw (Director, Center for Assurance, Deterrence, Escalation,
Nonproliferation Science & Education), interview with Commission staff, May 1,
2015; U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Elbridge Colby, April 1, 2015; andAmy Woolf, ‘‘Nonstrategic Nuclear Weapons,’’ Congressional Research Service, February 23, 2015, 6–8.
40. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Elbridge Colby, April 1, 2015.
41. Christopher Yeaw (Director, Center for Assurance, Deterrence, Escalation,
Nonproliferation Science & Education), interview with Commission staff, May 1,
2015; and U.S.-China Economic and Security Review Commission, Hearing on China’s Offensive Missile Forces, written testimony of Christopher Yeaw, April 1, 2015.
42. Hans M. Kristensen and Robert S. Norris, ‘‘Chinese Nuclear Forces, 2013,’’
Bulletin of the Atomic Scientists, November 1, 2013; U.S.-China Economic and Security Review Commission, Hearing on China’s Offensive Missile Forces, written testimony of Christopher Twomey, April 1, 2015; and U.S.-China Economic and Security
Review Commission, Hearing on China’s Offensive Missile Forces, written testimonyof James Acton, April 1, 2015.
43. Hans M. Kristensen and Robert S. Norris, ‘‘Chinese Nuclear Forces, 2013,’’
Bulletin of the Atomic Scientists, November 1, 2013; U.S.-China Economic and Security Review Commission, Hearing on China’s Offensive Missile Forces, written testimony of Christopher Twomey, April 1, 2015; and U.S.-China Economic and Security
Review Commission, Hearing on China’s Offensive Missile Forces, written testimonyof James Acton, April 1, 2015.
44. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of James Acton, April 1, 2015; U.S.China Economic and Security Review Commission, Hearing on China’s Offensive
Missile Forces, written testimony of Christopher Yeaw, April 1, 2015; and Jeffery
Lewis, ‘‘China’s Nuclear Modernization: Surprise, Restraint, and Uncertainty,’’ inAshley J. Tellis, et al., eds. Asia in the Second Nuclear Age, National Bureau of
Asian Research, 2013, 77.
45. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Christopher Twomey, April 1, 2015;
U.S.-China Economic and Security Review Commission, Hearing on China’s Offensive Missile Forces, written testimony of Christopher Yeaw, April 1, 2015.
46. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Christopher Yeaw, April 1, 2015.
47. U.S. Senate Armed Services Committee, Hearing on Worldwide Threats,
written testimony of Vincent R. Stewart, February 26, 2015.
48. Michael Chase, ‘‘China’s Transition to a More Credible Nuclear Deterrent: Implications and Challenges for the United States,’’ Asia Policy 16 (July 2013) 89–90.
49. U.S. Department of Defense, Annual Report to Congress: Military Power of
the People’s Republic of China 2009, March 2009, 24.
50. Matthew Fargo, ‘‘Ballistic Missile Technology 101—Rocket Fuel,’’ Center for
Strategic and International Studies, August 8, 2012.
51. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2014, April 2014, 7; andU.S.-China Economic and Security Review Commission, Hearing on China’s Offensive Missile Forces, written testimony of Christopher Yeaw, April 1, 2015.
52. Christopher P. Twomey and Michael S. Chase, ‘‘Chinese Attitudes Toward
Missile Defense,’’ in Catherine M. Kelleher and Peter J. Dombrowski, eds., Missile
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China’s Offensive Missile Forces, written testimony of Christopher Yeaw, April 1,
2015.
53. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 32;
Ethan Meick, ‘‘China’s Reported Ballistic Missile Sale to Saudi Arabia: Backgroundand Potential Implications,’’ U.S.-China Economic and Security Review Commission,
June 16, 2014, 2; Hans M. Kristensen, ‘‘Chinese Nuclear Missile Upgrade Near
Dalian,’’ Missile Threat, May 22, 2014; and U.S. National Air and Space Intelligence
Center, Ballistic and Cruise Missile Threat, 2013, 14.
54. Andrew S. Erickson, ‘‘Showtime: China Reveals Two ‘Carrier-Killer’ Missiles,’’National Interest, September 3, 2015; and Richard D. Fisher, Jr., ‘‘DF–26 IRBM
May Have ASM Variant, China Reveals at Military Parade,’’ Jane’s Defence Weekly,
September 2, 2015.
55. U.S. Senate Armed Services Committee, Hearing on U.S. Pacific Commandand U.S. Forces Korea, April 16, 2015, written testimony of Samuel J. Locklear III;
U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions forthe 21st Century, April 2015, 19–20; and U.S. Department of Defense, Annual Report to Congress: Military Power of the People’s Republic of China 2015, April 2015,
9.
56. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 19–20.
57. U.S. Senate Armed Services Committee, Hearing on U.S. Pacific Commandand U.S. Forces Korea, written testimony of Samuel J. Locklear III, April 16, 2015;
and U.S. Department of Defense, Annual Report to Congress: Military Power of thePeople’s Republic of China 2015, April 2015, 9.
58. Jeremy Page, ‘‘Deep Threat: China’s Submarines Add Nuclear-Strike Capability, Altering Strategic Balance,’’ Wall Street Journal, October 24, 2014.
59. Hans M. Kristensen, ‘‘Is China Planning to Build More Missile Submarines?’’
FAS Strategic Security Blog, April 23, 2015; U.S.-China Economic and Security Review Commission, Hearing on China’s Offensive Missile Forces, written testimony of
Christopher Yeaw, April 1, 2015; and U.S. Office of Naval Intelligence, The People’s
Army Liberation Navy: A Modern Navy with Chinese Characteristics, July 2009, 22.
60. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 9; U.S.China Economic and Security Review Commission, Hearing on China’s Offensive
Missile Forces, written testimony of Christopher Yeaw, April 1, 2015; Liu Kun,‘‘Media Reveals China’s Julang-3 Guided Missile, Developed from the Dongfeng-41,
Ranges All of U.S., Europe,’’ Hubei Daily, August 26, 2013. Staff translation; andU.S. House Armed Services Subcommittee on Strategic Forces, Hearing on Nuclear
Weapons Modernization in Russia and China: Understanding Impacts to the UnitedStates, written testimony of Richard D. Fisher, Jr., October 14, 2011.
61. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 12, 36,
40; U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and Implications for the United States, written testimony of
Lee Fuell, January 30, 2014; and U.S. House Armed Services Subcommittee on Strategic Forces, Hearing on Nuclear Weapons Modernization in Russia and China: Understanding Impacts to the United States, written testimony of Richard D. Fisher,Jr., October 14, 2011.
62. Hans M. Kristensen and Robert S. Norris, ‘‘Chinese Nuclear Forces, 2015,’’
Bulletin of the Atomic Scientists, 71:4 (2015): 83; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s
Republic of China 2015, April 2015, 46; U.S.-China Economic and Security Review
Commission, Hearing on China’s Offensive Missile Forces, written testimony of
Christopher Yeaw, April 1, 2015; Japan’s Ministry of Defense, Defense of Japan
2014, 2014, 36–37; Dennis M. Gormley, Andrew S. Erickson, and Jingdong Yuan,
A Low-Visibility Force Multiplier: Assessing China’s Cruise Missile Ambitions, National Defense University Press, 2014, 31–32; U.S. National Air and Space Intelligence Center, Ballistic and Cruise Missile Threat, 2013, 27–29; Hans M. Kristensen and Robert S. Norris, ‘‘Chinese Nuclear Forces, 2013,’’ Bulletin of the Atomic
Scientists, 69:6 (2013); and Hans M. Kristensen, ‘‘Air Force Briefing Shows Nuclear
Modernizations But Ignores US and UK Programs,’’ FAS Strategic Security Blog,
May 29, 2013.
63. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 33–34;
Ron Christman, ‘‘Conventional Missions for China’s Second Artillery Corps,’’ Comparative Strategy 30 (2011): 207; and Michael S. Chase and Andrew S. Erickson,

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64. Michael Chase, ‘‘Second Artillery in the Hu Jintao Era: Doctrine and Capabilities,’’ in Roy Kamphausen, et al., eds., Assessing the People’s Liberation Army in
the Hu Jintao Era, U.S. Army Strategic Studies Institute, April 2014, 303.
65. Thomas Schelling, Arms and Influence, Yale University Press, 1966, 71–78;
and Michael S. Chase and Andrew S. Erickson, ‘‘The Conventional Missile Capabilities of China’s Second Artillery Force: Cornerstone of Deterrence and Warfighting,’’
Asian Security 8:2 (2012), 117–118.
66. Michael S. Chase and Andrew S. Erickson, ‘‘The Conventional Missile Capabilities of China’s Second Artillery Force: Cornerstone of Deterrence and Warfighting,’’ Asian Security 8:2 (2012), 123.
67. U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and Implications for the United States, written testimony of
Lee Fuell, January 30, 2014; and Ron Christman, ‘‘Conventional Missions for China’s Second Artillery Corps,’’ Comparative Strategy 30 (2011), 205–206.
68. Evan Medeiros, ‘‘Minding the Gap’’: Assessing the Trajectory of the PLA’s
Second Artillery,’’ in Roy Kamphausen and Andrew Scobell, Right Sizing the People’s Liberation Army: Exploring the Contours of China’s Military, U.S. Army Strategic Studies Institute, September 2007, 167–168.
69. Michael S. Chase and Andrew S. Erickson, ‘‘The Conventional Missile Capabilities of China’s Second Artillery Force: Cornerstone of Deterrence and Warfighting,’’ Asian Security 8:2 (2012): 124.
70. Daniel J. Kostecka, ‘‘Aerospace Power and China’s Counterstrike Doctrine in
the Near Seas,’’ in Peter Dutton, Andrew S. Erickson, and Ryan Martinson, eds.,
China’s Near Seas Combat Capabilities, U.S. Naval War College China Maritime
Studies Institute, February 2014, 52–55; U.S.-China Economic and Security Review
Commission, Hearing on China’s Military Modernization and Implications for theUnited States, written testimony of Lee Fuell, January 30, 2014; and Michael S.
Chase and Andrew S. Erickson, ‘‘The Conventional Missile Capabilities of China’s
Second Artillery Force: Cornerstone of Deterrence and Warfighting,’’ Asian Security,
2012, 124.
71. Ian Easton, ‘‘Able Archers: Taiwan Defense Strategy in an Age of Precision
Strike,’’ Project 2049 Institute, September 2014, 5; U.S.-China Economic and Security Review Commission, Hearing on China’s Military Modernization and its Implications for the United States, written testimony of Roger Cliff, January 30, 2014;
and Randall Schriver and Mark Stokes, ‘‘The Chinese People’s Liberation Army:
Consequences of Coercive Aerospace Power for United States Conventional Deterrence,’’ Project 2049 Institute, August 2008, 11–12.
72. Evan Medeiros, ‘‘Minding the Gap’’: Assessing the Trajectory of the PLA’s
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73. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 8; andU.S.-China Economic and Security Review Commission, Hearing on China’s MilitaryModernization and Implications for the United States, written testimony of Lee
Fuell, January 30, 2014.
74. U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and Implications for the United States, written testimony of
Lee Fuell, January 30, 2014; and U.S. Department of Defense, Annual Report toCongress: Military and Security Developments Involving the People’s Republic ofChina 2011, 2011, 30.
75. U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and Implications for the United States, written testimony of
Lee Fuell, January 30, 2014.
76. Evan Medeiros, ‘‘ ‘Minding the Gap’: Assessing the Trajectory of the PLA’s
Second Artillery,’’ in Roy Kamphausen and Andrew Scobell, Right Sizing the People’s Liberation Army: Exploring the Contours of China’s Military, U.S. Army Strategic Studies Institute, September 2007, 171.
77. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, May 2015, 8.
78. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 34;
U.S.-China Economic and Security Review Commission, Hearing on China’s MilitaryModernization and its Implications for the United States, written testimony of Roger
Cliff, January 30, 2014; and U.S. National Air and Space Intelligence Center, Ballistic and Cruise Missile Threat, 2013, 14.

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79. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missiles, written testimony of Toshi Yoshihara, April 1, 2015.
80. U.S. Senate Armed Services Committee, Hearing on Worldwide Threats,
written testimony of Vincent Stewart, February 26, 2015; U.S.-China Economic andSecurity Review Commission, Hearing on China’s Offensive Missiles, written testimony of Mark Stokes, April 1, 2015; and U.S.-China Economic and Security Review
Commission, Hearing on China’s Offensive Missiles, written testimony of Toshi
Yoshihara, April 1, 2015.
81. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 34, 46;
and Ian Easton, China’s Evolving Reconnaissance-Strike Capabilities: Implications
for the U.S. Alliance, February 2014, 7.
82. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missiles, written testimony of Mark Stokes, April 1, 2015; U.S.-China Economic and Security Review Commission, Hearing on China’s Offensive Missiles,
written testimony of Christopher Yeaw, April 1, 2015; Baohui Zhang, China’s Assertive Nuclear Posture: State Security in an Anarchic International Order, Routledge,
2015, 54–55; Bill Gertz, ‘‘China Fields New Intermediate-Range Nuclear Missile:
DF–26C Deployment Confirmed,’’ Washington Free Beacon, March 3, 2014; and Sina
News, ‘‘Dongfeng-26 Advancement: Unmasking the PLA’s Solid-Fuelled MediumRange Missile’s Development,’’ September 15, 2014.
83. Andrew S. Erickson, ‘‘Showtime: China Reveals Two ‘Carrier-Killer’ Missiles,’’National Interest, September 3, 2015; and Richard D. Fisher, Jr., ‘‘DF–26 IRBM
May Have ASM Variant, China Reveals at Military Parade,’’ Jane’s Defence Weekly,
September 2, 2015.
84. Ron Christman, ‘‘China’s Second Artillery Force: Capabilities and Missions
for the Near Seas,’’ in Peter Dutton, Andrew S. Erickson, and Ryan Martinson, eds.,
China’s Near Seas Combat Capabilities, U.S. Naval War College China Maritime
Studies Institute, February 2014, 42; and John Wilson Lewis and Xue Litai, China’s
Strategic Seapower: The Politics of Force Modernization in the Nuclear Age, Stanford
University Press, 1993, 227.
85. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missiles, written testimony of Christopher Yeaw, April 1, 2015; BaohuiZhang, China’s Assertive Nuclear Posture: State Security in an Anarchic International Order, 2015, 54–55; and Open Source Center, ‘‘PRC Military BBS Carries
Photos of ‘New’ Missile Transporter,’’ December 10, 2013. OSC ID: CHO20131210
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86. Ron Christman, ‘‘China’s Second Artillery Force: Capabilities and Missions
for the Near Seas,’’ in Peter Dutton Andrew S. Erickson, and Ryan Martinson, eds.,
China’s Near Seas Combat Capabilities, U.S. Naval War College China Maritime
Studies Institute, February 2014, 42–43.
87. Andrew S. Erickson, ‘‘Chinese Anti-Ship Ballistic Missile (ASBM) Development: Drivers, Trajectories, and Strategic Implications,’’ Jamestown Foundation,
May 2013, 119.
88. Andrew Erickson, ‘‘Chinese Anti-Ship Ballistic Missile Development: Drivers,
Trajectories, and Strategic Implications,’’ Jamestown Foundation, May 2013, 10;
U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2013, 2013, 29; and Mark A.
Stokes and Ian Easton, ‘‘Evolving Aerospace Trends in the Asia-Pacific Region: Implications for Stability in the Taiwan Strait and Beyond,’’ Project 2049 Institute,
May 27, 2010, 16.
89. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missiles, written testimony of Dennis Gormley, April 1, 2015.
90. Andrew Erickson, ‘‘Chinese Anti-Ship Ballistic Missile Development: Drivers,
Trajectories, and Strategic Implications,’’ Jamestown Foundation, May 2013, 61; andRon Christman, ‘‘China’s Second Artillery Force: Capabilities and Missions for the
Near Seas,’’ in Peter Dutton, Andrew S. Erickson, and Ryan Martinson, eds., China’s
Near Seas Combat Capabilities, U.S. Naval War College China Maritime Studies Institute, February 2014, 41.
91. Andrew S. Erickson, ‘‘Showtime: China Reveals Two ‘Carrier-Killer’ Missiles,’’National Interest, September 3, 2015; and Richard D. Fisher, Jr., ‘‘DF–26 IRBM
May Have ASM Variant, China Reveals at Military Parade,’’ Jane’s Defense Weekly,
September 2, 2015.
92. Andrew S. Erickson, ‘‘Showtime: China Reveals Two ‘Carrier-Killer’ Missiles,’’National Interest, September 3, 2015.
93. Dennis M. Gormley, Andrew S. Erickson, and Jingdong Yuan, A Low-Visibility Force Multiplier: Assessing China’s Cruise Missile Ambitions, National Defense University Press, 2014, 2.

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94. Dennis M. Gormley, Andrew S. Erickson, and Jingdong Yuan, A Low-Visibility Force Multiplier: Assessing China’s Cruise Missile Ambitions, National Defense University Press, 2014, 2; and U.S. National Air and Space Intelligence Center, Ballistic and Cruise Missile Threat, 2013, 26.
95. U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and Implications for the United States, written testimony of
Lee Fuell, January 30, 2014.
96. James Winnefeld, ‘‘Remarks,’’ (Missile Defense and U.S. National Security,
Center for Strategic and International Studies, Washington, DC, May 19, 2015).
97. U.S. Department of Defense, Annual Report to Congress: Military Power of
the People’s Republic of China 2009, March 2009, 20; and Ian Easton, ‘‘The Assassin
Under the Radar: China’s DH–10 Cruise Missile Program,’’ Project 2049 Institute,
October 2009, 1.
98. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Dennis Gormley, April 1, 2015; andU.S. National Air and Space Intelligence Center, Ballistic and Cruise Missile Threat,
2013, 26–27; and Dennis M. Gormley, Andrew S. Erickson, and Jingdong Yuan, A
Low-Visibility Force Multiplier: Assessing China’s Cruise Missile Ambitions, National
Defense University Press, 2014, 1–3.
99. Ian Easton, ‘‘China’s Evolving Reconnaissance-Strike Capabilities,’’ Project2049 Institute, February 2014, 8.
100. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 12,
36, 40; U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and Implications for the United States, written testimony of
Lee Fuell, January 30, 2014; and U.S. House Armed Services Subcommittee on Strategic Forces, Hearing on Nuclear Weapons Modernization in Russia and China: Understanding Impacts to the United States, written testimony of Richard D. Fisher,Jr., October 14, 2011.
101. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2014, May 2014, 36.
102. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Dennis Gormley, April 1, 2015; andU.S.-China Economic and Security Review Commission, Hearing on China’s MilitaryModernization and Implications for the United States, written testimony of Jesse
Karotkin, January 30, 2014.
103. Robert Haddick, Fire on the Water: China, America, and the Future of the
Pacific, Naval Institute Press, 2014, 94; Vitaliy O. Pradun, ‘‘From Bottle Rockets to
Lightning Bolts: China’s Missile Revolution and PLA Strategy Against U.S. Military
Intervention,’’ U.S. Naval War College Review 64:2 (Spring 2011): 22–27; and U.S.
Government Accountability Office, Comprehensive Strategy Needed to Improve Cruise
Missile Ship Defense, July 11, 2000.
104. Robert Work, ‘‘Speech,’’ (China Aerospace Studies Institute, RAND Corporation, Arlington, VA, June 22, 2015).
105. U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and Implications for the United States, written testimony ofJesse Karotkin, January 30, 2014; John Patch, ‘‘Chinese Houbei Fast Attack Craft:
Beyond Sea Denial,’’ in Peter Dutton, Andrew S. Erickson, and Ryan Martinson,
eds., China’s Near Seas Combat Capabilities, U.S. Naval War College China Maritime Studies Institute, February 2014, 3–4; and U.S. Office of Naval Intelligence,
The People’s Liberation Army Navy: A Modern Navy with Chinese Characteristics,
July 2009, 27.
106. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 16; Dennis M. Gormley, Andrew S. Erickson,
and Jingdong Yuan, A Low-Visibility Force Multiplier: Assessing China’s Cruise Missile Ambitions, National Defense University Press, 2014, 16; and William S. Murray,‘‘Underwater TELs and China’s Antisubmarine Warfare: Evolving Strength and a
Calculated Weakness,’’ in Peter Dutton, Andrew S. Erickson, and Ryan Martinson,
eds., China’s Near Seas Combat Capabilities, U.S. Naval War College China Maritime Studies Institute, February 2014, 20.
107. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 46;
U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions forthe 21st Century, April 2015, 16; and William S. Murray, ‘‘Underwater TELs andChina’s Antisubmarine Warfare: Evolving Strength and a Calculated Weakness,’’ inPeter Dutton, Andrew S. Erickson, and Ryan Martinson, eds., China’s Near Seas
Combat Capabilities, U.S. Naval War College China Maritime Studies Institute,
February 2014, 20.

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Craft: Beyond Sea Denial,’’ in Peter Dutton Andrew S. Erickson, and Ryan Martinson, eds., China’s Near Seas Combat Capabilities, U.S. Naval War College China
Maritime Studies Institute, February 2014, 3–4.
109. U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and Implications for the United States, written testimony ofJesse Karotkin, January 30, 2014.
110. IHS Jane’s, ‘‘Jane’s Strategic Weapon Systems: C–801, C–802, C–803,’’ July21, 2015; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 46.
111. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 19; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republicof China 2015, May 2015, 10, 46; William Murray, ‘‘Underwater TELs and China’s
Antisubmarine Warfare: Evolving Strength and Calculated Weakness,’’ in Peter
Dutton, Andrew Erickson, and Ryan Martinson, eds., China’s Near Seas Combat Capabilities (Naval War College, February 2014), 19; U.S.-China Economic and Security Review Commission, Hearing on PLA Modernization and Its Implications for theUnited States, written testimony of Jesse Karotkin, January 30, 2014; and U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2010, 2010, 3, 30.
112. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 16.
113. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 46;
U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions forthe 21st Century, April 2015, 20–22; and Dennis M. Gormley, Andrew S. Erickson,
and Jingdong Yuan, A Low-Visibility Force Multiplier: Assessing China’s Cruise Missile Ambitions, National Defense University Press, 2014, 58–59.
114. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 46; andU.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions forthe 21st Century, April 2015, 21.
115. Robert Haddick, Fire on the Water: China, America, and the Future of the
Pacific, Naval Institute Press, 2014, 93–94.
116. Robert Haddick, ‘‘China’s Most Dangerous Missile (So Far),’’ War on theRocks, July 2, 2014.
117. Dennis M. Gormley, Andrew S. Erickson, and Jingdong Yuan, ‘‘A Potent Vector: Assessing China’s Cruise Missile Developments,’’ National Defense University
Press, Joint Force Quarterly 75, September 30, 2015.
118. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Dennis Gormley, April 1, 2015; U.S.China Economic and Security Review Commission, Hearing on China’s Offensive
Missile Forces, written testimony of Robert Haddick, April 1, 2015.
119. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missiles, oral testimony of Mark Stokes, April 1, 2015.
120. Tai Ming Cheung (Director, University of California Institute on Global Conflict and Cooperation), interview with Commission staff, October 1, 2015; Tai Ming
Cheung, ‘‘Introduction,’’ in Tai Ming Cheung, Forging China’s Military Might: A
New Framework for Assessing Innovation, Johns Hopkins University Press, 2014,
10; U.S.-China Economic and Security Review Commission, 2014 Annual Report,
November 2014, 293; Tai Ming Cheung, ed., China’s Emergence as a Defense Technological Power, Routledge, 2013, 51; Tai Ming Cheung, ‘‘The Special One: The Central Special Committee and the Structure, Process, and Leadership of the Chinese
Defense and Strategic Dual-Use Science, Technology and Industrial Triangle’’ (Conference on the Structure, Process, and Leadership of the Chinese Science and Technology System, San Diego, CA, July 16–17, 2012); Tai Ming Cheung, ed., ‘‘New Perspectives On Assessing The Chinese Defense Economy 2011 Industry Overview And
Policy Briefs,’’ University of California Institute on Global Conflict and Cooperation,
2011; Evan A. Feigenbaum, China’s Techno-Warriors: National Security and Strategic Competition from the Nuclear to Information Age, Stanford University Press,
2003, 53; and People’s Daily, ‘‘Reason for China’s Development of Manned Spacecraft,’’ January 17, 2003.
121. Mark Stokes, ‘‘China’s Evolving Space and Missile Industry: Seeking Innovation in Long-Range Precision Strike,’’ in Tai Ming Cheung, Forging China’s Military

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Might: A New Framework for Assessing Innovation, Johns Hopkins University Press,
2014, 244–245.
122. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missiles, oral testimony of Mark Stokes, April 1, 2015; and Mark Stokes,‘‘China’s Evolving Space and Missile Industry: Seeking Innovation in Long-Range
Precision Strike,’’ in Tai Ming Cheung, Forging China’s Military Might: A New
Framework for Assessing Innovation, Johns Hopkins University Press, 2014, 244–
245.
123. Mark Stokes, ‘‘China’s Evolving Space and Missile Industry: Seeking Innovation in Long-Range Precision Strike,’’ in Tai Ming Cheung, Forging China’s Military
Might: A New Framework for Assessing Innovation, Johns Hopkins University Press,
2014, 248–249.
124. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missiles, oral testimony of Mark Stokes, April 1, 2015.
125. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missiles, oral testimony of Mark Stokes, April 1, 2015.
126. Tai Ming Cheung (Director, University of California Institute on Global Conflict and Cooperation), interview with Commission staff, June 12, 2015; and Tai
Ming Cheung, China’s Really Big Military R&D Effort (Lowy Institute, October 6,2013).
127. Tai Ming Cheung (Director, University of California Institute on Global Conflict and Cooperation), interview with Commission staff, June 12, 2015; and Tai
Ming Cheung, ‘‘How Much Does China Spend on Defense-Related Research and Development’’ (2015 Workshop on Chinese Defense Science, Technology, and Innovation in a Period of Major Change, Washington, DC, February 9, 2015).
128. Tai Ming Cheung, ‘‘How Much Does China Spend on Defense-Related Research and Development’’ (2015 Workshop on Chinese Defense Science, Technology,
and Innovation in a Period of Major Change, Washington, DC, February 9, 2015).
129. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missiles, oral testimony of Dennis Gormley, April 1, 2015; and U.S.-China
Economic and Security Review Commission, Hearing on China’s Offensive Missiles,
oral testimony of Mark Stokes, April 1, 2015.
130. Commission assessment based on differentiated innovation levels describedby Tai Ming Cheung, Thomas G. Mahnken, and Andrew L. Ross, ‘‘Frameworks forAnalyzing Chinese Defense and Military Innovation,’’ Forging China’s Military
Might: A New Framework for Assessing Innovation, Johns Hopkins University Press,
2014, 30–33.
131. Mark Stokes, ‘‘China’s Evolving Space and Missile Industry: Seeking Innovation in Long-Range Precision Strike,’’ in Tai Ming Cheung, Forging China’s Military
Might: A New Framework for Assessing Innovation, Johns Hopkins University Press,
2014, 264–265.
132. Mark Stokes, ‘‘China’s Evolving Space and Missile Industry: Seeking Innovation in Long-Range Precision Strike,’’ in Tai Ming Cheung, Forging China’s Military
Might: A New Framework for Assessing Innovation, Johns Hopkins University Press,
2014, 260, 264–265.
133. Frank A. Rose, ‘‘Ballistic Missile Defense and Strategic Stability in East
Asia,’’ (Federation of American Scientists Workshop, Washington, DC, February 20,2015); U.S. Department of Defense, Ballistic Missile Defense Review Report, February 2010, 4–6.
134. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Robert Haddick, April 1, 2015.
135. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Christopher Twomey, April 1, 2015.
136. Gregory Kulacki, ‘‘The Chinese Military Updates China’s Nuclear Strategy,’’
Union of Concerned Scientists, March 2015, 6; Amy F. Woolf, ‘‘Conventional Prompt
Global Strike and Long-Range Ballistic Missiles: Background and Issues,’’ Congressional Research Service, February 6, 2015, Summary; and Lora Saalman, ‘‘Prompt
Global Strike: China and the Spear,’’ Asia-Pacific Center for Security Studies, April
16, 2014, 1, 5.
137. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Robert Haddick, April 1, 2015.
138. Ian E. Rinehart, Steven A Hildreth, and Susan V. Lawrence, ‘‘Ballistic Missile Defense in the Asia-Pacific Region: Cooperation and Opposition,’’ Congressional
Research Service, April 3, 2015, 17; and Brad Roberts, ‘‘China and Ballistic Missile
Defense: 1955 to 2002 and Beyond,’’ Institute for Defense Analyses, September 2003,
2, 19.
139. Frank A. Rose, ‘‘Missile Defense and the U.S. Response to the North Korean
Ballistic Missile and WMD Threat’’ (Institute for Korean-American Studies, Wash-

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ington, DC, May 19, 2015); U.S.-China Economic and Security Review Commission,
Hearing on China’s Offensive Missile Forces, written testimony of Robert Haddick,
April 1, 2015; and Choe Sang-Hun, ‘‘South Korea Tells China Not to Meddle in Decision Over Missile System,’’ New York Times, March 17, 2015.
140. China’s Ministry of National Defense, Regular Press Conference, March 26,
2015.
141. U.S. Department of Defense, Annual Report to Congress on Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 32;
Li Bin, ‘‘What China’s Missile Intercept Test Means,’’ Carnegie Endowment forInternational Peace, February 4, 2013; and Lora Saalman, ‘‘China’s Evolution on
Ballistic Missile Defense,’’ Carnegie Endowment for International Peace, August 23,
2012.
142. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of Robert Haddick, April 22, 2015.
143. Sydney J. Freedberg, Jr., ‘‘Army Explores New Missile Defense Options,’’
Breaking Defense, February 18, 2015.
144. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Toshi Yoshihara, April 1, 2015.
145. U.S. Department of Defense, Annual Report to Congress on Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 8;
U.S. Senate Armed Services Committee, Hearing on Worldwide Threats, written testimony of Vincent R. Stewart, February 26, 2015; and U.S. Senate Armed Services
Committee, Hearing on Worldwide Threats, written testimony of James Clapper,
February 26, 2015.
146. Jeffrey Lewis, ‘‘Great, Now China’s Got Multiple Nuclear Warhead Missiles?’’ Foreign Policy, May 26, 2015; U.S. Department of Defense, Annual Reportto Congress on Military and Security Developments Involving the People’s Republicof China, April 2015, 8; David E. Sanger and William J. Broad, ‘‘China Making
Some Missiles More Powerful,’’ New York Times, May 16, 2015; and Hans M.
Kristensen, ‘‘Pentagon Report: China Deploys MIRV Missile,’’ FAS Strategic Security Blog, May 11, 2015.
147. IHS Jane’s Strategic Weapon Systems, ‘‘DF–41,’’ January 6, 2015; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2014, April 2014, 7.
148. U.S. House Armed Services Subcommittee on Strategic Forces, Hearing on
Fiscal Year 2016 Budget Request for Strategic Forces, written testimony of Cecil D.
Haney, February 26, 2015.
149. Richard D. Fisher, ‘‘Evidence Emerges of Possible DF–31 ICBM Variant,’’
IHS Jane’s Defense Weekly, March 3, 2015.
150. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Christopher Yeaw, April 1, 2015; IHS
Jane’s Strategic Weapon Systems, ‘‘DF–31,’’ March 11, 2015; Minnie Chan, ‘‘China
Puts On Show of Force with the DF–31B Mobile ICBM Missile Test,’’ South China
Morning Post, October 4, 2014; and Bill Gertz, ‘‘China Conducts Flight Test of New
Mobile ICBM,’’ Washington Free Beacon, October 2, 2014.
151. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Christopher Yeaw, April 22, 2015.
152. Chairman of the Joint Chiefs of Staff, Security Classification Policy for Multiple Independently Targetable Reentry Vehicles and Maneuverable Reentry Vehicles,
July 1, 2004. ID: CJCSI 5220.01A.
153. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of Christopher Twomey, April 22, 2015; andU.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 8.
154. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Dennis Gormley, April 22, 2015; andRonald O’Rourke, ‘‘China Naval Modernization: Implications for U.S. Navy Capabilities—Background and Issues for Congress,’’ Congressional Research Service, June 1,
2015, 6–7.
155. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Christopher Yeaw, April 22, 2015;
Richard Fisher (Senior Fellow, International Assessment and Strategy Center),interview with Commission staff, June 20, 2014; and William Lowther, ‘‘China Developing New Nuclear Missile,’’ Taipei Times, March 6, 2014; and Bradley Perrett
et al., ‘‘U.S. Navy Sees HGV as Part of Wider Threat,’’ Aviation Week and SpaceTechnology, January 27, 2014.
156. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of James Acton, April 1, 2015; Harry

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Kazianis, ‘‘The Real Military Game-Changer: Hypersonic Weapons 101,’’ Lowy Institute for International Policy Interpreter Blog, March 14, 2014; and Zachary Keck,‘‘Will Hypersonic Capabilities Render Missile Defense Obsolete?’’ Diplomat, February 7, 2014.
157. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of James Acton, April 1, 2015; and Bill
Gertz, ‘‘China Secretly Conducts Second Flight Test of New Ultra High-Speed Missile,’’ Washington Times, August 19, 2014.
158. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of James Acton, April 1, 2015; and Harry
Kazianis, ‘‘The Real Military Game-Changer: Hypersonic Weapons 101,’’ Lowy Institute for International Policy Interpreter Blog, March 14, 2014.
159. Bill Gertz, ‘‘China Conducts Fifth Test of Hypersonic Glide Vehicle,’’ Washington Free Beacon, August 21, 2015; and Bill Gertz, ‘‘China Confirms HypersonicMissile Test: Defense Ministry Says Weapon not Directed at U.S.,’’ Washington Free
Beacon, June 13, 2015.
160. Harry Kazianis, ‘‘The Real Military Game-Changer: Hypersonic Weapons
101,’’ Lowy Institute for International Policy Interpreter Blog, March 14, 2014; andMark Stokes, ‘‘China’s Quest for Joint Aerospace Power: Concepts and Future Aspirations,’’ in Richard P. Hallion, Roger Cliff, and Phillip C. Saunders, eds., The Chinese Air Force: Evolving Concepts, Roles, and Capabilities, National Defense University Press, 2012, 50–51.
161. James Acton (Co-Director, Nuclear Policy program, Carnegie Endowment forInternational Peace), interview with Commission staff, May 26, 2015.
162. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of James Acton, April 1, 2015.
163. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of James Acton, April 1, 2015.
164. James Acton (Co-Director, Nuclear Policy program, Carnegie Endowment forInternational Peace), interview with Commission staff, May 26, 2015.
165. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of James Acton, April 1, 2015; U.S.-China
Economic and Security Review Commission, Hearing on China’s Offensive Missile
Forces, oral testimony of Christopher Yeaw, April 1, 2015; and U.S.-China Economic
and Security Review Commission, Hearing on PLA Modernization and Its Implications for the United States, testimony of Lee Fuell, January 30, 2014.
166. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of James Acton, April 1, 2015.
167. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of James Acton, April 1, 2015; and U.S.China Economic and Security Review Commission, Hearing on China’s Offensive
Missile Forces, oral testimony of Christopher Yeaw, April 1, 2015.
168. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of James Acton, April 1, 2015; Lora Saalman, ‘‘Prompt Global Strike: China and the Spear,’’ Asia-Pacific Center for Security
Studies, April 16, 2014, p. 12; and Harry Kazianis, ‘‘The Real Military Game-Changer:
Hypersonic Weapons 101,’’ Lowy Institute for International Policy Interpreter Blog,
March 14, 2014.
169. Lora Saalman, ‘‘China’s Evolution on Ballistic Missile Defense,’’ Carnegie
Endowment for International Peace, August 23, 2012.
170. Brad Roberts, ‘‘China and Ballistic Missile Defense: 1955 to 2002 and Beyond,’’ Institute for Defense Analyses, September 2003, 7–8.
171. Lora Saalman, ‘‘China’s Evolution on Ballistic Missile Defense,’’ Carnegie
Endowment for International Peace, August 23, 2012.
172. Brad Roberts, ‘‘China and Ballistic Missile Defense: 1955 to 2002 and Beyond,’’ Institute for Defense Analyses, September 2003, 13–14.
173. Lora Saalman, ‘‘China’s Evolution on Ballistic Missile Defense,’’ Carnegie
Endowment for International Peace, August 23, 2012.
174. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 71.
175. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 71.
176. Frank A. Rose, ‘‘Ballistic Missile Defense and Strategic Stability in East
Asia’’ (Federation of American Scientists Workshop, Washington, DC, February 20,2015).
177. U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and Implications for the United States, written testimony of
Lee Fuell, January 30, 2014.

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179. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 35.
180. Andrew S. Erickson, ‘‘Chinese Anti-Ship Ballistic Missile (ASBM) Development: Drivers, Trajectories, and Strategic Implications,’’ Jamestown Foundation,
May 2013, 84–87.
181. Eric D. Pedersen, ‘‘Land- and Sea-Based C4ISR Infrastructure in China’s
Near Seas,’’ in Peter Dutton, Andrew S. Erickson, and Ryan Martinson, eds., China’s
Near Seas Combat Capabilities, U.S. Naval War College China Maritime Studies Institute, February 2014, 77.
182. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 25.
183. Eric D. Pedersen, ‘‘Land- and Sea-Based C4ISR Infrastructure in China’s
Near Seas,’’ in Peter Dutton, Andrew S. Erickson, and Ryan Martinson, eds., China’s
Near Seas Combat Capabilities, U.S. Naval War College China Maritime Studies Institute, February 2014, 77–78.
184. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 14.
185. Mark Stokes, ‘‘The Second Artillery Force and the Future of Long-Range
Precision Strike,’’ in Ashley Tellis and Travis Tanner, eds., Strategic Asia 2012–2013: China’s Military Challenge, October 2012, 149.
186. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 36–37;
and U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions
for the 21st Century, April 2015, 22.
187. Open Source Center: Ji Jianchun, Wang Zhixin, Ge Song, ‘‘Accelerate Research of Law of Near Space—Proposal by Delegate Zhang Junxiang When Givinga Speech During PLA Delegation Panel Discussion,’’ Huojianbing Bao (Strategic
Rocket Forces News), March 10, 2015. ID: CHO2015051165561304; Ian Easton, ‘‘China’s Evolving Reconnaissance-Strike Capabilities: Implications for the U.S.-Japan
Alliance,’’ Project 2049 Institute, 2014, 15; and Mark A. Stokes with Dean Cheng,‘‘China’s Evolving Space Capabilities: Implications for U.S. Interests,’’ Project 2049
Institute, prepared for the U.S.-China Economic and Security Review Commission,
April 26, 2012, 45.
188. Eric D. Pedersen, ‘‘Land- and Sea-Based C4ISR Infrastructure in China’s
Near Seas,’’ in Peter Dutton, Andrew S. Erickson, and Ryan Martinson, eds., China’s
Near Seas Combat Capabilities, U.S. Naval War College China Maritime Studies Institute, February 2014, 80–81.
189. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Force, oral testimony of James Action, April 1, 2015; and Michael
S. Chase and Evan Medeiros, ‘‘China’s Evolving Nuclear Calculus: Modernization
and Doctrinal Debate,’’ in James Mulvenon and David Finkelstein, eds., China’s
Revolution in Doctrinal Affairs: Emerging Trends in the Operational Art of the Chinese People’s Liberation Army, CNA, 2002, 147–152.
190. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of Christopher Twomey, April 1, 2015; U.S.China Economic and Security Review Commission, Hearing on China’s Offensive
Missile Forces, oral testimony of Christopher Yeaw, April 1, 2015; and U.S.-China
Economic and Security Review Commission, Hearing on Developments in China’s
Cyber and Nuclear Capabilities, written testimony of Phillip C. Saunders, March 26,
2012.
191. Christopher Twomey (Associate Professor, U.S. Naval Postgraduate School),interview with Commission staff, July 20, 2015.
192. U.S. Department of Defense, Annual Report to Congress on Military and Security Developments Involving the People’s Republic of China 2014, April 24, 2014,12; Michael S. Chase, ‘‘The Second Artillery Force in the Xi Jinping Era,’’ China
Brief 13:7 (March 28, 2013); and Michael S. Chase and Andrew Erickson, ‘‘The Conventional Missile Capabilities of China’s Second Artillery Force: Cornerstone of Deterrence and Warfighting,’’ Asian Security 8:2 (July 12, 2012): 128.
193. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 1–2.
194. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 1–2;
Open Source Center, ‘‘China Expands Cross-region Training to Artillery, Air Defense Brigades in ‘Firepower-2014’ ’’ OSC Media Note, April 22, 2015. ID: CHL
2015042248214971; U.S.-China Economic and Security Review Commission, Hearing
on China’s Offensive Missile Forces, testimony of Dennis Gormley, April 1, 2015;

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387
U.S. Department of Defense, Annual Report to Congress on Military and Security
Developments Involving the People’s Republic of China 2014, April 24, 2014, 12; andChina Military Online, ‘‘News Survey Report on ‘Joint Operation-2014’ Actual-Troop
Exercises,’’ November 2, 2014.
195. Open Source Center, ‘‘JFJB ‘Sidelights’ on PLAN’s Joint Operations Exercise
in South China Sea,’’ July 29, 2015. ID: CHR20150729007161013; and Open Source
Center, ‘‘PLA Navy Researcher, Other Experts Comment on Role of the 2nd Artillery in South China Sea Exercises,’’ July 30, 2015. ID: CHO2015073055374244.
196. Open Source Center, ‘‘Yin Zhuo: SCS Exercises Show PLA ASW Capabilities
Improved,’’ July 30, 2015. ID: CHO2015073055948281; and Open Source Center,‘‘PRC: Military Expert on 2nd Artillery Missiles in Antiship Role in South China
Sea,’’ July 30, 2015. ID: CHO2015073054565335.
197. Zhang Jian, Qin Tao, and Li Mingri, ‘‘PLA 2nd Artillery Base Logistics Department Enhances Planning, Command Capabilities,’’ Huojianbing Bao Online,
February 27, 2015. Open Source Center translation. ID: CHR 2015033072859388;
and U.S.-China Economic and Security Review Commission, Hearing on China’s
Military Modernization and Implications for the United States, written testimony of
Lee Fuell, January 30, 2014.
198. Open Source Center: Zhou Yuan and Zhang Baoqi, ‘‘JFJB: Jinan MR Artillery Brigade Emphasizes Data Analysis When Replaying War Games,’’ Jiefangjun
Bao Online, March 30, 2015. ID: CHN2015033006705761; Open Source Center: Yu
Juncheng, Zhou Bo, and Song Haijun, ‘‘PLA 2nd Artillery Brigade Three-PeatsClass-A Title Without Covering Up Defects in Training,’’ Huojianbing Bao Online,
January 21, 2015. ID: CHL2015042965098205; and Open Source Center: Zhou Bo,‘‘PLA 2nd Artillery Brigade Combines Great Discussion on Combat Power Criterion,
Readiness Training,’’ Huojianbing Bao Online, October 18, 2014. ID: CHL2015021
865916324.
199. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 2; andU.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2014, April 24, 2014, 12.
200. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Robert Haddick, April 1, 2015.
201. Robert Work, ‘‘Speech’’ (China Aerospace Studies Institute, RAND Corporation, Arlington, VA, June 22, 2015); Kenneth Todorov, ‘‘Remarks on Policy and Operations,’’ (Next Steps in Missile Defense, Center for Strategic and International
Studies, Washington, DC, April 7, 2015); Richard Matlock, ‘‘Remarks on Future Directions,’’ (Next Steps in Missile Defense, Center for Strategic and International
Studies, Washington, DC, April 7, 2015); U.S.-China Economic and Security Review
Commission, Hearing on China’s Offensive Missile Forces, written testimony of Robert Haddick, April 1, 2015; and U.S. Joint Chiefs of Staff, Joint Integrated Air andMissile Defense: Vision 2020, December 5, 2013, 3–5.
202. Andrew Krepinevich (President, Center for Strategic and Budgetary Assessments), interview with Commission staff, June 2, 2015; John Stillion (Senior Fellow,
Center for Strategic and Budgetary Assessments), interview with Commission staff,
June 2, 2015; U.S.-China Economic and Security Review Commission, Hearing on
China’s Offensive Missile Forces, written testimony of Robert Haddick, April 1, 2015;
and Harry Kazianis, ‘‘The Real Military Game-Changer: Hypersonic Weapons 101,’’
Lowy Institute for International Policy Interpreter Blog, March 14, 2014.
203. Sydney J. Freedberg, Jr., ‘‘Army Explores New Missile Defense Options,’’
Breaking Defense, February 18, 2015.
204. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Robert Haddick, April 1, 2015.
205. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Toshi Yoshihara, April 1, 2015.
206. Avery Goldstein (Professor and Director of the Center for the Study of Contemporary China, University of Pennsylvania), interview with Commission staff,
June 8, 2015.
207. U.S. Department of State, 2015 Report on Adherence to and Compliance with
Arms Control, Nonproliferation, and Disarmament Agreements and Commitments,
June 5, 2015; and U.S. Department of State, Adherence to and Compliance with
Arms Control, Nonproliferation, and Disarmament Agreements and Commitments,
July 31, 2014.
208. Evan Braden Montgomery, ‘‘China’s Missile Forces Are Growing: Is It Time
to Modify the INF Treaty?’’ National Interest, July 2, 2014; Steven Pifer, ‘‘Don’t
Scrap the INF Treaty,’’ National Interest, June 9, 2014; and Elbridge Colby, ‘‘The
Real Trouble with Russia: Moscow Might Have Violated the Intermediate-Range
Nuclear Forces Treaty—Here’s How to Respond,’’ Foreign Affairs, April 7, 2014.

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209. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, written testimony of Evan Braden Montgomery, April 1,
2015.
210. Matthew Hallex, ‘‘China’s Mighty Missile Threat: What Should America Do
about It?’’ National Interest, September 13, 2014; and Steven Pifer, ‘‘Don’t Scrap the
INF Treaty,’’ National Interest, June 9, 2014.
211. Avery Goldstein, ‘‘China’s Real and Present Danger,’’ Foreign Affairs, August
12, 2013.
212. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of Christopher Yeaw, April 1, 2015; andU.S.-China Economic and Security Review Commission, Hearing on China’s Offensive Missile Forces, written testimony of Elbridge Colby, April 1, 2015.
213. U.S.-China Economic and Security Review Commission, Hearing on China’s
Offensive Missile Forces, oral testimony of James Acton, April 1, 2015; U.S.-China
Economic and Security Review Commission, Hearing on China’s Offensive Missile
Forces, oral testimony of Christopher Yeaw, April 1, 2015; and U.S.-China Economic
and Security Review Commission, Hearing on China’s Offensive Missile Forces, written testimony of Elbridge Colby, April 1, 2015.

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RECOMMENDATIONS
China’s Space and Counterspace Programs
The Commission recommends:• Congress continue to support the U.S. Department of Defense’s
efforts to reduce the vulnerability of U.S. space assets throughcost-effective solutions, such as the development of smaller andmore distributed satellites, hardened satellite communications,and non-space intelligence, surveillance, and reconnaissance assets such as unmanned aerial vehicles.
• Congress direct the U.S. Department of Defense, U.S. Air Force,and relevant agencies within the U.S. Intelligence Community tojointly prepare a classified report that performs a net assessmentof U.S. and Chinese counterspace capabilities. The report should
include a strategic plan for deterring, with active and passive
systems, strikes against U.S. assets in light of other countries’
rapid advancements in kinetic and non-kinetic counterspace technology.
• Congress direct appropriate jurisdictional entities to undertake areview of (1) the classification of satellites and related articles on
the U.S. Munitions List under the International Trafficking inArms Regulations and (2) the prohibitions on exports of Commerce Control List satellites and related technologies to China
under the Export Administration Regulations, in order to determine which systems and technologies China is likely to be able
to obtain on the open market regardless of U.S. restrictions andwhich are critical technologies that merit continued U.S. protection.
• Congress allocate additional funds to the Director of National Intelligence Open Source Center for the translation and analysis ofChinese-language technical and military writings, in order todeepen U.S. understanding of China’s defense strategy, particularly related to space.
China’s Offensive Missile Forces
The Commission recommends:

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• Congress direct the U.S. Department of Defense to provide an
unclassified estimate of the People’s Liberation Army Second Artillery Force’s inventory of missiles and launchers, by type, in future iterations of its Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China, as
included previously but suspended following the 2010 edition.
(389)

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390• Congress direct the U.S. Department of Defense to prepare a report on the potential benefits and costs of incorporating groundlaunched short-, medium-, and intermediate-range conventional
cruise and ballistic missile systems into the United States’ defensive force structure in the Asia Pacific, in order to explore howsuch systems might help the U.S. military sustain a cost-effective
deterrence posture.
• Congress continue to support initiatives to harden U.S. bases in
the Asia Pacific, including the Pacific Airpower Resiliency Initiative, in order to increase the costliness and uncertainty of conventional ballistic and cruise missile strikes against these facilities, and thereby dis-incentivize a first strike and increase regional stability.

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• Congress continue to support ‘‘next-generation’’ missile defense
initiatives such as directed energy and rail gun technologies, andrequire the U.S. Department of Defense to report to committees
of jurisdiction on the status of current component sourcing plans
for the development and production of directed energy weapons.

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CHAPTER 3
CHINA AND THE WORLDSECTION 1: CHINA AND CENTRAL ASIA
Introduction
One of the most visible manifestations of China’s expanding
global engagement has been its cultivation of close economic, political, and security ties with countries in Central Asia (Kazakhstan,
Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan). Beijingsees Central Asia as a potential land bridge to markets in the Middle East and Europe, a source of much-needed oil and natural gas
resources, and a dependable bastion of diplomatic support. But
Central Asia is also a source of anxiety for Beijing, which fears
Islamist groups in its economically and politically fraught western
province of Xinjiang will find common cause with extremist or terrorist groups operating in the region. As the United States reshapes its own Central Asia policy in the wake of the drawdown
in Afghanistan, it will have to take China’s growing presence there
into careful consideration.
This section surveys China’s economic, energy, and security relations with Central Asia. In particular, it explores how China’s engagement with the region has evolved under Chinese President andGeneral Secretary of the Chinese Communist Party (CCP) Xi
Jinping. China’s growing ties with the South Asian country of Afghanistan are also discussed. Additionally, this section examines
how China’s interests in Central Asia both complement and compete with the interests of the United States as well as Russia, andconsiders the implications for the United States of China’s growing
influence in the region. This section draws from the Commission’s
March 2015 hearing on China-Central Asia relations; its July 2015
fact-finding trip to China (Beijing and Urumqi), Kazakhstan(Astana and Almaty), and Uzbekistan (Tashkent); consultations
with experts on Chinese economic, foreign policy, and security affairs; and open source research and analysis.
China’s Central Asia Strategy

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Since the establishment of the Silk Road during the Han dynasty(206 BC–AD 220), Central Asia has intermittently played an important role in China’s economic development and foreign relations.
In modern times, Beijing’s view of Central Asia’s strategic value
has waxed and waned. Fearing Soviet encirclement, Beijing viewed
the region warily while it was part of the Union of Soviet Socialist
Republics (USSR).1 After the fall of the Soviet Union in 1991, however, Beijing began the process of establishing diplomatic relations(391)

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with the new post-Soviet states, seeking to create favorable conditions for the economic development and security of its western frontier. During this time, Beijing cultivated ties with Central Asian
governments, peacefully settled outstanding boundary disputes,
and sought to take advantage of the region’s vast mineral wealth.
When the U.S. War on Terror led Washington to establish bases
and strengthen its strategic links in Central Asia in the 2000s, Beijing again became concerned about encirclement—this time by theUnited States—and sought to strengthen its ties with Central
Asian capitals to sustain Chinese influence.2 Under President Xi,
China’s longstanding efforts to cultivate influence in Central Asia
became official policy in the form of the ‘‘Silk Road Economic Belt,’’
discussed later in this section.

Decades before the Silk Road Economic Belt was announced,
China approached relations with Central Asia with a clear set ofinterrelated objectives: (1) encouraging economic engagement between Central Asia and China’s westernmost province, Xinjiang, tobolster development and stability in that province; 3 (2) eradicating
what it calls the ‘‘three evils’’ of extremism, separatism, and terrorism from the region and preventing them from taking root in
Xinjiang; 4 and (3) expanding China’s economic and geostrategic in-

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Figure 1: Map of Central Asia

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fluence.5 The dominant driver of these objectives is China’s perception that unrest in Xinjiang poses a threat to China’s sovereignty
and stability. However, the most visible manifestation of China’s
engagement in Central Asia is its growing economic presence.

dkrause on DSKHT7XVN1PROD with USCCHow Xinjiang Informs China’s Central Asia Policy
Xinjiang, home to China’s Islamic Uyghur ethnic group,* has experienced varying degrees of unrest in the past several decades. As
in Tibet, many residents of Xinjiang do not culturally or politically
identify with China, and some Uyghur groups advocate for greater
autonomy or full independence for Xinjiang. Beijing views the existence of these groups as a threat to China’s sovereignty and security and has sought to silence them while simultaneously integrating Xinjiang into the social, economic, and political fabric ofGreater China.6
Chinese integration policies in Xinjiang are often violently repressive, alienating Uyghurs and fueling ethnic tensions. A decades-long government-led influx of majority Han Chinese into Xinjiang † was meant to bring greater economic development to the region,‡ but had the effect of disenfranchising local Uyghurs who
found themselves excluded from economically productive sectors.7
This mass Han migration also led to the erosion of Uyghur cultural
identity and language.8 Fearful of the ‘‘three evils,’’ Beijing haslaunched several ‘‘Strike Hard’’ campaigns to ‘‘root out places
where criminals breed, and change the face of the public security
situation’’ in Xinjiang.9 This has manifested in a heavy-handed security apparatus § and led to the adoption of a repressive approachto Islam in Xinjiang. Human Rights Watch cataloged the range ofChina’s repression of religion in Xinjiang, referring to[a] multi-tiered system of surveillance, control, and suppression of religious activity aimed at Xinjiang’s Uyghurs.
. . . At its most extreme, peaceful activists who practice theirreligion in a manner deemed unacceptable by state authorities or CCP officials are arrested, tortured, and at times executed. At a more mundane and routine level, many
Uighurs experience harassment in their daily lives. Celebrating religious holidays, studying religious texts, or
showing one’s religion through personal appearance are* Xinjiang has a population of 21.8 million, and is home to 13 major ethnic groups: the
Uyghurs, Hans, Kazakhs, Mongolians, Huis, Kyrgyz, Manchus, Xibes, Tajiks, Daurs, Uzbeks,
Tatars, and Russians. The four largest ethnic groups are Uyghur (46 percent), Han (39 percent),
Kazakh (7 percent), and Hui (5 percent). Sunni Islam is the most widely practiced religion in
Xinjiang. Anthony Howell and C. Cindy Fan, ‘‘Migration and Inequality in Xinjiang: A Surveyof Han and Uyghur Migrants in Urumqi,’’ Eurasian Geography and Economics 52:1 (2011): 123;
University of Michigan China Data Center, ‘‘China 2010 Census Data Released,’’ September 29,
2011; and China.org.cn, ‘‘Ethnic Minorities of Xinjiang,’’ August 25, 2005.
† A 1953 Chinese census notes Xinjiang’s population was 75 percent Uyghur and 6.7 percent
Han; by 2008, Han Chinese accounted for 39 percent of the population. Anthony Howell andC. Cindy Fan, ‘‘Migration and Inequality in Xinjiang: A Survey of Han and Uighur Migrants
in Urumqi,’’ Eurasian Geography and Economics 52:1 (2011): 119–122.
‡ While the stated objective of Beijing’s immigration program was economic development, one
observer cites political drivers as well, namely: ‘‘counteracting political pressure from Uyghurs. . . to import a loyal Han constituency.’’ Gardner Bovingdon, ‘‘Autonomy in Xinjiang: Han Nationalist Imperatives and Uyghur Discontent,’’ East-West Center, 2004, 23. See also Congressional-Executive Commission on China, 2007 Annual Report to Congress, 2007, 107.
§ For an in-depth examination of China’s recent security and stability maintenance efforts in
Xinjiang and elsewhere, see U.S.-China Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 365–368.

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strictly forbidden at state schools. The Chinese government
has instituted controls over who can be a cleric, what
version of the Koran may be used, where religious gatherings may be held, and what may be said on religious occasions.10
In recent years, the Chinese government has implemented anumber of repressive measures, including banning Islamic veils
and long beards, prohibiting some Muslims from celebrating Ramadan, and, although many Muslims do not drink alcohol, organizing
a beer festival in a heavily Muslim-populated town in an effort toprevent ‘‘illegal religious promotion . . . and guarantee the village’s
harmony and stability,’’ among other restrictions.* 11
Predictably, these policies have fostered resentment that has frequently bubbled over into protests, unrest, and violence, which Beijing in turn often violently suppresses with police and paramilitaryforces.† 12 This cycle of distrust, resentment, fear, and violence has
been a prominent feature of Xinjiang’s governance, particularly
since 2009, when anti-Chinese protests and riots in Xinjiang’s capital, Urumqi, caused the deaths of at least 197 people.13 A stringof particularly violent incidents between 2013 and 2014 led to thedeaths of hundreds more.14 China invariably refers to such incidents as acts of terrorism. Some undoubtedly are,‡ but in manycases it is nearly impossible for outsiders to assess the veracity of
the Chinese government’s accounts of ‘‘terrorist’’ incidents, which
likely exaggerate the ‘‘three evils’’ threat to justify crackdowns. According to Andrew Small, transatlantic fellow at the German Marshall Fund of the United States:
Beijing’s tendency to attribute almost any act of violence inXinjiang to ‘‘separatists,’’ to claim malevolent intent behindeven the most peaceful of protests, and to criminalize political groups . . . leaves the line between the terrorist, the activist, and the aggrieved citizenry permanently blurred.
However, this well-founded skepticism about Beijing’s approach should not obscure the fact that there is, and has
long been, organized militant opposition to Chinese rule in
Xinjiang.15
Beijing fears extremist groups outside China seek to spread theirideology and activities to Xinjiang, and Chinese officials often claim‘‘hostile foreign forces’’ encourage the spread of the ‘‘three evils’’
there.16 These fears are not unfounded. Central Asia is spotted* Such abusive policies are likely to increase if China perceives the threat of instability in Xinjiang is growing. For example, Human Rights Watch writes that a draft counterterrorism law
currently under consideration by China’s legislature ‘‘makes clear the government’s intent to establish a counterterrorism structure with enormous discretionary powers, define terrorism andterrorist activities so broadly as to easily include peaceful dissent or criticism of the governmentor the Communist Party’s ethnic and religious policies, and set up a total digital surveillancearchitecture subject to no legal or legislative control.’’ Human Rights Watch, ‘‘China: Draft
Counterterrorism Law a Recipe for Abuses,’’ January 20, 2015.
† In the absence of reliable Chinese government statistics, a report by the Washington, DCbased Uyghur Human Rights Project estimated that 656–715 people were violently killed in Xinjiang from 2013 to 2014, with Uyghurs accounting for more than 75 percent of the deaths.
Uyghur Human Rights Project, ‘‘Legitimizing Repression: China’s ‘War on Terror’ under Xi
Jinping and State Policy in East Turkestan,’’ March 3, 2015, 8.
‡ For example, four bombings and a knife attack occurred in China between October 2013 andSeptember 2014. In each incident, Uyghurs or Uyghur groups appear to have been involved.
U.S.-China Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 367.

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395
with extremist groups and terrorist organizations that share ethnic, religious, cultural, political, and linguistic similarities with
Uyghurs in Xinjiang. Members of the East Turkestan Islamic
Movement, a Uyghur separatist organization labeled a terroristgroup by China and the United States, reportedly have resided inor been trained by terrorist groups in Pakistan, Afghanistan, andKyrgyzstan.17 In 2014, from his hideout in Pakistan, the leader ofthe East Turkestan Islamic Movement gave an interview to Reuters in which he said: ‘‘China is not only our enemy, but it is theenemy of all Muslims. . . . We have plans for many attacks in
China.’’ 18 Beijing also fears Chinese extremists will join terroristgroups and mount attacks overseas; according to Chinese officials
and media reports, several Chinese citizens, including some fromXinjiang, have joined the Islamic State of Iraq and the Levant(ISIL, also known as ISIS, or IS).19 China’s Middle East Envoy Wu
Sike acknowledged that approximately 100 Chinese citizens may befighting or receiving training in the Middle East.20 One of two suspects in the August 2015 bombing of the popular Erawan Shrinein Thailand, which killed 20 people, is a Chinese Uyghur.21
This reality drives much of China’s engagement with Central
Asia. Xinjiang shares 1,750 miles of border with Kazakhstan, Kyrgyzstan, and Tajikistan, and hundreds of thousands of Uyghurs
live in Central Asia (primarily in Kazakhstan and Kyrgyzstan). According to Marlene Laruelle, professor and director of the Central
Asia Program at the Elliott School of International Affairs at
George Washington University, Kazakhstan at times represses its
Uyghur population because ‘‘Kazakhstan understood that if it
wants to have good relations with China, there is no way it canlook like it is welcoming any kind of Uyghur independence or autonomous movements.’’ 22 In strengthening ties with its westernneighbors, China seeks to create conditions for stability and development in Xinjiang by pursuing a two-pronged, almost contradictory approach: integrating its economy with those of Central Asia
while ensuring Xinjiang is insulated from the region’s pervasive
problem of ethnic and religious conflict and the spread of the ‘‘threeevils.’’ It remains to be seen whether China will be successful in
its efforts to close Xinjiang’s borders to transnational threats while
simultaneously opening them to regional commerce and investment.

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China’s New Silk Road Policy
President Xi announced the Silk Road Economic Belt in a 2013speech at Kazakhstan’s Nazarbayev University. According to President Xi, the initiative is aimed at enhancing regional economic andcultural integration by ‘‘building policy communication,’’ ‘‘having
full discussions on development strategies and policy response[s],’’‘‘improving road connectivity,’’ ‘‘promoting unimpeded trade,’’ and‘‘increasing understanding’’ through people-to-people exchanges.23
China also envisions the Silk Road as a region of ‘‘more capital convergence and currency integration,’’ promoting the use of therenminbi (RMB) and facilitating its internationalization.24
The most immediate objective of the initiative is to encourage
economic development and stability in Xinjiang. According to re-

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searchers who met with the Commission in Xinjiang, Urumqi is‘‘taking direction from President Xi’’ to become the ‘‘centerpiece’’ ofthe Silk Road Economic Belt.25 Currently, some 78 percent of Xinjiang exports go to Central Asian states.26 Authorities in Beijing
believe increased economic activity and trade ties with the region
will benefit the Uyghur population and diminish ethnic unrest.
China hopes that with construction of new roads, railways, and related infrastructure, Urumqi may be transformed into a regionaland financial hub.27 China has already invested more than $91 billion in trade-related infrastructure in Xinjiang.28
Although fostering economic development in Xinjiang is one of
the stated objectives of the Silk Road Economic Belt,29 it remains
to be seen if the initiative will bring significant economic benefits
to China’s Uyghurs. Raffaello Pantucci, director of International
Security Studies at the Royal United Services Institute for Defense
and Security Studies in London, testified to the Commission thatthe vast majority of Uyghurs live in southern Xinjiang, while themajority of the new Silk Road projects and trade routes traverse
the northern part of Xinjiang.30
China’s Silk Road initiatives are not new; they are a culmination
and a rebranding of several previous policies and projects aimed at
linking China with its trading partners.* 31 The land-based Silk
Road Economic Belt has a maritime counterpart, the ‘‘21st Century
Maritime Silk Road,’’ which will run from China’s coast throughSoutheast Asia and the Indian Ocean to Africa and the Mediterranean Sea (see Figure 2). Together, they are commonly referred toas the ‘‘One Belt, One Road’’ initiative. Speaking in March 2015 at
the Boao Forum held in Hainan Province—Asia’s response to theWorld Economic Forum held in Davos, Switzerland—President Xi
said he hopes the annual volume of trade between China and countries along One Belt, One Road will be over $2.5 trillion in a decade.32 (For more on the 21st Century Maritime Silk Road initiative, see Chapter 3, Section 2, ‘‘China and Southeast Asia.’’)* Although China’s engagement with Central Asia had been ongoing for some time, a Kazakhstani government researcher told the Commission that China’s Central Asia policy prior to 2013
had been ‘‘chaotic and ad hoc,’’ but that China’s approach has been ‘‘much more deliberate andstrategic’’ in the years since. Kazakhstan Presidential Library, discussion with Commission,
Astana, Kazakhstan, July 27, 2015.

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Figure 2: China’s Silk Road Economic Belt and 21st Century Maritime
Silk Road

During the Boao Forum, China’s National Development and Reform Commission (the paramount state economic planning agency),
the Ministry of Foreign Affairs, and the Ministry of Commerce released a joint action plan for the One Belt, One Road initiative.
Though the plan did not detail prospective projects, it envisions afuture where China and other countries coordinate their economic
policies, open free trade areas, and lower nontariff barriers.33 The
plan also calls for the expansion of bilateral currency swaps anddevelopment of a bond market in Asia.
Although the initial impact of the One Belt, One Road initiativeis on China’s neighbors in Asia, the Chinese government’s official
action plan calls for bringing together ‘‘China, Central Asia, Russia
and Europe (the Baltic); linking China with the Persian Gulf andthe Mediterranean Sea through Central Asia and West Asia; andconnecting China with Southeast Asia, South Asia and the Indian
Ocean.’’ 34 In other words, the scope of the project is global, andwill require buy-in from countries in Europe and the Middle East
to be effective. In June 2015, Hungary became the first European
country to sign a cooperation agreement with China on promoting
the Silk Road initiatives.35
To facilitate its engagement with countries that fall within One
Belt, One Road, China’s State Council created the $40 billion Silk
Road Fund, which went into operation in February 2015. The fund

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Source: Charles Clover and Lucy Hornby, ‘‘China’s Great Game: Road to a New Empire,’’ Financial Times, October 12, 2015.

398
is financed from China’s foreign currency reserves (accounting forabout 65 percent of the fund), with the rest coming from the government’s sovereign wealth fund, China Investment Corporation(15 percent); and from two policy banks, the Export-Import Bankof China (China Exim Bank) (15 percent) and the China Development Bank (CDB) (5 percent).36 Unlike other recent financing vehicles spearheaded by China (the New Development Bank, also
known as the BRICS * Bank, and the Asian Infrastructure Investment Bank), China is the sole founder and funding source for the
Silk Road Fund. This arrangement will give absolute control overthe various projects to Chinese policymakers. In addition, the National Development and Reform Commission’s action plan for One
Belt, One Road calls for the establishment of a financing institution
administered by the Shanghai Cooperation Organization (SCO, discussed later in this section).37 Funding is expected to come fromother sources as well, varying by project and location. For example,
the CDB announced it will invest over $890 billion into more than
900 projects to bolster the One Belt, One Road initiative.38
Trade, Infrastructure, and Natural Resources in China’s
Central Asia Engagement

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Although the primary objective of China’s economic engagementwith Central Asia is to promote the security and development of
Xinjiang, this policy has significant benefits for China’s overall economic growth. First, China intends to diversify its energy portfolio
by gaining access to Central Asian resources. Second, Beijing seeks
to develop new markets for its companies through construction ofroads and railways, with the ultimate goal of reaching Russia,
Iran, and Europe. This has an added corollary of creating outlets
for Chinese industries, such as iron, steel, and cement, which areexperiencing overcapacity and slackening domestic demand due toChina’s economic slowdown (for more on China’s economic slowdown, see Chapter 1, Section 3, ‘‘China’s Economic Reforms’’). Finally, China seeks to engender political goodwill and influence byfostering economically based ‘‘good neighborly relations.’’ 39 For
landlocked Central Asia, China’s economic largesse is an opportunity to upgrade its outdated infrastructure and connect to theglobal economy. Central Asian states also welcome China as acounterbalance to Russia, which until recently tended to dominate
the former Soviet republics.40
While China’s economic engagement with Central Asia appears
most often in imports of natural resources or investment in energy
companies and energy-related infrastructure, China has also become an important source of exports of manufactured goods andloans to non-energy-related projects. The structure of the tradeshows a lack of diversity, with China exporting finished goods andimporting natural resources. Despite the strength of its energy exports, Central Asia as a whole tends to run trade deficits with
China (see Table 1). Yet trade data do not tell the full tale. For
most of these countries, China is not just an important trade partner; it is the largest by a wide margin (see Table 2).
* BRICS is the acronym for five major emerging economies: Brazil, Russia, India, China, andSouth Africa.

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Table 1:China’s Exports to and Imports from Central Asia
(US$ millions)
Amount2005

2008

Share of Central Asia

2011

2014

2005 2008 2011 2014

CentralAsia Total

Exports 5,229.3 22,593.5 18,588.7 24,065.7
Imports 3,491.0 8,226.5 20,998.5 20,914.0
Balance 1,738.3 14,367.0 (2,409.7) 3,151.8

Kazakhstan

Exports 3,898.9
Imports 2,902.3
Balance
996.6

9,819.6 9,567.8 12,722.3 74.6% 43.5% 51.5% 52.9%
7,726.2 15,329.0 9,698.5 83.1% 93.9% 73.0% 46.4%
2,093.4 (5,761.2) 3,023.8 ————Kyrgyzstan

Exports
Imports
Balance

865.9
104.6
761.4

9,213.8
121.2
9,092.6

4,878.8
97.5
4,781.3

5,245.1 16.6% 40.8% 26.2% 21.8%
54.4 3.0% 1.5% 0.5% 0.3%
5,190.7 ————Tajikistan

Exports
Imports
Balance

143.9
14.2
129.7

1,479.7
20.2
1,459.5

1,997.0
72.0
1,925.0

2,469.2
47.7
2,421.5

2.8%
0.4%
—

6.5% 10.7% 10.3%
0.2% 0.3% 0.2%———

Turkmenistan

Exports
Imports
Balance

90.4
19.0
71.5

803.0
785.8
954.4
28.4 4,693.2 9,516.2
774.5 (3,907.4) (8,561.7)

1.7%
0.5%
—

3.6% 4.2% 4.0%
0.3% 22.4% 45.5%———

Uzbekistan

Exports
Imports
Balance

230.2
451.0
(220.8)1,277.4
330.4
947.0

1,359.4
806.8
552.7

—
—
—

2,674.7 4.4%
1,597.1 12.9%
1,077.5 —

—
—
—

5.7%
4.0%
—

—
—
—

—
—
—

7.3% 11.1%
3.8% 7.6%——

Note: The table describes China’s exports to, imports from, and trade balance with each country. Amounts in parentheses indicate a trade deficit.
Source: China Ministry of Commerce via CEIC database.

Table 2: China’s Place in Exports and Imports of Central Asian States, 2013
Exports

Imports

Share

Rank

Share

Rank

Kazakhstan

19.5%

1

17%

2

Kyrgyzstan

4%

7

34%

1

Tajikistan

11%

2

46%

1

Turkmenistan

77%

1

15%

3

Uzbekistan

31%

1

21%

2

Source: The Atlas of Economic Complexity. http://atlas.cid.harvard.edu/.

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Although official statistics often understate the true magnitudeof Chinese foreign direct investment (FDI) in Central Asia, they
demonstrate a clear upward trend. As Figure 3 shows, the global
financial crisis of 2008 was a turning point, after which Chinese investment soared, especially in Kazakhstan, where it reached $7 billion by the end of 2013.

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400
Figure 3: Accumulation of Chinese FDI in Central Asia, 2003–2013

When it comes to trade, investment, and loans, Kazakhstan, theregion’s largest economy, is the dominant player. In 2014, Kazakhstan accounted for 53 percent of China’s exports to Central Asia,and 46 percent of imports (see Table 1). Kazakhstan’s importanceis evident on many fronts. In September 2013, President Xi choseto inaugurate his Silk Road vision in Astana, Kazakhstan’s capital.
During that visit, Kazakhstan received the lion’s share of signed
agreements (up to $30 billion), compared with $8 billion in Turkmenistan, $15 billion in Uzbekistan, and $3 billion in Kyrgyzstan.41 Since then, Kazakhstan has continued receiving significant
Chinese investment. During Chinese Premier Li Keqiang’s 2014
visit to Kazakhstan, the two countries signed $14 billion worth of
economic deals, and in March 2015, Kazakhstan’s Prime Minister
Karim Masimov concluded his visit to China with deals worth another $23.6 billion.42
Kyrgyzstan is the second-largest destination for Chinese exports.
Turkmenistan is the only country in Central Asia that has had a
trade surplus with China, due to exports of natural gas. Uzbekistan, less important than Turkmenistan in terms of gas exports,
is courting Chinese investment. In 2014, Uzbekistan’s President
Islam Karimov and President Xi signed an agreement for cooperation in diverse sectors, including energy, high technology, and finance, with deals worth $6 billion between 2015 and 2018.43
Kyrgyzstan and Tajikistan, the two smaller, energy-poor statesin the region, have benefited less from China’s expansion in Central Asia than the other countries, though both are adapting in
unique ways. Kyrgyzstan has exploited its central geographical position to become a regional wholesale market.44 Two-thirds of Kyrgyzstan’s imports come from China; Kyrgyzstan then re-exports
three-quarters of these goods (primarily clothes and electrical products), mostly to Uzbekistan and Kazakhstan.45 So great is Kyrgyz-

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Source: China’s Ministry of Commerce via CEIC database.

401dkrause on DSKHT7XVN1PROD with USCC

stan’s dependence on China that re-exports of Chinese goods account for about 15 percent of its gross domestic product (GDP).46
Tajikistan, Central Asia’s poorest country, has traditionally depended on remittances from Russia for economic survival (according to World Bank estimates, remittances—90 percent of which
originate from Russia—represent nearly half of the country’sGDP).47 However, with Russia’s economy hit by U.S. and European
sanctions over annexation of Crimea, and the economy further
weakened by the falling price of oil, Russian remittances to Tajikistan have been declining rapidly: in U.S. dollar value, remittances
dropped 8.3 percent in 2014 year-on-year, and 40 percent the firsttwo months of 2015 over the same period of 2014.48 Wedged between China, Afghanistan, and Turkmenistan, making it advantageous for transport routes, Tajikistan hopes to leverage its geographic position to attract Chinese investment.49 In 2014, China
committed to invest at least $6 billion in Tajikistan over the next
three years—a sum equivalent to two-thirds of Tajikistan’s 2013
GDP and more than 40 times its annual foreign direct investment.50 As of July 2014, China Exim Bank, the largest single creditor to Tajikistan, held over 40 percent of Tajikistan’s external
debt, compared with the World Bank and Asian Development
Bank, which held 16 percent and 14 percent, respectively.51
As China’s trade with the region rises exponentially, its engagement has become more comprehensive. According to Alexander
Cooley, professor of political science at Barnard College, Columbia
University, China’s role in Central Asia is shifting from a merecommercial partner to a ‘‘regional provider of collective goods—including economic mediation and governance, development financing
and even emergency lending.’’ 52 In fact, according to Dr. Cooley,with its massive investments in Central Asia’s infrastructure,
China had become the region’s ‘‘de facto development assistanceprovider.’’ 53 The rest of this section considers this broader regional
engagement.
Strengthening Energy Security
China has shifted from energy self-sufficiency in the 1980s to dependence on external sources of oil for about half of its consumption needs. Eighty percent of China’s energy imports arrive from
the Middle East and West Africa by passing through the narrow
Strait of Malacca, which China perceives is vulnerable to blockade(the so-called ‘‘Malacca dilemma’’).54 Chinese leaders therefore lookto oil- and natural-gas-rich Central Asian countries to diversify
China’s energy sources and bypass critical maritime chokepoints.55
Kazakhstan is the primary recipient of Chinese investment inCentral Asian oil. China’s largest national oil company, China
National Petroleum Corporation, is the majority owner of two of
Kazakhstan’s major oil companies (it owns 85.42 percent of
AktobeMunaiGas and 67 percent of PetroKazakhstan) and is involved in several oil exploration and production projects throughout
the country.56 China’s sovereign wealth fund, China Investment
Corporation, also invested almost $1 billion in Kazakh energy in2009.57 Chinese companies control up to half of Kazakhstan’s oil
production.58 During his September 2013 tour of Central Asia,
President Xi reportedly signed agreements for $8 billion in loans

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402
from the CDB and China Exim Bank to Kazakhstan 59—loans thatwill likely finance energy projects as well.
Chinese investment in Central Asian natural gas focuses on
Turkmenistan, which has the sixth-largest natural gas reserves in
the world.60 In 2012, over half of Turkmenistan’s 1.6 trillion cubicfeet of natural gas exports went to China, and the two countries
signed several natural gas contracts to increase exports to 2.3 trillion cubic feet by 2020.61 In 2014, China National Petroleum Corporation, the dominant foreign player in Turkmenistan’s hydrocarbon sector, invested around $4 billion in the industrial development of Turkmenistan’s natural-gas-rich Bagtyyarlyk field.62
All of China’s Central Asian energy imports are transported via
two pipeline networks: the Kazakhstan-China oil pipeline delivers
Kazakh oil to Xinjiang, and the Central Asia-China natural gas
pipeline delivers Turkmen (and to a lesser extent, Uzbek) natural
gas to China by way of Turkmenistan, Uzbekistan, and Kazakhstan (see Figure 4). Chinese companies played a major role in funding, construction, and operation of these pipelines, with China National Petroleum Corporation occupying the lead position. Other
companies, including Sinopec (another state-owned oil company)
and CITIC (a state-owned conglomerate) are minor players by comparison.63 China also backs new oil refineries in Central Asia, or
finances upgrades to old ones, since Central Asian states lack sufficient refinery capacity.64

Source: Tom Miller, ‘‘Travels along the New Silk Road: The Economics of Power,’’ Gavekal
Dragonomics, October 24, 2014.

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Figure 4: Oil and Natural Gas Pipelines from Central Asia to China

403

dkrause on DSKHT7XVN1PROD with USCCThe Central Asia-China natural gas pipeline consists of threelines (known as Lines A, B, and C), the latest of which came online
in 2014. Construction of the fourth line, Line D, is scheduled tostart in December 2015.65 All lines originate in Turkmenistan, butwhere Lines A, B, and C run parallel to each other through Uzbekistan and Kazakhstan, Line D will bypass Kazakhstan, going
through Kyrgyzstan and Tajikistan instead, allowing Central Asia’spoorest countries to collect transit fees.66 China has not provided
a clear explanation for the inclusion of these energy-deficient countries in the pipeline network, though statements by China National
Petroleum Corporation point to the desire to boost regional presence.67 The corporation said by 2020 the four lines of the Central
Asia-China pipeline will carry over 2.8 trillion cubic feet of natural
gas per year.68
Though China’s energy needs are such that China will neverovercome the ‘‘Malacca dilemma’’ with imports of Central Asian energy, some diversification is taking place. In 2004, China imported
26,000 barrels per day of oil from Kazakhstan; in 2014, the Kazakhstan-China oil pipeline shipped 240,000 barrels per day toChina (approximately 100,000 barrels of Kazakh oil and 140,000
barrels of Russian oil), accounting for just 4 percent of China’s total
crude oil imports.69 By comparison, for the same year Saudi Arabia
supplied 20 percent of total crude imports and was China’s top oil
supplier.70
Turkmenistan, on the other hand, has emerged as China’s largest supplier of natural gas after the Central Asia-China pipeline
went into operation in 2009. In 2014, Turkmenistan delivered 911
billion cubic feet of natural gas, accounting for 44 percent of China’s imports.71 Uzbekistan, a relative latecomer, started exporting
natural gas to China in 2012, though there are plans for growing
the relationship.72 For example, Uzbekneftegaz announced that gas
supplies to China will be increased from 211 billion cubic feet to353 billion cubic feet per year in 2015.73
In addition to directly purchasing or investing in hydrocarbon
projects, China provides energy-backed loans to Central Asianstates. During the 2008 financial crisis, China provided two loans
to Turkmenistan, valued at about $8 billion, in exchange for natural gas delivery commitments. China also concluded $13 billion
worth of loans for energy deals with Kazakhstan, including a $3
billion loan in 2013 after China National Petroleum Corporationacquired a stake in an international oil consortium developing theoffshore Kashagan oil field, the world’s largest oil field discovery in
35 years.74
Transportation Infrastructure and Other Sectors
According to S. Frederick Starr, chairman of the Central AsiaCaucasus Institute and Silk Road Studies Program at the Johns
Hopkins University School for Advanced International Studies,
China ‘‘elevates transport to the level of a geopolitical project ofprime importance’’ in Central Asia.75 Most countries targeted by
China’s Silk Road initiatives have outdated or failing infrastructure, and lack the funds for upgrades. Seeking to fill this gap,
China has invested heavily in Central Asian transportation systems. China stands to benefit from infrastructure improvement in

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Central Asia in several ways: First, it facilitates trade with Europe
and other regions.* Second, routes heading to China’s border posts
will reach isolated regions, boosting development and enhancing
domestic connectivity.76 Third, Chinese companies, including thestate-owned railway enterprises, heavy equipment manufacturers,
and construction specialists, will profit from overseas infrastructure projects.77
Several existing and new transportation infrastructure projects
exemplify this trend:• A $79.8 billion road project launched in 2015 in northwestern
Gansu Province will add 60,000 kilometers (37,282 miles) tothe existing transportation network connecting China’s westernmost provinces to North and Central Asia.78• A railway stretching 13,000 kilometers (over 8,000 miles), inaugurated in 2014, connects Yiwu, a small consumer goods hub
located on China’s coast, with Madrid. This railway, theworld’s longest, traverses China, Kazakhstan, Russia, Belarus,
Poland, Germany, and France before reaching Spain.79

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Kazakhstan, which shares a border with China and Russia, thus
presenting the most direct land route to Europe, had become thefocus of China’s infrastructure efforts in Central Asia even before
the inauguration of the Silk Road Economic Belt. China has built
a series of rail links connecting Urumqi to the Chinese city of
Khorgos, which borders Kazakhstan, and is an important hub
along the existing Soviet-era railway networks.80 The first rail
services along this ‘‘New Eurasian Land Bridge’’ began in 2012,
with passage from western China to western Europe taking up to
three weeks depending on destination, instead of five weeks using
trucks and ships.81 Companies like HP, Acer, and Foxconn use theroute to export computers from their manufacturing bases inland.82
China also built a free trade zone in Khorgos, though it has notbeen well used because it is five hours away from the next nearest
city, Almaty.83 China is working on addressing that transportation
concern as well, with plans to upgrade the highway to Almaty—thelast section of a transcontinental highway from China’s east coast
port of Lianyungang to Russia’s St. Petersburg—to be opened by
2016.84 In addition, researchers at the Xinjiang Academy of Social
Sciences told the Commission the central government in Beijing
would like to expand high-speed rail in Xinjiang, linking the province with Central Asia (particularly from Urumqi to Kazakhstan)
and with China’s eastern provinces.85
In Kyrgyzstan, an $850 million allocation from the state-owned
China Exim Bank is financing construction and reconstruction ofmajor highways expected to facilitate regional trade.86 In Tajikistan, using a $900 million loan from China, Chinese companies
built roads linking the capital, Dushanbe, with important provincial towns.87 In 2013, President Xi signed with Uzbekistan a contract for the construction of a $455 million railway tunnel in Uz* Goods traveling to Europe via the maritime route take anywhere from 20 to 40 days; theinland route, by contrast, would allow Chinese products to reach European markets in 11 days.
Camille Brugier, ‘‘China’s Way: The New Silk Road,’’ European Union Institute Security Studies,May 2014.

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405

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bekistan.88 Central Asian countries have also been purchasing locomotives and passenger carriages from Chinese suppliers.89
In his testimony before the Commission, George Washington
University professor Sebastien Peyrouse documented extensive investment by Chinese companies in other sectors as well—fromhydroelectricity to communications. These projects are usually financed by China Exim Bank, the CDB, or funds secured in joint
venture partnerships.90 Some examples of these projects are outlined here:• Telecommunications: Chinese telecommunications companies
ZTE and Huawei are engaged in the development of wirelesstelephone networks in Kazakhstan, Tajikistan, and Turkmenistan.91• Hydroelectricity: Chinese companies have entered partnerships
with Central Asian states in the interest of having hydroelectricity delivered to Xinjiang or exported to countries farther
south, including Afghanistan and Pakistan.92• Uranium: Uranium plays an important role in China’s economic partnership with Kazakhstan. After signing several cooperation agreements and strategic partnerships between Chinese companies and Kazatomprom, the Kazakhstani national
company, Kazakhstan became China’s main foreign supplier ofuranium. Kazakhstan has agreed to supply a total of about
24,000 tons of uranium to China by 2020.93 China is also active in Uzbekistan: in 2009, the Guangdong Nuclear UraniumCorp. signed an agreement with the State Committee of Geology and Mineral Resources to establish a joint venture for the
exploration of deposits in the Navoy region, whose uranium
will be commercialized by the Chinese company.94• Cement: Chinese firms are involved in the construction ofmany large cement factories in Tajikistan and Kyrgyzstan. Beijing has also proposed small-scale projects for the constructionof mini-mills and factories for the production of bricks.95
It is worth noting that road and rail infrastructure have military
applications as well.* Many of China’s highways and rail systems
have been designed to military specifications.96 China’s new highway and rail projects in Xinjiang—a large yet remote region witha smaller and more dispersed military presence relative to China’s
eastern regions 97—likely are being designed with these applications in mind.
China’s promise of enhanced interconnectedness and improved
infrastructure leaves Central Asian states with a dilemma. Although they welcome Chinese trade and investment, many Central
Asians—particularly in Kazakhstan and Kyrgyzstan, which havelong borders with China—are wary of Chinese people migrating to
the region. Statistics on Chinese migration patterns to Central Asia
are unreliable, but Dr. Laruelle testified that ‘‘figures are mod* For example, the U.S. Strategic Highway Coordinator Network, consisting of more than
1,700 miles of corridors and interstate highways planned jointly by the U.S. Department of Defense and U.S. Department of Transportation, was designed to facilitate rapid deployment of
troops and equipment for national security purposes. Rodney E. Slater, ‘‘The National Highway
System: A Commitment to America’s Future,’’ Federal Highway Administration, 1996.

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406
est.’’ 98 Nevertheless, Dr. Laruelle noted anxieties persist becausethe ‘‘potential for a Chinese ‘migration invasion’ into Central Asia
would mean a fundamental undermining of the new states’ autonomy. Whereas the region has fewer than 60 million inhabitants, anover-populated China contains over 1.3 billion people.’’ 99 As a result, most Central Asian countries have enacted strict visa restrictions for Chinese travelers.100 A Kazakhstani foreign policy analyst
with whom the Commission met in Almaty noted that Kazakhstan
has been reluctant to incentivize Chinese tourism to the country forfear that Chinese tourists would overstay their visas, causing Kazakhstan to ‘‘become too dependent on Chinese tourism for its economy and thus lose leverage to Beijing.’’ 101
China’s Security Engagement with Central Asia
As with its economic engagement, China crafts its approach tosecurity relations with Central Asian countries with the domestic
security situation in Xinjiang in mind. China-Central Asia security
cooperation is designed largely to address shared concerns about
terrorism and extremism. According to Zhang Xinfeng, one of China’s top officials with responsibility for Central Asia, ‘‘Terrorism attacks in Xinjiang are closely related to the activities of terrorist,
separatist, and extremist forces in Central Asia, so joint anti-terrorist efforts from the [Central Asian] countries are crucial to China’s stability.’’ 102 This cooperation is facilitated in part by Central
Asian and Chinese governments’ shared willingness to use repression and government control—in varying degrees—to defend sovereignty and maintain stability.103
The Shanghai Cooperation Organization

dkrause on DSKHT7XVN1PROD with USCCThe SCO, established in 2001 by China, Russia, Kazakhstan,
Kyrgyzstan, Tajikistan, and Uzbekistan (and which agreed toadmit India and Pakistan as new members in June 2015), is theprimary vehicle for China’s security engagement with Central
Asia.* Although the SCO ostensibly concerns itself with a wide
range of issues, including economic cooperation, energy ties, counternarcotics, tourism, cultural exchanges, and international affairs,
counterterrorism is the stated primary focus of the organization.104
One of the SCO’s foundational documents, the 2005 Concept of Cooperation, states SCO cooperation on counterterrorism focuses ondeveloping unified political, legal, and law enforcement approaches
to counterterrorism; conducting joint counterterrorism exercisesand developing counterterrorism personnel; sharing information
about terrorists and suspected terrorists and developing shared capacity for counterterrorism research and analysis; and collaborating with civil society and mass media to combat terrorism,
among other activities.105 In some respects, this list of objectives
remains aspirational, as illustrated below.
* Turkmenistan, in keeping with its isolationist foreign policy, is the only Central Asian country that is not a member of the SCO. There currently are four SCO observers (Afghanistan,
Belarus, Iran, and Mongolia), six dialogue partners (Armenia, Azerbaijan, Cambodia, Nepal, Sri
Lanka, and Turkey), and three guests (the Association of Southeast Asian Nations, Turkmenistan, and the Commonwealth of Independent States). The SCO’s predecessor, the Shanghai Five
(China, Russia, Kazakhstan, Kyrgyzstan, and Tajikistan), was established in 1996.

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407
Aside from frequent joint statements and regular high-levelmeetings, military exercises are the most visible manifestation of
the SCO’s activities. China has participated in 15 military drills or
exercises under the auspices of the SCO since 2002, when China
conducted its first-ever military exercise with another country, Kyrgyzstan.106 These exercises always include China and at least one
other SCO country, and have included anywhere from a few hundred to 10,000 personnel.107 All but one of these exercises havefocused explicitly on counterterrorism; various activities have included apprehending illegal border crossers, rescuing hostages, recovering a hijacked airplane, subduing ethnic conflict, engaging inclose combat, and conducting reconnaissance, electronic warfare,and psychological warfare.108
On the whole, these exercises are not particularly sophisticated,and observers point out that they are largely scripted events withminimal interoperability demonstrated by troops from the participating countries. Interoperability is hindered in part by language
barriers: Russian is the common operating language used in the exercises, requiring the Chinese participants to rely heavily on translators, which can be time consuming and cumbersome.109 Nevertheless, the SCO has been a valuable vehicle for the People’s Liberation Army (PLA) to gain much-needed experience.* Close to halfof China’s military exercises with other countries have been held
under SCO auspices, enabling the PLA to interact with politicaland military leadership of other countries; operate in unfamiliar
environments outside China; address linguistic, cultural, and otherlogistical barriers to effective communication with foreign troops;
and practice battlefield tactics and combat methods.110 The PLA
has also achieved a number of firsts in its SCO exercises: in its Coordination-2006 exercise with Tajikistan, the PLA Air Force for the
first time transported troops across the Chinese border; and in thePeace Mission-2007 exercise, the PLA conducted its first joint landair exercise outside Chinese territory.111
The SCO’s Regional Anti-Terrorism Structure

dkrause on DSKHT7XVN1PROD with USCCThe SCO’s only permanent operational entity, the Regional
Anti-Terrorist Structure (RATS) headquartered in Tashkent,
Uzbekistan, is the organization’s clearinghouse for exchanging
information on suspected terrorists and promoting common
counterterrorism practices. RATS is notoriously opaque, but isknown for its role in the extradition of suspected terrorists toand from member countries, and for its secret ‘‘black list’’ of approximately 1,000 individuals and 40 organizations.112 In their2012 book, The Chinese Question in Central Asia: Domestic
Order, Social Change, and the Chinese Factor, Drs. Laruelle andPeyrouse write:* The PLA was joined in several of these exercises by People’s Armed Police border troops,
anti-terror reconnaissance units, and militia personnel. Dennis J. Blasko, ‘‘People’s Liberation
Army and People’s Armed Police Ground Exercises with Foreign Forces, 2002–2009,’’ in Roy
Kamphausen et al., The PLA at Home and Abroad: Assessing the Operational Capabilities ofChina’s Military, Strategic Studies Institute, 2010, 384–387.

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408
The SCO’s Regional Anti-Terrorism Structure—Continued
It seems that on several occasions the Chinese authorities
have requested their Central Asian partners to arrest anddeport some Uyghur opponents, and when alleged Islamists cross the border, they are followed by the RATS joint
procedures set up to monitor them. However, it is difficult
to say whether this type of information exchange has been
made possible thanks to RATS, or rather whether it took
place in a bilateral framework. Truly sensitive matters,such as the expulsion of Uyghur opponents to China, aregenerally managed at the highest levels of bilateral relations.113

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Testifying in 2011 to the Tom Lantos Human Rights Commission of the U.S. House of Representatives, Martin Scheinin, thenUN special rapporteur on human rights and counterterrorism,
asserted RATS’ activities (and those of the SCO in general) poseserious human rights concerns.114 For example, the SCO charter
conflates acts of extremism, separatism, or terrorism, and considers all three to be extraditable offenses, whereas internationallaw follows the principle that only acts of terrorism—not to include crimes related to extremism or separatism, no matter how
serious—may be targeted by counterterror legislation.115 China
regularly pressures neighboring countries to detain and deport
Chinese Uyghurs (many of whom are refugees) back to China.
China often refers to these individuals as criminals or terrorists,
but in many cases they appear to be ordinary citizens seeking
economic opportunity or fleeing religious and cultural repressionin China. Once back in the country, these forcibly returned individuals often ‘‘disappear’’ into China’s secretive security apparatus.116
China is by far the dominant actor in the SCO, and its priorities
drive the organization’s agenda.117 The SCO serves three main
purposes for China: First, in adopting China’s ‘‘three evils’’ construct118 and sharing its heavy-handed approach to ethnic unrest,
the SCO lends a veneer of international legitimacy to China’s
brand of stability maintenance.119 Second, it provides China the opportunity to use intelligence and resources from neighboring countries to inform and augment its domestic security activities in Xinjiang. Third, as the first intergovernmental organization with Chinese leadership, the SCO provides Beijing an avenue to demonstrate regional leadership and goodwill. In particular, it provides
an opportunity for China to seek a larger security role in what haslong been Russia’s sphere of influence.
For all its utility to China, the SCO has avoided taking on someof the region’s most pressing challenges, like cross-border water
conflicts, civil unrest, and participating in postwar Afghanistan reconstruction efforts.120 The reluctance of SCO countries to be perceived as interfering in the internal affairs of other countries also
contributes to its ineffectiveness. According to Drs. Laruelle andPeyrouse, even RATS, arguably the most tangible manifestation of

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dkrause on DSKHT7XVN1PROD with USCCSCO action, is apparently viewed by China as ‘‘an empty shell with
virtually no efficacy.’’ 121 As SCO membership is set to expand with
the inclusion of regional rivals India and Pakistan, achieving consensus on sensitive issues may be even more difficult.122 Moreover,Russia actively seeks to undermine the efficacy of the SCO (see‘‘China in Russia’s Backyard?’’ later in this section).
China’s Bilateral Security Cooperation with Central AsianCountries
China’s security engagement with Central Asian countries is limited outside the umbrella of the SCO. This is due in large part toChina’s preference to conduct even its bilateral security engagements with these countries through the SCO, presumably to lend
substance to the organization and avoid creating the impressionthat China is unilaterally pursuing self-interested objectives in theregion.123 When bilateral engagement does occur, it is usually inthe form of border security cooperation, arms sales, and militaryeducation and training.
China and Central Asian countries sometimes cooperate on nontraditional security issues like drug trafficking and organizedcrime. For example, Chinese and Kazakhstani border security
forces have conducted drug-seizing operations along their sharedborder since 2008 (in 2012, 70 percent of drugs in Urumqi werefrom South and Central Asia).124 Efforts in this area remain minimal, however, despite hopeful pronouncements during bilateralmeetings that the two sides will enhance cooperation on drug trafficking.125 China also cooperates with Tajikistan on counternarcotics (Tajikistan is a major conduit for opium trafficked fromCentral and South Asia to China).126 In 2014, a joint force of morethan 5,000 Tajikistani and Chinese police seized 181 kilograms ofheroin and other illegal drugs and arrested 38 suspected drug manufacturers and dealers.127
Reports indicate China allocated approximately $40 million
worth of military aid (including equipment sales, construction of
military facilities, loans for purchases of military equipment, andother forms of military assistance) to Central Asia from the 1990s
to 2014. Equipment transfers have mostly included small arms
(such as sniper rifles), communications equipment, vehicles, mobile
scanning equipment to monitor border crossings, and other unspecified military hardware.128 According to U.S. diplomats who met
with the Commission in Uzbekistan, China is among Uzbekistan’s
biggest suppliers of security-related products, which since 2013
have included surface-to-air missiles and at least one unmanned
aerial vehicle (the cost of which is not included in the aforementioned $40 million figure).129 China’s arms sales to Central Asia
represent a small share of China’s global arms sales, and pale incomparison to Russian arms sales to the region.130 China also provides military education and training to Central Asian troops, although language barriers limit the efficacy of such interactions.131
China’s ability to expand its security presence in Central Asia
may grow over time, particularly if a new draft counterterrorism
law under consideration by China’s National People’s Congress
passes. The draft law stipulates that the PLA or China’s police
force could send troops outside the country to perform counter-

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terror missions with a host country’s approval.132 If passed, thislaw could have broad applicability in Central Asia given China’s
terrorism concerns there and existing structures for collaborationand information sharing between Beijing and Central Asian capitals.
The Question of Afghanistan
Since 2012, China has pursued an increasingly proactive policy
toward Afghanistan. This marks a decisive shift from previous
years, during which China largely avoided engagement with Afghanistan.* 133
China for several decades perceived Afghanistan through the lensof ongoing competition with Russia and the United States for influence in Central Asia, though China’s engagement in the country
was minimal.† After September 11, 2001, the threat of terrorism
emanating from Afghanistan and the consequent U.S. militarypresence in the region caused Afghanistan’s strategic importance toChina to grow; but even then, bilateral engagement remained limited. Since 2012, however, China appears to have come to termswith the fact that creating conditions for stability in Xinjiang requires it to take greater responsibility for the security and stabilityof Afghanistan as the United States and International Security Assistance Force withdraw from the country and the region.134 Still,
China’s security engagement with Afghanistan is in a nascentstage.

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Drivers of China’s Shifting Approach to Afghanistan
As with its Central Asian neighbors, China seeks to ensure terrorist or other groups in Afghanistan do not contribute to instability in Xinjiang or provide a safe haven for militant Uyghurs. Estimates of militant Uyghurs operating from Afghanistan range
from the tens to the low hundreds. They affiliate largely with theIslamic Movement of Uzbekistan, a terrorist organization that operates primarily from Afghanistan.135 One senior Afghan Talibancommander told Reuters in 2014 that ‘‘[Chinese Uyghurs] live herewith us but are always concerned about their people and missionin China. They are nice people, good Muslims and the best fighters.’’ 136 It is unclear, though, whether Taliban-affiliated Uyghurs
have participated in any terrorist activity in China.
Beyond the immediate concern related to China’s Uyghurs, Beijing is increasingly worried the International Security Assistance
Force’s departure from Afghanistan will leave the country in chaos,and fears the potential implications for stability in Afghanistan,South and Central Asia, and—ultimately—China.137 As noted
above, however, China had been reluctant to play any role in Afghanistan, largely rebuffing requests by the international community to contribute to security activities in the country.138 This was* China had robust relations with Afghanistan’s mujahedeen in the 1980s, but Afghanistan
was largely absent from China’s foreign policy in the 1990s. Andrew Small, The China-Pakistan
Axis: Asia’s New Geopolitics, Oxford University Press, 2015, 123.
† China’s Afghanistan policy also is closely tied to its relations with Pakistan. In his 2015
book, The China-Pakistan Axis: Asia’s New Geopolitics, Andrew Small asserts that for several
decades, ‘‘much of Beijing’s Afghanistan policy was effectively run through Pakistan.’’ Andrew
Small, The China-Pakistan Axis: Asia’s New Geopolitics, Oxford University Press, 2015, 162.

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in large part due to deep skepticism and fears of encirclement as
the U.S. military quickly established a robust presence in Afghanistan and Central Asia in the early 2000s. After the Obama Administration announced its plan to gradually withdraw forces from theregion in 2011, China’s concerns shifted from the U.S. presence tothe uncertain future of a post-occupation Afghanistan.139 Startingin 2012, China began to signal greater willingness to contribute to
Afghanistan’s security. Recent engagement in the region includes:• In September 2012, then Chinese Minister of Public Security
and Politburo Standing Committee member Zhou Yongkang
traveled to Afghanistan—the highest-level visit by a Chinese
official since 1966—and pledged China would train about 300
Afghan police officers over the next four years.140• Also in 2012, China and the United States began an annual
collaborative program to train Afghan diplomats in either Beijing or Washington, DC.141 In 2013, bilateral cooperation became more institutionalized, with the two sides establishingregular meetings on Afghanistan through the biannual Strategic & Economic Dialogue.142• During Afghan President Ashraf Ghani’s 2014 state visit to
Beijing (his first foreign trip after becoming president), Chinese Foreign Minister Wang Yi pledged, ‘‘We will help Afghanistan to enhance its counterterrorism capabilities.’’ 143 It is unclear, however, what form this assistance will take. That same
year, Beijing appointed a special envoy for Afghanistan under
the Ministry of Foreign Affairs.144• In November 2014, China sent a military equipment package
worth $1 million to the Afghan Ministry of Interior Affairs.
The equipment package included 17 types of military equipment to increase Afghan police force capabilities and assist
them in seizing narcotics and drugs.145• In addition to strengthening bilateral diplomatic relations,
China increasingly seeks to engage Afghanistan in multilateralcontexts, primarily via the SCO-Afghanistan Contact Group(established in November 2005).146 Afghanistan became an observer to the SCO in 2012.147

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• Chinese Ambassador to Afghanistan Deng Xijun remarked in
November 2014 that China supports ‘‘the ‘Afghan-led and Afghan-owned’ peace and reconciliation process,’’ 148 referring to
Afghanistan’s internal peace process between the governmentand opposition groups, including the Taliban, with which Beijing is increasingly engaging.* 149 China in the past year has
publicly indicated its interest in hosting or mediating politicaltalks between the Afghan civilian government and the Taliban,
and in July 2015 participated (along with the United States
and Pakistan) in the first of a series of planned talks between
the two sides.150 It is unclear, however, whether China can* A high-level Taliban delegation visited Beijing as recently as December 2014, according tomedia reports. Nathan Hodge, Habib Khan Totakhil, and Josh Chin, ‘‘China Creates New Avenue for Afghan Peace Talks,’’ Wall Street Journal, January 6, 2015.

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provide the diplomatic prowess and leadership required tomake meaningful progress toward reconciliation,151 especiallygiven the death—reported in late July 2015—of longtime
Taliban leader Mullah Omar, who had been Beijing’s most important contact with the group.152
China’s relationship with the Taliban is complicated. Before September 11, 2001, Beijing maintained good relations with the Afghan Taliban, offering engagement in exchange for the Taliban’s
promise that it would not provide cover or assistance to Chinese
Uyghurs engaging in militant or extremist activities.153 Following
the September 11 attacks and the start of the U.S. war in Afghanistan, China became more circumspect in its dealings with the
Taliban, but it continued to quietly maintain ties.154 Now that reconciliation between Kabul and the Taliban is a stated priority for
the Afghan government, China is reaching out as well, not least of
all because it seeks a favorable position in the event the Taliban
emerges as a major political player in Afghanistan.155
China also has economic interests in Afghanistan, but instability
and violence have limited investment so far. China’s two major
projects in the country—the Aynak copper mine and the Amu
Darya oil field—have significant economic potential but have suffered major delays in the past several years due to instability andterror threats.156 Chinese investment in the Aynak copper mine,for instance, has stalled due to an uptick in violence—including
rocket attacks and improvised explosive devices—in nearby areas
in 2014.157 China’s economic interests in Afghanistan are thus likely to remain aspirational until the security environment improves
considerably.

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China in Russia’s Backyard?
One of the consequences of China’s growing influence in Central
Asia has been the relative weakening of Russia’s preeminence inthe region. This has particularly been the case in the economic
realm, where China is establishing itself as a provider of development assistance and a reliable consumer of Central Asian resources
as Russia’s relative economic power declines. China’s security presence is growing as well, though Russia remains the region’s dominant security actor and cultural influence.158
Russia has been reluctant to embrace China’s economic plans forthe region, seeing in them the diminution of its own influence overits former republics in Central Asia. During the 2008 financial crisis, China surpassed Russia as the region’s leading trading partner, and Russia’s recent economic troubles have contributed to theperception that China, not Russia, is the ‘‘regional economic stabilizer.’’ 159 Russia has other reasons to dislike China’s growing economic presence. According to Erica Downs, senior analyst at Eurasia Group, China’s investment in Central Asia’s energy sector has
contributed to the ‘‘erosion of Russian influence over Central Asianstates by providing them with non-Russian export routes andsources of financing.’’ 160
Russia has been actively promoting its own regional economic integration effort, the Eurasian Economic Union, which comprises
Russia, Belarus, Kazakhstan, Armenia, and—as of May 2015—Kyr-

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gyzstan. Still, Moscow has found it prudent to link this effort with
China’s economic plans for the region. In May 2015 during a summit in Moscow, Russian President Vladimir Putin and President Xi
signed a declaration on cooperation between the Eurasian Economic Union and China’s Silk Road initiative.161 As part of this cooperation, China agreed to invest $5.8 billion in a $21.4 billion
project to extend the Moscow-Kazan high-speed railway throughKazakhstan to China.162
The Eurasian Economic Union had an unexpected benefit for
China: because it created a customs union among its members thattook effect in January 2012, the Eurasian Economic Union eliminated lengthy inspections at each border; cargo traveling from
China needs to be inspected only once upon entering the customs
union—through Russia or Kazakhstan—and can proceed to Europe
unimpeded.163
The SCO is perhaps the most compelling illustration of emerging
Sino-Russian competition in Central Asia.164 Dr. Cooley testified to
the Commission that ‘‘Russia has at every point dragged its feet[in] signing off on major Chinese economic initiatives, especiallythrough the SCO.’’ 165 For example, Russia prevented China fromcreating an SCO emergency crisis fund in the wake of the global
financial crisis (though China went on to provide unilateral assistance to several Central Asian countries, as noted earlier) andblocked China from establishing an SCO development bank.166
Similarly, Russia has sought to downplay the SCO’s role in theCentral Asian security realm to maintain its place as the region’s
top security provider.167 Niklas Swanström, director of the Institute for Security and Development Policy in Stockholm, Sweden,
told the Commission that China’s SCO leadership ‘‘has arguably
only been accepted by Russia for the purpose of monitoring the
Chinese expansion into the region.’’ 168 By virtue of its legacy of
military influence during the Soviet era, Russia’s security ties with
Central Asia remain robust * (Russia has military bases in Kazakhstan, Kyrgyzstan, and Tajikistan and is the primary source of military equipment and training for Central Asian countries).169 Further, the Russia-led Collective Security Treaty Organization has
been the dominant security organization in the region, a position
Moscow does not wish to cede to a China-led organization.† Yet
China and Russia both seek to downplay this growing rivalry.
China in particular is careful not to create the impression that it
has military ambitions in Central Asia, and recognizes that attracting suspicion from the Central Asian countries and Russia would
tarnish its reputation.170 According to Mr. Pantucci, ‘‘Whenever
Chinese officials and experts talk of Russia in a Central Asian context, they go to great lengths to highlight the fact that they would
do nothing that would contradict their Russian counterparts’ inter* For example, the Baikonur Cosmodrome—the launching site of Sputnik and the world’s firstand largest space launch facility—was established in 1955 in what is now Kazakhstan. Russia,
which now leases Baikonur from Kazakhstan, continues to operate it.
† Established in 1992, the Collective Security Treaty Organization is a Russia-led intergovernmental military alliance among Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan.

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ests in Central Asia.’’ * 171 For its part, Moscow avoids publicly expressing dissatisfaction with the SCO or Beijing’s role in it.172
Central Asian capitals generally welcome this emerging competition for influence. All of these countries are adept at extracting
gains by playing the two big powers (in addition to the UnitedStates and Europe) off each other.173 For example, the opening of
the Central Asia-China natural gas pipeline broke Russia’s monopoly on transit of natural gas in the region, and allowed Turkmenistan to gain leverage in negotiations with Russia over prices andvolume of gas supplies.174 One Kazakhstani government researcher
told the Commission, however, that China’s new economic initiatives in the region can sometimes ‘‘put Kazakhstan in a difficult
place,’’ and ‘‘[ask] Astana to choose China over Russia.’’ 175
Enhanced Sino-Russian competition in Central Asia occurs in thecontext of a growing disparity of power between the two countries
more generally, and the emergence of a relationship in which Russia is highly dependent on China, a reality of which Moscow ispainfully aware. According to the RAND Corporation, ‘‘Many Chinese analysts view Russia as a weak great power that is likely to
weaken even further in the future.’’ 176 In the economic realm, Russia relies heavily on China as a market for its oil and natural gas
exports.177 Particularly after its intervention in Ukraine, Russia
has been economically and politically isolated and forced to dependon China to withstand economic sanctions and alienation by theinternational community.178 Still, ethnic Russians are a prominentgroup in populations across Central Asia,† and Russia’s deeply
rooted cultural influence in the region—through language, media,
and shared history—cannot be underestimated.179 For example, as
Commissioners heard during their 2015 trip to Kazakhstan, mostKazakhstanis obtain their news from Russian television and newspapers.180
Implications for the United States

dkrause on DSKHT7XVN1PROD with USCCThe United States has identified ‘‘four critical areas of cooperation and concentration in Central Asia—security cooperation, economic ties, promotion of human rights and good governance, andefforts to bolster each country’s sovereignty and independence.’’ 181
From an economic perspective, China’s efforts to promote development and connectivity in Central Asia may offer opportunities for
U.S.-China cooperation.
To its Central Asian neighbors, China emphasizes the ‘‘win-win’’
aspect of its economic engagement with the region. To be sure, creation of new infrastructure in landlocked Central Asia has broad
benefits, such as improved transportation and communication,
which could ultimately lead to greater integration of the region into
the global economy. But the focus on infrastructure aids China’s
own economic interests first: the new trade routes will serve pri* For example, Xinjiang public security officials stressed to the Commission that China’s Silk
Road Economic Belt did not affect China-Russia relations or Russian economic interests in theregion. Border Department, Xinjiang Foreign/Public Affairs Office, Xinjiang Provincial Government, discussion with Commission, Urumqi, China, July 24, 2015.
† In parts of Kazakhstan, for example, ethnic Russians constitute as much as half of the population. Robert Coalson, ‘‘Putin Pledges to Protect All Ethnic Russians Everywhere. So Where Are
They?’’ Radio Free Europe, September 20, 2015.

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marily to transport Central Asian oil and natural gas to China,
while facilitating export of Chinese goods west, ultimately reaching
Europe. Chinese companies are expected to be big beneficiaries of
the new push for infrastructure building in Central Asia, especiallyas it will absorb China’s excess capacity in industries such as steel
and heavy machinery.182
By building roads and railways, purchasing the region’s natural
resources, and promoting the use of the RMB, China is ultimately
tying its Central Asian neighbors’ prosperity to their relationshipwith China, potentially creating an unhealthy dependency. Indeed,
there have been instances of public backlash in some countries,
driven by lack of opportunities and fear of being overwhelmed by
the Chinese presence.183 For example, as Commissioners heard
during their fact-finding trip to Kazakhstan, China often uses its
own workers for projects, which increases resentment of China and,on occasion, has led to minor clashes between locals and the Chinese workers.184 Environmental concerns also inform these fears,
as in the case of Kyrgyzstan, which temporarily suspended operations at a Chinese-built oil refinery in 2014, after public protests
over pollution.185 Xinjiang-based researchers told the Commissionthat Beijing is becoming more sensitive to these concerns, however,and is trying to address them by hiring more local workers at Chinese embassies in the region; establishing more cultural exchanges,
including opening Confucius Institutes and ‘‘build[ing] bridges’’ between Uyghurs in Xinjiang and their counterparts in Central Asia;and highlighting Chinese investments that bring economic benefits
to the region.186
It is not clear if the economic benefits from Chinese engagement
extend beyond Chinese companies getting valuable tenders andrent-seeking by local elites. Central Asian countries have severe
corruption problems. According to Transparency International’s
2014 Corruption Perceptions Index, of 175 countries and territories
surveyed, Central Asian states were some of the most corrupt.*
Growing economic linkages with China may exacerbate the situation, since Chinese enterprises are perceived to be very corrupt.187
According to Transparency International’s 2011 Bribe Payers
Index, of 28 countries surveyed, China was the second most likely
country (after Russia) to have firms that pay bribes while operating
abroad.188 In his book on Central Asia, Dr. Cooley documented
multiple instances of corrupt dealings by Chinese companies inCentral Asia, centered primarily on getting access to natural resources.189 The Commission was told during its trip to Kazakhstanthat Chinese companies are ‘‘more than willing to pay bribes’’ toclose business deals in Kazakhstan.190
When it comes to U.S. goals of advancing human rights and good
governance in Central Asia, China’s presence poses several challenges. China, with its poor record on human rights, transparency,
and corruption, is unlikely to be a force for good governance inCentral Asian countries, which already have similarly poor records* The Corruption Perceptions Index ranks countries and territories based on how corrupt their
public sector is perceived to be. Ranked from 1 (very clean) to 175 (highly corrupt), Central
Asian states fall at the corrupt end of the spectrum: Kazakhstan (126), Kyrgyzstan (136), Tajikistan (152), Uzbekistan (166), and Turkmenistan (169). Transparency International, ‘‘Corruption
Perceptions Index 2014: Results.’’

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in these areas. As Dr. Cooley pointed out in his testimony to theCommission, Chinese investment tends to focus on ‘‘hardware’’
rather than ‘‘software’’:The current assumption of Chinese leaders is that better‘‘hardware,’’ in the form of modern infrastructure, will spur
economic development and improve market-oriented practices. But the region is challenged as much by its poor ‘‘software’’—particularly corruption and rent-seeking—at all levels of government. We should not underestimate the extent
of these governance challenges, for Central Asia today remains one of the [most] trade-unfriendly regions in theworld.191
This poses a direct challenge to U.S. and Western efforts to encourage the adoption of transparent and democratic processes inCentral Asia. According to Dr. Cooley, for governments in the region—all of which exhibit varying degrees of authoritarianism—thepresence of Chinese patronage creates an opportunity ‘‘to pushback and bargain against the conditions and terms demanded ofthem by more traditional Western lenders.’’ 192 One consequence of
this is that U.S. companies are disincentivized from trading withand investing in this risky environment, which in turn weakens
overall U.S. influence in the region and reinforces Central Asian
countries’ preferences for working with Chinese companies.193
In the security realm as well, China’s lack of transparency,
heavy-handed approach to securing its western frontier, and preference for security and stability over fundamental human rights
and religious freedom could have lasting impacts on the directionof Central Asia’s development.
It remains to be seen how China’s Silk Road initiatives will impact U.S. objectives in the region, and whether China’s Silk Road
Economic Belt and the United States’ ‘‘New Silk Road’’ initiative
will complement or compete with each other. Currently, China’s
well-funded projects appear to be outshining the United States’ initiative. The U.S. program, announced by the Obama Administration in 2011, aims to foster communication and economic growth
between Central Asia and Afghanistan, but it receives little attention and limited resources.194 For example, the U.S. New Silk Road
initiative’s cornerstone project, the Turkmenistan-AfghanistanPakistan-India natural gas pipeline, has yet to attract any energy
companies. Notably, the U.S. New Silk Road’s central goal is to integrate Afghanistan with the rest of the region, whereas China has
made no effort to incorporate Afghanistan into its many regional
integration efforts. Part of the challenge the United States faces inrealizing this goal is Central Asian countries’ desire to distancethemselves from Afghanistan, which they perceive to be a highly
unstable neighbor.195
U.S. State Department officials told the Commission that theUnited States and China have held ‘‘remarkably candid and friendly consultations’’ on potential areas of cooperation in Central
Asia,196 and China’s ambassador to Kazakhstan told the Commission that Beijing ‘‘is ready to foster close cooperation with theUnited States in Central Asia.’’ 197 In an influential 2012 article
urging China to ‘‘march westwards’’ and engage more with Central

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Asia, Wang Jisi, dean of the School for International Studies at
Beijing’s Peking University, pointed out that ‘‘if China ‘marches
westwards,’ the potential for U.S.-China cooperation in the fields ofinvestment, energy, terrorism, non-proliferation, and the maintenance of regional stability will increase.’’ 198 Indeed, China and theUnited States appear to have converging interests in the region:
enhancing stability, promoting economic growth, and discouraging
patterns of extremism, militancy, and terrorism. Nevertheless, thetwo countries’ preferred means to reach these similar ends vary
greatly. On the whole, Washington’s policies in Central Asia seek
to encourage the development of good governance and discourage
authoritarianism and corruption. China’s preferred approach appears more appealing to Central Asian leaders, many of whomshare China’s views on counterterrorism and understand China
will support their efforts to remain in power and ignore corruption
and human rights violations. This divergence in principles both undermines U.S. policy in Central Asia and will make it difficult for
China and the United States to cooperate, particularly on counterterrorism, where Chinese practices may not be morally or legallycompatible with U.S. practices and international standards.
Conclusions• Although engagement with Central Asia has been a longstanding
endeavor for the Chinese government, Chinese President Xi
Jinping has recently elevated the region in China’s foreign policyin the form of the Silk Road Economic Belt initiative, which envisions a massive network of trade and infrastructure connecting
China with Europe by way of Central Asia.
• China’s overarching objective for engagement with Central Asia
is to encourage economic development and stability in its westernmost province, Xinjiang, which shares an extensive borderwith Kazakhstan, Kyrgyzstan, and Tajikistan. Chinese leaders
perceive ethnic tensions, separatist movements, and related violent activity in Xinjiang to be among the greatest security
threats facing China today, and fear patterns of religious extremism and terrorism in Central Asia enable this unstable environment. Therefore, Beijing uses its relations with Central Asian
governments to seek to neutralize and eradicate these perceived
threats.

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• China’s security cooperation with Central Asia is designed toaugment domestic security policies in Xinjiang, and therefore focuses on counterterrorism and information sharing about extremist and terrorist groups and individuals. China’s security engagement with the region occurs primarily via the Shanghai Cooperation Organization, which China uses as a tool to influence anddemonstrate leadership in the region, but which has yet to playa significant security-providing role.
• Although the primary objective of China’s economic engagementwith Central Asia is to promote the security and development of
Xinjiang, this domestic-oriented policy also promotes China’s
overall economic growth by (1) allowing China to diversify its

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energy portfolio by gaining access to Central Asian resources,(2) developing new markets for its companies in industries experiencing overcapacity at home, and (3) engendering goodwill toward its policies in the region.
• China’s trade with the region is growing rapidly, but it is very
unbalanced, with China exporting finished goods and importing
natural resources. Despite the strength of its energy exports,
Central Asia as a whole tends to run trade deficits with China.
For most countries in the region, China is the biggest trade partner. Kazakhstan, the region’s largest economy, is the biggest recipient of Chinese trade, investment, and loans. Through its massive investments in Central Asia’s infrastructure—including
roads, railways, hydroelectricity, and telecommunications—China
has also become a de facto provider of development assistance.
• Chinese leaders look to oil- and natural gas-rich Central Asian
countries to diversify China’s energy sources, though the volumes
involved will not be sufficient to overcome China’s dependence on
traditional sources of hydrocarbon imports, particularly Middle
Eastern oil. One notable exception is Turkmenistan, which in recent years has emerged as China’s largest supplier of naturalgas, accounting for 44 percent of China’s imports in 2014.
• As China’s influence in Central Asia grows, it increasingly iscompeting with Russia, which has long dominated the region in
the economic, security, and cultural realms. China now dominates in the economic realm, though Russia is still the primary
military and cultural power in the region. Beijing, which seeks
stable ties with Moscow, avoids creating the perception of overt
competition between the two countries.
• After several years of relative disinterest, China has been increasing engagement with Afghanistan since 2012. As with Central Asia, China fears extremist and terrorist elements in Afghanistan contribute to instability in Xinjiang. Anticipating the
U.S. withdrawal from Afghanistan, China is starting to realize it
will have to involve itself in the country’s reconstruction and stabilization to preserve stability and security in Xinjiang.

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• China and the United States appear to share similar priorities
in Central Asia, such as promoting economic growth andconnectivity and preventing the spread of extremism and terrorism. Yet Beijing and Washington pursue these goals in very
different ways, which could make meaningful cooperation in theregion challenging. In particular, while the United States seeks
to encourage democratization and discourage corruption in government and business, China supports the region’s authoritarian
governments and is more tolerant of the region’s widespread corruption.

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 1
1. Andrew Small, The China-Pakistan Axis: Asia’s New Geopolitics, Oxford University Press, 2015, 117–133.
2. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Michael Clarke, March 18, 2015;
U.S.-China Economic and Security Review Commission, Hearing on Looking West:
China and Central Asia, written testimony of Niklas Swanström, March 18, 2015;
and U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Andrew Small, March 18, 2015.
3. Xinhua (English edition), ‘‘Xinjiang Aims for Financial Hub on Economic
Belt,’’ November 8, 2014; Xinhua (English edition), ‘‘Xinjiang Set to Embrace Silk
Road Economic Belt Initiatives,’’ April 1, 2015; Xinhua (English edition), ‘‘Xinjiang
Eyes ‘Core Area’ of Silk Road Economic Belt,’’ March 10, 2015; Xinhua (English edition), ‘‘Xinjiang to Promote Silk Road Economic Belt,’’ January 16, 2014; and Xinhua(English edition), ‘‘Joining the Dots along Xinjiang’s Silk Road,’’ March 22, 2014.
4. China Military Online (English edition), ‘‘SCO Supports China to Crack
Down upon ‘Three Evil Forces,’’’ July 5, 2013; Sam Dupont, ‘‘China’s War on the‘‘Three Evil Forces,’’’ Foreign Policy, July 25, 2007.
5. Martha Brill Olcott, ‘‘China’s Unmatched Influence in Central Asia,’’ Carnegie Endowment for International Peace, September 18, 2013; Andrew Scobell, Ely
Ratner, and Michael Beckley, ‘‘China’s Strategy toward South and Central Asia: An
Empty Fortress,’’ RAND Corporation, 2014, 1, 9.
6. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Raffaello Pantucci, March 18,
2015; U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Michael Clarke, March 18, 2015.
7. Sophie Richardson, ‘‘How the West Was Lost,’’ Foreign Policy, February 23,
2015; U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, oral testimony of Marlene Laruelle, March 18, 2015.
8. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Raffaello Pantucci, March 18,
2015.
9. Tania Branigan, ‘‘China Launches ‘Strike Hard’ Crackdown in Xinjiang,’’
Guardian, November 3, 2009; James T. Areddy, ‘‘Xinjiang Arrests Nearly Doubled
in 2014, Year of ‘Strike Hard’ Campaign,’’ China Real Time Report (Wall Street
Journal blog), January 23, 2015.
10. Human Rights Watch, ‘‘Devastating Blows: Religious Repression of Uyghurs
in Xinjiang,’’ April 12, 2005.
11. Ben Blanchard, ‘‘Exiles Angered as China Holds Beer Festival in Muslim
County,’’ Reuters, June 22, 2015; Economist, ‘‘Wooing Islamists with a Beer Festival,’’ June 27, 2015; Al Jazeera, ‘‘China Bans Ramadan Fasting in Mainly Muslim
Region,’’ June 18, 2015; Timothy Grose and James Liebold, ‘‘Why China Is Banning
Islamic Veils and Why It Won’t Work,’’ ChinaFile, February 4, 2015; Martin Patience, ‘‘China Xinjiang: Muslim Students ‘Made to Eat’ at Ramadan,’’ BBC, July 11,
2014; and United States Commission on International Religious Freedom, Annual
Report 2015, April 30, 2015, 34.
12. Andrew Scobell, Ely Ratner, and Michael Beckley, ‘‘China’s Strategy toward
South and Central Asia: An Empty Fortress,’’ RAND Corporation, 2014, 10–12.
13. Xinhua (English edition), ‘‘Innocent Civilians Make Up 156 in Urumqi Riot
Toll,’’ August 5, 2009.
14. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 365–366.
15. Andrew Small, The China-Pakistan Axis: Asia’s New Geopolitics, Oxford University Press, 2015, 73.
16. Nick Holdstock, China’s Forgotten People: Xinjiang, Terror, and the ChineseState, I.B. Tauris and Co., 2015, 4.
17. Beina Xu, Holly Fletcher, and Jayshree Bajoria, ‘‘The East Turkestan Islamic Movement (ETIM),’’ Council on Foreign Relations, September 4, 2014.
18. Saud Mehsud and Maria Golovnina, ‘‘From His Pakistan Hideout, Uighur
Leader Vows Revenge on China,’’ Reuters, March 14, 2014.
19. Steven Jiang, ‘‘China Says its Nationals Have Fought for ISIS,’’ CNN, March
11, 2015; Qiu Yongzheng, ‘‘Turkey’s Ambiguous Policies Help Terrorists Join IS
Jihadist Group: Analyst,’’ Global Times (China), December 15, 2014.
20. Ben Blanchard, ‘‘China Says May Have Citizens Fighting in Iraq,’’ Reuters,
July 28, 2014.
21. Thomas Fuller, ‘‘Passport Hints at a Uyghur Link in Bangkok Bombing,’’
New York Times, September 2, 2015.

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420
22. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, oral testimony of Marlene Laruelle, March 18, 2015.
23. Chinese Ministry of Foreign Affairs, ‘‘President Xi Jinping Delivers Important Speech and Proposes to Build a Silk Road Economic Belt with Central AsianCountries,’’ September 7, 2013.
24. Xinhua, ‘‘ ‘New Silk Road, New Dream’ Special Feature: How to Win theWorld?’’ May 8, 2014. Staff translation.
25. Xinjiang Academy of Social Sciences’ Institute of Central Asia, discussion
with Commission, Urumqi, China, July 24, 2015.
26. Camille Brugier, ‘‘China’s Way: The New Silk Road,’’ European Union Institute Security Studies, May 2014.
27. Tom Miller, ‘‘Blood and Bazaars on the New Silk Road,’’ Gavekal Dragonomics, October 22, 2014.
28. Camille Brugier, ‘‘China’s Way: The New Silk Road,’’ European Union Institute Security Studies, May 2014.
29. Xinhua (English edition), ‘‘Xinjiang Aims for Financial Hub on Economic
Belt,’’ November 8, 2014; Xinhua (English edition), ‘‘Xinjiang Set to Embrace Silk
Road Economic Belt Initiatives,’’ April 1, 2015; Xinhua (English edition), ‘‘Xinjiang
Eyes ‘Core Area’ of Silk Road Economic Belt,’’ March 10, 2015; Xinhua (English edition), ‘‘Xinjiang to Promote Silk Road Economic Belt,’’ January 16, 2014; and Xinhua(English edition), ‘‘Joining the Dots along Xinjiang’s Silk Road,’’ March 22, 2014.
30. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, oral testimony of Raffaello Pantucci, March 18, 2015.
31. Kazakhstan Ministry of Investment and Development, discussion with Commission, Astana, Kazakhstan, July 27, 2015; U.S.-China Economic and Security Review Commission, Hearing on Looking West: China and Central Asia, written testimony of S. Frederick Starr, March 18, 2015; U.S.-China Economic and Security Review Commission, Hearing on Looking West: China and Central Asia, written testimony of Raffaello Pantucci, March 18, 2015.
32. Shannon Tiezzi, ‘‘Where Is China’s Silk Road Actually Going?’’ Diplomat(Japan), March 30, 2015.
33. Chinese National Development and Reform Commission, the Ministry of Foreign Affairs, and the Ministry of Commerce, Vision and Actions on Jointly Building
Silk Road Economic Belt and 21st-Century Maritime Silk Road, March 28, 2015.
34. Chinese National Development and Reform Commission, the Ministry of Foreign Affairs, and the Ministry of Commerce, Vision and Actions on Jointly Building
Silk Road Economic Belt and 21st-Century Maritime Silk Road, March 28, 2015.
35. Lawrence Chung, ‘‘Hungary Is First in Europe to Sign up for China’s New
Silk Road Plan,’’ South China Morning Post, June 7, 2015.
36. Zhang Yuzhe, ‘‘With New Fund, China Hits a Silk Road Stride,’’ Caixin, December 3, 2014.
37. Chinese National Development and Reform Commission, the Ministry of Foreign Affairs, and the Ministry of Commerce, Vision and Actions on Jointly Building
Silk Road Economic Belt and 21st-Century Maritime Silk Road, March 28, 2015.
38. He Yin, ‘‘China to Invest $900b in Belt and Road Initiative,’’ China Daily,
May 28, 2015.
39. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Sebastien Peyrouse, March 18,
2015.
40. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Marlene Laruelle, March 18,
2015.
41. Jim Nichol, ‘‘Central Asia: Regional Developments and Implications for U.S.
Interests,’’ Congressional Research Service, March 21, 2014, 17.
42. Shannon Tiezzi, ‘‘China’s Silk Road in the Spotlight as Xi Heads to Kazakhstan,’’ Diplomat (Tokyo), May 8, 2015.
43. Doniyor Asilbekov, ‘‘China’s Influence Grows in Uzbekistan,’’ Silk Road Reporters, May 13, 2015; RIA Novosti, ‘‘Uzbekistan and China Sign Agreements Worth$6 Billion,’’ August 20, 2014. Staff translation.
44. Tom Miller, ‘‘Blood and Bazaars on the New Silk Road,’’ Gavekal Dragonomics, October 22, 2014.
45. Tom Miller, ‘‘Blood and Bazaars on the New Silk Road,’’ Gavekal Dragonomics, October 22, 2014.
46. Tom Miller, ‘‘Travels along the New Silk Road: The Economics of Power,’’
Gavekal Dragonomics, October 24, 2014.
47. Marina Bakanova and Ravshan Sobirzoda, ‘‘Tajikistan: Slowing Growth, Rising Uncertainties,’’ World Bank Economic Update 1 (Spring 2015): 14.

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421
48. Marina Bakanova and Ravshan Sobirzoda, ‘‘Tajikistan: Slowing Growth, Rising Uncertainties,’’ World Bank Economic Update 1 (Spring 2015): 2.
49. Nadin Bakhrom, ‘‘Tajikistan Considers Price Tag on Relations with China,’’
Silk Road Reporters, December 20, 2014; Marlene Laruelle and Sebastien Peyrouse,
The Chinese Question: Domestic Order, Social Change and the Chinese Factor, Columbia University Press, 2012, 53.
50. Jack Farchy, ‘‘Tajikistan Looks to China as Russian Remittances Dry up,’’Financial Times, October 22, 2014.
51. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Alexander Cooley, March 18,
2015.
52. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Alexander Cooley, March 18,
2015.
53. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Alexander Cooley, March 18,
2015.
54. Bernard D. Cole, ‘‘The Great Wall at Sea: China’s Navy in the 21st Century,
Second Edition,’’ Naval Institute Press, 2010, 55.
55. Nadege Rolland, ‘‘China’s New Silk Road,’’ The National Bureau of Asian Research, February 12, 2015.
56. China National Petroleum Corporation, ‘‘CNPC in Turkmenistan.’’
57. Rick Carew and Guy Chazan, ‘‘China Makes Big New Bet on Kazakhstan’s
Oil,’’ Wall Street Journal, October 1, 2009.
58. Alexander Cooley, Great Games, Local Rules: The New Great Power Contest
in Central Asia, Oxford University Press, 2012, 91.
59. Mariya Gordeyeva, ‘‘China Buys into Giant Kazakh Oilfield for $5 Billion,’’
Reuters, September 7, 2013.
60. U.S. Energy Information Administration, Country Analysis Briefs: Turkmenistan, July 2014.
61. U.S. Energy Information Administration, Country Analysis Briefs: Turkmenistan, July 2014.
62. U.S. Energy Information Administration, Country Analysis Briefs: Turkmenistan, July 2014; Aynur Jafarova, ‘‘CNPC Invests $4 Bln in Turkmenistan’s
Bagtyyarlyk Contract Area,’’ Azernews, May 12, 2014.
63. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Erica Downs, March 18, 2015.
64. Anatole Douaud, ‘‘Why China Is Investing in Central Asia’s Energy,’’ Asia
Pacific Foundation of Canada, December 16, 2014.
65. Alexander Gupta, ‘‘China Doubles down in Central Asia with New Natural
Gas Pipeline,’’ American Security Project, June 19, 2014.
66. Saltanat Berdikeeva, ‘‘Regional Skirmishes Could Complicate China’s Deepening Ties to Central Asia,’’ National Geographic, May 19, 2014.
67. Michael Lelyveld, ‘‘China Runs Risk with New Gas Route through Central
Asia,’’ Radio Free Asia, March 24, 2014.
68. Michael Lelyveld, ‘‘China Runs Risk with New Gas Route through Central
Asia,’’ Radio Free Asia, March 24, 2014.
69. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Erica Downs, March 18, 2015.
70. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Erica Downs, March 18, 2015.
71. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Erica Downs, March 18, 2015.
72. Dmitry Solovyov, ‘‘Update 1: Uzbekistan Aims to Join China Gas Supply
Route in 2012,’’ Reuters, May 17, 2012.
73. Doniyor Asilbekov, ‘‘China’s Influence Grows in Uzbekistan,’’ Silk Road Reporters, May 13, 2015.
74. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Alexander Cooley, March 18,
2015.
75. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of S. Frederick Starr, March 18,
2015.
76. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Sebastien Peyrouse, March 18,
2015.

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422
77. Zhang Yuzhe, ‘‘With New Fund, China Hits a Silk Road Stride,’’ Caixin, December 3, 2014; Nathan Beauchamp-Mustafaga, ‘‘Rolling out the New Silk Road:
Railroads Undergird Beijing’s Strategy,’’ China Brief, April 16, 2015.
78. Economic Times (India), ‘‘China Kicks off $79.8 Billion Silk Road Infrastructure Project in Northwest Province of Gansu,’’ March 2, 2015.
79. Agence France-Presse, ‘‘First Direct China-Spain Freight Train Arrives in
Madrid,’’ December 9, 2014.
80. Tom Miller, ‘‘Blood and Bazaars on the New Silk Road,’’ Gavekal Dragonomics, October 22, 2014.
81. Tom Miller, ‘‘Blood and Bazaars on the New Silk Road,’’ Gavekal Dragonomics, October 22, 2014; Keith Bradsher, ‘‘Hauling New Treasure along the Silk
Road,’’ New York Times, July 20, 2013.
82. Tom Miller, ‘‘Blood and Bazaars on the New Silk Road,’’ Gavekal Dragonomics, October 22, 2014.
83. Jeremy Page, ‘‘Five Things to Know about Horgos and China’s New Silk
Roads,’’ Wall Street Journal, November 4, 2015.
84. Jeremy Page, ‘‘Five Things to Know about Horgos and China’s New Silk
Roads,’’ Wall Street Journal, November 4, 2015.
85. Xinjiang Academy of Social Sciences’ Institute of Central Asia, discussion
with Commission, Urumqi, China, July 25, 2015.
86. Agence France-Presse, ‘‘China Lends $300 Mn to Build Strategic Road in
Kyrgyzstan,’’ June 16, 2015; U.S.-China Economic and Security Review Commission,
Hearing on Looking West: China and Central Asia, written testimony of Sebastien
Peyrouse, March 18, 2015.
87. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Sebastien Peyrouse, March 18,
2015.
88. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Sebastien Peyrouse, March 18,
2015.
89. Marlene Laruelle and Sebastien Peyrouse, The Chinese Question: Domestic
Order, Social Change and the Chinese Factor, Columbia University Press, 2012, 91.
90. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Sebastien Peyrouse, March 18,
2015.
91. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Sebastien Peyrouse, March 18,
2015; Marlene Laruelle and Sebastien Peyrouse, The Chinese Question: Domestic
Order, Social Change and the Chinese Factor, Columbia University Press, 2012, 91–
93.
92. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Sebastien Peyrouse, March 18,
2015; Marlene Laruelle and Sebastien Peyrouse, The Chinese Question: Domestic
Order, Social Change and the Chinese Factor, Columbia University Press, 2012, 86–
87.
93. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Sebastien Peyrouse, March 18,
2015.
94. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Sebastien Peyrouse, March 18,
2015.
95. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Sebastien Peyrouse, March 18,
2015.
96. Roger Cliff, China’s Military Power: Assessing Current and Future Capabilities, Cambridge University Press, 2015, 143.
97. Andrew Scobell, Ely Ratner, and Michael Beckley, ‘‘China’s Strategy toward
Central Asia: An Empty Fortress,’’ RAND Corporation, 2014, 12–14.
98. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Marlene Laruelle, March 18,
2015. See also Marlene Laruelle and Sebastien Peyrouse, The Chinese Question inCentral Asia: Domestic Order, Social Change and the Chinese Factor, Columbia University Press, 2012, 128–129.
99. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Marlene Laruelle, March 18,
2015. See also U.S.-China Economic and Security Review Commission, Hearing on
Looking West: China and Central Asia, written testimony of S. Frederick Starr,
March 18, 2015.

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423100. Faculty, Al-Farabi University International Relations Department, discussion with Commission, Almaty, Kazakhstan, July 29, 2015; Marlene Laruelle andSebastien Peyrouse, The Chinese Question in Central Asia: Domestic Order, Social
Change and the Chinese Factor, Columbia University Press, 2012, 128–129.
101. Analyst, Kazakhstan Presidential Library, discussion with Commission,
Astana, Kazakhstan, July 27, 2015.
102. Reuters, ‘‘China to Boost Anti-Terror Cooperation with Central Asia,’’ June
10, 2014.
103. Marlene Laruelle and Sebastien Peyrouse, The Chinese Question in Central
Asia: Domestic Order, Social Change and the Chinese Factor, Columbia University
Press, 2012, 29.
104. Shanghai Cooperation Organization, ‘‘Brief Introduction to the Shanghai Cooperation Organization.’’ Marlene Laruelle and Sebastien Peyrouse, The Chinese
Question in Central Asia: Domestic Order, Social Change and the Chinese Factor,
Columbia University Press, 2012, 28.
105. International Federation for Human Rights, ‘‘Concept of Cooperation between SCO Member States in Combating Terrorism, Separatism, and Extremism,’’
June 5, 2005. Unofficial translation.
106. China Military Online (English edition), ‘‘China Participates in SCO Joint
Anti-Terrorism Exercise in Kyrgyzstan,’’ April 21, 2015; Xinhua (English edition),‘‘Kazakh Troops Reach SCO Anti-Terror Drill Site,’’ August 15, 2014; and Andrew
Scobell, Ely Ratner, and Michael Beckley, ‘‘China’s Strategy toward Central Asia:
An Empty Fortress,’’ RAND Corporation, 2014, 40.
107. Andrew Scobell, Ely Ratner, and Michael Beckley, ‘‘China’s Strategy toward
Central Asia: An Empty Fortress,’’ RAND Corporation, 2014, 40.
108. Dennis J. Blasko, ‘‘People’s Liberation Army and People’s Armed Police
Ground Exercises with Foreign Forces, 2002–2009,’’ in Roy Kamphausen et al., The
PLA at Home and Abroad: Assessing the Operational Capabilities of China’s Military, Strategic Studies Institute, 2010, 384–385, 388–389, 399.
109. Andrew Scobell, Ely Ratner, and Michael Beckley, ‘‘China’s Strategy toward
Central Asia: An Empty Fortress,’’ RAND Corporation, 2014, 40–41; Marlene
Laruelle and Sebastien Peyrouse, The Chinese Question in Central Asia: Domestic
Order, Social Change and the Chinese Factor, Columbia University Press, 2012, 28–
29; Dennis J. Blasko, ‘‘People’s Liberation Army and People’s Armed Police Ground
Exercises with Foreign Forces, 2002–2009,’’ in Roy Kamphausen et al., The PLA at
Home and Abroad: Assessing the Operational Capabilities of China’s Military, Strategic Studies Institute, 2010, 378, 394; and David Harrison, ‘‘Kazakhstan’s Defense
Cooperation with China,’’ China in Central Asia (Blog), February 26, 2015.
110. Dennis J. Blasko, ‘‘People’s Liberation Army and People’s Armed Police
Ground Exercises with Foreign Forces, 2002–2009,’’ in Roy Kamphausen et al., The
PLA at Home and Abroad: Assessing the Operational Capabilities of China’s Military, Strategic Studies Institute, 2010, 379; Andrew Scobell, Ely Ratner, and Michael Beckley, ‘‘China’s Strategy toward Central Asia: An Empty Fortress,’’ RAND
Corporation, 2014, 40.
111. Dennis J. Blasko, ‘‘People’s Liberation Army and People’s Armed Police
Ground Exercises with Foreign Forces, 2002–2009,’’ in Roy Kamphausen et al., The
PLA at Home and Abroad: Assessing the Operational Capabilities of China’s Military, Strategic Studies Institute, 2010, 390, 392–393.
112. Marlene Laruelle and Sebastien Peyrouse, The Chinese Question in Central
Asia: Domestic Order, Social Change and the Chinese Factor, Columbia University
Press, 2012, 29.
113. Marlene Laruelle and Sebastien Peyrouse, The Chinese Question in Central
Asia: Domestic Order, Social Change and the Chinese Factor, Columbia University
Press, 2012, 29.
114. Tom Lantos Human Rights Commission to the U.S. House of Representatives, Hearing on Human Rights in the North Caucasus, written testimony of Martin
Scheinin, April 15, 2011. See also Marlene Laruelle and Sebastien Peyrouse, The
Chinese Question in Central Asia: Domestic Order, Social Change and the Chinese
Factor, Columbia University Press, 2012, 29.
115. Human Rights in China, ‘‘Counter-Terrorism and Human Rights: The Impact of the Shanghai Cooperation Organization,’’ 2011, 43.
116. U.S. State Department officials, briefing to Commission, Washington, DC,
April 17, 2015; Bethany Matta, ‘‘China to Neighbors: Send Us Your Uighurs,’’ Al
Jazeera, February 18, 2015; and Human Rights Watch, ‘‘China: Account for Forcibly
Returned Uighurs,’’ September 2, 2011.
117. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, oral and written testimony of Niklas Swanström,
March 18, 2015.

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424118. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Michael Clarke, March 18, 2015.
119. Shannon Tiezzi, ‘‘The New, Improved Shanghai Cooperation Organization,’’
Diplomat (Japan), September 13, 2014.
120. Marlene Laruelle and Sebastien Peyrouse, The Chinese Question in Central
Asia: Domestic Order, Social Change and the Chinese Factor, Columbia University
Press, 2012, 30.
121. Alexander Cooley, Great Games, Local Rules: The New Great Power Contest
in Central Asia, Oxford University Press, 2012, 84–85; Marlene Laruelle andSebastien Peyrouse, The Chinese Question in Central Asia: Domestic Order, Social
Change and the Chinese Factor, Columbia University Press, 2012, 163.
122. Farkhod Tolipov, ‘‘Uzbekistan Concerned over SCO Expansion,’’ CACI Analyst, August 5, 2015.
123. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Niklas Swanström, March 18,
2015.
124. Marlene Laruelle and Sebastien Peyrouse, The Chinese Question in Central
Asia: Domestic Order, Social Change and the Chinese Factor, Columbia University
Press, 2012, 29; Zhang Yong-an, ‘‘Asia, International Drug Trafficking, and U.S.China Counternarcotics Cooperation,’’ Brookings Institution, February 2012, 5.
125. Xinhua (English edition), ‘‘China, Kazakhstan Pledge More Security Cooperation,’’ December 4, 2014.
126. Sebastien Peyrouse, ‘‘Sino-Kazakh Relations: A Nascent Strategic Partnership,’’ China Brief, November 4, 2008.
127. Xinhua (English edition), ‘‘38 Suspects Nabbed in China-Tajikistan AntiDrug Campaign,’’ November 21, 2014.
128. Andrew Scobell, Ely Ratner, and Michael Beckley, ‘‘China’s Strategy toward
South and Central Asia: An Empty Fortress,’’ RAND Corporation, 2014, 40–41;
Joshua Kucera, ‘‘China Boosts Military Aid to Kyrgyzstan, Tajikistan,’’ EurasiaNet,
September 4, 2014.
129. U.S. Embassy Tashkent, discussion with Commission, Tashkent, Uzbekistan,
July 30–31, 2015.
130. Richard Weitz, ‘‘China-Kazakhstan Military Ties Continue,’’ Central AsiaCaucasus Institute, January 9, 2013.
131. Andrew Scobell, Ely Ratner, and Michael Beckley, ‘‘China’s Strategy toward
South and Central Asia: An Empty Fortress,’’ RAND Corporation, 2014, 40.
132. China Law Translate, ‘‘Counterterrorism Law (Initial Draft),’’ November 8,
2014.
133. Zhao Hong, ‘‘China’s Afghan Policy: The Forming of the ‘March West’ Strategy?’’ Journal of East Asian Affairs 27:2 (Fall/Winter 2013): 6.
134. Andrew Small, The China-Pakistan Axis: Asia’s New Geopolitics, Oxford University Press, 2015, 160.
135. Andrew Small (Transatlantic Fellow, German Marshall Fund of the UnitedStates), interview with Commission staff, August 19, 2015; Saud Mehsud and Maria
Golovnina, ‘‘From His Pakistan Hideout, Uighur Leader Vows Revenge on China,’’
Reuters, March 14, 2014.
136. Saud Mehsud and Maria Golovnina, ‘‘From His Pakistan Hideout, Uighur
Leader Vows Revenge on China,’’ Reuters, March 14, 2014.
137. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Andrew Small, March 18, 2015.
138. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Andrew Small, March 18, 2015.
139. U.S. State Department officials, briefing to Commission, Washington, DC,
April 17, 2015; U.S.-China Economic and Security Review Commission, Hearing on
Looking West: China and Central Asia, written testimony of Andrew Small, March
18, 2015.
140. BBC, ‘‘China and Afghanistan Sign Economic and Security Deals,’’ September 23, 2012.
141. Xinhua (English edition), ‘‘Spotlight: Silk Road Wide Enough for China-U.S.
Cooperation,’’ September 14, 2015.
142. Lyle Goldstein, ‘‘China’s Afghanistan Moment,’’ National Interest, July 1,
2015.
143. Brian Spegele, ‘‘China to Help Afghanistan Fight Terrorism, Rebuild,’’ WallStreet Journal, October 31, 2014.
144. Ankit Panda, ‘‘China Announces Special Envoy for Afghanistan,’’ Diplomat(Japan), July 19, 2014.
145. Khaama Press (Afghanistan), ‘‘Afghanistan Receives Military Equipment
Worth $1M from China,’’ November 8, 2014.

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425
146. Shanghai Cooperation Organization, ‘‘Protocol on Establishment of the SCOAfghanistan Contact Group between the Shanghai Cooperation Organization andthe Islamic Republic of Afghanistan,’’ May 7, 2009.
147. Andrew Small, ‘‘Afghanistan: The View from China,’’ European Institute for
Security Studies, January 2014.
148. Xinhua (English edition), ‘‘China to Support Afghan-Led Peace Process: Chinese Ambassador,’’ November 10, 2014.
149. Brian Spegele, ‘‘China to Help Afghanistan Fight Terrorism, Rebuild,’’ WallStreet Journal, October 31, 2014.
150. Hamid Shalizi, ‘‘Second Round of Afghan Peace Talks Likely Next Week in
China,’’ Reuters, July 24, 2015.
151. Nathan Hodge, Habib Khan Totakhil, and Josh Chin, ‘‘China Creates New
Avenue for Afghan Peace Talks,’’ Wall Street Journal, January 6, 2015; Andrew
Small, The China-Pakistan Axis: Asia’s New Geopolitics, Oxford University Press,
2015, 155–164.
152. Andrew Small, ‘‘China’s Man in the Taliban,’’ Foreign Policy, August 3, 2015.
153. Andrew Small, The China-Pakistan Axis: Asia’s New Geopolitics, Oxford University Press, 2015, 128.
154. Andrew Small, The China-Pakistan Axis: Asia’s New Geopolitics, Oxford University Press, 2015, 128.
155. Andrew Small, ‘‘Why Is China Talking to the Taliban?’’ Foreign Policy, June21, 2013.
156. Muhammad Daim Fazil, ‘‘China in Afghanistan: Contemporary Engagements
and Challenges Ahead,’’ IOSR Journal of Humanities and Social Science 19:8 (August 2014): 83–88.
157. Kathleen Caulderwood, ‘‘China and Afghanistan’s Minerals: Archaeologists
Still Scrambling to Save Mes Aynak,’’ International Business Times, August 25,
2014.
158. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Marlene Laruelle, March 18,
2015.
159. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Alexander Cooley, March 18,
2015.
160. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Erica Downs, March 18, 2015.
161. RT (Russia), ‘‘Russia, China Agree to Integrate Eurasian Union, Silk Road,
Sign Deals,’’ May 8, 2015.
162. RT (Russia), ‘‘Russia, China Agree to Integrate Eurasian Union, Silk Road,
Sign Deals,’’ May 8, 2015.
163. Keith Bradsher, ‘‘Hauling New Treasure along the Silk Road,’’ New YorkTimes, July 20, 2013.
164. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, oral testimony of Niklas Swanström, March 18, 2015.
165. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, oral testimony of Alexander Cooley, March 18, 2015.
See also U.S.-China Economic and Security Review Commission, Hearing on Looking West: China and Central Asia, written testimony of Niklas Swanström, March
18, 2015.
166. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, oral testimony of Alexander Cooley, March 18, 2015.
167. U.S. State Department officials, briefing to Commission, Washington, DC,
April 17, 2015; Marlene Laruelle and Sebastien Peyrouse, The Chinese Question inCentral Asia: Domestic Order, Social Change and the Chinese Factor, Columbia University Press, 2012, 30.
168. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Niklas Swanström, March 18,
2015.
169. Dmitry Gorenburg, ‘‘External Support for Central Asian Military and Security Forces,’’ Stockholm International Peace Research Institute, January 2014, 26.
170. Andrew Scobell, Ely Ratner, and Michael Beckley, ‘‘China’s Strategy toward
South and Central Asia: An Empty Fortress,’’ RAND Corporation, 2014, 20; Alexander Cooley, Great Games, Local Rules: The New Great Power Contest in Central
Asia, Oxford University Press, 2012, 95–96.
171. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Raffaello Pantucci, March 18,
2015.

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426172. Niklas Swanström, ‘‘Sino-Russian Relations at the Start of the New Millennium in Central Asia and Beyond,’’ Journal of Contemporary China 13:32 (January2014): 483–488.
173. Kazakhstan Ministry of Foreign Affairs, discussion with Commission, Astana,
Kazakhstan, July 27, 2015; Märta Carlsson, Susanne Oxenstierna, and Mikael
Weissmann, ‘‘China and Russia—A Study of Cooperation, Competition, and Distrust,’’ FOI, Swedish Defense Research Agency, June 2015, 68; Dmitri Trenin, ‘‘From
Greater Europe to Greater Asia? The Sino-Russian Entente,’’ Carnegie Endowment
for International Peace, April 2015, 8; and U.S.-China Economic and Security Review Commission, Hearing on Looking West: China and Central Asia, written testimony of S. Frederick Starr, March 18, 2015. See also: Alexander Cooley, ‘‘Local
Rules: How Central Asian Regimes Survive,’’ in Alexander Cooley, Great Games,
Local Rules: The New Great Power Contest in Central Asia, Oxford University Press,
2012, 16–29.
174. Alexander Cooley, Great Games, Local Rules: The New Great Power Contest
in Central Asia, Oxford University Press, 2012, 94.
175. Kazakhstan Presidential Library, discussion with Commission, Astana, Kazakhstan, July 27, 2015.
176. Andrew Scobell, Ely Ratner, and Michael Beckley, ‘‘China’s Strategy toward
South and Central Asia: An Empty Fortress,’’ RAND Corporation, 2014, 20.
177. Nick Cunningham, ‘‘Russia in Weak Position for New Gas Deal with China,’’
Oil Price, November 11, 2014.
178. Alexander Gabuev, ‘‘A ‘Soft Alliance’? Russia-China Relations after the
Ukraine Crisis,’’ European Council on Foreign Relations, February 2015, 1.
179. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, oral testimony of Marlene Laruelle, March 18, 2015.
180. Citibank Kazakhstan, discussion with Commission, Almaty, Kazakhstan,
July 29, 2015.
181. Richard E. Hoagland, ‘‘Developments in South and Central Asia’’ (Washington International Business Council, Washington, DC, June 2, 2015).
182. Zhang Yuzhe, ‘‘With New Fund, China Hits a Silk Road Stride,’’ Caixin, December 3, 2014.
183. Alexander Cooley, Great Games, Local Rules: The New Great Power Contest
in Central Asia, Oxford University Press, 2012, 166–167; Tom Miller, ‘‘Travels along
the New Silk Road: The Economics of Power,’’ Gavekal Dragonomics, October 24,
2014; and Ting Shi, ‘‘Xi Risks Silk Road Backlash to Remake China Center ofWorld,’’ Bloomberg Businessweek, November 25, 2014.
184. Kazakhstan Ministry of Foreign Affairs, discussion with Commission,
Astana, Kazakhstan, July 27, 2015; PricewaterhouseCoopers Kazakhstan, discussion
with Commission, Almaty, Kazakhstan, July 29, 2015.
185. David Trilling, ‘‘Kyrgyzstan Suspends Work at New Chinese Refinery,’’
EurasiaNet, February 19, 2014.
186. Xinjiang Academy of Social Sciences’ Institute of Central Asia, discussion
with Commission, Urumqi, China, July 25, 2015.
187. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Alexander Cooley, March 18,
2015.
188. Transparency International, ‘‘2011 Bribe Payers Index,’’ 2011.
189. Alexander Cooley, Great Games, Local Rules: The New Great Power Contest
in Central Asia, Oxford University Press, 2012, 134–148.
190. U.S. firm, discussion with Commission, Almaty, Kazakhstan, July 29, 2015.
191. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Alexander Cooley, March 18,
2015.
192. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Alexander Cooley, March 18,
2015.
193. U.S. State Department official, briefing to Commission, Washington, DC,
April 17, 2015.
194. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, oral testimony of S. Frederick Starr, March 18, 2015.
195. U.S.-China Economic and Security Review Commission, Hearing on Looking
West: China and Central Asia, written testimony of Raffaello Pantucci, March 18,
2015; Barcelona Center for International Affairs, ‘‘Sources of Tension in Afghanistan
and Pakistan: Perspectives from the Region in 2013: China,’’ May 2013, 13.
196. U.S. State Department officials, briefing to Commission, Washington, DC,
April 17, 2015.

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197. Chinese Mission to Kazakhstan, discussion with Commission, Astana, Kazakhstan, July 27, 2015.
198. Wang Jisi, ‘‘ ‘Marching Westwards’: The Rebalancing of China’s Geostrategy’’(English translation), Peking University Center for International and Strategic Studies, October 7, 2012, 8.

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SECTION 2: CHINA AND SOUTHEAST ASIA
Introduction
China’s relations with Southeast Asia are complex and dynamic.
Some of China’s strongest and weakest bilateral relationships arewith Southeast Asian countries, and Southeast Asia is a usefulprism through which to observe how Beijing perceives its place in
the Asia Pacific and in the world. Currently, China-Southeast Asia
relations are characterized by seemingly contradictory trends:
China is aggressively advancing its territorial claims in the South
China Sea at the expense of its Southeast Asian neighbors while
simultaneously seeking to strengthen relations with the region,
often through economic diplomacy.1
Since December 2013, China has expanded seven land features
it controls in the Spratly Islands, which the Philippines and Vietnam also claim, by more than 2,900 acres—the equivalent size ofmore than 2,000 football fields.2 The scale and speed of these activities have far outpaced the activities of other claimants on theland features they control, and China intends to use its enhanced
land features for military and other purposes. At the same time,
however, China has sought to improve relations with Southeast
Asian countries, primarily through economic initiatives and engagement with the Association of Southeast Asian Nations(ASEAN).* China established the Asian Infrastructure Investment
Bank (AIIB), which all the countries in ASEAN joined, and the‘‘21st Century Maritime Silk Road,’’ a massive (and thus far largely
conceptual) initiative that aims to enhance regional connectivity
through infrastructure and other projects, traversing all of Southeast Asia and beyond once it is established.3 China appears to view
economic cooperation through such initiatives as a way to ease tensions arising from China’s actions in the South China Sea.4 Moreover, China uses its engagement with ASEAN as a means of improving its relations with Southeast Asian countries and trying toreassure them that it seeks to be a peaceful and cooperative partner, while also promoting its own economic development.5 Amongother ASEAN and ASEAN-related fora, China participates annually in the ASEAN-China Summit, the ASEAN Plus Three Summit,
the ASEAN Regional Forum, and the East Asia Summit.† At the

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* ASEAN is comprised of Brunei, Burma (Myanmar), Cambodia, Indonesia, Laos, Malaysia,
the Philippines, Singapore, Thailand, and Vietnam.
† In these fora, representatives of the member countries discuss regional and international
issues and promote economic, political, and security cooperation and people-to-people and cultural exchange, among other things. The ASEAN-China Summit is attended by the heads ofstate of ASEAN member countries and China’s premier. The ASEAN Plus Three Summit consists of ASEAN member countries and China, Japan, and South Korea. The ASEAN Regional
Forum is comprised of the ASEAN Plus Three member countries as well as Australia, Bangladesh, Canada, the EU, India, Mongolia, New Zealand, North Korea, Pakistan, Papua New
Guinea, Russia, Sri Lanka, Timor-Leste, and the United States. The East Asia Summit consistsof the ASEAN Plus Three member countries as well as Australia, India, New Zealand, Russia,(428)

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China-ASEAN Summit in November 2014, Chinese Premier Li
Keqiang announced that China would provide loans and development aid to Southeast Asia and take further steps to develop the
China-ASEAN Investment Cooperation Fund, which is focused oninvestment in natural resources, energy, and infrastructure in
ASEAN countries.6 He also promoted the idea of a ‘‘China-ASEAN
Treaty on Good Neighborliness, Friendship and Cooperation,’’which he said would ‘‘provide an institutional framework and legal
guarantee for the peaceful coexistence of both sides from generation to generation.’’ 7This section explores this dynamic of competition and cooperation, discussing the South China Sea disputes, China-Southeast
Asia economic relations, and China’s security cooperation with
Southeast Asia. The findings in this section are based on a May
2015 Commission hearing on the security, diplomatic, and economic
elements of China’s relations with Southeast Asia; the Commission’s July 2015 fact-finding trip to China and Vietnam; and open
source research and analysis.
The South China Sea Disputes: New Developments and China’s Relations with the Southeast Asian Claimants

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Among security and geopolitical challenges in Southeast Asia,
the South China Sea disputes are the most contentious.* In thepast six years, China has taken a more assertive approach to its
territorial claims in the South China Sea.† China has largely employed a gradual, ‘‘salami-slicing’’ approach to consolidating its
claims, which Bonnie Glaser, a senior adviser for Asia at the Center for Strategic and International Studies, describes as ‘‘using
small, incremental actions, none of which by itself is a casus
belli.’’ 8 Starting in late 2013, however, Beijing’s efforts took on increased urgency as it began to use land reclamation and construction on the land features it controls to vastly expand its civilian
and military presence in contested waters (see Figure 1).

and the United States. Association of Southeast Asian Nations, ‘‘Chairman’s Statement of the
17th ASEAN-China Summit,’’ December 27, 2014; Association of Southeast Asian Nations,‘‘ASEAN Plus Three Cooperation,’’ January 22, 2014; ASEAN Regional Forum, ‘‘About theASEAN Regional Forum’’; and Association of Southeast Asian Nations, ‘‘Chairman’s Statementof the Ninth East Asia Summit,’’ November 13, 2014.
* Six countries have overlapping claims to territory in the South China Sea: Brunei, China,
Malaysia, the Philippines, Taiwan, and Vietnam. China delineates its claims on its South China
Sea maps using a nine-dash line, which encompasses almost all of the South China Sea (seeFigure 1). China occupies the Paracel Islands, though Taiwan and Vietnam also claim them.
All the claimants, except Brunei, have military outposts in the Spratly Islands. (See Chapter
3, Section 3, ‘‘Taiwan,’’ for further discussion of Taiwan’s role in the South China Sea disputes.)† For an in-depth look at China’s growing assertiveness in the South China Sea since 2009,see U.S.-China Economic and Security Review Commission, 2009 Annual Report to Congress,
November 2009, 123–124; U.S.-China Economic and Security Review Commission, 2010 Annual
Report to Congress, November 2010, 132–137; U.S.-China Economic and Security Review Commission, 2011 Annual Report to Congress, November 2011, 166–172; U.S.-China Economic andSecurity Review Commission, 2012 Annual Report to Congress, November 2012, 215–240; U.S.China Economic and Security Review Commission, 2013 Annual Report to Congress, November
2013, 266, 268–276, 278–284; and U.S.-China Economic and Security Review Commission, 2014
Annual Report to Congress, November 2014, 244–252, 411–412.

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The United Nations Convention on the Law of the Sea
The United Nations Convention on the Law of the Sea(UNCLOS) specifies up to four main sovereign territorial or jurisdictional zones to which coastal states are entitled. A coastal
state is entitled to a ‘‘territorial sea’’ of no more than 12 nautical
miles (nm) extending out from its coast, over which the state has
full sovereignty, subject to the right of innocent passage. Extending out an additional 12 nm is a ‘‘contiguous zone,’’ in which acoastal state can prescribe and enforce customs-related laws.9 A
coastal state is also entitled to an ‘‘exclusive economic zone’’(EEZ), a 200-nautical-mile zone extending from its coastline
within which that state can exercise exclusive sovereign rights
and jurisdiction over living and nonliving resources, but not fullsovereignty.10 In addition, if a state’s continental shelf extends
beyond its EEZ, it can submit a claim for an outer limit to its
continental shelf to an UNCLOS governing body, which will provide recommendations on its delimitation.11 According to
UNCLOS, ‘‘The continental shelf of a coastal State comprises theseabed and subsoil of the submarine areas that extend beyond
its territorial sea throughout the natural prolongation of its land
territory to the outer edge of the continental margin. . . .’’ 12
UNCLOS stipulates that only a country’s coastline and islands
may generate an EEZ and a continental shelf.13 Islands, as defined by UNCLOS, must be above water at high tide and be capable of sustaining human habitation or economic activity of
their own.14 Rocks, which are defined as being above water athigh tide but unable to sustain human habitation or economic
activity, only generate a 12-nm territorial sea.15 ‘‘Low-tide elevations,’’ which are submerged at high tide, do not generate aterritorial sea (unless they are located within the territorial seaof an island or mainland coastline).16 Artificial islands, with the
exception of those that are built on rocks, do not generate a territorial sea.17
Under UNCLOS, foreign civilian and military ships may transit through a country’s territorial sea according to the principleof ‘‘innocent passage.’’ Passage is innocent so long as it does not
involve activities that are ‘‘prejudicial to the peace, good order or
security of the coastal State,’’ such as military exercises or intelligence gathering.18 Foreign aircraft do not have the right of innocent passage above a country’s territorial sea.19 China assertsthat it has the right to require foreign ships to obtain permission
or provide notification before conducting innocent passage,
though UNCLOS does not include such a provision.20

dkrause on DSKHT7XVN1PROD with USCCUNCLOS also entitles both foreign military ships and aircraft
to conduct freedom of navigation and overflight and ‘‘other internationally lawful uses of the sea’’ such as conducting military exercises and collecting intelligence in the EEZ.21 In contrast,
China and a minority of other states 22 assert a right to restrict
military activity in their EEZs.23 Although China does not object
to foreign military vessels or aircraft merely transiting through

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431
The United Nations Convention on the Law of the Sea—
Continued
or flying over its EEZ, China rejects their right to conduct military activities, including intelligence gathering, while in theEEZ.24
U.S. law and practice is generally compatible with UNCLOS,
but the United States has not ratified the treaty due to concerns
in Congress. Proponents of ratifying the treaty argue that doing
so would be economically beneficial and, by giving the UnitedStates a ‘‘seat at the table,’’ would enable the United States tohave greater influence over international discussions and negotiations related to the treaty.25 Opponents of ratification argue
that the treaty would impinge on U.S. sovereignty, and thatsigning it would be detrimental to U.S. economic interests.26

Figure 1: South China Sea Map

Source: Economist, ‘‘The South China Sea: Making Waves,’’ May 2, 2015.

China’s recent land reclamation activities in the Spratly Islands
began in late 2013.27 Since then, China has conducted land reclamation activities on Johnson South, Cuarteron, Gaven, Subi, Mis-

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China’s Land Reclamation and Construction Activities in the
Spratly Islands

432
chief, Hughes, and Fiery Cross reefs (see Table 1).* Although theland reclamation phase appears to be nearing completion, China
continues to build, expand, and upgrade infrastructure on these reclaimed sites.28 At the time of the writing of this Report, available
satellite imagery and reporting suggests this infrastructure includes at least one and up to three airstrips, helipads, port facilities, radars, and satellite communication equipment.29 The New
York Times reported in May 2015 that, according to U.S. officials,
two mobile artillery vehicles had been observed on one of China’s
artificial islands. Another U.S. official said that these weapons
were detected about a month before and that China later removed
or hid them. That official also noted that some islands occupied byother countries were within range of these weapons, but they could
not threaten U.S. ships or aircraft.30 In July 2015, Admiral Harry
Harris, commander of the U.S. Pacific Command, said China is‘‘building revetted aircraft hangars at some of the facilities therethat are clearly designed, in my view, to host tactical fighter aircraft.’’ 31 Although China built structures on some of these reefs
prior to 2014, the structures were small and could not accommodate combat aircraft or major surface combatants, as Fiery Cross
Reef appears able to do now.32
Table 1:China’s Recent Land Reclamation and Construction Activities in
the Spratly Islands

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Land
FeatureApproximate
Date
Reclamation
Began

Changein Size

Preexisting
Infrastructure(Selected)

New
Infrastructure(Selected)

Mischief
Reef

Early 2015

5,580,000
squaremetersTwo military facilities and a shelter
for fishermen.

Reinforced seawalls, and airstrip(potential).

Subi Reef

July 2014

3,950,000
squaremetersHelipad, militaryfacility, and probable radar facility.

Reinforced seawalls and airstrip(potential).

Fiery
Cross
Reef

August 2014

2,740,000
squaremeters

Oceanic observation station, communications equipment, helipad,
pier, air-defense
guns, and garrison
for approximately
200 soldiers.

Airstrip, administrative facility andsupport building,harbor, port, a second helipad, radar
tower (potential),and circular antenna array.

Cuarteron
Reef

Summer 2014

231,100
squaremetersMilitary facility
and satellite communication antenna.

Helipad, sensor
array, and support
buildings.

Gaven
Reef

Spring 2014

136,000
squaremetersMilitary facility.

A second militaryfacility, port, andhelipad.

* Since beginning land reclamation on Fiery Cross Reef in August 2014, China has multiplied
the size of that land feature by 11. Mira Rapp Hooper, ‘‘Before and After: The South China Sea
Transformed,’’ Center for Strategic and International Studies, February 18, 2015.

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Table 1:China’s Recent Land Reclamation and Construction Activities in
the Spratly Islands—Continued

Land
FeatureApproximate
Date
Reclamation
Began

Changein Size

Preexisting
Infrastructure(Selected)

New
Infrastructure(Selected)

JohnsonSouth
Reef

January 2014

109,000
squaremetersMilitary facility,
pier, helipad, communications facility, and garrison
building.

A second militaryfacility, harbor,
port, fuel dump,
desalination
pumps, radar
tower, and defensive towers.

Hughes
Reef

Summer 2014

76,000squaremetersLighthouse andhelipad.

Harbor, port, military facility, anddefensive towers.

Source: Center for Strategic and International Studies, ‘‘Island Tracker’’ (Last accessed on
October 8, 2015); Victor Robert Lee, ‘‘South China Sea: Satellite Imagery Shows China’s Buildup on Fiery Cross Reef,’’ Diplomat (Tokyo), September 16, 2015.

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Although China correctly points out that other countries in theregion have also engaged in land reclamation and construction onland features in the South China Sea, China’s activities differ fromthose of the other claimants in the pace at which they have occurred and the amount by which they have enlarged the features.
For example, in contrast to the more than 2,900 acres China hasreclaimed since 2013, Vietnam’s reclamation activities in the South
China Sea since 2009 have yielded around 60 acres of land.33 Although the Philippines military developed a plan to upgrade facilities on the eight Philippines-controlled islands and reefs in the
Spratly Islands, it apparently did not carry out these plans.34
The number of land features in the Spratly Islands that are occupied by each of the claimants is as follows: China, 8; Malaysia, 5;
the Philippines, 8; and Taiwan, 1. Reports vary as to the numberof features occupied by Vietnam, with the number ranging between
22 and 27.* 35 Available information indicates that at least Fiery
Cross Reef (China), Gaven Reef (China), Mischief Reef (China),
Johnson South Reef (China), Subi Reef (China), Swallow Reef (Malaysia), Thitu Island (Philippines), Itu Aba Island (Taiwan), Spratly
Island (Vietnam), and Sand Cay (Vietnam) are inhabited by military or coast guard personnel. Civilians not affiliated with government agencies also live on several of these islands.36 Reporting on
the human population of the Spratly Islands is limited; a comprehensive listing of the number of people living on each land feature is unavailable. Among the facilities the other claimants havebuilt or are building on the land features they administer in the
Spratly Islands are airstrips, port facilities, lighthouses, a surveillance facility, radar and communications equipment, hangers,
helipads, gun emplacements, schools, and medical clinics.37* According to a map of the Spratly Islands produced by the U.S. Department of Defense, Vietnam occupies 48 ‘‘outposts,’’ but this refers to the number of structures that Vietnam has built
on the land features it controls. U.S. Department of Defense, Asia-Pacific Maritime Security
Strategy, August 2015, 7; Gregory Poling, ‘‘Sophistry and Bad Messaging in the South China
Sea,’’ Center for Strategic and International Studies, Asia Maritime Transparency Initiative, July
1, 2015.

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434
The Contentious China-Philippines Dispute and thePhilippines’ South China Sea Arbitration Casedkrause on DSKHT7XVN1PROD with USCCThe China-Philippines dispute is among the most volatile of
the South China Sea disputes. In recent years, China has taken
advantage of its superior maritime presence and greater economic, political, and military footprint in the region to gain theupper hand in the competition for territory. China-Philippine relations came under stress in 2011 with a tense encounter between Chinese maritime law enforcement ships and a Frenchship conducting seismic testing in oil and gas fields for the Philippines government.38 In 2012, after a standoff between Philippine and Chinese ships, China effectively secured control of
Scarborough Reef,* a contested fishing ground approximately
500 nm from Hainan Island, China’s southernmost province, and
124 nm from the Philippines’ province of Zambales.† 39 Althoughaccounts of how the standoff ended differ widely, U.S. officials
assert that in a meeting with Chinese counterparts in June 2012
they reached an understanding for both sides’ ships to simultaneously withdraw from the reef.40 According to China’s Vice Foreign Minister Fu Ying, who participated in the meeting in June
2012, there was no such understanding. U.S. officials told the Financial Times ‘‘there was a clear understanding at the 2012
meeting that the Chinese would take the idea of a mutual withdrawal from Scarborough [Reef] back to senior leaders in Beijing.
They say it is unclear whether Ms. Fu really tried to sell theagreement in Beijing or whether the foreign ministry was overruled by more hawkish elements in the Chinese system, including the military.’’ 41 The Philippines later accused China of reneging on this ‘‘agreement.’’ 42 According to one report, the Chinese ships initially left Scarborough Reef, but they returned
shortly thereafter.43 In 2014, China Coast Guard (CCG) ships attempted to block the Philippines from resupplying its South
China Sea outpost aboard the Sierra Madre, a navy ship thePhilippines intentionally grounded in 1999 to mark its claim to* For an in-depth examination of the Scarborough Reef standoff, see U.S.-China Economic andSecurity Review Commission, 2012 Annual Report to Congress, November 2012, 231–233.
† Chinese maritime law enforcement ships continue to patrol the vicinity of Scarborough Reef.
According to a spokesperson for China’s Ministry of Foreign Affairs, ‘‘Chinese government vessels perform guard duty in waters off the Huangyan Island [the Chinese name for ScarboroughReef] to maintain the normal order of these waters in accordance with the law.’’ The Philippine
government claimed the China Coast Guard rammed Filipino fishing boats in Scarborough Reef
in January 2015 and deployed a water cannon against Filipino fishing boats there in April 2015.
Regarding the events of January 2015, a spokesperson for China’s Ministry of Foreign Affairs
said, ‘‘The Chinese coast guard sent a dinghy to lawfully drive away the Philippine vessels, andthe dinghy slightly rubbed against one of the vessels during its operation.’’ When asked about
the events of April 2015 during a regular press conference on April 22, 2015, a spokesperson
for the Ministry neither confirmed nor denied the allegations. Will Englund, ‘‘For Some Filipino
Fishermen, the South China Sea Dispute Is Personal,’’ Washington Post, June 7, 2015; U.S. Department of Defense, Annual Report to Congress on the Military and Security Developments Involving the People’s Republic of China 2015, May 2015, 4; China’s Ministry of Foreign Affairs,
Foreign Ministry Spokesperson Hong Lei’s Regular Press Conference on April 22, 2015, April 22,
2015; Manny Mogato, ‘‘Philippines Accuses China of Turning Water Cannon on Its Fishing
Boats,’’ Reuters, April 21, 2015; Philippines’ Department of Foreign Affairs, Statement on Recent
Incidents in the Philippines’ Bajo de Masinloc, February 4, 2015; and China’s Ministry of Foreign Affairs, Foreign Ministry Spokesperson Hong Lei’s Regular Press Conference on February
5, 2015, February 5, 2015.

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The Contentious China-Philippines Dispute and thePhilippines’ South China Sea Arbitration Case—
Continued
Second Thomas Shoal. Since then, CCG ships have continued topatrol in that area, and the Philippine Navy has air-dropped
supplies by parachute or delivered supplies by small boat.44
Economically, diplomatically, and militarily outmatched by
China, the Philippines turned to legal arbitration. In 2013, thePhilippines, among other requests, asked an arbitral tribunal at
the Permanent Court of Arbitration in The Hague to: (1) declarewhether China’s claims based on the nine-dash line * are invalid
under UNCLOS; (2) declare whether certain land features in theSouth China Sea are rocks rather than islands and whether certain features are low-tide elevations; and (3) declare whether
China has interfered with the Philippines’ right to exploit resources within the Philippines’ EEZ and continental shelf.45 Before the tribunal can rule on the Philippines’ case, it must first
decide whether it has jurisdiction over such a case.† In July
2015, the tribunal convened and the Philippines’ delegation presented its arguments in support of the tribunal’s jurisdiction.46
The Philippines’ legal consul estimated the tribunal would issue
a ruling on the question of jurisdiction by October 2015.47 At thetime of the writing of this Report a ruling had not been issued.
Should the tribunal decide it has jurisdiction over the Philippines’ case, it is expected to rule on the case by June 2016.48
China’s land reclamation may complicate the ability of the tribunal to rule on the status of the land features. Mira Rapp Hooper, then director of the Asia Maritime Transparency Initiativeat the Center for Strategic and International Studies, told theCommission that ‘‘while China will surely not convince the [arbitral tribunal of the Permanent Court of Arbitration in The
Hague] that these artificial features deserve to be treated as fullfledged islands under UNCLOS, its rapid-fire building may makeit more difficult for the tribunal to rule on their previous status.’’ 49

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Beijing has rejected the arbitration process as ‘‘manifestly unfounded’’ under UNCLOS and declined to participate, rejecting the
involvement of third parties.50 China’s leaders likely fear the tribunal will rule, at least partially, in the Philippines’ favor, andseek to avoid tacitly affirming the arbitration’s legitimacy by participating in the case.
China’s rapid land reclamation and construction activities appear
to be driven by several factors: China’s desire to unilaterally im* Although China’s claim in the South China Sea is often depicted by a nine-dash line, Beijing
in recent years has issued new maps with ten dashes. Ishaan Tharoor, ‘‘Could This Map ofChina Start a War?’’ Washington Post, June 27, 2014; Euan Graham, ‘‘China’s New Map: Just
another Dash?’’ Australian Strategic Policy Institute (The Strategist blog), September 17, 2013.
† If the tribunal decides the Philippines is seeking a ruling on territorial sovereignty, a question over which the tribunal does not have jurisdiction, it will refuse to allow the case to proceed. Center for Strategic and International Studies, Asia Maritime Transparency Initiative,‘‘Arbitration on the South China Sea: Rulings from The Hague.’’

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pose its claims and avoid arbitration or negotiation with other parties over the disputes; China’s ambition to enhance its ability to
project power into the South China Sea; and, potentially, China’s
intention to establish an air defense identification zone (ADIZ) overpart of the South China Sea.* †China’s land reclamation and construction projects present theother claimants with a fait accompli.51 Regardless of the protestations of other countries, once the work is completed China will
have significantly enhanced its control over these features and its
presence in the South China Sea.
China will be able to use these land features to bolster its ability
to sustain its military and maritime law enforcement presence in
the South China Sea. Currently, the ability of the People’s Liberation Army (PLA) Air and Naval Aviation forces to conduct combat
air patrols near the Spratly Islands is limited not only by the long
distance from China’s airbases, but also by the PLA’s nascent aircraft carrier aviation capability and its limited capacity for aerial
refueling.52 The recently completed airstrip on Fiery Cross Reef is
10,250 feet (3,125 meters) in length, which should allow it to accommodate most PLA combat and support aircraft.‡ 53 There areindications that China also may be preparing to build airstrips on
Subi Reef and Mischief Reef.54 In addition, China appears to bebuilding a seaport at Fiery Cross Reef, with a harbor that could belarge enough to allow large Chinese naval and maritime law enforcement ships to dock to replenish supplies.55 The newly upgraded islands also enable the PLA Navy and maritime law enforcement entities to enhance maritime domain awareness and improve intelligence, surveillance, and reconnaissance capabilities farther from China’s coast.56 At a November 2014 international defense forum in China, a senior PLA officer said, ‘‘There is a needfor a base [in the Spratly Islands] to support our radar system andintelligence-gathering activities.’’ 57 China appears to already haveor to be building radar facilities on Fiery Cross, Johnson South,and Subi reefs, and Fiery Cross Reef will be able to accommodate
surveillance aircraft once the airstrip is completed.58
China also may use the facilities it is building on these land features in the Spratly Islands to establish an ADIZ over part of theSouth China Sea.59 In December 2013, after China declared an
ADIZ over the Senkaku Islands in the East China Sea, China’s
then ambassador to the Philippines responded to questions about
whether China might declare an ADIZ in the South China Sea,saying China was entitled to decide ‘‘where and when to set up the
new air identification zone.’’ 60 During the International Institute* For more information on the drivers of China’s approach to the maritime disputes in theSouth China Sea, including nationalism and natural resources, see U.S.-China Economic andSecurity Review Commission, 2013 Annual Report to Congress, November 2013, 270–272.
† An ADIZ is a publicly declared area established in international airspace adjacent to astate’s national airspace, in which civil aircraft must be prepared to submit to local air traffic
control and provide aircraft identifiers and location. Its purpose is to allow a state the time andspace to identify the nature of approaching aircraft prior to entering national airspace in orderto prepare defensive measures if necessary. For an in-depth examination of China’s East China
Sea ADIZ, see Kimberly Hsu, ‘‘Air Defense Identification Zone Intended to Provide China Greater Flexibility to Enforce East China Sea Claims,’’ U.S.-China Economic and Security Review
Commission, January 14, 2014.
‡ China has one other airstrip in the South China Sea on Woody Island in the Paracel Islands.

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for Strategic Studies’ May 2015 Shangri-La Dialogue,* Chinese Admiral Sun Jianguo, the head of China’s delegation to the dialogue
and deputy director of the PLA’s General Staff Department, said
China would only establish an ADIZ in the South China Sea if
faced with security threats.61 This remark followed a similar statement by Ouyang Yujing, the director general of the Department ofBoundary and Ocean Affairs of China’s Ministry of Foreign Affairs.
He said, ‘‘Whether China will set up an ADIZ in the South China
Sea depends on whether and to what extent the security of airspace is threatened as well as other factors. Currently, the situation in the South China Sea is stable on the whole.’’ 62 These statements indicate China is positioning itself to justify the establishment of an ADIZ as a defensive response to the actions of othercountries.
Figure 2: Comparison of Airstrips by Claimant in the South China Sea’s
Spratly Islands

Source: Center for Strategic and International Studies, Asia Maritime Transparency Initiative, ‘‘Airpower in the South China Sea.’’* The Shangri-La Dialogue is a high-profile meeting of regional defense leaders held annuallyin Singapore.

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China has stated its land reclamation and construction activities
are primarily for civilian purposes, such as providing services toChinese and foreign ships transiting the South China Sea; facilitating oceanic research and meteorological observation; and providing fisheries services.63 The Chinese government acknowledgedin April 2015 that the islands have military purposes as well, whena Ministry of Foreign Affairs spokesperson stated that the islands
are intended to satisfy China’s ‘‘military defense needs’’ and to‘‘better safeguard territorial sovereignty and maritime rights andinterests.’’ 64438
China has consistently argued that it has the right to conduct
these activities.65 Beijing frequently asserts that it has ‘‘indisputable sovereignty over the Nansha Islands [China’s name for the
Spratly Islands] and their adjacent waters’’ and that ‘‘the relevant
construction, which is reasonable, justified and lawful, is well within China’s sovereignty. It does not impact or target any country,
and is thus beyond reproach.’’ 66 In written responses to questions
submitted by the Wall Street Journal before his state visit to theUnited States in September 2015, Chinese President and General
Secretary of the Chinese Communist Party (CCP) Xi Jinping reiterated China’s stance that ‘‘the [Spratly Islands] have been China’s
territory since ancient times. This is fully backed by historical andlegal evidence.’’ 67 In fact, China argues that the United States, notChina, is increasing tensions in the region through its surveillanceflights and criticism of China. In addition, China regularly assertsthat the United States is not acting like a neutral party in theSouth China Sea disputes.68
Perhaps recognizing the alarm the land reclamation and construction has caused in the region, China also has begun to stress
how the islands help it meet its international obligations in areas
such as maritime search and rescue.69 China’s Ministry of Transportation noted that its construction of lighthouses on both
Cuarteron and Johnson South reefs will ‘‘immensely improve thenavigation safety’’ in the South China Sea.70 Ms. Glaser explainedthat ‘‘the Chinese are now attempting to assuage concerns about
their artificial island building by claiming that these activities are
aimed at providing public goods.’’ 71
China also appears to be seeking to legitimize some of the civilian facilities it is building in the Spratly Islands by suggesting they
are endorsed by international organizations. For example, during
the 2015 Shangri-La Dialogue, Admiral Sun remarked that ‘‘China
has built an oceanic survey station for the United Nations on the
Yongshu Jiao [the Chinese name for Fiery Cross Reef].’’ 72 Admiral
Sun was referring to China’s construction of an observation stationthat began in 1988 in response to a directive by the UN Educational, Scientific, and Cultural Organization for its members tobuild monitoring stations for a study of oceans around the world.73

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Ecological Impacts of China’s Land Reclamation
Despite China’s claims about the benefits of its land reclamationand construction activities in the Spratly Islands, the damage tothe coral reefs caused by China’s land reclamation may have amajor impact on the South China Sea’s ecosystem, particularly its
fish, which are a critical protein source for the populations ofSoutheast Asia.* 74 Since China’s enhanced land features are intended in part to support Chinese fishermen,† they will lead to in* For example, more than a quarter of the Philippines’ fishing grounds are located in theSouth China Sea, where around 12,200 Filipino fishermen pursue their livelihoods. Pia Ranada,‘‘China Reclamation Poses P4.8–B Economic Loss for PH,’’ Rappler (Philippines), April 23, 2015.
† A spokesperson for China’s Ministry of Foreign Affairs said these land features will support‘‘fishery production and service,’’ and China’s National Development and Reform Commission
announced it will provide fishing boats with shelter during storms and repair and replenishmentservices. China’s National Development and Reform Commission, National Development and Reform Commission Draws up a Plan for the Construction of Civilian Infrastructure on the Islands
and Reefs in the Spratly Islands, June 17, 2015. Staff translation; Open Source Center, ‘‘Tran-

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creased Chinese fishing in the South China Sea and greater depletion of local fisheries. Given the massive size of China’s fishingfleet and its record of overfishing along China’s coast, greater capacity for Chinese fishermen to fish in the South China Sea bodes
ill for the fish stocks there.75
According to the Philippines Bureau of Fisheries and Aquatic Resources, China’s land reclamation activities on five land features
have buried 768 acres of coral reef.76 Since the coral reefs contribute to food production as well as to ‘‘raw materials, waste treatment, erosion prevention, and tourism,’’ Edgardo Gomez, professor
emeritus at the University of the Philippines’ Marine Science Institute, estimates that China’s destruction of the reefs through reclamation will result in about $110 million in economic losses annually.77 In addition, land reclamation may result in ecological damage that extends beyond the South China Sea. For example, somemarine species spawn in the coral reefs of the South China Sea andthe young fish then swim to adjacent seas and the coastal areas ofSoutheast Asia. Moreover, the reefs in the South China Sea arehome to significant biodiversity and China’s activities could lead tothe extinction of some marine species.78
China’s land reclamation activities also may have violated its obligation as a signatory to UNCLOS to ‘‘protect and preserve themarine environment.’’ 79 China dismisses concerns about the environmental impact of its land reclamation activities.80
Different Claimants, Different Approach
China tailors its approach to its maritime and territorial disputes
depending on the claimant. As discussed previously, China’s approach to the Philippines involves bullying and intimidation. China’s approach to Vietnam, as discussed later, is also hardline. On
the other hand, China handles its disputes with Malaysia andBrunei more quietly, and has avoided publicly clashing with theseclaimants. China’s approach to Taiwan’s claims is altogether different given the unique cross-Strait relationship (see Chapter 3,
Section 3, ‘‘Taiwan,’’ for more information regarding the South
China Sea disputes in cross-Strait relations.)
China’s ‘‘Soft Approach’’ to Malaysia

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China takes a ‘‘soft approach’’ to Malaysia, according to Pek
Koon Heng, assistant professor and director of the ASEAN Studies Initiative at American University’s School of International
Service.81 In its relations with Malaysia, Beijing has not confronted Kuala Lumpur in public over Malaysia’s oil and gas exploration in the South China Sea, and Kuala Lumpur has adopted a similarly low-profile approach to China.82 The two sides appear to have reached a consensus to not air their grievances
through the media.* 83 After a meeting with President Xi Jinping

script of PRC FM Spokesman News Conference 9 April 2015,’’ April 9, 2015. ID: CHO20150409
28753011.
* However, recent events suggest Malaysia may be departing from this approach. (See ‘‘A
Change in Southeast Asia’s Strategy?’’ later in this section.)

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China’s ‘‘Soft Approach’’ to Malaysia—Continued
in November 2014, Malaysian Prime Minister Najib Razak said
President Xi ‘‘acknowledged that the quiet diplomacy approach
adopted by Malaysia was the best method, as it stressed on discussion rather than confrontation.’’ 84 This statement illustrates
Beijing’s preference to avoid ‘‘megaphone diplomacy.’’ 85
Concerns about indirectly pushing neighbors to enhance relations with the United States also may be a factor that moderates
China’s approach to its territorial dispute with Malaysia. Malaysia has enhanced its relations with the United States in recent
years, especially in the security realm.86 Beijing likely perceives
it has more to lose if Malaysia, which is not a U.S. treaty allyand has more amicable relations with China than the Philippines, becomes closer to the United States than if the Philippines, which is a U.S. ally and already has rocky relations with
China, enhances its relations with the United States.

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China, ASEAN, and the South China Sea Disputes
Although it actively participates in and promotes multilateral cooperation in Southeast Asia, China prefers to handle the South
China Sea disputes on a strictly bilateral basis.87 China assesses
it is disadvantaged by negotiating multilaterally—which could expose China to unified or near-unified opposition—rather than on abilateral basis, where it can rely on its overwhelming economic,
geopolitical, and military strength to influence outcomes.88 China
therefore refuses to negotiate a resolution to the disputes through
ASEAN. It insists the disputes are bilateral, between China and individual claimants, not multilateral.89 China even tries to limit discussion of the disputes in ASEAN fora. At the ASEAN Defense
Senior Officials Meeting Plus in February 2015, China’s delegation
rejected ASEAN’s proposal that the next ASEAN Defense Ministers
Meeting Plus, which will be held in November 2015, discuss the
China-ASEAN Declaration of Conduct on the South China Sea anda proposed Code of Conduct.* 90 Prior to the August 2015 ASEAN
foreign ministers meeting, China’s vice foreign minister said theASEAN countries should not discuss the South China Sea during
the meeting.91
Furthermore, China has nurtured and exploited divisions between Southeast Asian countries to prevent them from presenting
a united front in opposition to China’s actions in the South China
Sea. Southeast Asian countries’ national interests, concern about
China, and level of economic development vary widely. For example, some ASEAN countries, such as Cambodia, are more closely
tied to China than others, and have no claim in the territorial disputes; other countries, such as Vietnam, are claimants, and feel
* In 2002, ASEAN and China signed a nonbinding ‘‘Declaration on the Conduct of Parties in
the South China Sea,’’ and the parties intend to elevate this declaration to a binding Code of
Conduct. This document, known as the Declaration of Conduct, expresses ten principles aimed
to build trust and avoid escalation in disputed areas. ASEAN still seeks to sign a Code of Conduct on the South China Sea with China, but China is unlikely to agree to such a code atpresent. U.S.-China Economic and Security Review Commission, Hearing on China’s Relations
with Southeast Asia, written testimony of Bonnie Glaser, May 13, 2015.

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threatened by China’s actions.92 At the 2012 ASEAN foreign ministers summit, disagreement over whether to include a reference tothe standoff at Scarborough Reef led to a failure of ASEAN to issue
its usual joint communiqué. Cambodia, which held the chair of
ASEAN that year, reportedly prevented consensus in response to
overtures from China not to include a statement on the South
China Sea in the communiqué.93 In what appears to have been aneffort to cement Cambodia’s support for China’s stance on ASEAN’s
involvement in the South China Sea disputes, days before theASEAN summit, then Chinese President Hu Jintao visited Cambodia and announced that China’s trade with Cambodia would increase by $5 billion by 2017 and promised additional aid to Cambodia.94
Like Cambodia, Laos appears to be subject to Chinese influence.
In her oral remarks to the Commission, Dr. Heng said, ‘‘We don’tknow what Laos is going to do as ASEAN chair [in 2016]. That isa concern. For Malaysia [the 2015 ASEAN chair], we know that
there will be a consensus and Malaysia will uphold the consensus,
and will articulate or communicate Vietnam’s and the Philippines’
concerns [related to the South China Sea disputes], but Laos is adifferent story. And that’s where we’re going to see problems in
ASEAN.’’ 95
China does not have the same level of influence over most members of ASEAN. In written testimony to the Commission, PriscillaClapp, senior advisor to the U.S. Institute of Peace and the Asia
Society and former U.S. charge d’affaires in Burma (Myanmar),said even Burma, which once was widely believed to be beholden
to China, ‘‘can be expected to remain a loyal, if not particularly dynamic, member of ASEAN.’’ 96 She elaborated on this point in her
oral remarks to the Commission, saying Burma ‘‘would stand by
ASEAN over China on some of these issues, because ASEAN is [its]protection against China.’’ 97 Accordingly, during the 2014 oil rig
crisis between China and Vietnam, ASEAN countries—with Burmaas the chair—reached a consensus on the South China Sea, issuinga statement that ‘‘expressed their serious concerns over the ongoingdevelopments in the South China Sea, which have increased tensions in the area.’’ 98 (For more information on the oil rig crisis, see‘‘China-Vietnam Relations: A Case Study,’’ later in this section.) In
2015, Malaysia presided over the strongest ASEAN statements
about the South China Sea yet, despite Kuala Lumpur’s preference
for dealing with disputes with Beijing in private. The chairman’sstatement issued at the end of the April 2015 summit of ASEAN
heads of state declared that China’s land reclamation activities‘‘eroded trust and confidence and may undermine peace, security
and stability in the South China Sea.’’ 99 Several months later, thejoint communiqué issued at the conclusion of the August 2015
ASEAN foreign ministers meeting included the same language,
with the addition of the sentiment that these activities have ‘‘increased tensions’’ in the South China Sea.100

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Chinese Cyber Intrusions Targeting Southeast AsianCountries
In 2015, reports by companies that conduct cyber intelligence
research revealed that China-based cyber actors have carried out
intrusions into the computer networks of a wide range of targets
across Southeast Asia, including ASEAN. ThreatConnect Inc.
and Defense Group Inc. published a report in September that associated the activities of an advanced persistent threat (APT)group commonly referred to as ‘‘Naikon’’ with PLA Unit 78020,
the Second Technical Reconnaissance Bureau under the Chengdu Military Region.101 According to the report, ‘‘Unit 78020 conducts cyber espionage against Southeast Asian military, diplomatic, and economic targets. The targets include government entities in Cambodia, Indonesia, Laos, Malaysia, Myanmar, Nepal,
the Philippines, Singapore, Thailand, and Vietnam as well asinternational bodies such as United Nations Development Program (UNDP) and [ASEAN].’’ 102 Prior to the release of this report, in April, FireEye detailed the activities of another Chinabased APT group focused on Southeast Asia which it calls APT
30. Although FireEye could not conclusively link APT 30 to theChinese government, it states that the group’s activities are likely sponsored by the Chinese government.103

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Southeast Asia’s Response to China’s Activities in the South
China Sea
While each Southeast Asian claimant’s approach to maritime andterritorial disputes with China varies, Southeast Asian countries
have reacted with increasing alarm to China’s activities in theSouth China Sea. In response to China’s assertiveness in the South
China Sea and its massive military modernization program, Southeast Asian countries are enhancing their military and civilian maritime patrol capabilities and strengthening security cooperation
with the United States and other countries in the Asia Pacific.104
Of all the Southeast Asian countries, Vietnam has taken theboldest measures to enhance its deterrent capability against China’s military. Hanoi has already received 4 of 6 KILO-class submarines, and 28 of 50 submarine-launched antiship and land-attack missiles, purchased from Russia.105 Vietnam’s acquisition ofland-attack missiles—which have a range of 300 kilometers (186
miles)—enhances its ability not only to hold PLA Navy ships at
risk, but also to threaten PLA airfields and ports. Carlyle A.
Thayer, professor emeritus at the University of New South Walesin Canberra, Australia, said by acquiring land-attack missiles theVietnamese have ‘‘given themselves a much more powerful deterrent that complicates China’s strategic calculations.’’ 106 Vietnam is
the first Southeast Asian country to acquire submarines with aland-attack capability.107
Among the most recent developments, in what appears to be
driven in part by China’s assertive actions in the South China Sea,
Indonesia’s Defense Minister announced in September 2015 thatthe country would proceed with plans to enhance military infra-

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structure and capabilities on Natuna Island,108 the surrounding
waters of which are partially within China’s nine-dash line.* 109
The Defense Minister said that Indonesia would build a port,
lengthen its existing military runway, and station more fighter aircraft on Natuna Island.110 Although these measures may be driven
by concerns about various threats, tensions in the South China Sea
appear to be one factor that is prompting this action.111 ‘‘We are
not in a war situation, but the South China Sea is very close tous. We have to be prepared,’’ the Defense Minister explained.112
Japan—which is currently embroiled in a dispute with China in
the East China Sea—is emerging as a key source of support toSoutheast Asian countries on maritime security. In 2015, the Philippines reached an agreement to purchase ten patrol vessels for thePhilippine Coast Guard from a Japanese shipbuilding company,
and the Japanese government agreed to give the Philippines a $150
million low-interest loan to facilitate the transaction.113 These
ships likely will patrol Philippines-claimed waters disputed by Beijing. In 2014, Japan also pledged to give Vietnam six used patrol
vessels valued at a total of $5 million, a transfer that will be completed in 2015, according to the Japanese embassy in Vietnam.114
As of August 2015, Japan had delivered one vessel to the Fisheries
Resources Surveillance Department under Vietnam’s Ministry ofAgriculture and Rural Development, and another vessel to theVietnam Marine Police.115
Southeast Asian countries and Japan are also expanding opportunities for joint exercises, information sharing, and cooperation on
defense technology. The Philippines and Japan conducted the firstever exercise between their navies in June 2015.116 The exercise focused on search and rescue operations and included a flight over
the South China Sea by a Japanese P–3C Orion surveillance aircraft with three Philippine Navy personnel aboard.117 Before theexercise, a Philippine Navy spokesperson explained that the twosides also planned to conduct ‘‘staff-to-staff talks’’ to ‘‘strengthen
and institutionalize information-sharing between the [Philippine
Navy] and [Japan Maritime Self Defense Force] to step-up maritime situational awareness.’’ † Moreover, during his visit to Japanin June 2015, Philippines President Benigno Aquino said that heand Japanese Prime Minister Shinzo Abe agreed to begin talks ona potential Philippines-Japan visiting forces agreement.118 These
steps build upon a defense cooperation agreement signed by thetwo countries’ defense ministers in January 2015.119 Malaysia andthe Philippines respectively reached agreements with Japan to initiate negotiations regarding cooperation on defense equipment andtechnology transfer in May and June 2015.120
Southeast Asian claimants are also enhancing their security relations with one another. The most notable example is the strengthened relationship between the Philippines and Vietnam, the two* Although Indonesia’s claimed waters overlap with China’s claimed waters, it does not consider itself party to the South China Sea disputes because it has no disputes with China overland features.
† In May 2015, the Philippine and Japanese navies conducted a test of the Code for Unplanned Encounters at Sea, an agreement reached by 21 Pacific countries in 2014 with the purpose of reducing the risk of accidents at sea. Uel Balenia, ‘‘Philippine Navy Confirms Upcoming
Activity with Japan Maritime Self-Defense Force,’’ Ang Malaya Net (Philippines), June 9, 2015;
Ruser Mallari, ‘‘PHL, Japan to Hold First Full-Fledged Military Exercise in West PHL Sea,’’Ang Malaya Net (Philippines), June 9, 2015.

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countries with the tensest relations with China over the South
China Sea.121 The countries are negotiating a strategic partnershipagreement, a draft of which included a pledge to conduct confidence-building measures and, eventually, joint naval exercises, aswell as scientific cooperation in the South China Sea.122

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A Change in Southeast Asia’s Strategy?
Rising concern in Southeast Asian countries about China’s
land reclamation and construction activities and intentions in
the South China Sea raises questions about whether the trajectory of these countries’ relations with China and the UnitedStates and their approach to the Southeast Asia-China-U.S. triangular relationship is changing. Analysts have widely notedthat Southeast Asian countries pursue an ‘‘engage-and-hedge’’strategy toward China and do not want to choose sides between
the United States and China.123 However, in response to China’s
recent activities, some Southeast Asian countries are becoming
more vocal regarding their concerns about China and are enhancing their relations with the United States and with othercountries in the region.124
Interlocutors at many governmental and nongovernmental organizations with which the Commission met during its July 2015
trip to Vietnam expressed concern about China,125 and several
interlocutors during the trip argued that the trust that had previously existed between the two countries had been broken in recent years.126 Many interlocutors emphasized the need for theUnited States to provide assistance to Vietnam and other Southeast Asian countries in light of China’s assertiveness in theSouth China Sea.127 (See ‘‘China-Vietnam Relations: A Case
Study’’ later in this section for more detail.)
In June 2015, Malaysia responded to the presence of a CCG
ship near Luconia Shoal, which is located within Malaysia’s
EEZ, with rare public displeasure. Shahidan Kassim, the official
in the prime minister’s office who oversees the Malaysian National Security Council and Malaysian Maritime Enforcement
Agency, posted photos of the ship on his personal Facebook pageand declared that Malaysia was taking ‘‘diplomatic action,’’ including that Prime Minister Najib would broach Malaysia’s concern with President Xi.128 The CCG began patrolling near
Luconia Shoal in August 2013 and, according to China’s State
Oceanic Administration, was ‘‘on guard’’ there in 2014.129 In August 2015, Minister Shahidan told reporters that Malaysia has
been submitting protests to the Chinese government once a
week. He said, ‘‘They have to get out of our national waters. . . .
No parties should try to trespass [sic] the territorial right of thiscountry.’’ 130
Singapore, which like Malaysia maintains positive relations
with both China and the United States, has also expressed concerns about China’s activities. At the 2015 Shangri-La Dialogue,
Singapore’s Prime Minister Lee Hsien Loong acknowledged that

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A Change in Southeast Asia’s Strategy?—Continued
China’s behavior was alienating and alarming other countries,
including the United States. He said, ‘‘Each country feels compelled to react to what others have done in order to protect its
own interests.’’ 131
Nevertheless, despite growing worry among Southeast Asian
countries about China’s intentions and increased willingness to
express these concerns, they still seek to preserve positive relations with China and do not appear to have chosen to align exclusively with the United States.132 In fact, they may seek toavoid becoming too close to the United States. In his written testimony to the Commission, Patrick M. Cronin, senior advisor andsenior director of the Asia-Pacific Security Program at the Center for a New American Security, asserted:
Attempts by the United States to provide military reassurance
and presence, or to offer assurances to particular members [ofASEAN] such as the Philippines, incur a predictable backlashout of fear that America’s stabilization efforts may also roil theregion. That is why it is incumbent on U.S. officials to calibrate
efforts to strengthen our access and security cooperation in Southeast Asia with a sharp understanding of how far the region willgo based on the balance of political forces.133
Other Developments in China’s South China Sea Efforts
Aside from land reclamation, China continues to use other methods to promote its interests in the South China Sea.

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China Coast Guard Patrols
Beijing enforces its territorial claims through an approach inwhich civilian maritime law enforcement ships are at the forefront
with support from naval ships.* 134 According to the U.S. Office ofNaval Intelligence’s 2015 report The PLA Navy: New Capabilities
and Missions for the 21st Century:
When deployed, the CCG sometimes coordinates with the[PLA Navy], which, when necessary, will deploy destroyers
and frigates several dozen miles from the incident to provide a nearby, but indirect presence. . . . In recent years the[PLA Navy] has reduced its overt participation in coastal
patrols, law enforcement, EEZ enforcement, and territorial
claim issues as the CCG assumed these operations. China
prefers using its Coast Guard as the primary enforcer of its
maritime claims. This approach limits the potential for
confrontational incidents to escalate since most CCG ships
are unarmed, and those that are have relatively light weapons. This approach also helps Beijing manage the public
optic of any enforcement actions.135* For an in-depth assessment of China’s naval capabilities and how they advance China’s
South China Sea objectives, see U.S.-China Economic and Security Review Commission, 2014
Annual Report to Congress, November 2014, 299–308, 328–332.

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China’s commitment to this strategy is reflected in its enhancement of the size and capabilities of its maritime law enforcement
forces. China has acquired around 100 new ships—including patrol
combatants, large patrol ships, and support ships—over the pastten years and is expected to supplement these ships with morethan 20 patrol combatants and more than 30 large patrol ships by
2015.136 In November 2014, Chinese military websites featured images of a CCG ship based on the hull of the PLA Navy’s
JIANGDAO-class corvette.137 The adaptation of the JIANGDAO
hull for coast guard use suggests China seeks to increase systems
compatibility between the CCG and the PLA Navy, likely to cut
costs and increase interoperability. Furthermore, media reports
from October 2014 showed images of two coast guard ships underconstruction, with displacements over 10,000 tons.138 The CCG’s
acquisition of these larger, more capable ships will increase therange, seaworthiness, and firepower of its fleet. Furthermore, according to an article on the website of People’s Daily, a Chinesestate-run publication, China’s new-generation 12,000-ton coast
guard ship ‘‘has the power to smash into a vessel weighing morethan 20,000 tons and will not cause any damage to itself when confronting a vessel weighing under 9,000 tons. It can also destroy a
5,000 ton ship and sink it to the sea floor.’’ 139 Most of the Philippines’ and Vietnam’s maritime law enforcement ships are between 500 and 1,000 tons.140
Filipino and Vietnamese fishermen complain they have been harassed by Chinese ships, threatening not only the fishermen’s livelihood but also their personal safety. For example, Filipino fishermen say they are no longer able to fish at Scarborough Reef because Chinese ships block their access or harass them, ramming
their fishing boats or spraying them with water cannons.* 141 In
June 2015, Vietnamese fishermen said Chinese ships used watercannons to spray Vietnamese fishing boats near the Paracel Islands(which China administers but Vietnam claims), breaking the leg of
one of the fishermen.142 Vietnamese fishermen also allege that a
few days later, Chinese vessels confronted them and the individuals on board took away their communications devices and otherequipment, as well as their fish.143 Such instances of harassment,
if true, may increase as China’s maritime law enforcement forces’ability to operate in the Spratly Islands grows due to the land reclamation and construction activities.144
The Role of Fishermen

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Chinese fishermen also play an increasingly important role in
the South China Sea disputes. Fishermen on Hainan Island havebeen encouraged by the Hainan provincial government to fish indisputed waters.145 Fishing boat captains also receive government
subsidies for fuel and at reduced price can purchase satellite navigation systems that connect to Chinese authorities with the pushof a button.146* In September 2015, 16 Filipino fishermen submitted a petition to the United Nations requesting the organization ask China to allow them to fish in Scarborough Reef. Gabriel
Cardinoza, ‘‘16 PH Fishermen Sue China at UN over Sea Dispute,’’ Inquirer (Philippines), September 23, 2015.

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Furthermore, according to U.S. Naval War College associate professor Andrew Erickson and research fellow Conor Kennedy, China
under President Xi is ‘‘strengthening its maritime militia, a dualhatted force of specially registered fishing vessels with fishermansoldier crews. Portions of these coastal militias are organized by
local military and government officials along the nation’s many
ports, providing China with small tactical units designed to executespecific missions in support of the country’s more professional military and maritime interests.’’ 147 China’s maritime militias receive
military training, including in the use of light weapons.148 China
is training these maritime militias to support the activities of the
PLA Navy and China’s maritime law enforcement forces in theSouth China Sea.149 Among its duties, the Tanmen Village Maritime Militia Company on Hainan Island encourages fishermen to
upgrade their fishing boats, activities that Dr. Erickson and Mr.
Kennedy assert ‘‘have expanded Chinese patriot fishermen fleets
multifold in recent years.’’ 150 The company also transports building
materials, water, and food to Chinese outposts in the Spratly Islands, and conducts maritime search and rescue and reconnaissance, gathering information for the PLA.151 These militias are
well-resourced, with subsidies provided by the central and local
governments to build new fishing boats; 29 new boats were ordered
for the Tanmen Maritime Militia, and 17 of these boats have beendelivered.152

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Large-Scale PLA Navy Exercise in the South China Sea
The PLA Navy in July 2015 conducted a live-fire exercise in theSouth China Sea involving more than 100 ships, dozens of aircraft,and several Second Artillery Corps battalions.153 The Vietnamese
government protested the exercise, which took place near Hainan
Island and the disputed Paracel Islands, asserting that it violated
Vietnam’s sovereignty.154 A PLA Navy spokesperson described theexercise as a ‘‘regular, annual drill’’ and called for observers to refrain from ‘‘excessive interpretations.’’ 155 Xu Liping, a researcher
at the Chinese Academy of Social Sciences, said the drill is ‘‘a normal exercise of sovereignty. China wants to modernize its navy tomake sure it has the capability to protect its islands and waterway.’’ 156 However, Rory Medcalf, the head of the Australian National University’s National Security College, said ‘‘an exercise on
this scale in the South China Sea seems a needlessly excessive
show of force,’’ and that the drill ‘‘reinforces the view that China’s
wish to control the South China Sea is in large measure about
seeking strategic advantage.’’ 157
China’s Economic Engagement with Southeast Asia
China’s Economic Assistance to Southeast Asia
China’s economic assistance to Southeast Asia is an increasingly
important component of its engagement strategy with the region.
With the announcement by President Xi and Premier Li that China
will construct a 21st Century Maritime Silk Road, China has accelerated its economic engagement with Southeast Asia in what many
have called a ‘‘charm offensive’’ focused on development assistance.158 At the 2014 East Asia Summit, Premier Li said China
would be extending more loans and investments to ASEAN mem-

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bers, with assistance targeting infrastructure development andpoverty alleviation.159 China hopes its enhanced economic aid andinvestment will not only garner goodwill among its Southeast
Asian neighbors, but also achieve ‘‘favorable outcomes’’ on politically contentious issues such as the South China Sea disputes.160
Although some Southeast Asian countries are reportedly welcoming greater aid from China, many are concerned about the political and security implications of accepting China’s money. According to a report from the Center for a New American Security,
Chinese foreign assistance in Southeast Asia ‘‘diverge[s] from internationally accepted norms emphasizing good governance, transparency, and conditionality.’’ 161 Although China purports its foreign aid adheres to a policy of nonintervention toward recipient
countries, the Center for a New American Security reported thatin practice, ‘‘China often uses its development and investment policies to gain access to resources or achieve favorable diplomatic outcomes.’’ 162 China is putting stock in the potential for economic aid
to gain diplomatic sway in Southeast Asia, and is doing so throughbilateral infrastructure investment, including via broad policy initiatives like the 21st Century Maritime Silk Road and the establishment of China-led development banks such as the Asian Infrastructure Investment Bank (AIIB).
China’s 21st Century Maritime Silk Road Initiative
Frequently described as a counterbalance to the Obama Administration’s ‘‘rebalancing’’ policy in the Asia Pacific, China’s 21st Century Maritime Silk Road initiative touts a vision of constructing an
economic corridor stretching from its eastern seaboard through the
Taiwan Strait, South China Sea, Strait of Malacca, Indian Ocean,Suez Canal, and Mediterranean Sea to southern Europe. Althoughmany of the details of the Maritime Silk Road remain undefined,
the initiative intends to develop a network of port and coastal infrastructure projects that are expected to link directly with goals
set out in China’s 13th Five-Year Plan, and will predominantly target Southeast Asia.163
At present, the Maritime Silk Road remains largely a symbolic
vision linked to preexisting or tangentially related economic programs. For example, during an ASEAN Regional Forum meeting inMarch 2014, a representative of China’s Ministry of Foreign Affairs
linked the Maritime Silk Road to the $500 million China-ASEAN
Maritime Cooperation Fund, established two years before the announcement of the Maritime Silk Road.164 In addition, in a December 2014 People’s Daily article, the author describes the Greater
Mekong Subregion—a cooperative initiative established under the
Asian Development Bank in 1992—as a component of the Maritime
Silk Road that exemplifies concepts of a ‘‘new Asian security’’ and‘‘peripheral diplomacy’’ advocated by China.165 In May 2015, China’s Consul General in Mandalay, Burma, said that all development projects between China and Burma could be classified as partof the ‘‘One Belt, One Road’’ initiatives, which encompass the Maritime Silk Road as well as the Silk Road Economic Belt that connects China to South and Central Asia (see Figure 3).166 (For more
analysis of the One Belt, One Road initiatives and the Silk Road
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Although these statements imply some arbitrariness as to what
constitutes a Maritime Silk Road project, China has taken a few
concrete steps to realize its vision, primarily by pledging infrastructure investment funding for projects in Southeast Asia. For example, after declaring 2015 ‘‘the ASEAN-China Year of Maritime Cooperation,’’ China pledged $20 billion in loans at the 2014 ASEANChina Summit for infrastructure projects in Southeast Asia.167
Similarly, China announced the $40 billion China Silk Road Fundin November 2014, which will fund infrastructure projects along
the Silk Road Economic Belt and the Maritime Silk Road.168 The
fund’s first project, the construction of a $1.65 billion hydropower
station in Pakistan, is expected to be ‘‘emblematic of the kinds of
medium to long-term projects that will be supported by the Fundin Southeast Asia.’’ 169 In addition, Chinese state-owned banks are
already involved in realizing the Maritime Silk Road: The stateowned Industrial and Commercial Bank of China announced it iscurrently funding more than 130 projects with an estimated valueof $158.8 billion under the banner of the One Belt, One Road initiatives.170 Moreover, Chinese-funded port projects in Burma and Malaysia are underway and predicted to be models for more port development elsewhere in Southeast Asia and along the entire Maritime Silk Road.171 In addition, China and Thailand agreed in May
2015 to construct a canal through the Kra Isthmus, the narrowest
part of the Malay Peninsula in southern Thailand.172 Besides development aid, China also considers enhanced trade integration
with Southeast Asia (see ‘‘ASEAN-China Trade Relations’’ later inthis section) and the establishment of development banks such as
the AIIB (see ‘‘China-Led Development Banks’’ later in this section)
as components of the Maritime Silk Road.

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Figure 3: China’s Silk Road Economic Belt and 21st Century Maritime
Silk Road

Source: Charles Clover and Lucy Hornby, ‘‘China’s Great Game: Road to a New Empire,’’ Financial Times, October 12, 2015.

* In 2014, China published a white paper on its foreign aid, which stated that 31 percent, or$4.4 billion, of China’s aid was provided to Asia; there was no breakdown by country. David
B. Gootnick, ‘‘Southeast Asia: Trends in U.S. and Chinese Economic Engagement,’’ United States
Government Accountability Office, August 2015, 85.
† Between 2005 and 2013 the United States provided approximately $7.2 billion in ODA to
ASEAN countries. David B. Gootnick, ‘‘Southeast Asia: Trends in U.S. and Chinese Economic
Engagement,’’ United States Government Accountability Office, August 2015, 82.

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Development Aid with Chinese Characteristics
Despite China’s rapid growth, its official development assistance(ODA), as defined by the Organization for Economic Cooperation
and Development, remains relatively low both globally and inSoutheast Asia, specifically.173 Because China does not follow theinternational standards defining ODA and does not disaggregate
the data it reports by country, accurate data on its traditional aid
to Southeast Asia is unavailable.* However, estimates suggest Chinese ODA in Southeast Asia still lags significantly behind that of
the United States.† Yet, because of nontraditional forms of economic assistance, China is considered among the major donor countries to Southeast Asia. According to development experts, China’s
foreign assistance predominantly takes the form of export credits,
non-concessional loans, and state-sponsored investment support.174
Infrastructure financing is the main form of Chinese assistance inSoutheast Asia, and, when counted as foreign assistance, makes
China ‘‘one of the largest sources of economic assistance in Southeast Asia.’’ 175451
Because Chinese state-sponsored infrastructure financing iscounted as foreign direct investment (FDI), it is difficult to measure exactly how much Chinese government funding is going toSoutheast Asian economies. However, it is widely known that China’s government is actively funding development projects in many
Southeast Asian countries. Burma, Cambodia, and Laos have historically been major recipients of Chinese infrastructure financing.
According to a report from the Congressional Research Service,‘‘PRC government entities have financed many infrastructure, energy-related (especially hydropower), agricultural, and other highprofile development projects in these countries.’’ 176 For example,
the China Export-Import Bank issued two preferential buyer’s
credits of $100 million each to Cambodia (for highway construction)
and Burma (for a hydropower station).177 China is also expanding
its nontraditional foreign aid to other countries in Southeast Asia.
It has financed railways, hydropower, and shipbuilding facilities inVietnam as well as infrastructure, energy, agriculture, and mining
projects in the Philippines.178
China’s foreign assistance in Southeast Asia appears designed
primarily to serve China’s economic and diplomatic interests. By financing infrastructure projects, China can use ‘‘Chinese construction materials, equipment, technical expertise, and labor’’ to execute development projects.179 This benefits Chinese firms—often
state-owned—that win contracts, but limits opportunities for companies and labor in recipient countries. Moreover, China hopes byfinancing infrastructure and other development projects in Southeast Asia, it can win goodwill and cooperation in Southeast Asiaand advance its interests in the South China Sea.180 Some analysts
argue, though, that the self-serving nature of China’s nontraditional forms of foreign aid have ‘‘lessened the intended positive impact’’ and made recipient countries suspicious of China’s underlying
strategic goals.181 Robert Sutter, professor of practice of international affairs at George Washington University’s Elliot School ofInternational Affairs, noted in testimony before the Commissionthat the effectiveness of China-funded infrastructure projects inSoutheast Asia is largely unknown, and a ‘‘comprehensive assessment’’ of the achievements and failures of these projects is needed.182

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China-Led Development Banks
The formation of new development banks—namely, the New Development Bank * and the AIIB—is another strategy China uses toachieve its economic and diplomatic goals in Southeast Asia. In
2014, Brazil, Russia, India, China, and South Africa (the BRICS
countries) signed an agreement to establish the New Development
Bank with an initial capital of $50 billion and an emergency reserve fund of $100 billion.183 With its headquarters in Shanghai
and a guarantee that the combined share of the five founding
BRICS countries’ capital will never fall below 55 percent, China
will play a key role in the bank’s formation and operations.184 Analysts argue that the bank, which is considered a BRICS-led alternative to the World Bank, is a welcome addition to the options for* The New Development Bank was formerly known as the BRICS Development Bank because
it is operated by the BRICS countries: Brazil, Russia, India, China, and South Africa.

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investment finance, including in Southeast Asia where funding is
in high demand for expensive infrastructure projects.185 However,many argue that the New Development Bank will—in the words of
Vikram Nehru, formerly of the World Bank and now the Bakrie
Chair in Southeast Asian Studies at the Carnegie Endowment forInternational Peace—provide ‘‘another avenue to advance the regional and global strategic interests of the bank’s five founders.’’ 186
While the New Development Bank could elevate China’s influence in Southeast Asia, the AIIB, which is more directly under China’s control, will likely be China’s primary vehicle for channelingits development aid to the region in hopes of gaining diplomatic leverage.187 According to the Harvard Kennedy School’s Vietnam
Program economist David Dapice, ASEAN countries need about$100 billion per year in infrastructure investment. The World Bank
and Asian Development Bank currently lend about $20 billion peryear for infrastructure investment in emerging economies, leaving
significant unmet demand in Southeast Asia, which the AIIB hopes
to meet. Dr. Dapice told the Commission that China’s formation of
the AIIB is a ‘‘coincidence of interests’’—that is, ASEAN’s interest
in investing in infrastructure and China’s interest in using its capital and domestic companies and resources to build projects overseas.188 Moreover, Dr. Dapice noted that obtaining financing
through the AIIB may be simpler and more efficient than doing sothrough traditional international financial institutions like theWorld Bank, which makes it attractive to ASEAN countries in needof immediate access to funds.189
All ten members of ASEAN have signed on to join the AIIB, reflecting Southeast Asia’s interest in the prospective China-led
bank.190 Yet, some observers underscore that the AIIB is still
merely an idea, and the sources of funding are not fully understood.191 Dr. Sutter argues that with the AIIB, the Silk Road Fund,and several other large foreign assistance pledges (the funding
sources of which are all unknown), China appears to be seeking
momentum toward a political movement with diplomatic objectives,
rather than an economic initiative with purely development goals.192
China and the Lower Mekong Region

dkrause on DSKHT7XVN1PROD with USCCThe Mekong River is a lifeline and vital shared resource forsouthwestern China and mainland Southeast Asia. With its
source in China’s Tibetan Autonomous Region, the 3,000-milelong river cuts through China’s Yunnan Province before winding
its way through Burma, Laos, Thailand, Cambodia, and Vietnam, where its mouth pours into the South China Sea.193 While
the Mekong has been a source of regional integration for most of
mainland Southeast Asia, serving as the basis of international
initiatives such as the Mekong River Commission and the AsianDevelopment Bank’s Greater Mekong Subregion, the river is increasingly a source of contention between China and the lower
Mekong countries. China’s activities on the Mekong show a pattern of unilateral action that is isolating China from its lower
Mekong neighbors.

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China and the Lower Mekong Region—Continued
The main point of contention between China and the lower
Mekong countries has been the construction of Chinese dams
along the upper Mekong River and the ecological damage theycause downstream. According to the environmental watchdog
International Rivers, ‘‘Chinese dams are drastically changing theLower Mekong River’s natural flood-drought cycle, and reducing
the amount of water, sediments, and nutrients that flow into theriver basin and surrounding coastal areas.’’ 194 Moreover, the UN
Environment Program warned in 2009 that China’s plans foreight dams along the Mekong could pose a ‘‘considerable threat’’to the river and its resources.195 According to Dr. Dapice, China’s upstream dams dictate the fate of ecological systems along
the lower Mekong. In testimony before the Commission, Dr.
Dapice said, ‘‘How [Chinese] dams are managed . . . will in largepart determine China’s contribution to either stabilizing or aggravating dry season shortages’’ in lower Mekong countries.196
Dr. Dapice also pointed out that while ‘‘Chinese dam construction is rightly scrutinized, it is likely to be less important thanwhat is being done or planned by Thailand, Laos and Cambodia.’’ 197
China’s aspirations for water diversion projects on the upper
Mekong are of potentially even greater risk to the lower Mekong
region than are its dams (see Figure 4). The Mekong River is thetarget of the third phase of China’s massive infrastructure plans
to divert water from its water-rich south to the relatively dry
north. If fully implemented, these water diversion projects would
have the most damaging impact on lower Mekong ecological systems to date.198
China’s unilateral actions along the upper Mekong are undermining multilateral efforts among lower Mekong countries tomake decisions that are mutually advantageous for all countries
that benefit from the river’s resources. For example, the MekongRiver Commission, a multigovernment body whose members include Thailand, Laos, Cambodia, and Vietnam, has a mission todevelop ‘‘an economically prosperous, socially just, and environmentally sound Mekong River basin.’’ 199 However, as a ‘‘dialogue
partner,’’ China plays only a tangential role in the Mekong River
Commission, limiting the effectiveness of the organization. For
example, as a dialogue partner, China is not obligated to sharedata on water management with other Mekong nations, which
undermines information sharing among all Mekong River Commission members.200 Without a cohesive partnership of Mekong
nations, even lower Mekong countries, which are most vulnerable to dam construction, are pursuing environmentally compromising infrastructure projects. As Dr. Dapice told the Commission, ‘‘It’s like the left and right hands don’t know what they are
doing.’’ 201

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Moreover, international rivers like the Mekong lack any international law or treaty akin to United Nations Convention on the

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China and the Lower Mekong Region—Continued
Law of the Sea to regulate behavior along the river. The MekongRiver Commission is the closest alternative to an international
treaty, but China’s lack of participation limits the organization’s
authority. According to the State Department Special Coordinator for Water Resources Aaron Salzberg, China should join the
Mekong River Commission to more effectively address environmental and other problems faced by downstream Southeast
Asian nations.202 As in the case of the South China Sea disputes,
China prefers to handle such problems bilaterally rather than
via multilateral organizations like the Mekong River Commission.203
In the absence of China’s engagement with lower Mekong
countries and to enhance U.S. cooperation in the region on
Mekong River issues, the State Department in 2009 establishedthe Lower Mekong Initiative (LMI) to support environmental
and social development along the lower portion of the river. Currently, the LMI includes the United States, the four member
countries of the Mekong River Commission, and, since 2012,
Burma.204 U.S. funding supports the six pillars of the LMI: agriculture and food security, connectivity, education, energy security, environment and water, and health.205 In 2012, the UnitedStates committed to provide $50 million over three years to support an expansion of the initiative, known as LMI 2020.206
Law enforcement along the Mekong is one exceptional area
where China is cooperating with lower Mekong countries. Overthe past three years, China has organized and participated injoint law enforcement patrols along the river with Burma, Laos,and Thailand.207 Together, these countries established the Safe
Mekong Coordination Center in Chiang Mai, Thailand, and engage in intelligence sharing. China’s incentive to cooperate multilaterally on Mekong law enforcement came only after two Chinese cargo ships on the Thai portion of the river were hijacked in
2011. During the attack, 13 Chinese sailors aboard the cargoships were killed, allegedly by Thai counternarcotics soldiersbribed by a drug smuggling ring.208 Although the hunt for the
Burmese leader of the drug ring was conducted jointly by
Burma, China, Laos, and Thailand, China’s Ministry of Public
Security reportedly considered—but ultimately refrained from—using an unmanned aerial vehicle to kill the drug kingpin while
he was still in Burma.209

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China and the Lower Mekong Region—Continued
Figure 4:

Dams along the Mekong River

Source: International Rivers.

As a whole, Southeast Asia is growing more economically integrated with China, with two-way trade and investment rising significantly in recent years. China’s growing economic influence inSoutheast Asia has raised concerns that ASEAN countries may become overly dependent on China and are at risk of economic coercion.210 Within Southeast Asia, lesser developed countries, such as
Laos and Cambodia, have welcomed enhanced economic relationships with China, while more advanced and emerging economies
are more skeptical about the risks of China’s economic dominancein the region.211 For example, ASEAN’s middle-income and emerging economies, including Malaysia, Indonesia, Singapore, and the

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China’s Investment, Trade, and Financial Relations with
Southeast Asia

456
Philippines, have expressed concern about the environmental costsof Chinese infrastructure investment, the prevalence of corrupt
practices in Chinese financial dealings, and the ‘‘loss of local competitiveness due to the importation of cheap goods from
[China].’’ 212 This diversity among individual ASEAN countries’ economic relationships with China makes it more difficult for ASEAN
as a group to manage the threat of excessive economic dependenceor coercion. However, China’s active steps toward deeper integration in trade, investment, and finance implies positioning itself as
the economic core of Southeast Asia is a key part of its strategy.
Chinese Investment in ASEAN
China’s outbound FDI to ASEAN countries is an area where economic dependence may be of concern in the future. Although still
small in absolute terms, the stock of Chinese FDI in ASEAN has
grown rapidly in recently years (see Figure 5). According to
ASEAN, FDI flows from China surpassed those of the UnitedStates in 2013 (latest data available).213 While the stock of U.S.
FDI in ASEAN far exceeds China’s, the ASEAN share of China’s
overall outbound FDI is steadily increasing and has been higher
than the ASEAN share of U.S. outbound FDI since 2009 (see Figure 5).
Figure 5: Foreign Direct Investment in ASEAN

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Note: Latest data available.
Source: UN Conference on Trade and Development.

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China’s Special Economic Zones in Southeast Asia
In addition to traditional FDI, China is also expanding its economic influence by investing in special economic zones, usuallyindustrial estates, in some Southeast Asian countries. Organizedby the Chinese government, which has clearly signaled that ‘‘thezones have political importance over and above their economicrole,’’ the zones were constructed and are being operated by Chinese companies that won contracts awarded by China’s Ministryof Commerce.214 Although officially the contracts were awarded
based purely on the financial merits of the companies, China’s
Ministry of Foreign Affairs had to sign off on all zone projects‘‘as they were to benefit other countries through official Chinese
government subsidies.’’ 215 China’s government pledged to reimburse Chinese companies at least 30 percent of the cost of constructing the zones.216 Chinese special economic zones exist in
Cambodia, Laos, Indonesia, Thailand, and Vietnam.217 In manyof these zones, China has leased the land for 99 years, and thezones are often governed by committees of Chinese businessmen
and former officials, sometimes with local citizens having toshow passports to enter the area.218 Some zones reportedly operate in China’s time zone, use the renminbi (RMB) as the exclusive currency, and use Chinese phone and Internet networks.
Even police forces are sometimes supplied by China, serving incooperation with local police, but often with local police having
limited jurisdiction over Chinese-owned businesses.219
ASEAN countries welcome Chinese investment as an essential
link to the global economy.220 Developed by China in 2007,
Longjiang Industrial Park in Vietnam attracted 11 enterprises
and $68.6 million in investment before development of the zone
was complete. 221 Other zones in the region attracted similar levels of investment halfway through development, including theSihanoukville Special Economic Zone in Cambodia ($32.7 million) and the Thai-Chinese Rayong Industrial Zone ($315 million).222
More than 95 Chinese companies have invested in Laos’ special economic zones, with total investment from China at $4.2
billion.223 In the Golden Triangle Special Economic Zone, privatecompanies from China and Hong Kong developed entertainment
centers with casinos, resorts, clubs, and golf courses aimed at attracting regional tourism. The zone, which lies in Laos’ northernborderlands, previously had little economic significance, but now
attracts foreign visitors from Southern and Eastern Asia.224
Similarly, the Thai-Chinese Rayong Industrial Zone, a joint effort between Thailand’s Amata Corporation and China’s HolleyGroup, has integrated Thai companies with the world economy;around 60 percent of the estate’s products, including car parts,
electronics, and other machinery, are exported to markets
around the world, including the United States and Europe.225 To
make Thai goods easier to transport and to bolster the Rayong
zone’s exports, China is also planning to build a rail network
running north from Thailand through Laos and into China.226

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China’s Special Economic Zones in Southeast Asia—
Continued
Southeast Asian countries also see the zones as engines of local
growth, creating jobs for the local population and eradicating
poverty. The Rayong zone, for example, employs over 10,000
Thai workers,227 and Laos’ zones employ more than 4,000 local
workers.228
The benefits of these special economic zones do not always
trickle down to the local populations. Although the zones increase employment, local workers are often discriminatedagainst. Higher-level positions are given to Chinese workers,
while local workers are relegated to low-skill jobs.229 In addition,
harmful narcotics and gambling practices are sometimes introduced into villages from the nearby casinos and clubs.230 Construction of zones also commonly displaces local villagers, wholose their livelihoods when development begins. In resettlementagreements, governments offer extremely low compensation for
locals who have to relocate their homes, and no compensation for
those who lose their paddy fields and farmlands.231
While the increase in Chinese investment into ASEAN may bepolitically motivated and raise certain reservations among ASEAN
countries, a wider shift in manufacturing FDI diverted from China
to Southeast Asia may help diversify the portfolio of FDI hosted in
ASEAN. According to global consulting firm McKinsey & Company,‘‘As China shifts from an export-driven economic model to a consumption-driven one, its wages are rising,’’ which is diverting somelabor-intensive manufacturing FDI out of China.232 Cambodia, Indonesia, Laos, Burma, and Vietnam are among the most attractive
alternate destinations for manufacturing FDI, given their abundance of low-cost labor.233 However, relatively low productivity andpoor infrastructure may limit the ability of these countries to attract manufacturing FDI out of China.

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Trade liberalization has been an important element of China’s
economic engagement with Southeast Asia. Following the 1997–
1998 Asian financial crisis, China sought to forge a closer economic
relationship with Southeast Asia by forming the ASEAN-China
Free Trade Area (FTA).234 Although the ASEAN-China FTA touts
mutually beneficial economic relations, the reality has been a dramatic shift in ASEAN-China trade relations in China’s favor. Prior
to 2004, when an Early Harvest * version of the ASEAN-China
FTA went into effect, ASEAN countries collectively enjoyed a growing trade surplus with China (see Figure 6). With implementationof the Early Harvest agreement, ASEAN’s surplus began a steadydecline until the 2008–2009 global financial crisis, when it disappeared altogether.235* An ‘‘early harvest’’ program allows negotiators in trade talks to immediately lower trade barriers to certain goods and services even before negotiations on the final agreement have concluded.

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In 2010, the full ASEAN-China FTA went into effect and saw atemporary rebound in ASEAN’s trade surplus with China over the
next two years. However, analysts did not attribute this temporary
shift to the ASEAN-China FTA, but rather to growing Chinese demand for imports bolstered by its 2008 $586 billion stimulus package and for imports of components from elsewhere in Asia to assemble final products for export to the world as it recovered fromthe financial crisis.236 Since 2012, in the absence of large economic
stimulus and with a gradual slowdown in China’s economy, ASEAN
has seen a large and rapidly increasing trade deficit with China,
reaching nearly $90 billion in 2014.237
Figure 6: ASEAN-China Trade Balance

ASEAN’s rapidly increasing trade deficit with China has coincided with the slowdown of China’s economy, as shown in Figure6.238 Some ASEAN countries have raised concerns that trade liberalization with China has led to ASEAN’s growing vulnerability tofluctuations in China’s economy. For example, Indonesia, which exports coal, tin, rubber, cocoa, and palm oil to China, saw these exports decline and prices fall as Chinese demand weakened.239 Even
more advanced economies that are less dependent on China economically, such as Singapore, are worried that some high-value exports (like electronics and pharmaceuticals) as well as its investments in China may be affected.240
Despite these concerns, ASEAN has been leading negotiations toward a Regional Comprehensive Economic Partnership (RCEP),
which would combine five of its individual FTAs with Australia and
New Zealand, China, India, Japan, and South Korea, and would
further advance trade liberalization between China and ASEAN.

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Source: China General Administration of Customs, via CEIC database; Tradingeconomics.com.

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RCEP negotiations were launched in November 2012, and are officially slated for completion by the end of 2015, though it seems unlikely the parties will meet this deadline given the current state of
the negotiations. Proponents of RCEP argue it could deepen economic integration in Asia, the region that has been the focal pointof global trade growth over the past decade. Skeptics claim that despite China’s official policy to defer to ASEAN as the leader of thearrangement, China may come to dominate the development of
RCEP. Critics also counter that RCEP is likely to be a shallow
agreement amenable to ASEAN’s heterogeneous member states,
and as such will not make a major impact on regional economic
ties. RCEP excludes many of the advanced trade provisions promoted by the United States, such as those governing regulatory
convergence, digital goods and services, and intellectual property.241 Yet, according to Senior Vice President of Trade, Economic,
and Energy Affairs at the National Bureau of Asian Research Meredith Miller, ‘‘For ASEAN, RCEP is important not only in terms of
the potential economic gains and engagement with China, but also
because . . . it helps to solidify their position as the organizer ofbroader regional cooperation.’’ 242
The Trans-Pacific Partnership (TPP) is another prospective FTA
that may afford ASEAN countries the opportunity to diversify theorganization’s trade liberalization strategy beyond an exclusive
focus on China. Four ASEAN countries—Brunei, Malaysia, Singapore, and Vietnam—are party to the TPP negotiations. As Ms. Miller told the Commission, TPP is envisioned to have greater scope,
depth, and coverage than RCEP, and notably does not include
China.243 While some observers argue that RCEP and TPP are mutually exclusive (or potentially complementary), others claim theagreements are a competition between China and the UnitedStates to win diplomatic leverage in Southeast Asia. According to
Ms. Miller, ‘‘It’s very important at this juncture for the [UnitedStates] to continue to support ASEAN’s [trade] diversification strategy.’’ 244

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Regional Financial Relations
China is also gaining greater monetary influence in Southeast
Asia. ASEAN’s increased trade and investment with China has expanded the use of the RMB in regional economic transactions. In
a study by the Peterson Institute for International Economics, researchers found that seven out of ten Asian currencies * move moreclosely with the RMB than with the dollar, which is attributed toregional trade integration.245 Figure 7 illustrates the correlation
between growing ASEAN-China trade and the frequency of RMBdenominated cross-border transactions worldwide. According to the
Asian Development Bank, in addition to the increase in RMB-denominated trade and investment, RMB internationalization has
been a result of targeted Chinese government policies such as increased offshore RMB-denominated bonds (also known as dim sum
bonds) and bilateral currency swap agreements, including thosewith Thailand, Malaysia, Singapore, and Indonesia.246* Five of the seven currencies were Southeast Asian currencies: Indonesia, Malaysia, the Philippines, Singapore, and Thailand. The other two were South Korea and Taiwan.

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Figure 7: Cross-Border RMB Settlement and ASEAN-China Trade

Source: People’s Bank of China and the China General Administration of Customs, via CEIC
database.

* Under a reciprocal currency swap arrangement, a country’s central bank agrees to provide
liquidity to another country’s central bank.
† A crisis prevention mechanism known as the Chiang Mai Initiative Multilateralization Stability Fund was also established to provide short-term liquidity support to address sudden but
temporary liquidity shortages.

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Although monetary integration is not considered a near-termgoal in Southeast Asia,247 the region has taken steps toward an
Asian financial architecture in which China would be only one ofseveral key players. The region’s first major step toward monetary
cooperation came in the aftermath of the 1997–1998 Asian financial crisis, when five ASEAN countries (Indonesia, Malaysia, thePhilippines, Singapore, and Thailand) established bilateral currency swaps with one another.* In 2000, the remaining ASEAN
members as well as China, Japan, and South Korea joined the arrangement in what became known as the Chiang Mai Initiative.248
In March 2010, the bilateral currency swap mechanism was converted into a multilateral reserves pooling mechanism known as
the Chiang Mai Initiative Multilateralization.† The Chiang Mai
Initiative Multilateralization’s initial value was $120 billion, which
was doubled in 2012 to $240 billion.249 Under the Chiang Mai Initiative Multilateralization, China is an equal with Japan and is oneof several contributors to the fund. China and Japan are the largest contributors, with 32 percent shares each; ASEAN as a wholecontributes 20 percent, while South Korea contributes 16 percent.250 However, in their combined 15-year history, the Chiang
Mai Initiative Multilateralization and its predecessor, the Chiang
Mai Initiative, have never been used by any member country.
Moreover, the Chiang Mai Initiative Multilateralization is not acommon, centralized fund; it is merely a set of promises among themembers to lend funds as needed in a crisis, with the majority ofreserve funds disbursable only after the requesting member has al-

462
ready appealed to the International Monetary Fund.251 The procedures for borrowing funds are cumbersome, and the amounts thatmembers may borrow are still very low in comparison to othersources of finance.252
Although it is a major contributor to the Chiang Mai Initiative
Multilateralization, China appears to have few incentives to improve upon the effectiveness of the fund or use it as a basis for future monetary cooperation with Southeast Asia.253 With the increase in RMB-denominated transactions in Southeast Asia, China
does not need to rely on existing arrangements such as the Chiang
Mai Initiative Multilateralization, which has ties to the International Monetary Fund, to elevate its own currency. Moreover,given China’s equal status to Japan in the currency swap, someclaim China worries a strong Chiang Mai Initiative Multilateralization would curb the growing influence of the RMB (relative to theJapanese yen) and ‘‘preclude future Chinese currency hegemony inEast Asia.’’ 254 In addition, through the BRICS-led New Development Bank, China has pledged to finance more than 40 percent ofa $100 billion emergency swap fund, a mechanism that could shift
emergency borrowing away from the International Monetary Fundand Chiang Mai Initiative Multilateralization and toward a more
China-centric arrangement.255 (For more analysis of China’s financial statecraft, including the New Development Bank, see Chapter
1, Section 1, ‘‘Year in Review: Economics and Trade.’’)China’s Security Engagement with Southeast Asia

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Defense and security cooperation between China and countries inSoutheast Asia has grown over the last 15 years, despite mistrustof China in Southeast Asian capitals arising from China’s support
for communist insurgencies in Southeast Asia during the Cold War
and its actions in the South China Sea.256 China and Southeast
Asian countries have many shared security interests. These sharedinterests include maritime security, humanitarian assistance anddisaster relief (HA/DR), search and rescue, countering piracy, open
and secure sea lines of communication, counterterrorism, border security, and combating transnational crime and drug trafficking.
China’s security cooperation with Southeast Asian countries is designed largely to advance these interests; it is also designed tostrengthen bilateral relations with those countries and reassure its
neighbors that it seeks to be a peaceful and cooperative regional
partner. Cooperation between China and Southeast Asian countries
now includes joint and multilateral exercises,* military aid, training, arms sales, meetings between defense officials, educational exchanges, and cooperation in areas of nontraditional security and
HA/DR.257* According to the U.S. Department of Defense, China participated in bilateral or multilateral
exercises with Southeast Asian countries on 19 occasions between 2008 and 2014. These included exercises with Thailand (six), Singapore (six), Indonesia (six), Vietnam (two), Brunei(two), Malaysia (two), and the Philippines (one). During this timeframe, the only countries withwhich China participated in more exercises were the United States (7), Pakistan (7), and Russia(12). U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 76–77.

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China-Southeast Asia Defense Ties
China’s defense cooperation with Southeast Asia is most prominent with Burma, Cambodia, Laos, and Thailand, countries thatare among China’s nearest neighbors and that, with the exceptionof Thailand, have less developed militaries, have weak defense relations with the United States, and are more economically dependent on China than are other Southeast Asian countries.258 For example, in Cambodia, China funded the majority of the constructionof the country’s Army Institute building, Chinese advisors oversee
the institute’s teaching staff, and students at the institute are required to spend six months at a Chinese military academy. China
also donated military trucks and uniforms to Cambodia and provided a loan for Cambodia to purchase Chinese helicopters.259 According to Dr. Thayer, China’s aid to Cambodia’s Army Institute is‘‘the beginning of a long-term strategy of winning influence in the
Cambodian military by cultivating these people. And China keeps
very, very deep intelligence files on [the Cambodian military officers with whom China interacts].’’ 260
China-Thailand defense ties are particularly robust. The Chineseand Thai militaries have conducted joint exercises almost every
year since 2008, more than most other Southeast Asian militaries.261 In 2015, the two sides agreed to establish more mechanisms for defense cooperation, including educational exchanges andtraining. They also agreed to hold more exercises between the Chinese and Thai air forces.262 This announcement came amid a downturn in relations between Bangkok and Washington that began
after the 2014 coup that brought a military junta to power in Thailand. The Thai Navy in July 2015 announced it was consideringpurchasing three submarines from China in a $1 billion deal, which
would amount to one of the most lucrative Chinese arms sales todate. Thai officials subsequently said the decision to procure thesubmarines would be postponed; however, it is unclear what
prompted the announcement or Thailand’s apparent reconsideration.* 263 Enhanced ties between Thailand and China may yield
dividends for Beijing over time in the form of influence within theThai military as young Thai officers receive Chinese military education and training and rise through the ranks.264
In Thailand and other countries in Southeast Asia, China has
been quick to offer military aid when the United States withdraws
its own military support. After the Thai military overthrew thegovernment of Thaksin Shinawatra in 2006, for example, the U.S.
government stopped $24 million in military aid to Thailand. Several months later, China offered Thailand $49 million in militaryaid.265 In 2010, the United States stopped a shipment of 200 surplus U.S. military vehicles to Cambodia in protest over Cambodia’s
decision to repatriate to China 20 Uyghurs who were seeking asylum. A few weeks later, China promised Cambodia a package of
257 new military vehicles, 50,000 military uniforms, and $15 mil* On July 15, 2015, Thailand’s Defense Minister Prawit Wongsuwan said, ‘‘We will wait for
now and not introduce the deal to the cabinet for approval.’’ He added, ‘‘For now, the navy must
inform itself and educate itself on whether the submarines are worth it and how much they
will add to the Thai navy.’’ Reuters, ‘‘Thailand Puts $1 Billion Chinese Submarines on Hold,’’
July 15, 2015; Wassana Nanuam, ‘‘Prawit Delays Sending Sub Purchase to Cabinet,’’ Bangkok
Post, July 15, 2015.

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lion in military aid.266 Neither of these examples likely resulted ina major loss of U.S. influence in either country, but they illustrate
how China is able to nimbly exploit tensions in the United States’
relations in the region to its own advantage.
China has weaker defense ties with countries in maritime Southeast Asia.267 Most of these countries have stronger defense relations with the United States and are also involved in maritime territorial disputes with China. Nonetheless, China continues to develop its defense ties with maritime Southeast Asia. For example,
China and Malaysia held their first combined military exercise in
December 2014, a tabletop HA/DR exercise.268 The PLA and Malaysian Armed Forces held an exercise in the Strait of Malacca in
September 2015, focusing on operations including maritime escort,
search and rescue, HA/DR, and counterhijacking.269 According toChinese state-run media outlet Xinhua, the exercise was ‘‘the largest bilateral military exercise between China and a country fromASEAN.’’ 270
China views arms transfers as a means of strengthening bilateral relations and enhancing its influence in Southeast Asia while
also growing its defense export industry.271 Chinese arms transfers
to countries in Southeast Asia primarily consist of low-end Chineseequipment, and account for a small percentage of its global arms
transfers. Although China has begun to sell more advanced equipment—such as C–802 antiship missiles sold to Indonesia—toSoutheast Asian countries, China’s sales in the region are still primarily comprised of equipment such as K–8 trainer aircraft and
JIANGHU-class frigates.272 According to data gathered by the
Stockholm International Peace Research Institute, between 2010
and 2014, Burma was the largest recipient of Chinese arms inSoutheast Asia, followed by Indonesia, Thailand, Cambodia, Laos,and Timor Leste.273 During this time, China transferred $1.3 billion in arms to these seven countries, comprising 16.6 percent of
the value of China’s global arms transfers.274
China’s arms sales to Burma reflect the robust military-to-military ties the two countries have enjoyed since the late 1980s, when
China provided military aid and sold arms to the country after the
Burmese junta’s 1988 crackdown on prodemocracy demonstrations
led to international isolation; these sales also speak to China’s interest in encouraging stability and political continuity in its southern neighbor, with which it shares a long and often troubled border.275,276 Between 2010 and 2014, China supplied 56 percent of
Burma’s arms imports (Russia provided 40 percent).277 Although
the United States and European countries have strengthened theirpolitical and economic relations with Burma in recent years, they
continue to maintain restrictions on the export of defense equipment due to continuing concerns about abuses by the Burmese
military. For its part, the United States has limited military-tomilitary engagement to meetings between senior officials and training on military legal affairs.278

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Conflict on the China-Burma Border
China is involved in a long-simmering conflict in northern
Burma between the Burmese military and several armed rebel
groups. Some of these rebel-controlled territories, by virtue of
their location near the Chinese border, have many connections to
China. In addition to their large ethnic Chinese populations,these areas are heavily economically integrated with China’s
Yunnan Province, though this economic relationship is often
fraught with tension. For example, some stalled Chinese-backed
economic projects, like the Myitsone Dam, are symbolic of resistance to China’s presence in the region. Additionally, China’s
massive demand for northern Burma’s vast jade reserves has
spawned a corrupt and predatory industry associated with rampant intravenous heroin use by miners, often enabled by Chinese
precursor chemicals. As a result, HIV is a significant health concern in northern Burma.279
Further complicating the relationship, northern Burmese rebel
groups are apparent beneficiaries of Chinese arms (although the
Chinese government denies this).280 Under then Chairman of the
CCP Mao Zedong, China openly supported communist rebels in
Burma, but in recent decades it has cultivated ties with the ruling Burmese government and has sought to help broker aceasefire agreement among the Burmese government and various rebel groups. Nevertheless, it appears some of the rebel
groups are enabled by some degree of Chinese military assistance—if not sanctioned by Beijing, then possibly orchestrated by
Chinese officials or other actors in Yunnan Province.281 Among
Chinese arms reported to be used by rebel forces are man-portable air defense systems, armored vehicles, and infantry support
weaponry.282
In 2015, the intermittent conflict between the Burmese military and rebels became particularly intense, leading to heightened tensions between China and Burma. In March 2015, China
criticized the Burmese military for accidentally dropping bombson the Chinese side of the border and killing four Chinese citizens.283 China threatened a ‘‘decisive response’’ if Burmese
bombing in China’s territory continued, and sent fighter aircraft
to patrol the affected area.284 Then, in June 2015, China announced it would conduct live-fire military exercises on the
China-Burma border.285 Retired PLA colonel Yue Gang said‘‘live-fire military exercises by the PLA are very rare in this region’’ and asserted that the exercises are intended to ‘‘show that
there is a bottom line to China’s tolerance. When [Burma]
crosses the line China must strike back to defend itself, not tostart a war.’’ 286 Around this same time, as a result of growing
violence, as many as 60,000 Burmese refugees reportedly crossed
the border into China.287

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It is unclear how Beijing will seek to balance what appear to
be competing Chinese interests in Burma going forward. Maintaining positive ties with the Burmese government has become

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Conflict on the China-Burma Border—Continued
even more important to China now that the United States andEuropean countries have expanded relations with Burma. According to Jane’s Intelligence Review, China’s apparent recent
support for rebel groups near the border may even be intended
as a ‘‘warning’’ to Naypyidaw, the Burmese capital, that its
thawing relations with the United States and the West ‘‘not jeopardize Beijing’s long-standing strategic and economic interests’’in Burma.288
Nontraditional Security Cooperation

dkrause on DSKHT7XVN1PROD with USCCCounterterrorism
Counterterrorism is an important area of cooperation for China
and Southeast Asia; it has been the focus of almost half of China’s
military exercises with Southeast Asian countries between 2008
and 2014.289 Terrorism is a growing security challenge for China.
In addition to Beijing’s concerns about domestic terrorism, new external threats such as the Islamic State in Iraq and the Levant(ISIL, also known as ISIS) are emerging. ISIL has publicly identified China as a country where ‘‘Muslims’ rights are forcibly
seized.’’ * In July 2014, China’s Middle East Envoy Wu Sike acknowledged that approximately 100 Chinese citizens may be fighting or receiving training in the Middle East.290 Mr. Wu did not
specify whether those individuals undergoing training are being
trained by ISIL or other groups. As violent attacks on governmentand civilian targets in China allegedly carried out by militant
Uyghurs have increased, the Chinese government is concerned that
individuals within China could draw inspiration from ISIL, or that
Chinese citizens fighting with ISIL or receiving training from theorganization could return to China to carry out attacks.† 291 In addition, hailing from countries on China’s periphery, there reportedly are more than 500 Indonesians and dozens of Malaysians
fighting for ISIL.292 More than being a source of fighters, Southeast Asia could also become a safe haven from which ISIL could
initiate terror attacks, a concern raised by Singapore’s Prime Minister Lee during his speech at the 2015 Shangri-La Dialogue.293
Given these concerns, China may increase counterterrorism cooperation with Southeast Asian countries. (For a discussion of China’s counterterrorism cooperation with Central Asian countries, see
Chapter 3, Section 1, ‘‘China and Central Asia.’’)* In July 2014, Abu Bakr al-Baghdadi, the leader of ISIL, listed China among the countries
where ‘‘Muslims’ rights are forcibly seized,’’ and called on Muslims to take action, saying, ‘‘Your
brothers all over the world are waiting for your rescue, and are anticipating your brigades.’’
SITE Monitoring Service, ‘‘Islamic State Leader Abu Bakr al-Baghdadi Encourages Emigration,
Worldwide Action,’’ July 1, 2014.
† While terrorism is a real and growing threat to peace and security in China, the Chinese
government tends to employ an excessively broad definition of and approach to terrorism, often
conflating terrorism with extremism, criminality, or peaceful political protest. This, along withthe opacity of China’s counterterrorism policies, makes it difficult to assess the legitimacy ofsome of China’s terror threat assessments. U.S.-China Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 367; Andrew Small, The China-Pakistan
Axis: Asia’s New Geopolitics, Oxford University Press, 2015, 73.

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In addition, the August 2015 bombing of Thailand’s Erawan
Shrine may mean that terrorism will become a larger issue in
China-Thailand relations. In September 2015, Thai police announced that two suspects—a man of unknown nationality and a
Uyghur man from China—had confessed to carrying out the attack,which killed 20 people, including tourists from mainland China andHong Kong.294 The police alleged that their primary motive was retaliation for the Thai government’s crackdown on a network that
helped to smuggle Uyghurs out of China through Thailand.295
However, this allegation has yet to be independently confirmed.
Humanitarian Assistance and Disaster Relief
China also seeks to enhance cooperation with Southeast Asian
countries in the area of HA/DR, cooperation through which Beijing
can try to reassure its Southeast Asian neighbors of its intentions
and support its efforts to present China as a contributor to international security. HA/DR exchanges between the PLA and regional
militaries also are a relatively nonsensitive area of cooperation. In
2014, China sent military personnel to participate in an ASEAN
HA/DR exercise in Thailand, and later in the year signed a memorandum of understanding with ASEAN on disaster management.296
The agreement includes a grant from the Chinese government tosupport ASEAN disaster management programs.297 Moreover, following the March 2014 disappearance of Malaysia Airlines Flight370, on which most of the passengers were Chinese citizens, China
deployed a large number of military assets, including transport aircraft, guided-missile frigates, and helicopters, to conduct searchand rescue operations.298 In 2013, China deployed the PLA Navyhospital ship the Peace Ark to the Philippines in response to Typhoon Haiyan. This deployment was the first time China sent anaval vessel overseas for a medical HA/DR relief operation.299

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Trafficking and Infectious Diseases
China cooperates with Southeast Asian countries to combat othernontraditional security threats, including human and drug trafficking and the spread of infectious diseases. Among the examplesof this collaboration is China-Vietnam cooperation to crack down onhuman trafficking rings in China and rescue Vietnamese women
who had been promised work in China but were later sold to brothels.* 300 The Chinese government partners with the Burmese military and police to try to counter drug trafficking activities between
Burma and China.† 301 Joint health initiatives have included China’s partnership with Malaysia in fighting the spread of severe
acute respiratory syndrome (SARS) in 2003 and later avian influenza; China also collaborated with Indonesia, Thailand, and Viet* In addition, Vietnamese are being smuggled into China to work in factories. It is unclear,
however, whether the Chinese and Vietnamese governments are working together to stop thesesmuggling operations. James Pomfret, ‘‘Special Report: How Smuggled Workers Power ‘Made in
China,’ ’’ Reuters, August 6, 2015.
† The U.S. and Chinese governments also have cooperated to combat drug trafficking originating in the Golden Triangle, the area where the borders of Burma, Laos and Thailand meet.
One of the most prominent examples of such cooperation was the dismantling of the ‘‘125’’ drugsmuggling ring, which was trafficking heroin produced in Burma to the United States via China,
in 2003. Zhang Yongan, ‘‘Asia, International Drug Trafficking, and U.S.-China Counternarcotics
Cooperation,’’ Brookings Institution, February 2012, 2, 12, 16; Susan Saulny, ‘‘China’s Help Is
Credited in Tripping up Drug Ring,’’ New York Times, May 17, 2003.

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nam on a study regarding enhancing surveillance and early detection of avian influenza.302
PiracyPiracy has increased in maritime Southeast Asia and could have
major implications for China as the majority of its oil imports transit through Southeast Asia by way of the Strait of Malacca. During
the first three months of 2015, 55 percent of all armed robbery andpiracy incidents occurred in Southeast Asia, including the hijackingof five oil tankers.303 In addition, in 2014, of the seafarers who
were the victims of piracy in Southeast Asia and whose nationalities were known to the International Maritime Bureau, 10.8 percent were Chinese, the third-largest percentage among all nationalities identified.304
Despite the threat of piracy in maritime Southeast Asia, however, the PLA’s antipiracy operations are focused on the Gulf ofAden in the western Indian Ocean. Since piracy is declining in the
Gulf of Aden and is on the rise in the Gulf of Guinea and maritime
Southeast Asia, PLA Navy antipiracy operations may shift to theseareas.305 China’s cooperation with Southeast Asia in combating piracy includes its membership in the Regional Cooperation Agreement on Combating Piracy and Armed Robbery against Ships in
Asia, and its assignment of a Chinese liaison officer to the Information Fusion Center; both organizations are based in Singapore.306
Furthermore, as discussed earlier, the PLA and Malaysian Armed
Forces’ combined exercises held in the Strait of Malacca in September 2015 included maritime escort and counterhijacking
drills.307

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China-Vietnam Relations: A Case Study
China-Vietnam relations are among the most complex of China’s
bilateral relationships in Southeast Asia. China and Vietnam sharecommunist ideology and history, a border, cultural ties, and morethan 1,000 years of imperial Chinese control over Vietnam. Although China supported the North Vietnamese during their war
with the United States, Vietnam’s toppling of the China-backed
Khmer Rouge in Cambodia in 1978 and Vietnam’s security links to
the Soviet Union prompted China to invade Vietnam in 1979,
sparking a month-long war. Estimates of the casualties among thetwo sides’ militaries range as high as 26,000 Chinese soldiers and
30,000 Vietnamese soldiers killed.308 According to an article in the
New York Times, 10,000 Vietnamese civilians were killed.309 In theSouth China Sea, China seized control of the Paracel Islands in1974 and Johnson South Reef in 1988 using military force against
Vietnamese military personnel.310 Although the bilateral relationship improved after the two countries normalized relations in 1991,
they did not reach an agreement on the demarcation of their borderuntil 2009, 30 years after the 1979 border war.311
Today, bilateral cooperation between China and Vietnam spansa broad range of areas.312 China-Vietnam memoranda of understanding cover topics such as human trafficking, educational exchanges, and nuclear energy exchanges. For example, the Vietnam
National University of Agriculture has more than 15 agreements

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469
with Chinese universities on student exchange and educational
programming.313
The two countries also have strong economic ties—China is thethird-largest destination for Vietnam’s exports, Vietnam’s largest
source of imports, and a growing source of investment in Vietnam.
In late 2013, Beijing and Hanoi signed a memorandum of understanding to increase trade and economic cooperation by creating
four new economic zones along the Vietnam-China border by
2020.314 However, economic cooperation between China and Vietnam is not free from tension.315 For example, during the Commission’s trip to Vietnam in 2015, multiple observers noted problems
with the construction of an urban rail system in Hanoi by a Chinese company. China Railway Sixth Group Co., Ltd. is the main
contractor for the ongoing construction of the urban rail system, aproject which has experienced delays, cost overruns, and safety
problems.316 The rail system was originally scheduled to become
operational in 2013, but that date has been extended to 2016; thecost of construction has been $339 million more than expected;
scaffolding has collapsed, and steel bars and reels have fallen on
cars and motorcycles, with a steel reel killing one person and injuring two others.317 In January 2015, Vietnam’s Minister of Transportation described the project as the ‘‘worst’’ in Vietnam.318
Disputes over sovereignty in the South China Sea remain amajor source of friction in China-Vietnam relations, as discussed
earlier, and Vietnam is one of the most vocal Southeast Asian
countries in criticizing China’s assertive behavior in the South
China Sea.319 Amid the PLA’s rapid modernization and China’s efforts to consolidate its claims, Vietnam has also taken measures toenhance its military capabilities to deter potential Chinese coercion.320 During many of the Commission’s meetings with the Vietnamese government, the Communist Party of Vietnam, and academic organizations in Hanoi, interlocutors expressed their concerns about China’s activities in the South China Sea, including
the view that China seeks to control part or all of the South China
Sea.321 Reflecting these concerns, an interlocutor from the Institutefor Defense Strategy at Vietnam’s Ministry of Defense told theCommission that Vietnam seeks a peaceful and stable relationshipwith China rather than an ‘‘unreal, verbal peace.’’ 322 Interlocutors
from the Diplomatic Academy of Vietnam told the Commission that
China’s approach to the South China Sea dispute suggests China
has a long-term strategy to dominate Vietnam.323 In addition,interlocutors from the Communist Party of Vietnam Central Committee said that, should China announce an ADIZ over the South
China Sea, it would be capable of enforcing the ADIZ, and ‘‘freedomof navigation will be no more.’’ 324 During several of the Commission’s meetings in Hanoi, interlocutors expressed their view that
the United States should be more assertive in response to China’s
actions in the South China Sea.325
One of the worst crises in China-Vietnam relations since 1979
ensued when Chinese state-owned oil company China National Petroleum Corporation deployed its ultradeepwater oil rig Haiyang
Shiyou 981 to waters disputed by China and Vietnam between May

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and July 2014.* 326 Although the two sides appear to have stabilized bilateral relations since then, the oil rig crisis may have a
far-reaching impact on Vietnam’s view of China and its approachto the relationship. A U.S. embassy official who met with the Commission in Hanoi described the crisis as ‘‘paradigm-shattering,’’
causing Vietnam to feel ‘‘very betrayed’’ by China.327 Murray
Hiebert, senior fellow and deputy director of the Sumitro Chair forSoutheast Asian Studies at the Center for Strategic and International Studies, stated in his written testimony to the Commission that ‘‘as a result of the oil rig crisis, even party stalwarts in
Hanoi have become disillusioned with China’s treatment of Vietnam. Strategic trust has been weakened.’’ 328 As further evidenceof this shift, in July 2014, 61 members of the Communist Party ofVietnam, including a former Vietnamese ambassador to China andformer vice minister of Vietnam’s Ministry of Science and Technology, sent a letter to Vietnam’s leaders in which they called for
Vietnam to ‘‘escape’’ from what they described as the country’s dependence on China.329
Concerns about China in Vietnam are not limited to the South
China Sea. According to U.S. officials in Hanoi, Vietnam views China’s construction of dams on the Mekong River as part of China’s
effort to ‘‘pinch’’ Vietnam from the West. These officials also said
that Vietnam is concerned neighboring Laos no longer ‘‘needs’’ Vietnam due to its relationship with China.330

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Vietnam-U.S. Relations
The oil rig crisis appears to have motivated Vietnam to pursue
more vigorous outreach to third-party countries, particularly theUnited States.331 Since Vietnam and the United States restored
diplomatic relations in 1995, the two countries have graduallystrengthened bilateral relations, a process that has gained momentum from the U.S. rebalance to Asia policy and China’s actions in
the South China Sea.332 During his visit to Vietnam in June 2015,
U.S. Secretary of Defense Ashton Carter announced the UnitedStates will provide Vietnam $18 million to procure U.S.-made patrol vessels and will station a U.S. peacekeeping expert at the U.S.
embassy in Vietnam, with the aim of assisting Vietnam in pursuing its goal of participating in UN peacekeeping operations. In
addition, the two sides pledged to expand defense trade, potentiallyto include coproduction of defense equipment.333 In another sign of
growing ties, Secretary Carter visited a Vietnamese military baseand toured a Vietnamese Coast Guard ship, marking the first time
the Vietnamese military had invited a U.S. secretary of defense tovisit a military base and set foot on a coast guard vessel.334 Following Secretary Carter’s visit to Vietnam, in July 2015, General
Secretary Nguyen Phu Trong, Vietnam’s most powerful politicalleader, visited the United States, the first time a Communist Partyof Vietnam general secretary has done so. General Secretary Trongbelongs to the conservative faction of the Communist Party of Vietnam, a group within the party that traditionally has viewed theUnited States with suspicion.335 However, according to Jonathon* For more information about the oil rig crisis, see U.S.-China Economic and Security Review
Commission, 2014 Annual Report to Congress, November 2014, 244–246.

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London, assistant professor at the City University of Hong Kong,the visit indicates that ‘‘even the most conservative, doctrinaire elements of the Communist Party have now come to recognize
the practical indispensability of strong Vietnamese-U.S. ties.’’ 336
As Vietnam continues to develop its relations with the UnitedStates to balance its relations with China, limits on the U.S.Vietnam partnership may arise from the misgivings of senior
Vietnamese officials who fought against the United States in the
Vietnam War.337 Vietnamese officials and strategists are concernedthat if Vietnam becomes too close to the United States, China
will respond negatively.338 A further complication exists regarding
the U.S. restriction on selling weapons to Vietnam. Although theUnited States eased such restrictions in 2014 to allow for thetransfer of maritime security equipment, Washington still bans thesale of lethal weapons to Vietnam due to concerns about Vietnam’s
human rights record. Vietnam is seeking a removal of the remaining restrictions.339

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Implications for the United States
China’s relations with Southeast Asian countries and its activities in Southeast Asia have important implications for the UnitedStates related to regional stability, U.S. commitments to allies,
freedom of navigation, economics and trade, and nontraditional security threats.
China’s land reclamation and construction activities in the South
China Sea, once completed, likely will have significant implications
for U.S. interests in Southeast Asia.
First, military infrastructure on the land features China controls
in the Spratly Islands could enhance China’s antiaccess/area denial * capabilities, potentially challenging the U.S. military’s ability
to freely operate in the region. Ms. Glaser writes that ‘‘in peacetime
and in a crisis, [these land features] will provide China with thecapability to hold U.S. forces at risk at a farther distance than it
can at present. This could have implications for a U.S. effort tocome to Taiwan’s defense. A U.S. carrier battle group sailing fromthe Arabian Gulf or Indian Ocean that was coming to Taiwan’s aid
would have to pass through the South China Sea.’’ 340
Second, tensions between China and the other claimant states,
namely the Philippines and Vietnam, have the potential to spark
an armed clash, which would threaten regional stability and theglobal economy and could involve the United States. The UnitedStates maintains the 1951 Mutual Defense Treaty with the Philippines, and though it has affirmed its commitment to the treaty,
the United States has not officially articulated the specific geographic areas that would trigger a mutual defense response.341
Thus, a potential military clash between China and the Philippinesthat begins in the South China Sea could lead to involvement by* According to the U.S. Department of Defense, ‘‘antiaccess’’ actions are intended to slow the
deployment of an adversary’s forces into a theater or cause them to operate at distances farther
from the conflict than they would prefer. ‘‘Area denial’’ actions affect maneuvers within a theater, and are intended to impede an adversary’s operations within areas where friendly forces
cannot or will not prevent access. China, however, uses the term ‘‘counterintervention,’’ reflecting its perception that such operations are reactive. U.S. Department of Defense, Military andSecurity Developments Involving the People’s Republic of China 2013, 2013, i, 32, 33; U.S. Department of Defense, Air Sea Battle: Service Collaboration to Address Anti-Access & Area Denial
Challenges, May 2013, 2.

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the U.S. military. In the current climate of China-Philippines relations, as China becomes bolder in its efforts to secure control overPhilippines-claimed waters, the potential for miscalculation, crisis,and conflict is high.
Third, the South China Sea is also a major irritant in U.S.-China
relations and is the most likely location of a dangerous encounter,
whether intended or unintended, between the U.S. and Chinese
militaries. Once the airstrip on Fiery Cross Reef is operational,
China could send fighter aircraft to challenge U.S. surveillanceflights near its reclaimed land features, increasing the chance of acollision and a political crisis. Likewise, the growing presence of
the PLA Navy and Chinese maritime law enforcement ships in theSouth China Sea raises the risk of a maritime incident between the
U.S. and Chinese ships.
U.S. Patrols near China’s Land Reclamation Projects in
the South China Sea
On May 20, 2015, a U.S. Navy P–8A Poseidon surveillance aircraft flew from Clark Air Base in the Philippines to airspacenear Subi Reef, Mischief Reef, and Fiery Cross Reef. CNN reporter Jim Sciutto accompanied the crew and reported on the
mission. Over the course of the flight, the PLA Navy ordered thecrew of the Poseidon to leave the airspace eight times. The radiotransmission also included the following directive: ‘‘You are approaching our military alert zone. Leave immediately.’’ * 342 At
one point, the Chinese radio operator’s warnings grew more urgent, and he yelled, ‘‘You go!’’ † 343 It is unclear how the PLA
Navy defines a military alert zone, which is not an internationally recognized military term.

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Publicizing U.S. surveillance flights near China’s reclaimed
land features in the South China Sea appears to be part of an effort by the United States to impose reputational costs on China
as its land reclamation and construction activities continue. In
his keynote speech at the 2015 Shangri-La Dialogue, Secretary* The first reported instance of the PLA challenging foreign aircraft flying near the land features on which it is conducting land reclamation in the South China Sea occurred on April 19,
2015, when a PLA Navy ship ordered a Philippine Air Force aircraft conducting a patrol near
Subi Reef to leave the airspace to ‘‘avoid misjudgment.’’ A spokesperson for China’s Ministryof Foreign Affairs confirmed the PLA’s challenge to the Philippine Air Force patrols, saying,‘‘Planes from the Philippines have conducted multiple intrusions into the area above waters
near China’s islands and reefs over recent days. The Chinese garrison there took actions in accordance with the law by asking them to leave through radio.’’ The head of the Philippine military’s Western Command reported that at least six similar incidents of China challenging Philippine military aircraft in the South China Sea have occurred since then. Carmela Fonbuena,‘‘China Continues to Harass PH Air Patrols in West PH Sea,’’ Rappler (Philippines), May 7,
2015; China’s Ministry of Foreign Affairs, Foreign Ministry Spokesperson Hong Lei’s Regular
Press Conference on April 24, 2015, April 24, 2015.
† CNN reported the P–8 crew had been flying such missions for months and were accustomed
to similar warnings, but they noted the warnings had become more aggressive as China’s land
reclamation projects progressed. In May 2015, a U.S. defense official said U.S. Navy surveillance
missions over China’s land reclamation projects occur on an almost-daily basis. Helene Cooper
and Jane Perlez, ‘‘U.S. Flies over a Chinese Project at Sea, and Beijing Objects,’’ New YorkTimes, May 22, 2015; CNN, ‘‘High Stakes Surveillance over the South China Sea,’’ May 20,
2015.

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U.S. Surveillance Flights over the South China Sea—
Continued
Carter asked for ‘‘a lasting halt’’ to land reclamation in theSouth China Sea and harshly criticized China’s land reclamation, saying, ‘‘Turning an underwater rock into an airfield simply
does not afford the rights of sovereignty or permit restrictions on
international air or maritime transit.’’ 344 He also reaffirmed theUnited States’ right and intention to ‘‘fly, sail, and operate wherever international law allows.’’ 345 U.S. surveillance flights havecontinued since then, including one on which Admiral Scott
Swift, commander of the U.S. Pacific Fleet, was aboard.346
The United States’ response to China’s activities in the South
China Sea continues to evolve. On May 12, the Wall Street Journal reported that Secretary Carter was contemplating sending
U.S. Navy surveillance aircraft and ships within 12 nm of China’s land reclamation projects,347 citing ‘‘growing momentum
within the Pentagon and the White House for taking concrete
steps in order to send Beijing a signal that the recent buildup in
the Spratlys went too far and needed to stop.’’ 348 After much deliberation by the Obama Administration,349 on October 27 a U.S.
Navy guided missile destroyer conducted a freedom of navigation
patrol within 12 nm of Subi Reef, an artificial island createdfrom a low-tide elevation, appearing to signal that the UnitedStates does not consider Subi Reef to have a territorial sea.* 350
According to a U.S. official quoted by the Washington Post, thepatrol ‘‘was completed without incident,’’ though the PLA Navy
sent at least one ship to monitor the U.S. destroyer, and a Chinese Ministry of Foreign Affairs spokesperson warned that, ‘‘If
the relevant party keeps stirring things up, it will be necessary
for China to speed up its construction activities.’’ † 351 As of thewriting of this Report, Chinese officials had not otherwise publicly reacted to the patrol.

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China’s security cooperation with mainland Southeast Asia may
have implications for U.S. influence in the region as well. This isparticularly the case in Burma, where China appears to believe it
is in a contest for influence with the United States (and to a lesser
extent, other major powers).352 While the U.S.-Thai alliance remains in place and Washington and Bangkok are mending ties
after a period of tension, China’s security ties with Thailand arealso growing.353 It remains to be seen how Thailand will manage
this dynamic, but U.S.-China competition for influence in the country almost certainly will grow in the future.
* According to UNCLOS, low-tide elevations, which are submerged at high tide, may not generate a territorial sea unless they are located within the territorial sea of an island or mainland
coastline. UN Convention on the Law of the Sea, ‘‘Part 2: Territorial Sea and Contiguous Zone.’’See also Gregory Poling, ‘‘Carter on the South China Sea: Committed and (Mostly) Clear,’’ Center for Strategic and International Studies, Asia Maritime Transparency Initiative, June 3, 2015.
† Another U.S. official told the Financial Times that the U.S. ship had also sailed within 12
nm of features claimed by the Philippines and Vietnam. Demetri Savastopulo and Charles Clover, ‘‘China Accuses US Navy of Illegal Incursion in South China Sea,’’ Financial Times, October27, 2015.

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In its economic relations with Southeast Asia, China is actively
expanding its foreign assistance in the region through mechanisms
such as its 21st Century Maritime Silk Road initiative and the
AIIB in order to serve its own diplomatic and economic interests.
Although this assistance is primarily in the form of infrastructure
investment versus traditional official development assistance, thevalue of its pledges exceeds estimates of infrastructure aid toSoutheast Asia from U.S.-backed development organizations suchas the World Bank and the Asian Development Bank. If China follows through on its pledges and outpaces the United States andU.S.-backed aid organizations in foreign assistance to Southeast
Asia, this could undermine U.S. development goals in the region,
including promoting democracy, human rights, governance, genderequality, and sustainable development. At the same time, China’s
continued unilateral activities along the Mekong River—activities
that are having detrimental environmental and socioeconomic effects on downstream countries—provide an opportunity for theUnited States to expand its cooperation with lower Mekong countries through programs such as the Lower Mekong Initiative.
Furthermore, as Southeast Asia becomes increasingly reliant on
trade with China and vulnerable to fluctuations in China’s economy, the region has an incentive to diversify its trade and investment partners, including closer cooperation with the United States.
Current U.S.-led trade negotiations, such as the Trans-Pacific Partnership, focus on developing ‘‘21st century standards’’ in intellectual property, labor protection, and environmental conservation—
goals that may be difficult for some lesser developed Southeast
Asian countries to achieve. U.S.-funded training programs, such as
intellectual property enforcement training by the U.S. Patent andTrademark Office and the U.S. State Department’s international
visitor program, may be mechanisms for helping Southeast Asia
prepare for enhanced trade cooperation with the United States.
A bright spot in China-Southeast Asia relations is the growing
cooperation on shared security threats like terrorism, piracy, natural disasters, trafficking, and infectious diseases. The UnitedStates should welcome and encourage these activities, as it too hasa stake in countering these threats and an interest in the convergence of interests between China and its Southeast Asian neighbors on regional security issues.
Conclusions• China’s approach to Southeast Asia involves both consolidating
its territorial claims in the South China Sea and seeking to improve economic ties with countries in Southeast Asia. China’s
leaders seem to believe that striking a balance between these two
endeavors enables China to protect its perceived sovereignty in
the South China Sea and benefit from economic engagement withthe region, while ensuring tensions along its periphery do not become intolerably high for Beijing.
• Since late 2013, China has conducted dramatic land reclamationand construction activities on the land features it controls in the
Spratly Islands. These rapid activities appear to be driven by
several factors: China’s desire to unilaterally impose its claims

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and avoid arbitration or negotiation with other parties over the
disputes; China’s ambition to enhance its ability to project power
into the South China Sea; and, potentially, China’s intention toestablish an air defense identification zone over part of the South
China Sea.
• Southeast Asian countries have reacted with increasing alarm toChina’s activities in the South China Sea. They continue to enhance their military and civilian maritime patrol capabilities andto strengthen security relations with the United States and othercountries in the Asia Pacific. However, despite growing worry
among Southeast Asian countries about China, and rising assertiveness in expressing these concerns, they still seek to preserve
positive relations with China and appear to still be balancing
their relationships with China and the United States.
• Although historical animosities and China’s actions in the South
China Sea continue to hamper trust of China in Southeast Asian
capitals, defense and security cooperation between China andcountries in Southeast Asia has grown over the last 15 years.
China’s most prominent defense ties in Southeast Asia are withcountries in mainland Southeast Asia: Burma, Cambodia, Laos,and Thailand, all of which are among its nearest neighbors.
China has also increasingly engaged with Southeast Asian countries in the areas of nontraditional security and humanitarianassistance and disaster relief.
• China is vastly expanding its foreign assistance and investment
programs in Southeast Asia as a means of achieving its foreign
policy goals in the region, including efforts to defuse tensions
surrounding contentious disputes such as those in the South
China Sea. Chinese foreign assistance to Southeast Asia comesprimarily in the form of infrastructure investment, and projects
are frequently implemented by Chinese firms using Chineselabor, limiting the benefits for local communities.
• The Association of Southeast Asian Nations’ (ASEAN) trade liberalization with China from 2004 to 2010 has led to a large andgrowing bilateral trade deficit. Economic integration has also increased the association’s vulnerability to fluctuations in China’s
economy, with China’s recent economic slowdown exacerbating
ASEAN’s trade deficit with China.

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• Use of the renminbi (RMB) in international transactions is expanding rapidly in Southeast Asia and paving the way toward
more extensive use of the currency regionally. Limited progressin advancing multilateral monetary cooperation in Southeast
Asia, such as through the Chiang Mai Initiative Multilateralization, may allow for the RMB’s increased circulation in the region.
• China continues to unilaterally construct dams along the MekongRiver without any obligation to share information about water
management with downstream Mekong countries. China’s actions on the Mekong are causing major fluctuations in water levels in the Mekong Basin, but China has expressed little interestin cooperating with its southern neighbors by joining the Mekong

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River Commission. Dam construction and resource mismanagement by downstream nations also pose a significant problem.

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 2
1. Michael Swaine, ‘‘Chinese Views and Commentary on Periphery Diplomacy,’’
China Leadership Monitor 44 (Summer 2014):1.
2. Andrew Erickson and Kevin Bond, ‘‘Dredging under the Radar: China Expands South China Sea Foothold,’’ National Interest, August 25, 2015; U.S. Department of Defense, Asia-Pacific Maritime Security Strategy, August 2015, 16.
3. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, written testimony of Robert Sutter, May 13, 2015.
4. Chun Han Wong and Carol E. Lee, ‘‘China Extends Diplomatic Blitz toSoutheast Asia,’’ Wall Street Journal, November 13, 2014.
5. Michael Swaine, ‘‘Chinese Views and Commentary on Periphery Diplomacy,’’
China Leadership Monitor 44 (Summer 2014): 12, 17.
6. Robert Sutter and Chin-Hao Huang, ‘‘China-Southeast Asia Relations: Beijing Sets Positive Agenda, Plays Down Disputes,’’ Center for Strategic and International Studies, January 2015, 3; Robert Sutter and Chin-Hao Huang, ‘‘ChinaSoutheast Asia Relations: Beijing Shifts to the Positive, Downplays Disputes,’’ Center for Strategic and International Studies, January 2014, 4; and China-ASEAN Investment Cooperation Fund, ‘‘China-ASEAN Investment Cooperation Fund.’’
7. Robert Sutter and Chin-Hao Huang, ‘‘China-Southeast Asia Relations: Beijing Sets Positive Agenda, Plays Down Disputes,’’ Center for Strategic and International Studies, January 2015, 3; Li Keqiang, ‘‘Li Keqiang’s Remarks at the NinthEast Asia Summit,’’ Xinhua (Chinese edition), November 14, 2014. Staff translation;
and Robert Sutter and Chin-Hao Huang, ‘‘China-Southeast Asia Relations: Beijing
Shifts to the Positive, Downplays Disputes,’’ Center for Strategic and International
Studies, January 2014, 4.
8. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, written testimony of Bonnie Glaser, May 13, 2015.
9. UN Convention on the Law of the Sea, ‘‘Part 2: Territorial Sea and Contiguous Zone.’’10. UN Convention on the Law of the Sea, ‘‘Part 5: Exclusive Economic Zone.’’
11. United Nations Division for Ocean Affairs and the Law of the Sea, ‘‘Commission on the Limits of the Continental Shelf: Purpose, Functions, and Sessions.’’
12. UN Convention on the Law of the Sea, ‘‘Part 6: Continental Shelf.’’
13. UN Convention on the Law of the Sea, ‘‘Part 5: Exclusive Economic Zone.’’
14. UN Convention on the Law of the Sea, ‘‘Article 121: Regime of Islands.’’
15. UN Convention on the Law of the Sea, ‘‘Article 121: Regime of Islands.’’
16. UN Convention on the Law of the Sea, ‘‘Part 2: Territorial Sea and Contiguous Zone.’’17. UN Convention on the Law of the Sea, ‘‘Part 5: Exclusive Economic Zone’’;Ben Dolven et al., ‘‘Chinese Land Reclamation in the South China Sea: Implications
and Policy Options,’’ Congressional Research Service, June 18, 2015, 4.
18. UN Convention on the Law of the Sea, ‘‘Part 2: Territorial Sea and Contiguous Zone’’; Shannon Tiezzi, ‘‘The Truth about U.S. Freedom of Navigation Patrols
in the South China Sea,’’ Diplomat (Tokyo), September 22, 2015.
19. James Kraska, ‘‘The Legal Rationale for Going Inside 12,’’ Center for Strategic and International Studies Asia Maritime Transparency Initiative, September
11, 2015.
20. Raul Pedrozo, ‘‘Preserving Navigational Rights and Freedoms: The Right to
Conduct Military Activities in China’s Exclusive Economic Zone,’’ Chinese Journalof International Law (2010): 9–29.
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185. Vikram Nehru, ‘‘The BRICS Bank: Now Comes the Hard Part,’’ Carnegie Endowment for International Peace, July 17, 2014.
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187. Sabrina Snell, ‘‘U.S. Allies Split with Washington, Bank with China,’’ U.S.China Economic and Security Review Commission, March 31, 2015.
188. U.S.-China Economic and Security Review Commission, Hearing on China’s
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189. U.S.-China Economic and Security Review Commission, Hearing on China’s
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195. Jennifer Turner and Ada Wu, ‘‘Step Lightly: China’s Ecological Impact on
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210. Bonnie S. Glaser, ‘‘China’s Coercive Economic Diplomacy,’’ Diplomat (Tokyo),
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211. Peter Chalk, ‘‘ASEAN Ascending: Achieving ‘Centrality’ in the Emerging
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214. Deborah Bräutigam and Tang Xiaoyang, ‘‘Economic Statecraft in China’s
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215. Deborah Bräutigam and Tang Xiaoyang, ‘‘Economic Statecraft in China’s
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216. Deborah Bräutigam and Tang Xiaoyang, ‘‘Economic Statecraft in China’s
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217. Pal Nyiri, ‘‘Enclaves of Improvement: Sovereignty and Developmentalism in
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220. Yos Santasombat, ed., Impact of China’s Rise on the Mekong Region, Palgrave Macmillan, 2015, 127.
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225. Kwanchai Rungfapaisam, ‘‘Chinese Investors Strongly Drawn towards Thailand,’’ Nation (Thailand), February 16, 2015.
226. Open Source Center, ‘‘Thailand: Chinese Investment in Thailand Sets a Pathfor the Future,’’ February 15, 2015. ID: SER2015021569626284.
227. Open Source Center, ‘‘Xinhua: Chinese Enterprises Investing Overseas
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228. Open Source Center, ‘‘Laos: Vientiane Times,’’ August 11, 2015. ID: SEN
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229. Pal Nyiri, ‘‘Enclaves of Improvement: Sovereignty and Developmentalism in
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230. Yos Santasombat, ed., Impact of China’s Rise on the Mekong Region, Palgrave Macmillan, 2015, 119.
231. Yos Santasombat, ed., Impact of China’s Rise on the Mekong Region, Palgrave Macmillan, 2015, 131.
232. McKinsey Productivity Sciences Center, ‘‘Understanding ASEAN: The Manufacturing Opportunity,’’ October 2014.
233. McKinsey Productivity Sciences Center, ‘‘Understanding ASEAN: The Manufacturing Opportunity,’’ October 2014.
234. Nargiza Salidjanova and Iacob Koch-Weser, ‘‘China’s Economic Ties with
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235. China General Administration of Customs, via CEIC database; Tradingeconomics.com.
236. Francoise Lemoine and Deniz Unal, ‘‘China’s Strong Domestic Demand Has
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237. China General Administration of Customs, via CEIC database; Tradingeconomics.com.
238. James Kynge, ‘‘China Effect Weights on Emerging Market Exports,’’ Financial Times, May 19, 2015.
239. Eric Bellman and Nopparat Chaichalearmmongkol, ‘‘Southeast Asia Shows
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241. Nargiza Salidjanova and Iacob Koch-Weser, ‘‘China’s Economic Ties with
ASEAN: A Country-by-Country Analysis,’’ U.S.-China Economic and Security Review Commission, March 17, 2015.
242. U.S.-China Economic and Security Review Commission, Hearing on China’s
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243. U.S.-China Economic and Security Review Commission, Hearing on China’s
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244. U.S.-China Economic and Security Review Commission, Hearing on China’s
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245. Arvind Subramanian and Martin Kessler, ‘‘The Renminbi Bloc Is Here: Asia
Down, Rest of the World to Go?’’ Peterson Institute for International Economics, August 2013.
246. Barry Eichengreen and Masahiro Kawai, ‘‘Issues for Renminbi Internationalization: An Overview,’’ Asian Development Bank Institute, Working Paper 454,
January 2014.
247. Ulrich Volz, ‘‘Lessons of the European Crisis for Regional Monetary and Financial Integration in East Asia,’’ Asian Development Bank Institute, Working Paper
347, February 2012.
248. C. Randall Henning, ‘‘The Future of the Chiang Mai Initiative: An AsianMonetary Fund?’’ Peterson Institute for International Economics, February 2009.
249. Mashiro Kawai and Yung Chul Park, ‘‘Financial and Monetary Cooperationin East Asia’’ in Masahiro Kawai et al., Monetary and Financial Cooperation in East
Asia, Oxford University Press, 2015, 37–40.
250. Mashiro Kawai and Yung Chul Park, ‘‘Financial and Monetary Cooperationin East Asia’’ in Masahiro Kawai et al., Monetary and Financial Cooperation in East
Asia, Oxford University Press, 2015, 37–40.
251. William Grimes, ‘‘The Asian Monetary Fund Reborn? Implications of Chiang
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252. Hal Hill and Jayant Menon, ‘‘Asia’s New Financial Safety Net: Is the Chiang
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253. Wolf Hassdorf, ‘‘Much Ado about Nothing? Chiang Mai Initiative
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254. Wolf Hassdorf, ‘‘Much Ado about Nothing? Chiang Mai Initiative
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255. Reuters, ‘‘China Parliament Ratifies BRICS Bank Agreement,’’ July 22,
2015.
256. Ian Storey, ‘‘China’s Bilateral Defense Diplomacy in Southeast Asia,’’ Asian
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257. Ian Storey, ‘‘China’s Bilateral Defense Diplomacy in Southeast Asia,’’ Asian
Security 8:3 (2012): 287–310.
258. Carlyle A. Thayer, ‘‘China’s Relations with Laos and Cambodia,’’ International Association for Counterterrorism and Security Professionals, February
2014, 214–215; Phuong Nguyen and Brittany Billingsley, ‘‘China’s Growing Militaryto-Military Engagement with Thailand and Myanmar,’’ Center for Strategic andInternational Studies, September 12, 2013.
259. Audrey Belford and Prak Chan Thul, ‘‘Chinese Influence in Cambodia Grows
with Army School, Aid,’’ Reuters, April 2, 2015.
260. Carlyle Thayer (Emeritus Professor, University of New South Wales), interview with Commission staff, October 2, 2015; Audrey Belford and Prak Chan Thul,‘‘Chinese Influence in Cambodia Grows with Army School, Aid,’’ Reuters, April 2,
2015.
261. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 76–77.
262. ‘‘Thailand, China Agree to Closer Military Ties during Senior Official’s
Visit,’’ Nation (Thailand), April 25, 2015; Amy Sawitta Lefevre, ‘‘Thailand Boosts
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263. Reuters, ‘‘Thailand Puts $1 Billion Chinese Submarines on Hold,’’ July 15,
2015.
264. Wyatt Olsen, ‘‘China Lurks as US Ties with Thailand Splinter, Military Experts Say,’’ Stars and Stripes, April 11, 2015; Audrey Belford and Prak Chan Thul,‘‘Chinese Influence in Cambodia Grows with Army School, Aid,’’ Reuters, April 2,
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265. Ian Storey, ‘‘China’s Bilateral Defense Diplomacy in Southeast Asia,’’ Asian
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266. Radio Free Asia, ‘‘More China Aid to Cambodia,’’ May 6, 2010.
267. Ian Storey, ‘‘China’s Bilateral Defense Diplomacy in Southeast Asia,’’ Asian
Security 8:3 (2012): 301.
268. Nicholas Cheng, ‘‘Malaysia and China Hold First-Ever Joint Military Exercise,’’ Star (Malaysia), December 23, 2014.
269. China’s Ministry of National Defense, Defense Ministry Spokesperson Yang
Yujun’s Regular Press Conference on Aug. 27, August 27, 2015.
270. Xinhua, ‘‘China, Malaysia Conclude First Joint Military Exercise,’’ September 22, 2015.
271. Ian Storey, ‘‘China’s Bilateral Defense Diplomacy in Southeast Asia,’’ Asian
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272. Richard Bitzenger, ‘‘China as a Major Arms Exporter: Implications forSoutheast Asia,’’ S. Rajaratnam School of International Studies, October 30, 2013.
273. Stockholm International Peace Research Institute, ‘‘The SIPRI Arms Transfers Database.’’274. Stockholm International Peace Research Institute, ‘‘The SIPRI Arms Transfers Database.’’275. Stockholm International Peace Research Institute, ‘‘The SIPRI Arms Transfers Database.’’276. Ian Storey, ‘‘China’s Bilateral Defense Diplomacy in Southeast Asia,’’ Asian
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277. Stockholm International Peace Research Institute, ‘‘The SIPRI Arms Transfers Database.’’278. Walter Lohman, ‘‘U.S. Congress in the Driver’s Seat on US-Burma Military
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279. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, written testimony of Priscilla Clapp, May 13, 2015;
Jonah M. Kessel, ‘‘In Myanmar’s ‘Black Zones,’ Illicit Commerce Is Said to Thrive,’’
Sinosphere (New York Times blog), January 22, 2015; and Dan Levin, ‘‘Jade’s Journey Marked by Drugs and Death,’’ New York Times (Video), December 1, 2014; andJuan Pablo Cardenal and Heriberto Araujo, China’s Silent Army, Crown Publishers,
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280. Jane’s Intelligence Review, ‘‘Myanmar Ceasefire Deal on Brink of Collapse,’’March 11, 2015.
281. Jane’s Intelligence Review, ‘‘Myanmar Ceasefire Deal on Brink of Collapse,’’March 11, 2015; Jane Perlez, ‘‘Myanmar’s Fight with Rebels Creates Refugees andIll Will with China,’’ New York Times, March 21, 2015; and Minnie Chan, ‘‘Senior
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282. Jane’s Intelligence Review, ‘‘Myanmar Ceasefire Deal on Brink of Collapse,’’March 11, 2015.
283. Charles Hutzler, ‘‘China Deploys Forces to Myanmar Border after Bombing,’’
Wall Street Journal, March 15, 2015.
284. Charles Hutzler, ‘‘China Deploys Forces to Myanmar Border after Bombing,’’
Wall Street Journal, March 15, 2015; Reuters, ‘‘China Threatens ‘Decisive’ Response
after Myanmar Bombing,’’ March 15, 2015.
285. Tom Mitchell and Michael Peel, ‘‘China to Hold Live-Fire Military Drills at
Myanmar Border,’’ Financial Times, June 1, 2015.
286. Tom Mitchell and Michael Peel, ‘‘China to Hold Live-Fire Military Drills at
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287. Jane Perlez, ‘‘Myanmar’s Fight with Rebels Creates Refugees and Ill Will
with China,’’ New York Times, March 21, 2015; Agence France-Presse, ‘‘Myanmar
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288. Jane’s Intelligence Review, ‘‘Myanmar Ceasefire Deal on Brink of Collapse,’’March 11, 2015.
289. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, April 2015, 76–77.
290. Ben Blanchard, ‘‘China Says May Have Citizens Fighting in Iraq,’’ Reuters,
July 28, 2014.
291. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 365–366; Edward Wong, ‘‘Iraqis Identify Prisoner as
Chinese Islamist Fighter,’’ New York Times, September 4, 2014.
292. Lee Hsien Loong, ‘‘Keynote Address’’ (2015 Shangri-La Dialogue, Singapore,May 29, 2015).
293. Lee Hsien Loong, ‘‘Keynote Address’’ (2015 Shangri-La Dialogue, Singapore,May 29, 2015).

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Solved,’’ Financial Times, September 28, 2015.
295. Aukkarapon Niyomyat, ‘‘Thai Police Reiterate Crackdown was Motive for
Bombing,’’ Reuters, September 28, 2015.
296. Association of Southeast Asian Nations, ‘‘ASEAN and China Sign Agreement
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297. Association of Southeast Asian Nations, ‘‘ASEAN and China Sign Agreement
on Disaster Management,’’ October 6, 2014.
298. U.S. Department of Defense, China: PLA Activities Report, 16–30 March
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299. Qiu Yongzheng and Liu Yunlong, ‘‘China’s Peace Ark Wins over Filipinos,’’
Global Times (English edition), December 26, 2013.
300. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, written testimony of Murray Hiebert, May 13, 2015.
301. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, written testimony of Priscilla Clapp, May 13, 2015.
302. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, written testimony of Pek Koon Heng, May 13, 2015;
Asia Partnership on Emerging Infectious Disease Research, ‘‘What We Do.’’
303. International Chamber of Commerce, ‘‘One Coastal Tanker Hijacked Every
Two Weeks in South East Asia,’’ April 21, 2015; Elliot Brennan, ‘‘Yes, Southeast
Asian Piracy Really Has Spiked,’’ Lowy Interpreter, August 21, 2015.
304. Matthew R. Walje, ‘‘The State of Maritime Piracy 2014: Assessing The Economic and Human Cost,’’ One Earth Future Foundation, 81.
305. Andrew Erickson and Austin Strange, ‘‘China’s Global Maritime Presence:
Hard and Soft Dimensions of PLAN Antipiracy Operations,’’ China Brief, May 1,
2015.
306. Miha Hribernik, ‘‘Countering Maritime Piracy and Robbery in Southeast
Asia,’’ International Relations and Security Network, April 28, 2014; China Military
Online, ‘‘Chinese Naval Chief Meets with Singaporean Counterpart,’’ July 9, 2015.
307. China’s Ministry of National Defense, Defense Ministry Spokesperson Yang
Yujun’s Regular Press Conference on Aug. 27, August 27, 2015.
308. Edward C. O’Dowd and John F. Corbett, Jr., ‘‘The 1979 Chinese Campaign
in Vietnam: Lessons Learned,’’ in Laurie Burkett, Andrew Scobell, and Larry
Wortzel, eds., The Lessons of History: The Chinese People’s Liberation Army at 75,
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309. Jane Perlez, ‘‘Shadow of Brutal ‘79 War Darkens Vietnam’s View of China
Relations,’’ New York Times, July 5, 2014.
310. James Hardy et al., ‘‘China Goes All out with Major Island Building Projectin the Spratlys,’’ IHS Jane’s 360, June 20, 2014; Nga Pham, ‘‘Shift as Vietnam
Marks South China Sea Battle,’’ BBC, January 15, 2014.
311. China’s Ministry of Foreign Affairs, Chinese and Vietnamese Governments
Sign Land Border Demarcation Documents, November 19, 2009.
312. National Assembly of Vietnam, discussion with Commission, Hanoi, Vietnam, July 24, 2015; U.S.-China Economic and Security Review Commission, Hearing on China’s Relations with Southeast Asia, written testimony of Murray Hiebert,
May 13, 2015; and Mark E. Manyin, ‘‘U.S.-Vietnam Relations in 2014: Current
Issues and Implications for U.S. Policy,’’ Congressional Research Service, June 24,
2014, 28–29.
313. Nargiza Salidjanova and Iacob Koch-Weser, ‘‘China’s Economic Ties with
ASEAN: A Country-by-Country Analysis,’’ U.S.-China Economic and Security Review Commission, March 17, 2015, 28.
314. Nargiza Salidjanova and Iacob Koch-Weser, ‘‘China’s Economic Ties with
ASEAN: A Country-by-Country Analysis,’’ U.S.-China Economic and Security Review Commission, March 17, 2015, 28.
315. Prashanth Parameswaran, ‘‘Vietnam Gives China Earful for ‘Worst’ Project,’’
Diplomat (Tokyo), January 9, 2015.
316. Tuoi Tre News (Vietnam), ‘‘Vietnam Warns Contractor of Chinese-Funded
Railway Project over Safety Violations,’’ August 28, 2015; Prashanth Parameswaran,‘‘Vietnam Gives China Earful for ‘Worst’ Project,’’ Diplomat (Tokyo), January 9,
2015.
317. Tuoi Tre News (Vietnam), ‘‘Vietnam Warns Contractor of Chinese-Funded
Railway Project over Safety Violations,’’ August 28, 2015.
318. Thai Son, ‘‘Chinese Builder Ordered to Clean House after Second Railway
Collapse in Hanoi,’’ Thanh Nien News (Vietnam), January 6, 2015.

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319. Tuoi Tre News, ‘‘China Wrong to Seize Vietnam’s Sovereignty by Force: Vietnamese General,’’ June 5, 2014.
320. Greg Torode, ‘‘Vietnam Buys Submarine-Launched Land Attack Missiles to
Deter China,’’ Reuters, April 30, 2015.
321. National Assembly of Vietnam, discussion with Commission, Hanoi, Vietnam, July 24, 2015; Diplomatic Academy of Vietnam, discussion with Commission,Hanoi, Vietnam, July 24, 2015; Vietnam Ministry of National Defense, Institute for
Defense Strategy, discussion with Commission, Hanoi, Vietnam, July 27, 2015; Vietnam Ministry of National Defense, Institute for Defense and International Relations, discussion with Commission, Hanoi, Vietnam, July 27, 2015; Vietnam National Border Commission, Maritime Affairs Department, Hanoi, Vietnam, July 27,
2015; and Vietnam Ministry of Public Security, Institute of Science and Strategy,
Hanoi, Vietnam, July 28, 2015.
322. Vietnam Ministry of National Defense, Institute for Defense Strategy, discussion with Commission, Hanoi, Vietnam, July 27, 2015.
323. Diplomatic Academy of Vietnam, discussion with Commission, Hanoi, Vietnam, July 24, 2015.
324. Communist Party of Vietnam Central Committee, discussion with Commission, Hanoi, Vietnam, July 24, 2015.
325. National Assembly of Vietnam, discussion with Commission, Hanoi, Vietnam, July 24, 2015; Diplomatic Academy of Vietnam, discussion with Commission,Hanoi, Vietnam, July 24, 2015; Vietnam Ministry of National Defense, Institute for
Defense Strategy, discussion with Commission, Hanoi, Vietnam, July 27, 2015; andVietnam Ministry of National Defense, Institute for Defense and International Relations, discussion with Commission, Hanoi, Vietnam, July 27, 2015.
326. Carlyle A. Thayer, ‘‘China-Vietnam Defense Hotline Agreed: What Next?’’
Diplomat, October 20, 2014.
327. U.S. Embassy Hanoi, discussion with Commission, Hanoi, Vietnam, July 27,
2015.
328. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, written testimony of Murray Hiebert, May 13, 2015.
329. John Boudreau, ‘‘Vietnam Party Group Calls for More Openness,’’
Bloomberg, August 6, 2014.
330. U.S. Embassy Hanoi, discussion with Commission, Hanoi, Vietnam, July 27,
2015.
331. International Crisis Group, ‘‘Stirring up the South China Sea (III): A Fleeting Opportunity for Calm,’’ May 7, 2015, 21.
332. Alexander L. Vuving, ‘‘A Breakthrough in U.S.-Vietnam Relations,’’ Diplomat, April 10, 2015; Murray Hiebert et al., ‘‘A New Era in U.S.-Vietnam Relations,’’ Center for Strategic and International Studies, June 2014, 4–8.
333. Cheryl Pellerin, ‘‘Carter: U.S., Vietnam Committed to Defense Relationship,’’
DoD News, June 2, 2015; Aaron Mehta, ‘‘New US-Vietnam Agreement Shows
Growth, Challenges,’’ Defense News, June 2, 2015.
334. Cheryl Pellerin, ‘‘Carter: U.S., Vietnam Committed to Defense Relationship,’’
DoD News, June 2, 2015.
335. Kristine Kwok, ‘‘Vietnam’s Communist Party Chief’s Visit to White House‘Rich in Symbolism,’ ’’ South China Morning Post (Hong Kong), June 28, 2015.
336. Kristine Kwok, ‘‘Vietnam’s Communist Party Chief’s Visit to White House‘Rich in Symbolism,’ ’’ South China Morning Post (Hong Kong), June 28, 2015.
337. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, written testimony of Murray Hiebert, May 13, 2015.
338. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, written testimony of Murray Hiebert, May 13, 2015;
International Crisis Group, ‘‘Stirring up the South China Sea (III): A Fleeting Opportunity for Calm,’’ May 7, 2015, 22.
339. Ankit Panda, ‘‘U.S. to Help Vietnam Bolster Maritime Security,’’ Diplomat(Tokyo), June 2, 2015.
340. Bonnie Glaser, ‘‘The Growing Militarization of the South China Sea,’’ Lowy
Interpreter, July 29, 2015.
341. Senate Foreign Relations Committee, Hearing on Safeguarding American Interests in the East and South China Seas, oral testimony of David Shear, May 13,
2015.
342. Jim Scuitto, ‘‘Behind the Scenes: A Secret Navy Flight over China’s Military
Buildup,’’ CNN, May 26, 2015.
343. Jim Scuitto, ‘‘Behind the Scenes: A Secret Navy Flight over China’s Military
Buildup,’’ CNN, May 26, 2015.
344. U.S. Department of Defense, IISS Shangri-La Dialogue: ‘A Regional Security
Architecture Where Everyone Rises,’ May 30, 2015.

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345. U.S. Department of Defense, IISS Shangri-La Dialogue: ‘A Regional Security
Architecture Where Everyone Rises,’ May 30, 2015.
346. James Pearson and Ben Blanchard, ‘‘U.S. Admiral Says His South China
Sea Surveillance Flight ‘Routine,’ ’’ July 20, 2015.
347. UN Convention on the Law of the Sea, ‘‘Part 2: Territorial Sea and Contiguous Zone’’; UN Convention on the Law of the Sea, ‘‘Part 5: Exclusive Economic
Zone’’; and Gregory Poling, ‘‘Carter on the South China Sea: Committed and (Mostly) Clear,’’ Center for Strategic and International Studies Asia, Maritime Transparency Initiative, June 3, 2015.
348. Adam Entous and Julian A. Barnes, ‘‘U.S. Military Proposes Challenge to
China Sea Claims,’’ Wall Street Journal, May 12, 2015.
349. Austin Wright, Philip Ewing, and Bryan Bender, ‘‘Obama Team, Military at
Odds over South China Sea,’’ Politico, July 31, 2015; Dan De Luce and Paul
Mcleary, ‘‘In South China, a Tougher U.S. Stance,’’ Foreign Policy (Blog), October
2, 2015.
350. Demetri Savastopulo and Charles Clover, ‘‘China Accuses US Navy of Illegal
Incursion in South China Sea,’’ Financial Times, October 27, 2015.
351. Jane Perlez, ‘‘Beijing Calls U.S. Warship’s Route in South China Sea a ‘Provocation,’ ’’ New York Times, October 27, 2015; Simon Denyer, Craig Whitlock, andSteven Mufson, ‘‘U.S. Warship Sails within 12 Miles of Chinese-Built Island inSouth China Sea,’’ Washington Post, October 26, 2015; Demetri Savastopulo andCharles Clover, ‘‘China Accuses US Navy of Illegal Incursion in South China Sea,’’Financial Times, October 27, 2015; and China’s Ministry of Foreign Affairs, Foreign
Ministry Spokesperson Lu Kang’s Remarks on USS Lassen’s Entry into Waters near
Relevant Islands and Reefs of China’s Nansha Islands, October 27, 2015.
352. Abraham Denmark, ‘‘Myanmar and Asia’s New Great Game,’’ in Abraham
Denmark et al., Myanmar’s Growing Regional Role, National Bureau of Asian Research, 79.
353. Shawn Crispin, ‘‘New Ambassador Holds Key to U.S.-Thailand Relations,’’
Diplomat (Tokyo). September 26, 2015.

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Introduction
Cross-Strait relations in 2015 were essentially stable. At thesame time, concern in Taiwan about increasing cross-Strait economic integration with China * intensified—as manifested in the2014 Sunflower Movement, during which Taiwan citizens occupied
the legislature in part to protest expanding cross-Strait economic
ties. Taiwan citizens’ wariness of China, spurred by the Mainland’s
increasing economic interconnectedness with Taiwan, appears to bepartially responsible for flagging public confidence in Taiwan’s
Kuomintang (KMT)-led government. With Taiwan’s national elections approaching in January 2016, and the Democratic Progressive Party (DPP), Taiwan’s opposition and traditionally pro-independence party, leading in presidential polls, China-Taiwan relations may be facing a major shift. Meanwhile, China’s continued
military modernization poses a growing threat to Taiwan, and thebalance of power in the Taiwan Strait continues to shift strongly
in China’s favor.
Outside the cross-Strait relationship, Taiwan is making progressaddressing several economic and security challenges. Despite China’s restrictions on Taiwan’s participation in multilateral institutions, Taiwan continues to attempt to expand its status and legitimacy in international affairs by actively pursuing both regional
economic integration and fisheries agreements with its maritime
neighbors. U.S.-Taiwan relations also remain strong, with annual
bilateral trade reaching a record high of $67.4 billion in 2014 andcontinued growth expected in 2015.1 In the security realm, increased U.S.-Taiwan security cooperation demonstrates the U.S.
commitment to Taiwan’s defense.
This section examines the state of cross-Strait ties, Taiwan’s
international engagement, Taiwan military and security issues,and U.S.-Taiwan relations, and ends with a discussion of the implications of these developments for the United States. It is based on
the Commission’s meetings with Taiwan officials in Washington,consultations with U.S. and foreign nongovernmental experts, andopen-source research and analysis.
Cross-Strait Relations
A series of events that occurred in Taiwan in 2014 continue toshape its political environment and the cross-Strait relationship.
The first of these events, and perhaps the most influential forcross-Strait ties, was the Sunflower Movement. The Sunflower
Movement started as a grassroots student-led occupation of Tai-

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* For the purposes of this section, China refers to mainland China (the Mainland), or the People’s Republic of China.

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wan’s national legislature, the Legislative Yuan, for 23 days between March and April 2014 in opposition to the Ma Ying-jeou Administration’s handling of a major cross-Strait economic deal, theCross-Strait Services Trade Agreement (CSSTA) (discussed later inthe section). The protests sparked a public debate in Taiwan about
whether the services agreement would create unfair competitionand enable China to exercise excessive economic leverage over Taiwan. The Sunflower Movement delayed ratification of the services
agreement and effectively postponed negotiations on other crossStrait agreements.* The protests also played a role in pushing theLegislative Yuan to craft an oversight mechanism for cross-Strait
agreements.2 As of the writing of this Report, the Legislative Yuan
has yet to pass legislation to establish such a mechanism.†
Eight months after the student-led occupation of the Legislative
Yuan, the KMT suffered a landslide defeat to the DPP in Taiwan’s
November 2014 local elections.‡ Polls conducted in the aftermathof the elections found the public’s rejection of the Ma Administration’s performance was the main reason for the KMT defeat.3 Most
voters in the elections were primarily concerned with local issues,
such as wages, housing prices, and food safety. Cross-Strait relations did not appear to play a sizable role in voting patterns. Nevertheless, some—particularly younger voters—may have voted forthe DPP due to suspicion of China’s intentions and unease with
China’s growing influence over Taiwan.4 Following the poor resultsof the local elections for the KMT, President Ma (who was also
KMT chairman) resigned as party chairman in December 2014 in
response to pressure from the party elite.5
Taiwan citizens’ affinity for and identification with mainland
China appears to be decreasing. According to a 2014 survey of Taiwan citizens conducted by National Chengchi University in Taipei,
when asked how they view their national identity, over 60 percent
of respondents—an all-time high since the survey was first conducted in 1992—said they self-identified as Taiwanese instead ofChinese or a combination of the two. Those who identified as both
Taiwanese and Chinese comprised 32.5 percent.6 By comparison,
the survey conducted in 2013 found about 57 percent identified
themselves as Taiwanese (35.8 percent as Taiwanese and Chinese),and in 2008, when President Ma was first elected, it found thatless than 50 percent identified themselves as Taiwanese (43.1 percent as Taiwanese and Chinese).7 The survey results suggest that
Taiwan citizens in general view identity more in terms of citizen* For more information on the Sunflower Movement, see U.S.-China Economic and Security
Review Commission, 2014 Annual Report to Congress, November 2014, 482–484.
† The idea for an oversight mechanism on cross-Strait agreements is not new. The DPP and
KMT debated the idea of an oversight mechanism in 2010 before Taiwan and China signed their
Economic Cooperation Framework Agreement (ECFA). Kuomintang, ‘‘KMT’s Response to the
DPP’s ‘Five Questions’ for Chairman Ma,’’ February 12, 2010.
‡ On November 29, 2014, Taiwan held a series of local elections for 11,130 positions, including
mayors, county magistrates, city and county councilors, township chiefs, and village and boroughchiefs. The KMT won six races for mayor and county magistrates, while the DPP won 13; threeothers went to independent candidates. In the popular vote for these 22 races, the DPP earned
47.6 percent of the vote and the KMT earned 40.7 percent. In other local elections, the KMTwon a larger number of city and county councilor seats than the DPP, but the DPP increased
its share of seats by 12.8 percent. The DPP also raised its number of township seats by 58.8
percent. In the elections for village and borough chiefs, the DPP increased representation from52 to 390, but the KMT retained its majority with 1,794 seats. Matthew Southerland and Kevin
Rosier, ‘‘Taiwan’s 2014 Local Elections: Implications for Cross-Strait Relations,’’ U.S.-China Economic and Security Review Commission, December 30, 2014, 2.

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ship than ethnic or cultural identity.8 This trend shows that China’s efforts to move Taiwan politically and culturally closer to theMainland are not necessarily successfully promoting cross-Strait
cultural integration or affinity for the Mainland by Taiwan citizens.
It also seems to reflect Taiwan citizens’ increasing skepticism about
China.
Informing Taiwan’s growing pessimism about the Mainland’s political encroachment is the ongoing political turmoil in Hong Kong.
In a July 2015 speech at the Brookings Institution, Mainland Affairs Council (MAC) * Minister Andrew Hsia said, ‘‘. . . [O]bviously
we are also concerned with the level and the latitude of freedom
and democracy given to the people of Hong Kong. We are disappointed, of course, and we certainly hope that the Beijing regime
will respect the people of Hong Kong and its freedom to choose.’’ 9
Hong Kong’s fight for democracy serves as a warning that, if Taiwan were reunified with China, Beijing would not likely adhere to
any promise it might make to protect Taiwan’s civil liberties. (Formore information on recent developments in Hong Kong, see Chapter 3, Section 4, ‘‘Hong Kong.’’)China also has taken unilateral actions that appear to be designed to move Taiwan closer to the ‘‘one country, two systems’’framework that Beijing uses for interacting with Hong Kong and
Macau. Through these measures, Beijing seeks to move Taiwan
closer politically to the Mainland and further constrain its sovereignty. For example, China in July 2015 passed a National Security Law that states, ‘‘The sovereignty and territorial integrity of
China cannot be encroached upon or divided. Maintenance of national security and territorial integrity is a shared obligation of all
the Chinese people, including compatriots from Hong Kong, Macau,
and Taiwan.’’ 10 The Ma Administration responded by issuing a formal protest with the Chinese government, and the DPP called thelaw a ‘‘disrespectful decision’’ toward the Taiwan people.11 China
also announced a new requirement for Taiwan citizens traveling to
the Mainland to use entry permit cards similar to those used byHong Kong residents in place of passports.12 Opponents of the decision in Taiwan criticized it as a ‘‘downgrade’’ of Taiwan’s status.13
Cross-Strait Political Relations

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As the KMT and DPP vie for power, the Chinese government appears to be increasingly uneasy about the prospect of the DPP winning Taiwan’s presidency in the January 2016 elections.14 With the
DPP’s chairperson and presidential candidate Tsai Ing-wen leading
all other candidates in the polls,15 observers assess that Beijing isworried that if DPP Chairperson Tsai is elected, she may not accept the notion that the Mainland and Taiwan are part of one
country and may seek to steer Taiwan toward de jure independence.16 Bonnie Glaser, senior advisor for Asia at the Center for
Strategic and International Studies (CSIS) and Jacqueline Vitello,
program associate at CSIS, assert that this fear is based on Chair* The Mainland Affairs Council is a cabinet-level agency in Taiwan’s executive branch thatis responsible for overseeing Taiwan’s cross-Strait policies.

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person Tsai’s unwillingness to agree to the ‘‘one China’’ principle *and her role in creating the ‘‘two states theory’’ † when she served
as a senior advisor in the Taiwan government in 1999.17 Despite
Beijing’s perception that Chairperson Tsai would damage crossStrait ties, her stated position of ‘‘maintaining the status quo’’ incross-Strait relations indicates a pragmatic approach.18
Beijing is also concerned, in part, because the last time the
DPP held power (from 2000 to 2008), the administration of thenpresident Chen Shui-bian pursued a pro-independence policy.19
Throughout 2015, Chinese President and General Secretary of theChinese Communist Party (CCP) Xi Jinping, Premier Li Keqiang,
and other senior officials have made statements insisting that Taiwan follow the ‘‘1992 Consensus,’’ 20 a tacit understanding reached
between the two sides that interprets the ‘‘one China’’ principle
such that each side maintains its own definition of ‘‘one China.’’ 21
While President Ma has cited the 1992 Consensus as the basis forseven years of positive cross-Strait relations, the DPP has rejected
the term.22

KMT and DPP Views on Cross-Strait Relations
Although it is unclear how cross-Strait issues will influence
the outcome of Taiwan’s elections, the two leading political parties’ cross-Strait policies will have important implications for future relations between Taiwan and the Mainland.
President Ma has defended the KMT’s adherence to the 1992
Consensus and ‘‘Three No’s’’—no unification, no independence,and no use of force—as the keys to successfully reaching crossStrait agreements on trade and investment.23 The KMT appears
to be trying to sell Taiwan citizens on its accomplishments indeepening and stabilizing cross-Strait ties, warning that any
changes to cross-Strait policy would invite instability. In an
April 2015 speech at Taiwan’s MAC, President Ma said, ‘‘By adhering to the [1992 Consensus], cross-Strait relations are boundto flourish. Divergence is sure to result in deterioration. And opposing the 1992 Consensus is sure to create turmoil.’’ 24

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Facing low poll numbers and the prospect of losing both thepresidential election and the majority of seats in the Legislative
Yuan, the KMT in October 2015 decided to replace its presidential candidate, eight term legislator Deputy Legislative Speaker
Hung Hsiu-chu, with KMT chairman and mayor of New Taipei* The ‘‘one China’’ principle states that both Taiwan and China are a part of a single ‘‘China.’’
China’s Taiwan Affairs Office and State Council, The One-China Principle and the Taiwan Issue,
February 21, 2000.
† In 1999, then Taiwan president Lee Teng-hui proposed the ‘‘two states theory,’’ which considered Taiwan a separate state from the Mainland, leading to the suspension of cross-Strait talks
and political discord. Tsai Ing-wen served as senior advisor on Taiwan’s National Security Council at the time and is said to be one of the key architects of the theory. Goh Sui Noi, ‘‘Tsai Ingwen: The ‘Doc’ who Nursed DPP Back to Health,’’ Straits Times (Singapore), July 27, 2015; Taiwan Panorama, ‘‘A Woman of Many Parts: Tsai Ing-wen,’’ July 1, 2012.

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KMT and DPP Views on Cross-Strait Relations—Continued
City Eric Chu.* Ms. Hung upon her July 2015 nomination as the
KMT’s presidential candidate was seen by some KMT party
members as a controversial choice due to statements she madethat were viewed as more pro-China and pro-unification than the
KMT mainstream.† Mr. Chu, by contrast, is a popular KMT centrist who has pledged to uphold the 1992 Consensus and follow
President Ma’s cross-Strait policy.25 A KMT government in 2016
probably would continue to pursue a strategy of rapprochementwith Beijing and seek improved economic, cultural, and peopleto-people ties, though it would likely face the same obstacles that
the Ma Administration has encountered in recent years.

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Meanwhile, DPP Chairperson Tsai has left her party’s crossStrait policy purposefully vague, stating the DPP supports‘‘maintaining the status quo’’ without agreeing to the 1992 Consensus or any form of the ‘‘one China’’ principle.26 In a speechduring her visit to the United States in June 2015, Chairperson
Tsai said, ‘‘[If] elected President, I will push for the peaceful andstable development of cross-Strait relations in accordance withthe will of the Taiwanese people and the existing [Taiwan] constitutional order. [The accumulated outcomes of more than 20
years of negotiations and exchanges] will serve as the firm basisof my efforts . . . .’’ 27 Her comments suggest that she will notseek to reverse the accomplishments of the 1992 Consensus.28
By leaving ambiguity in the DPP’s cross-Strait policy, Chairperson Tsai appears to be seeking to avoid alienating both the
DPP’s staunch pro-independence base and mainstream Taiwan
voters who seek stability in the cross-Strait relationship. A DPP
government in 2016 likely would seek to create greater transparency in cross-Strait negotiations. If elected, Chairperson Tsai
could also slow the pace of rapprochement with Beijing due to
Taiwan citizens’ fear of the Mainland’s increasing influence in
Taiwan.29* On October 17 at a special party congress, 812 out of 891 KMT delegates voted to remove
Ms. Hung as the party’s presidential candidate. A majority of delegates then voted to replace
Ms. Hung with Mr. Chu, and he accepted, though he had previously said he would not run forpresident. Stacy Hsu, ‘‘Presidential Campaign: KMT’s Eric Chu Takes Over Campaign,’’ Taipei
Times, October 18, 2015; Yuan-Ming Chiao, ‘‘Hung Ouster Settled, Chu Begins Bid,’’ China Post
(Taiwan), October 18, 2015; and Austin Ramzy, ‘‘Fearing Election Losses, Taiwan’s Governing
Party Drops Its Presidential Candidate,’’ New York Times, October 17, 2015.
† In May 2015 when Ms. Hung was a prospective candidate, she proposed a framework forcross-Strait relations, ‘‘one China, same interpretation,’’ which interpreted the ‘‘one China’’ principle such that each side agrees to the same definition of ‘‘one China,’’ which was widely viewed
as inconsistent with the party’s 1992 Consensus. As a prospective candidate she also made provocative comments, such as denying the existence of Taiwan, calling for ending arms procurement from the United States, and proposing a peace agreement with China. In July 2015 prior
to the KMT party congress where party delegates nominated their candidate, Ms. Hung agreed
to drop her ‘‘one China, same interpretation’’ stance and instead follow the KMT’s party platform. Goh Sui Noi, ‘‘Hung Hsiu-chu: KMT’s ‘Little Chilli’ Spices Up Race,’’ Straits Times (Singapore), July 27, 2015; Ricky Yeh, ‘‘The Challenging Road for Taiwan’s Newest Presidential Candidate,’’ Diplomat, July 19, 2015; Loa Lok-sin, ‘‘Hung Vows to Drop ‘Same Interpretation’: Lawmakers,’’ Taipei Times, July 10, 2015; Yuan-Ming Chiao, ‘‘Hung Draws Criticism for Her ‘Can’t
Say ROC Exists’ Stance,’’ China Post (Taiwan), July 4, 2015; and Central News Agency (Taiwan), ‘‘ ‘One China, Same Interpretation’ Is Cross-Strait Status Quo: KMT’s Hung,’’ May 7, 2015.

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Cross-Strait Agreements and Diplomatic Relations
Since April 2014, progress on major cross-Strait negotiations has
slowed and Taiwan’s ratification of signed cross-Strait agreements
has stalled, in large part due to President Ma’s waning public support and political gridlock in the Legislative Yuan. In March 2014,
protestors occupying the Legislative Yuan during the Sunflower
Movement demanded the government adopt an oversight mechanism to enhance transparency in the approval process of future
cross-Strait agreements. The protestors proposed a mechanism togrant the Legislative Yuan the right to manage and engage in negotiations on all cross-Strait agreements with China.30 This effort
remains stalled in the Legislative Yuan, which has yet to debate
the nine proposed draft versions of the bill. Much of the politicallogjam is the result of disagreement over the respective roles of theLegislative Yuan and the Executive Yuan (Taiwan’s executive
branch of government) in the oversight process.31 Although implementing the oversight mechanism is one of President Ma’s top priorities before leaving office, it appears increasingly unlikely that hewill achieve this goal.32 Nevertheless, when this oversight mechanism is eventually adopted, it will have significant implications for
all future cross-Strait agreements.
Major cross-Strait agreements pending completion include thefollowing:• Cross-Strait Services Trade Agreement (CSSTA): Awaiting ratification in the Legislative Yuan, the CSSTA, signed in 2013,
was designed to open up the services sectors of China and Taiwan to cross-Strait trade. The agreement is one of the most important cross-Strait economic deals promoted by the Ma Administration under the 2010 Economic Cooperation Framework
Agreement (ECFA), the main framework for cross-Strait economic integration.* If ratified, the services agreement would
have a significant impact on Taiwan’s services industries, a
key driver of Taiwan’s economy, accounting for over 62 percent
of its gross domestic product (GDP) and 59 percent of its workforce.33 By eliminating investment restrictions and other barriers across 64 service industries in Taiwan and 80 services industries in China, the CSSTA would primarily benefit Taiwan’s financial and retail industries, according to observers.34
However, public and legislative opposition to the agreement
has effectively stalled the ratification process. The DPP andother opponents argue the CSSTA will create unfair competition, marginalize Taiwan’s low-end service sector businesses,
and expose Taiwan to increased economic and political influence from the Mainland.35

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• Cross-Strait Trade in Goods Agreement: Progress on the proposed cross-Strait trade in goods agreement under the ECFA
* The ECFA lays out a roadmap for four subsequent agreements concerning investment protection, dispute settlement, trade in goods, and trade in services. Kerry Brown, Justin HempsonJones, and Jessica Pennisi, ‘‘The Economic Cooperation Framework Agreement (ECFA),’’ in Investment Across the Taiwan Strait, Chatham House, November 2010, 20–33; Alan D. Romberg,‘‘Ma at Mid-term: Challenges for Cross-Strait Relations,’’ China Leadership Monitor 33 (Summer2010), 1–4.

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also has slowed considerably since negotiations started in2010. The deal would cut tariffs on 10,000 categories of goods
shipped between China and Taiwan—impacting industries thatcomprise about 30 percent of Taiwan’s exports—including automotive parts, display panels, machine tools, and petrochemicals.36 After a nearly 11-month pause due in part to competingcross-Strait priorities and the Sunflower Movement, talks restarted in September 2014.37 The most contentious issue in thenegotiations is whether Taiwan will enjoy preferential tariff
status for its key export industries.38 Taiwan negotiators areseeking to obtain concessions greater than South Korea did in
its recent free trade agreement with China, since Taiwan andSouth Korea compete for the Chinese market in several industries.* (Some reports indicate that during talks concluded in
April 2015 mainland authorities rejected Taiwan’s efforts toobtain preferential status over South Korea.) 39 Though Taiwan
officials hope to conclude the agreement by the end of 2015,
lack of progress on this crucial issue casts doubt on an agreement being reached in the near term.40
Despite this slow progress on cross-Strait deals, low- and highlevel meetings continued over the past year, covering a broad rangeof cross-Strait issues, including party-to-party, economic, and security concerns. These meetings included the following:• In May 2015, KMT Chairman Eric Chu, prior to being nominated as his party’s presidential candidate, in a party-to-party
capacity met CCP General Secretary Xi in Beijing. Chairman
Chu was the highest ranking KMT official to meet with a top
CCP official since 2008.41 The meeting strengthened high-level
cooperation between political parties and promoted the 1992
Consensus as the guiding framework for cross-Strait ties. For
Beijing, the meeting appeared to serve as an opportunity to endorse the KMT’s cross-Strait policies and emphasize the needto continue along this path for continued stability in the relationship.42 At the meeting, CCP General Secretary Xi underscored the ‘‘political foundation’’ of cross-Strait relations as acceptance of the 1992 Consensus and opposition to Taiwan independence.43

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• In May and October 2015, MAC Minister Andrew Hsia andTaiwan Affairs Office † Director Zhang Zhijun met in Kinmen,
Taiwan and Guangzhou, China respectively. The talks built on
the historic February 2014 meeting between the heads of those
offices held in Nanjing, China—the first between government
officials from each side of the Taiwan Strait since Taiwan and* The China-South Korea free trade agreement has a significant impact on the Taiwan-China
trade in goods negotiations and other free trade negotiations under the ECFA. Taiwan competes
with South Korea in key industries, particularly liquid crystal display (LCD) panels, petrochemicals, and steel. Taiwan’s Ministry of Economic Affairs estimates Taiwan exporters could lose up
to $6 billion over the next 20 years as a result of the China-South Korea free trade agreement.
Other sources estimate much higher losses. Tang Pei-chun and Scully Hsiao, ‘‘Cabinet Urges
Faster Trade Talks as China, S. Korea Sign FTA,’’ Focus Taiwan, June 1, 2015; Amy Chyan,‘‘China-S. Korea FTA to Hurt Taiwan,’’ China Post (Taiwan), November 11, 2014.
† The Taiwan Affairs Office is an agency under China’s State Council that is responsible foroverseeing China’s cross-Strait policies.

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China split in 1949 following the Chinese civil war. The meetings in 2015 did not result in considerable progress on key diplomatic agreements, but helped reinforce this channel as ahigh-level cross-Strait policy dialogue.44• After an 18-month pause between meetings, in August 2015
Taiwan’s Straits Exchange Foundation and China’s Association
for Relations Across the Taiwan Strait * met for the 11th roundof cross-Strait talks in Fuzhou, China. The two sides signed
agreements on double taxation and aviation safety. Under the
taxation agreement, any business based in Taiwan that invests
in the Mainland, including via a third country, will not haveto pay extra taxes to China. In addition, foreign companies
with subsidiaries in Taiwan can now access the Chinese market without incurring additional taxes. Meanwhile, the flightsafety agreement allows Taiwan and Chinese carriers withcross-Strait flights to use each other’s technicians and maintenance facilities for routine aircraft inspections.45 Notably, thetwo sides decided shortly before the meeting to set aside a proposed agreement that would allow Chinese flights to maketransit stops in Taiwan.46• After five rounds of talks, Taipei and Beijing in March 2015settled a dispute over one of China’s four new civilian aircraft
routes in the Taiwan Strait.47 One of the routes, M503, announced in January, would pass as close as 8 kilometers (km),or approximately 5 miles (mi), away from Taiwan’s air space(the median line of the Taiwan Strait). Taiwan found M503
problematic due to its proximity to Taiwan air traffic and thepotential security risks to Taiwan’s airspace. China agreed to
a compromise, relocating the route 18–19 km (about 11 mi)west and suspending the three other flight routes along the
Chinese coast that would have intersected with M503.48
Cross-Strait Trade and Investment

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As of August 2015, China remains Taiwan’s largest trading partner, top source of imports, and biggest export market.† In 2014, annual cross-Strait trade reached $130.2 billion, comprising 22.1 percent of Taiwan’s total trade. Since President Ma took office in 2008,
bilateral trade has increased by over 32 percent (see Figure 1).49* The Straits Exchange Foundation and the Association for Relations Across the Taiwan Strait
facilitate cross-Strait negotiations in the absence of formal ties between the governments of Taiwan and China. Although the two bodies are semiofficial organizations, they receive direction
from their respective governments.
† Based on purchasing power parity, China’s GDP in 2014 was $17.6 trillion, while Taiwan’s
GDP was $1.07 trillion. China’s GDP per capita was $12,880 that year; Taiwan’s was $45,853.
Although GDP and GDP per capita figures can be estimated in different ways, purchasing power
parity helps minimize the effect of exchange rates on the calculations. International Monetary
Fund, ‘‘World Economic Outlook Database;’’ Bureau of Foreign Trade (Taiwan), ‘‘Trade Statistics.’’

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Figure 1: Taiwan’s Trade with China (2008–2014)

Source: Bureau of Foreign Trade (Taiwan).

* Of note, Taiwan Semiconductor Manufacturing Company is the largest semiconductor foundry in the world, and together with another Taiwan semiconductor foundry, United Microelectronics Corporation, accounted for over 60 percent of the industry’s global revenue in 2014. U.S.China Economic and Security Review Commission, Monthly Analysis of U.S.-China Trade Data,
August 5, 2015, 11.
† In 2014, microchips alone accounted for nearly 20 percent of all Taiwan exports to China.
Bureau of Foreign Trade (Taiwan), ‘‘Trade Statistics.’’

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Taiwan’s exports to China in 2014 were $82.1 billion, comprising26.2 percent of Taiwan’s exports to the world. Year-on-year, Taiwan’s exports to China grew less than one percent in 2014, andTaiwan’s trade surplus with China for that year was $34.1 billion,
the lowest since 2009.50 The declining growth of Taiwan’s exports
is explained in part by the rise of Chinese competitors, pricing Taiwan’s exports out of the market.51 Semiconductor-related products
dominate exports to China, supporting Taiwan’s largest industry.*
In 2014, three of the top five exports—microchips, semiconductors,
and printed circuit boards—made up over a quarter of total exports
to China.52 While exports of all of these products increased in 2014,
microchips, Taiwan’s largest export to China, grew by nearly 17
percent from 2013 to 2014.†
In 2014, China’s exports to Taiwan reached an all-time high, exceeding $48 billion and comprising a record 17.5 percent share of
Taiwan’s imports. That year, China replaced Japan as Taiwan’s
largest source of imports and remains in the same position as ofAugust 2015.53 Just as microchips dominate Taiwan exports to
China, they are also China’s top export to Taiwan. (Taiwan firms
generally design and manufacture unfinished microchips and othersemiconductor-related products in Taiwan for assembly and testingin China. China then typically exports the finished products backto Taiwan.) 54 However, Taiwan’s other top imports from China are
more diverse than Taiwan’s exports to China; they are cell phones,

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electronic computers, flat-rolled stainless steel, and chemical elements for use in electronics.55
According to official Taiwan data, Taiwan foreign direct investment (FDI) to the Mainland in 2014 was approximately $10.3 billion, nearly double U.S. FDI to China that year.* However, analysts believe this amount grossly understates the actual scale of investment. According to a 2011 study by Daniel H. Rosen and Zhi
Wang, many Taiwan firms use third-party companies, primarily inHong Kong, to invest in the Mainland, which accounts for the discrepancy.56 Official Taiwan FDI flows have nevertheless been declining since 2010, with the exception of a 13 percent increase in
2014. Much of the increase in 2014 was due to new Taiwan FDI
in China’s electronic parts manufacturing and computer manufacturing sectors, which together comprised over a quarter of all outbound Taiwan FDI that year. Aside from semiconductor-related
manufacturing, in 2014 Taiwan FDI in the Mainland was concentrated in the financial and insurance industry (16.1 percent)and wholesale and retail trade (10.7 percent).57 In 2015, Taiwan
FDI into China from January to August was approximately $6.8
billion, slightly exceeding 2014 numbers through August.58 Taiwan’s decision in August 2015 to lift restrictions on Taiwan firms
from owning more advanced semiconductor manufacturing plants
in China (for 12-inch wafer fabrication) could help stimulate greater investment flows into the Mainland.59
Meanwhile, official Taiwan statistics on Chinese FDI into Taiwan showed FDI flows in 2014 remaining steady at $335 million,
largely unchanged since 2012.60 In 2014, the main sectors of Chinese FDI in Taiwan were wholesale and retail trade (40 percent),
banking services (18.3 percent), and chemical products manufacturing (12.9 percent).61 Despite restrictions on inbound FDI from
the Mainland,† Chinese FDI to Taiwan more than tripled between
2010 and 2012, due in large part to the Ma Administration’s loosening of investment caps and regulations on mainland investment
into Taiwan.‡ However, with negotiations on cross-Strait economic
agreements at a standstill, Taiwan’s easing of its restrictions on
Chinese inbound investment has slowed down, limiting increases in
FDI flows. From January through August 2015, mainland investment in Taiwan was $79.2 million, dropping nearly 67 percent compared to the same period in 2014 when it was $239 million.62 But
according to some reports, mainland investment in Taiwan could
still recover to reach record-high levels if several large potential
deals are finalized.§* According to official Mainland data, Taiwan FDI to China in 2014 was $14.7 billion, the fifthlargest source of FDI to China. U.S. government data show U.S. FDI to China reached $6.3 billion that year. U.S. Department of Commerce, Bureau of Economic Analysis, China Factsheet,
July 31, 2015; Ministry of Economic Affairs, Overseas Chinese and Foreign Investment Commission (Taiwan), Monthly Report, December 2014.
† All investments require Taiwan government approval, and the Taiwan government prohibits
individuals from having stakes in or appointing managers to mainland investments.
‡ For example, in March 2012, Taiwan lifted mainland investment caps of 10 percent stakes
in local firms and 50 percent in joint ventures in Taiwan’s semiconductor, electronic, and metal
tool manufacturing sectors. PWC, ‘‘Chapter 4: The Bigger Picture–China’s Impact on the Semiconductor Industry 2012 Update,’’ September 2012.
§ One of the deals involves a joint venture between Taiwan-based CTBC Financial Holding
Co. and China’s CITIC Group Corp. The other deal is a proposed NTD (New Taiwan dollars)
48 billion (approximately $1.5 billion) sale of Mandarin Oriental Taipei to a Shanghai-based
company. John Liu, ‘‘Mainland Chinese Investment in Taiwan Slows Down,’’ China Post (Taiwan), June 22, 2015.

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Taiwan’s International Engagement

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Beijing’s insistence on the ‘‘one China’’ principle precludes any
country or international organization from simultaneously recognizing China and Taiwan, thereby restricting Taiwan’s full participation in the international community. Taiwan as a result of Chinese pressure in the UN and other international organizations is
unable to participate in the UN Framework Convention on Climate
Change, the International Atomic Energy Agency, the International
Civil Aviation Organization, the International Maritime Organization, and the International Criminal Police Organization (Interpol),among others.63 Such restrictions limit the existing few diplomaticlevers at Taiwan’s disposal to engage on important issues.
For example, Nepal in April 2015 rejected Taiwan’s offer to provide search and rescue teams to help look for survivors following
its massive 7.8 magnitude earthquake, though the Nepalese government eventually worked with Taiwan officials to arrange delivery of monetary and medical aid through Taiwan nongovernmentalorganizations.64 The Nepal government reportedly cited the lack of
diplomatic relations and the ‘‘great distance’’ between Nepal andTaiwan as reasons for its initial decision.65 As a result, Taiwan delivered a $300,000 donation check through Nepal’s embassy inIndia due to Nepal’s refusal to accept the funds in country.66 Although Chinese pressure on Nepal was not explicit, Nepal probably
did not want to anger China by accepting official assistance from
Taiwan.67
Nevertheless, Taiwan actively pursues greater international
space through its official diplomatic relations with 22 countries,*
expanding participation in international organizations that do not
require members to be recognized as sovereign states, andstrengthening economic and unofficial diplomatic partnerships withcountries other than China. Examples of Taiwan’s progress overthe past year include the following:• In March 2015, President Ma visited Singapore, a country thathas official diplomatic relations with China, to pay his respects
to deceased Singapore founding father and former prime minister Lee Kwan Yew. The visit was the first to Singapore bya Taiwan president since 1989 and President Ma’s first overseas travel to any country with diplomatic relations with China
aside from transit stops in the United States.68• Taiwan and Japan in March 2015 signed an updated fisheries
agreement, following their landmark 2013 deal to jointly manage fishing in the East China Sea near the disputed Senkaku
Islands. The updated agreement established new regulations
on sharing fisheries and could serve as an example of successful dispute resolution to other claimants involved in disputes
in the East and South China seas.69 (For more information
about the agreement and Taiwan’s other helpful efforts to promote cooperation in the region, see ‘‘Taiwan’s Response to Chi* Taiwan has diplomatic relations with Belize, Burkina Faso, the Dominican Republic, El Salvador, Guatemala, Haiti, the Holy See, Honduras, Kiribati, the Marshall Islands, Nauru, Nicaragua, Palau, Panama, Paraguay, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the
Grenadines, Sao Tome and Principe, the Solomon Islands, Swaziland, and Tuvalu. Taiwan’s
Ministry of Foreign Affairs, ‘‘Diplomatic Allies.’’

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na’s Assertiveness in the East and South China Seas,’’ later inthis section.)• In June 2015, Taiwan signed two memoranda of understanding
with South Korea to accelerate the governments’ existing crossborder patent review and approval process by fast-tracking applications for companies with an existing patent under one of
the governments and shortening the review process, among
other efficiencies. Together the agreements appear to mostly
benefit the electronics and semiconductor industries, sectorsthat comprise 65 percent of Taiwan’s exports to South Korea.70
The U.S. government has supported the expansion of Taiwan’s
participation in international organizations. In April 2015, U.S. Assistant Secretary of State for East Asia and Pacific Affairs Daniel
Russel, in testimony to Congress, expressed support for Taiwan’s
participation in international institutions, including Interpol. Assistant Secretary Russel said, ‘‘[The Administration wants] Taiwan
to be a member of organizations for which statehood is not a prerequisite, and we want Taiwan appropriately to interact, whether
as an observer or as the beneficiary of technical programs andother kinds of institutions. . . . We very much agree that Taiwan isa net contributor to international law enforcement, and we arelooking for ways to build on that.’’ 71
Taiwan Explores Regional Economic Integration
The Taiwan government has expressed interest in joining regional trade and investment regimes to encourage economic
growth and new market opportunities and expand its international footprint. President Ma has supported Taiwan becoming
a member of the Regional Comprehensive Economic Partnership(RCEP), led by the Association of Southeast Asian Nations(ASEAN), the U.S.-led Trans-Pacific Partnership (TPP),* andChina’s Asian Infrastructure Investment Bank (AIIB), emphasizing the benefits of regional economic integration for Taiwan’s
economy.72 Meanwhile, KMT Chairman Eric Chu during his visit
to Beijing in May 2015 voiced support for Taiwan’s participationin China’s 21st Century Maritime Silk Road, part of President
Xi’s ‘‘One Belt, One Road’’ initiative.73

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Announced in 2013 with negotiations planned to conclude thisyear, ASEAN’s Regional Comprehensive Economic Partnership(RCEP) is a proposed free trade agreement among the countriesof ASEAN and six additional Asian countries † that currently account for over half of Taiwan’s annual trade.74 China is among
the most influential participants in the RCEP negotiations, andinsists Taiwan conclude all ECFA-related agreements before join-* For more information on Taiwan’s aspirations to participate in TPP, see ‘‘The Role of Taiwan
in the U.S. Rebalance to Asia’’ later in this section.
† ASEAN’s members are Brunei, Burma (Myanmar), Cambodia, Indonesia, Laos, Malaysia, thePhilippines, Singapore, Thailand, and Vietnam. The other six RCEP negotiators are Australia,
China, India, Japan, New Zealand, and South Korea.

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Taiwan Explores Regional Economic Integration—
Continued
ing RCEP.75 Taiwan thus is unlikely to accede to the RCEP in
the near term, given the delays in finalizing cross-Strait economic agreements with China.
In contrast to RCEP’s initial closed membership, the AIIB had
an open application process with the opportunity to become afounding member if applications were submitted before March
31, 2015. Under the terms of the AIIB, only founding members
have the ability to propose new rules.* On the day of the AIIB’s
deadline for founding members, Taiwan submitted its application, which faced pushback from the DPP and other oppositiongroups.† On April 16, China announced 57 founding members of
the AIIB, but rejected Taiwan’s application over its implicit status. In Beijing’s view, by using an ‘‘improper name’’ (‘‘Taiwan’’),‡
Taiwan’s application implied independence from China.76

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If Taiwan joins the AIIB when China admits a new round ofmembers, as Chinese officials have said is likely, membership
could lead to increased Taiwan regional investment opportunities
and could widen Taiwan’s international economic presence.77 For
example, the Taiwan Ministry of Finance stated that successfully
joining the financial institution would increase Taiwan’s chancesof joining RCEP and other free trade agreements. Through the
AIIB, Taiwan could strengthen dialogue with other regional andglobal partners, which would help expand its visibility.78 Many
questions remain, however. It is still unclear what Taiwan’s status in the AIIB would be and whether it would have the same
access and influence within the institution compared to othermembers. The DPP and other opposition parties warn that Taiwan should proceed cautiously and carefully examine the political and economic implications of acceding to the bank.79 With
the AIIB set to begin operating by the end of 2015, Taiwan will
have an opportunity to observe the institution in action andstudy how it could impact Taiwan prior to submitting a revised
application.

* For more information about the AIIB, see Chapter 1, Section 1, ‘‘Year in Review: Economics
and Trade.’’† The DPP and other opposition groups were upset that the Ma Administration failed to consult with the legislature prior to submitting the application. They also protested the Ma Administration’s handling of the application submission; the Taiwan government used the same channel it uses for cross-Strait agreements instead of the channel it normally uses when applying
for membership in an international organization. Apple Daily (Taiwan), ‘‘Entering the Asian Infrastructure and Investment Bank, Ma: If Restricted, We Will Drop Out,’’ April 1, 2015. Staff
translation; Chu Pu-ching, ‘‘Asian Infrastructure and Investment Bank Controversy, Tsai Ingwen: The Government is Making International Affairs a Cross-Strait Issue,’’ Taiwan People
News, April 1, 2015. Staff translation.
‡ Taiwan often participates in international organizations under creative names to avoid opposition from China. For example, Taiwan joined the World Bank as ‘‘Separate Customs Territoryof Taiwan, Penghu, Kinmen, and Matsu.’’ After China joined the Asian Development Bank, Taiwan was required to participate under a different name, ‘‘Taipei, China.’’ Jenny W. Hsu, ‘‘China
Thwarts Taiwan’s Bid to be a Founding Member of AIIB,’’ Wall Street Journal, April 13, 2015;
Tseung Ying-yu, Lawrence Chiu, and Lilian Wu, ‘‘Taiwan Submits Letter of Intent to Join
AIIB,’’ Focus Taiwan, March 31, 2015; and Heh-Song Wang, ‘‘Taiwan and the Asian Development Bank,’’ ABA Journal (2007).

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Taiwan Explores Regional Economic Integration—
Continued
Proposed by President Xi in 2013, the 21st Century Maritime
Silk Road aims to enhance regional connectivity through tradeand investment in maritime Asia. (See Chapter 3, Section 2,‘‘China and Southeast Asia’’ for further discussion of China’s
21st Century Maritime Silk Road.) Beijing has encouraged Taiwan to participate in this initiative, in contrast to its rejectionsof Taiwan’s other efforts to participate in RCEP and the AIIB.
This is probably because the ‘‘One Belt, One Road’’ project is Beijing’s diplomatic initiative and not a formal international institution that would allow Taiwan a greater voice in the international
community.80 So far, Taiwan officials have been cautious in approaching the initiative, as it is unclear if Beijing will tie political conditions to Taiwan’s participation.81
Taiwan’s Response to China’s Assertiveness in the East andSouth China Seas

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While China has been increasingly assertive in the East andSouth China seas, Taiwan has proposed diplomatic frameworks
and signed agreements with other claimants to encourage the
shelving of territorial disputes and promotion of joint resource development. (See Chapter 3, Section 2, ‘‘China and Southeast Asia,’’
for further discussion of the territorial disputes in the South China
Sea.) In addition, Taiwan has taken steps to clarify its own claims
according to international law and thereby differentiate its claims
from those of China. Despite overtures from the Chinese government, Taiwan has refused to support China’s expansive sovereignty
claims on disputed territory in the region, though, to Beijing, Taipei’s claims are the same as its own.82
Since 2012, Taiwan has played a role in promoting cooperationin the East China Sea. Taiwan is one of three claimants to the
Senkaku Islands (known as the Diaoyutai in Taiwan and Diaoyu
in China) * and has long considered the waters around the islands
important fishing grounds to support its fishing industry, one of
the world’s largest.83 In August 2012, President Ma announced an
East China Sea Peace Initiative calling for all parties with conflicting claims ‘‘to replace confrontation with dialogue, shelve territorial disputes through negotiations, formulate a Code of Conduct
in the East China Sea, and engage in joint development of resources.’’ 84 The initiative led Taiwan and Japan to sign a landmark fisheries agreement in 2013 to set aside sovereignty claims;
share fishing grounds between their respective overlapping exclusive economic zones; † and extend the fishing area for both sides by
1,400 square nautical miles (nm).85 The international community
praised the agreement as a constructive model for jointly managing
resources in disputed waters.86 U.S. Secretary of State John Kerry* Other claimants of the Senkaku Islands are Japan and China.
† An exclusive economic zone is a 200 nm zone extending from the coastline of a state’s mainland and from the coastline of any territorial land features. UN Convention on the Law of theSea, ‘‘Part 5: Exclusive Economic Zone.’’

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in a 2014 speech said, ‘‘Japan and Taiwan . . . showed last year it’s
possible to promote regional stability despite conflicting claims.’’ 87
In an updated fisheries agreement reached in March 2015, eachside agreed to several amendments designed to avoid frictions bytaking turns operating in certain contested areas of the East China
Sea and increasing the distance between boats.88 Taiwan’s fisheries
agreements with Japan provide an example for other claimants in
the region of setting aside disputes and realizing mutual benefits
through sharing resources.
Over the past two years as tensions in the South China Sea increased, Taiwan has made helpful contributions to encourage cooperation among claimants. As one of six claimants of islands andfeatures in the South China Sea,* Taiwan administers and occupies
Itu Aba Island (also known as Taiping)—the largest natural landfeature in the Spratly Island archipelago and the wider South
China Sea—and Pratas Island (also known as Dongsha).89 In May
2015, President Ma announced the South China Sea Peace Initiative, a proposed framework similar to his 2012 initiative in the
East China Sea.90 This new framework calls for all claimants in
the South China Sea to exercise restraint; respect the spirit ofinternational law and seek peaceful settlement through dialogue;
ensure all concerned parties are involved; shelve sovereignty disputes and establish a regional mechanism for joint resource development; and establish coordination and cooperation mechanisms.91
The South China Sea Peace Initiative demonstrates Taiwan’s goodwill and cooperative intentions with its maritime neighbors while
making China’s position look increasingly recalcitrant. As the East
China Sea Peace Initiative contributed to finalizing a TaiwanJapan fisheries agreement, this new Initiative could help lead to abreakthrough in negotiations that have been ongoing since 2013
between Taiwan and the Philippines on a similar fisheries agreement.92
Taiwan also has taken steps to clarify its claims in the East andSouth China seas in accordance with the UN Convention on the
Law of the Sea and international law.† For example, Taiwan recently asserted its claims are derived from land features with thesurrounding waters granted through the Law of the Sea, as opposed to China’s expansive sovereignty claims to nearly all of theland and sea within its nine-dash line ‡ claim.§ Such statements* Other claimants in the South China Sea are Brunei, China, Malaysia, the Philippines, andVietnam.
† DPP Chairperson Tsai has not addressed all of Taiwan’s claims within its 11-dash line, but
she has said that she would pursue dialogue with all claimants in the South China Sea anddefend Taiwan’s claims of the Senkaku Islands and Itu Aba Island. Ralph Jennings, ‘‘Taiwan
Candidate Proposes Dialogue on S. China Sea,’’ Voice of America, September 22, 2015; Lao loksin, ‘‘Tsai Reiterates DPP Stance on Diaoyutai Islands,’’ Taipei Times, July 30, 2015; and Ko
Shu-ling, ‘‘FOCUS: Taiwan Ponders Dash-line Claim Over South China Sea,’’ Kyodo News
(Japan), June 29, 2015.
‡ Although China’s claim in the South China Sea is often depicted by a ‘‘nine-dash line,’’ Beijing in recent years has issued new maps with ten dashes. Ishaan Tharoor, ‘‘Could this Map
of China Start a War?’’ Washington Post, June 27, 2014; Euan Graham, ‘‘China’s New Map: Just
another Dash?’’ Australian Strategic Policy Institute (Strategist blog), September 17, 2013.
§ In a September 2014 speech, President Ma said, ‘‘[T]he principle that sovereignty over land
determines ownership of the surrounding waters, which is set out in [UNCLOS], applies to disputes concerning sovereignty over both land and sea.’’ Other official statements reflect Taiwan’s
increasing clarity on its own claims within its 11-dash line—serving as the basis for Taiwan’s
claims in the South China Sea since 1947. Lynn Kuok, ‘‘Times of Change: Taiwan’s Evolving
Position in the South China Sea and Why Other Actors Should Take Notice,’’ Brookings InstituContinued

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can help encourage other claimants to follow international law anddefine their own claims, thereby clarifying intentions and avoiding
misunderstanding. Some observers have noted that Taiwan could
contribute more to managing territorial disputes in the South
China Sea by clarifying its 11-dash line in a way that puts politicalpressure on China to clarify its own claims, benefiting other claimants and the United States.93 Bonnie Glaser, senior advisor for
Asia at CSIS, argued in her testimony to the Commission, ‘‘. . . [If]Taiwan were to say, ‘We claim the following land features,’ which
would probably be all of them within the dashed line, . . . it would
not include all of the waters. It would not provide jurisdiction over
all of the energy exploitation or all of the fishing, for example.’’ According to Ms. Glaser, taking such a position would make China’s
expansive claim appear all the more extreme by comparison.94

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Taiwan Military and Security Issues
Cross-Strait Military Balance
Although relations between Taipei and Beijing have improved
since 2008, China’s military modernization continues to focus on
improving its ability to conduct military operations against Taiwan
and deter the United States from assisting with Taiwan’s defense.95 Over the past decade, the balance of power across the Taiwan Strait has shifted significantly in China’s favor; China now enjoys both a quantitative and a qualitative advantage over Taiwan
and is capable of conducting a range of military campaigns against
Taiwan.*• China’s offensive missile forces, known as the Second Artillery,
have a large and sophisticated arsenal of ballistic and cruise
missiles, including more than 1,200 short-range ballistic missiles (SRBM) and 200–500 ground-launched land-attack cruise
missiles (LACM) † that are designed primarily to strike Taiwan.96 Although China’s inventory of SRBMs has only increased slightly since the late 2000s after a rapid expansion
earlier in the decade, the force has become more lethal as
China has gradually replaced older missiles lacking a true precision-strike capability with new SRBMs and more recent generations of existing SRBMs that feature longer ranges and improved accuracies and payloads. In a potential military conflict,tion, May 2015, 6–8; Office of the President, Republic of China (Taiwan), ‘‘Spotlight Issues: Safeguarding Sovereignty, Shelving Disputes, Pursuing Peace and Reciprocity, and Promoting Joint
Exploration and Development,’’ September 9, 2014.
* Some analysts argue, however, that the Taiwan military is superior to the PLA in certain
areas. Ian Easton, research fellow at the Project 2049 Institute, asserts that the Taiwan military
has a qualitative advantage over the PLA due to the Taiwan military’s training alongside theUnited States, the PLA’s lack of professionalism, and widespread corruption in the PLA. Ian
Easton (Research Fellow, Project 2049 Institute), August 11, 2015, interview with Commission
staff.
† Official U.S. and Taiwan estimates of China’s number of SRBMs and LACMs vary. For example, Defense Intelligence Agency Director Lieutenant General Vincent R. Stewart in his February 2015 testimony to Congress said, ‘‘[China has] more than 1,200 conventional short-range
ballistic missiles deployed opposite Taiwan . . . .’’ According to the Taiwan Ministry of National
Defense’s (MND) August 2015 report on China’s military power for the Legislative Yuan, China
increased its ballistic and cruise missile force from 1,600 to 1,700 over the past year and increased the number of missiles deployed against Taiwan from 1,400 to 1,500. H.H. Lu and Lillian Lin, ‘‘MND Reports China Deploying More Missiles Against Taiwan,’’ Focus Taiwan, August
31, 2015; Senate Armed Services Committee, Hearing on Worldwide Threats, oral testimony ofVincent R. Stewart, February 26, 2015.

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China could quickly conduct SRBM and LACM attacks against
Taiwan’s key defense nodes, including its air defense systems,
air bases, naval ports, and command and control infrastructure.97 (For more information on China’s missile forces, see
Chapter 2, Section 3, ‘‘China’s Offensive Missile Forces.’’)• The People’s Liberation Army (PLA) Air Force and Navy haveabout 2,100 combat aircraft, 330 of which operate from permanent bases in the eastern half of China, allowing them to conduct operations around Taiwan without aerial refueling.*
About 600 of China’s combat aircraft are modern,† while fewer
than 330 of Taiwan’s combat aircraft are modern.98 In addition, Russia in April 2015 confirmed the sale of four to six Russian S–400 surface-to-air missile systems to China and plans
to deliver them in 2017.99 The S–400 will increase the rangeof China’s surface-to-air missile force from 300 km (approximately 186 mi) to 400 km (approximately 249 mi)—enough tocover all of Taiwan ‡—and likely will feature an improved ballistic missile defense capability over China’s existing surfaceto-air missile systems, though the platform has yet to demonstrate such a capability.100 As China pursues the S–400, it
also is developing its next-generation indigenous surface-to-air
missile, the HQ–19, which likely will have features and range
similar to the S–400.101

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• The PLA Navy has more than 300 surface combatants, submarines, and missile-armed patrol craft.102 As China’s naval
modernization continues, an increasing percentage of theseships will be modern § and feature advanced weaponry. Taiwan, on the other hand, has 92 naval combatants, comprisedof 4 submarines and 88 surface ships.103 Taiwan’s submarine* Moreover, China—using its robust military, civilian, and reserve airfield network—could forward deploy hundreds of additional combat aircraft on short notice in a conflict scenario. U.S.
Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, May 2015, 80; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China
2014, June 2014, 78; and U.S.-China Economic and Security Review Commission, Hearing on
China’s Military Modernization and Its Implications for the United States, written testimony of
Lee Fuell, January 30, 2014.
† ‘‘Modern’’ combat aircraft are defined as possessing advanced avionics and weapons systems.
These aircraft include the J–10, J–11, JH–7, Su-27, and Su-30. For more information on theCommission’s definition of ‘‘modern’’ combat aircraft, see U.S.-China Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 309.
‡ China would have to deploy the battalions opposite Taiwan to have the range necessary tocover Taiwan. It is unclear whether the sale included the missiles themselves, and if so, what
their capabilities are. J. Michael Cole, ‘‘Alarm over China’s S–400 Acquisition is Premature,’’Diplomat, April 22, 2015; Zackary Keck, ‘‘Putin Approves Sale of S–400 to China,’’ Diplomat,
April 11, 2014; Wendell Minnick, ‘‘China’s New Jet, Radar Complicate U.S. Posture,’’ Defense
News, July 6, 2013; and Wendell Minnick, ‘‘Time Running Out for Taiwan if Russia Releases
S–400 SAM,’’ Defense News, May 25, 2013.
§ In reference to China’s submarine force, the term ‘‘modern’’ is used in this Report to describe
a second-generation submarine that is capable of employing antiship cruise missiles or submarine-launched intercontinental ballistic missiles. These include the SHANG nuclear attack
submarine (SSN), YUAN SSN, SONG diesel attack submarine (SS), KILO 636 SS, and JIN nuclear ballistic missile submarine (SSBN). In reference to China’s surface force, the term ‘‘modern’’ is used to describe a surface ship that possesses a multi-mission capability, is armed withmore than a short-range air defense capability, and has the ability to embark a helicopter.
These include the following: LUHU destroyer (DD), LUHAI DD, LUZHOU guided missile destroyer (DDG), LUYANG I/II/III DDG, Sovremenny I/II DDG, JIANGWEI I/II frigate (FF),JIANGKAI I FF, and JIANGKAI II guided missile frigate. For more information on the Commission’s definition of ‘‘modern’’ submarines and surface ships, see U.S.-China Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 300.

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fleet is particularly weak compared to that of China; * it includes two former U.S. boats that were built in the 1940s andtransferred to Taiwan in the 1970s. In a military contingency
with Taiwan, China could use its more numerous and advanced platforms to conduct a range of military courses of action, including a maritime blockade or quarantine, air and missile attacks, and amphibious invasions of Taiwan-held islandsin the Taiwan Strait and South China Sea. China is actively
pursuing amphibious capabilities, but does not have the necessary platforms needed to conduct a large-scale amphibious
invasion of Taiwan.104
China continues to prepare for a Taiwan contingency through avariety of exercises involving amphibious platforms, missiles fired
into Taiwan’s nearby waters, and combat aircraft flying close to
Taiwan’s airspace.105 In July 2015, one exercise involved PLA soldiers raiding a building similar in appearance to Taiwan’s presidential palace.106 In addition to a formal protest by the Taiwan
government, a Taiwan Ministry of National Defense (MND) spokesperson said, ‘‘[The exercise was] unacceptable for the Taiwanesepublic and the international community.’’ 107 J. Michael Cole, editor-in-chief of Thinking Taiwan, said that the exercise
strikes at the heart of what is recognizable to ordinary Taiwanese—downtown Taipei. . . . By making the threat more
recognizable and immediate than missiles fired off Taiwan’s northern and southern tips, or drills simulating anamphibious assault, Beijing may hope to engage ordinary
Taiwanese not at the intellectual and abstract level, but onan emotional one.108
Despite its growing military disadvantage relative to China, Taiwan’s defense budget has stagnated. Over the last decade, China
has boosted its defense budget in nominal terms by double digits
almost every year,† increasing the official defense spending gap between Taiwan and China in 2015 to more than $132 billion (seeFigure 2).‡ Taiwan’s announced 2015 defense budget increased, albeit slightly, for the first time since 2012. From 2009 to 2014, Taiwan’s defense budget declined by an average of 1.6 percent annually.§ 109 Despite a further increase in Taiwan’s announced 2016
defense budget, spending on the military is projected to fall to 1.8
percent of GDP, the lowest such level in over a decade.110 This
stagnation is due to a number of factors, including warming cross* For more information on Taiwan’s submarine fleet and indigenous production plans, see additional discussion later in this section.
† This measurement is according to China’s announced defense budgets, not actual aggregate
spending. China’s announced budget omits major defense-related expenditures such as purchases of advanced weapons, research and development programs, and local government support
to the PLA. For more information, see Chapter 2, Section 1, ‘‘Year in Review: Security and Foreign Affairs.’’‡ China’s announced defense budget in 2015 was RMB 886.9 billion ($141.9 billion) comparedto Taiwan’s budget of NTD (New Taiwan dollars) 319.3 billion ($10.7 billion). Xinhua (English
edition), ‘‘China 2015 Defense Budget to Grow 10.1 Pct., Lowest in 5 Years,’’ March 5, 2015;
China Post (Taiwan), ‘‘Taiwan’s Proposed Defense Budget for 2015 Sees $330 Million Increase,’’
August 30, 2014.
§ According to Mr. Easton, Taiwan’s defense budget, like China’s, is significantly underreported. However, unlike China’s defense budget, there are no outside estimates of Taiwan’s
real defense budget. Ian Easton (Research Fellow, Project 2049 Institute), interview with Commission staff, August 11, 2015.

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Strait ties that have reduced public perceptions of China’s military
threat to Taiwan; growing competition for government resources,
particularly from social welfare programs; increasing government
debt; partisan political wrangling; and uncertainty about the futureof U.S. arms sales to Taiwan, particularly requested sales that Taiwan factors into its budgets but are not completed due to delays
resulting from unresolved issues on both sides.111
Figure 2: Gap between Announced Defense Budgets of China and Taiwan(2005–2015)

Note: These numbers represent both China’s and Taiwan’s announced official defense budgets,not actual aggregate defense spending. China’s figures are converted from RMB into U.S. dollars
based on China’s year-end nominal exchange rate.
Source: The following sources were used to calculate China’s defense budget: China’s Ministryof Finance; Xinhua (English edition), ‘‘China 2015 Defense Budget to Grow 10.1 Pct, Lowest in
5 Years,’’ March 5, 2015; Xinhua (English edition), ‘‘China Defense Budget to Increase 12.2 Pct
in 2014,’’ March 5, 2014; Xinhua (English edition), ‘‘China Defense Budget to Increase 10.7 Pct
in 2013: Report,’’ March 5, 2013; and Dennis J. Blasko, et al., ‘‘Defense-Related Spending in
China: A Preliminary Analysis and Comparison with American Equivalents,’’ United StatesChina Policy Foundation, November 2006, 19. The following sources were used to calculate Taiwan’s defense budget: China Post (Taiwan), ‘‘Taiwan’s Proposed Defense Budget for 2015 Sees
$330 Million Increase,’’ August 30, 2014; Shirley Kan, ‘‘Taiwan: Major U.S. Arms Sales since
1990,’’ Congressional Research Service, August 29, 2014, 34.

• Surface-to-Air Missiles: In December 2014, Taiwan’s ChungShan Institute of Science and Technology confirmed it will upgrade the Tien Kung III, the third-generation of its family of

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Furthermore, Taiwan’s unique status and China’s insistence onthe ‘‘one China’’ principle make it difficult for Taiwan to procurearms from most producers. Taiwan also lacks the ability to indigenously design and produce certain weapons systems.112 Under such
constraints, Taiwan has mainly relied on the United States forarms and military equipment.
Nevertheless, Taiwan has sought to improve its position vis-à-vis
China in recent years by producing or acquiring military platforms
and weapon systems. Major indigenous programs under development or recently completed include the following:

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indigenous surface-to-air missiles, to extend the missile’s range
from 150 km (approximately 93 mi) to over 200 km (approximately 124 mi), potentially reaching mainland China.113 Production of the missile, which is capable of defending against
short- and medium-range ballistic missiles, is scheduled tooccur from 2015 through 2024.114 The Tien Kung III will complement Patriot missile systems, which Taiwan acquired fromthe United States to defend Taiwan’s air space, providing Taiwan greater air coverage in a potential cross-Strait conflict.115• Combat Support Ships: In January 2015, the Taiwan Navycommissioned its second supply vessel, the Panshih. The ship
has improved functionality and versatility over Taiwan’s othersupply ship, including its advanced medical equipment that
could be used for humanitarian assistance and disaster relief
missions. In a cross-Strait military conflict, this ship would enable Taiwan to better replenish its frigates and destroyers withammunition, fuel, and other supplies.116• Missile Corvette: In March 2015, the Taiwan Navy commissioned the TUO JIANG, its first ship in a new class of catamaran-style missile corvettes. Taiwan may build up to 11 moreof these ships. The new corvette has better range, endurance,and sea-keeping ability than Taiwan’s other patrol ships, andis equipped with 16 antiship cruise missiles. The ship enhances the survivability and lethality of Taiwan’s antisurface
force in a potential cross-Strait conflict and increases the Taiwan Navy’s ability to patrol the East and South China seas.117• Coast Guard Cutters: In June 2015, the Taiwan Coast Guard
Administration commissioned two helicopter-capable cutters.
These ships are the largest of Taiwan’s eight-ship Coast Guard
fleet, and each is armed with one 40 millimeter gun, two 20
millimeter guns, and a water cannon.118 The cutters will enhance the Coast Guard’s maritime patrol capabilities with therange necessary to conduct missions in the East and South
China seas.119

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• Unmanned Aerial Vehicles (UAVs): In August 2015 at the biennial Taipei Aerospace and Defense Technology Exhibition, Taiwan’s Chung-Shan Institute of Science and Technology unveiled a prototype of its largest UAV to date—more than double the size of any model in service.120 Although its specifictechnical details were not disclosed, the UAV has a medium
range and long endurance; can carry multiple payloads; and isdesigned for intelligence, surveillance, and reconnaissance(ISR) missions. When it enters service, the UAV will complement Taiwan’s operational fleet of 32 UAVs and will enhance Taiwan’s ISR capabilities.121
Select military equipment Taiwan is acquiring or seeking to acquire from the United States includes the following (see also thediscussion on arms sales, military-to-military contact, and U.S.-Taiwan defense relations in ‘‘U.S.-Taiwan Relations,’’ later in this section):

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• Black Hawk Helicopters: Between December 2014 and May
2015, Taiwan received eight UH–60 Black Hawk helicopters,
the first shipments of a U.S. arms package worth $3.1 billion
announced in 2010. A total of 60 helicopters are set to betransferred in eight subsequent batches with the final delivery
set for 2019.122 The helicopters reportedly will be equippedwith radar warning receivers, infrared countermeasure sets,
missile warning systems, Gatling-type guns, and data link systems.123 According to a Taiwan Army official, the UH–60s will
replace the aging UH–1H helicopter fleet and will be used primarily to transport supplies and personnel. Taiwan’s National
Airborne Service Corps reportedly will use 15 of the Black
Hawks for humanitarian assistance and disaster relief missions.124 In a potential PLA invasion of Taiwan territory, thehelicopters could be used to counter a PLA landing force andcoordinate command and control and special operations missions.125• OLIVER HAZARD PERRY-Class Guided-Missile Frigates: In
December 2014, U.S. President Barack Obama signed legislation authorizing the sale of four decommissioned and unarmed
PERRY-class frigates to Taiwan, but the Administration has
not formally notified Congress of the sale as of the writing of
this Report.126 Taiwan in April 2014 announced that it would
only buy two ships due to budget constraints.127 The ships,
scheduled to arrive in Taiwan starting in 2016, will modernize
and supplement Taiwan’s fleet of six KNOX-class frigates.
They will also help offset the retirement of two KNOX-classfrigates and the eventual decommissioning of all KNOX-classfrigates.128 The PERRY-class frigates, depending on the equipment and arms with which they are outfitted,* could be used
for antisubmarine, antisurface, and limited antiaircraft warfare in a conflict.129• F–16 Fighter Upgrade: Over the past year, the United States
and Taiwan have moved forward with the planned mid-life upgrade of Taiwan’s existing fleet of 145 F–16 A/B fighter aircraft. In December 2014, the United States awarded Lockheed
Martin a $308 million contract to supply active electronicallyscanned array radars for Taiwan’s F–16s.130 According to thedevelopment plan, the Taiwan Air Force will send two F–16s
to Lockheed Martin to install and test the radar before upgrading the rest of Taiwan’s fleet in Taiwan over the second halfof 2016.131 With these upgrades, Taiwan’s F–16 fleet will bebetter able to track China’s advanced combat aircraft andground-based targets.132• Submarines: In March 2015, President Ma reiterated his support for Taiwan to pursue an indigenous submarine program,following more than a decade of attempts to acquire diesel-elec* The Taiwan Navy will probably outfit the ships with a combination of indigenous and foreign
weapons systems, including surface to air missile systems, antiship missiles, and artillery. Notably, five of Taiwan’s eight domestically built CHENG KUNG-class frigates, based on PERRY-classfrigates, already carry advanced Hsiung Feng III antiship cruise missiles that reportedly havea range of 81 nm. IHS Jane’s, ‘‘Jane’s World Navies—Taiwan,’’ June 18, 2015, 20; Charles Au,‘‘Taiwan Releases First Firing Footage of HF–3 ‘Carrier Killer,’ ’’ IHS Jane’s, December 8, 2014.

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tric submarines from abroad.* The indigenous submarine program enters its three-year project design phase in 2016, but
Taiwan has already identified over 20 U.S. and European companies interested in assisting Taiwan shipbuilding companies.133 As mentioned previously, Taiwan has four submarines;
two are decommissioned U.S. Navy GUPPY-class submarines(they have undergone upgrades since the 1940s) used only fortraining.134 The Taiwan Navy’s already limited ability to conduct undersea warfare against China’s expanding fleet of modern surface ships and submarines will continue to erode as Taiwan’s submarine force ages.
• P–3C Orion Maritime Patrol Aircraft: Taiwan is scheduled toaccept its final delivery of four P–3C antisubmarine aircraft by
the end of 2015, which follows its first shipment of eight that
arrived in 2013. Originally purchased from the United Statesin 2007, the P–3Cs will replace the Taiwan Air Force’s fleet of
11 S–2T antisubmarine aircraft that have been in service forover 40 years.135 The P–3C will increase the capabilities andendurance of the military’s fixed-wing maritime patrol aircraft
force, improving Taiwan’s ability to perform antisubmarine
warfare and ISR missions.136

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Status of Taiwan’s Defense Reforms
As part of its military modernization effort, Taiwan is transitioning its conscripted military force to an all-volunteer army by
2017.† The goal of this effort is to create a ‘‘small but smart andstrong force’’ in response to ‘‘the requirement for high quality manpower under advanced technological conditions and economic andsocial changes.’’ 137 Taiwan’s transition has been far more costly
than expected, increasing budgetary pressure on research and development (R&D) as well as operations and maintenance.138 To
find additional savings, Taiwan in 2013 decided to reduce its active
duty force from 275,000 to 215,000 by 2015,139 and now plans to
reduce the force to 170,000 by the end of 2019.140
Reversing the trend of missing recruitment goals for its active
duty force by wide margins from 2011 to 2013,141 Taiwan in 2014
recruited over 15,000 men and women, exceeding its target of about
10,500. Yet, Taiwan will still need to exceed goals through 2017 tomeet the already reduced active duty target of 170,000.142 To encourage enrollment and retention, Taiwan has announced a varietyof new incentives, such as increased wages, service-extending stipends, and expanded base privileges.143 Although these new benefits show promise in reaching recruitment goals, they could also
further increase the financial burden of the all-volunteer force by* In 2001, then U.S. President George W. Bush proposed to help Taiwan acquire eight dieselelectric submarines, but the proposal has been delayed due to political and cost disagreements
on both sides. The United States also has not built a conventional submarine in over 40 years.
Taiwan Today, ‘‘Ma Pledges Support for Homegrown Naval Vessels,’’ April 1, 2015; Agence
France-Presse, ‘‘Taiwan Kicks Off Plan to Build Its Own Submarines,’’ December 29, 2014.
† Taiwan had originally planned to complete the transition at the end of 2014, but shifted thetimeline to 2017 due to lower than anticipated recruitment numbers. As part of the transition,
men born after 1994 are now required to undergo four months of active duty military service
and then enter Taiwan’s reserve system. Previously, Taiwan conscripts served one year as active
duty. Ministry of National Defense (Taiwan), National Defense Report 2013, October 2013, 95–
96; Chris Wang, ‘‘Date for All Volunteer Military Delayed,’’ Taipei Times, September 13, 2013.

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comprising a larger percentage of the overall defense budget. In asetback to Taiwan’s planned transition, the MND in August 2015
announced it would be unable to end conscription in 2016 for men
born before 1994, as previously announced. The ministry said that
recruitment goals fell short for voluntary enlistees in 2015 andtherefore decided to conscript in 2016 approximately 23,100 men
for one year of compulsory active duty service to meet defense
needs.144
The DPP Unveils Its Defense Reform Strategy in
Defense Policy Blue Papers
In May 2015, the New Frontier Foundation, a think tank established by the DPP, released four new defense policy blue papers * articulating the DPP’s views on Taiwan defense reform.
The blue papers, along with eight others released since June
2013, outline a defense strategy that focuses on revitalizing Taiwan’s indigenous defense industry, supporting the all-volunteer
force transition with increased funding, and building and acquiring asymmetric platforms.145 The DPP particularly emphasizes
the need to invest in R&D to upgrade Taiwan’s military equipment. Complementing its pledge of restoring defense spending to
3 percent of GDP annually,† the DPP advocates for 70 percent of
all new defense spending to go toward ‘‘military investments,’’ including procurement of weapons and equipment, defense construction, and R&D.146
The DPP by 2020 aims to have no less than 60 percent ofthese ‘‘military investments’’ spent on indigenous R&D.147 Like
the KMT, development of the indigenous submarine program is
the DPP’s top priority for the defense industry; the DPP has
outlined a 23-year development plan.148 In addition, the DPPprioritizes other indigenous solutions, such as unmanned aerial
vehicles, unmanned underwater vehicles, and short take-off andvertical landing fighter aircraft.149

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To strengthen Taiwan’s asymmetric capabilities, the DPP supports creating a new cybersecurity service for the military; bolstering missile defense capacity; building improved combat survivability against missile strikes; restructuring the ground force
into specialized rapid response units; and maintaining capabilities in air and sea control.150 Should the DPP win the January
2016 presidential election, it plans to initiate an open defense
policy discussion and issue its own quadrennial defense review
within a year.151* The four defense blue papers cover Taiwan’s military capabilities, defense information security, veteran’s affairs, and the indigenous defense industry. New Frontier Foundation, ‘‘Press
Conference Announcing the Publication of Defense Policy Blue Papers No. 9–12,’’ May 25, 2015.
Staff translation.
† This pledge restates the DPP’s commitment outlined in its first blue paper in June 2013.
The KMT similarly pledged to raise defense spending to three percent of GDP prior to the 2008
election, but did not fulfill its promise. New Frontier Foundation, Defense Blue Paper #1: DPP’s
Defense Agenda, June 2013, 19; Ralph Jennings, ‘‘Taiwan’s Ma Wins Election,’’ Reuters, March
22, 2008.

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Taiwan Military Training and Activities
The Taiwan military routinely conducts a range of exercises tomaintain combat readiness; integrate new weapons systems andtactics; test and improve its capabilities; and demonstrate to the
Taiwan people, China, and others that it has a credible deterrence
capability. In 2015, select major exercises and activities included
the following:• Naval Combat Readiness Exercise: On January 1–2, Taiwan
conducted an exercise with 13 vessels and 2 attack helicopters
off its southwest coast primarily to test its new TUO JIANGclass stealth missile corvette that had been commissioned into
service just one week before the exercise.152 The exercise simulated countering invading enemy naval forces, such as submarines and attack boats.153• Planned Air Surveillance Patrols: According to Taiwan’s MND,
P–3C antisubmarine aircraft currently conduct ISR missions
close to Taiwan’s coast and in airspace within its air defense
identification zone.* In April, the MND for the first time confirmed P–3C antisubmarine aircraft patrols would eventuallyextend to areas in the South China Sea without providing a
specific timeline. The expanded mission would enhance Taiwan’s ability to monitor Chinese naval activity in the South
China Sea.154• Han Kuang Exercises: Han Kuang is Taiwan’s most important
set of joint exercises; they have been held annually at the national level since 1984.155 For the first phase of the exercise in
May, the Taiwan military simulated rapid battle preparation,
electronic warfare, and cyber attacks.156 In the second phaseof the exercise in September, Taiwan conducted live-fire drills
simulating countering a Chinese invasion. The drills included
an antiamphibious landing exercise and tested Taiwan’s mostadvanced platforms.157 According to a senior MND official, theministry signed a five-year contract with the United States
worth $3.1 million, paying for the services of the U.S. military
to advise the Han Kuang exercises from 2015 through 2019.158
Previously, U.S. military representatives only observed the exercises. The senior MND official said, ‘‘The U.S. will advise instrategic planning and operational development of combat
units for Taiwan’s defense against hostile actions in the Taiwan Strait.’’ 159

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Cross-Strait Espionage
Expanding cross-Strait ties promote not only increasing economic
cooperation with China but also increase Taiwan’s vulnerability to
Chinese espionage. Increased travel between Taiwan and China* An air defense identification zone is a publicly-declared area established in international airspace adjacent to a state’s national airspace, in which civil aircraft must be prepared to submit
to local air traffic control and provide aircraft identifiers and location. Its purpose is to allow
a state the time and space to identify the nature of approaching aircraft prior to entering national airspace in order to prepare for defensive measures if necessary. U.S. Code of Federal
Regulations, 14 C.F.R. § 99.3 (2013); U.S. Department of Defense, ‘‘2.7.2.3 Air Defense Identification Zones in International Airspace,’’ in The Commander’s Handbook on the Law of Naval Operations (July 2007), p. 2–13; and Ruwantissa Abeyratne, ‘‘In Search of Theoretical Justification
for Air Defence Identification Zones,’’ Journal of Transportation Security (September 2011).

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heightens the risk of Taiwan defense secrets being compromised, as
China has improved access to Taiwan with better opportunities to
conduct intelligence operations against Taiwan citizens both in Taiwan and China.*
After 15 cases of alleged spying in 2014, nearly all involving active or retired Taiwan military officers, espionage continues toproliferate.160 The September 2014 arrest of retired PLA captainand intelligence officer Zhen Xiaojiang—the first mainland Chinese
spy to be apprehended in Taiwan in decades—uncovered the largest cross-Strait spy ring in years.161 In September 2015, Mr. Zhen
received a four-year prison sentence, while five retired Taiwan
military officers recruited by Mr. Zhen to spy for the Mainland
were handed more lenient sentences.162 Since 2005, Mr. Zhen allegedly acquired classified information on Taiwan’s Mirage 2000 aircraft, ultra-high frequency radar systems, and other weapons platforms.163 In another case, a retired vice admiral and deputy commander of the Taiwan Navy Ko Cheng-sheng was found guilty ofespionage and sentenced in October 2014 to 14 months in prison.
Vice Admiral Ko was one of the highest-ranking retired Taiwan
military officers to be caught spying for China.164
China’s increased efforts to acquire Taiwan defense secrets havesignificant implications for Taiwan’s security. In January 2015,
Taiwan Defense Minister Kao Kuang-chi said, ‘‘[T]he military[should] heighten its guard against spies, as China has not relented in its efforts to infiltrate Taiwan’s military as exchanges
across the Taiwan Strait increase.’’ 165 As noted by retired Vice
Minister of National Defense Lin Chong-pin, exposure of Beijing’s
successful infiltration of Taiwan defense systems supplied or marketed by the United States could give pause to U.S. defense officials regarding future arms sales to the island.166 Aside from traditional reasons for espionage, China also seeks to weaken the morale of the Taiwan military. Each spy case revealed by Taiwan has
the potential to achieve psychological benefits for Beijing, creating
an environment where China’s capture of Taiwan’s defense secrets
could be perceived as an inevitability.167

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Computer Network Security
Taiwan faces a growing problem of cyber attacks—increasingly
from China—that threaten the security of sensitive information.
According to U.S. cybersecurity firm FireEye, Taiwan in 2014 was
the third most targeted country in the Asia Pacific region in termsof hacking attempts to steal data.† In March 2015, senior Taiwan
intelligence officials publicly identified what appears to be a PLA
cyberespionage unit based at China’s Wuhan University responsible for cyber activities against Taiwan. The unit is reportedly
part of the Sixth Bureau of the PLA General Staff Department’s
Third Department, one of the 12 bureaus under the Third Depart* In 2014, nearly four million people from mainland China traveled to Taiwan, up from approximately three million visitors in 2013. Tourism Bureau (Taiwan), ‘‘Visitors by Residence,
2014.’’ August 17, 2015; Wendell Minnick, ‘‘Chinese Spies Expand Operations in Taiwan,’’ Defense News, January 24, 2015; and J. Michael Cole, ‘‘Why Spy on Taiwan when Taiwan Gives
Information Away for Free?’’ Diplomat, March 12, 2014.
† Only South Korea and Hong Kong faced a higher volume of attempted cyber intrusions in2014. Want China Times (Taiwan), ‘‘Taiwan Third Most Targeted Country by Cyber Attacks in
Asia,’’ April 3, 2015.

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ment whose mission is technical reconnaissance and digital information warfare.168 According to the National Security Bureau, oneof Taiwan’s major intelligence agencies, cyber attacks linked toChina in 2013 alone targeted the agency over seven million times
and the MND over one million times. This marked a significant increase in volume from previous years.169
In response, Taiwan is working to improve its defenses by creating a new cybersecurity department responsible for securing thegovernment’s information security and key network infrastructurethat would also have authority over military cyber defense.170
Moreover, Taiwan has asked to join U.S.-led Cyber Storm, a multilateral cybersecurity exercise held every two years. Taiwan Vice
Premier Simon Chang in a March 2015 interview noted that Taiwan’s participation could help improve its ability to protect against
Chinese cyber intrusions.171 The first Cyber Storm exercise in 2006
involved only U.S. government and private sector participants, but
it has since expanded in size and scope to become the most extensive government-sponsored cybersecurity exercise of its kind. In
Cyber Storm IV, the most recent exercise held in several stages between 2011 and 2014, participants aimed to ‘‘assess and strengthen
cyber preparedness, examine incident response processes in response to ever-evolving threats, and enhance information sharing
among federal, state, international, and private sector partners.’’ 172
The exercise involved 11 countries that are all members of theInternational Watch and Warning Network (a framework for cooperation on cyber situational awareness and incident response), of
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U.S.-Taiwan Relations
Diplomatic Affairs
The U.S. and Taiwan governments continue to make progress onbilateral initiatives and areas of mutual interest. In February
2015, the United States issued new license plates to Taiwan’s representatives in the United States similar to those granted to foreign diplomats, as a follow-on to an agreement reached in 2013.
The license plates provide previously unavailable immunity privileges to Taiwan representatives.173 U.S. and Taiwan officials inJune 2015 signed a memorandum of understanding to increase cooperation in international public health, humanitarian assistance,and other global issues.174 The United States also hosted DPP
Chairperson Tsai on her June 2015 U.S. visit, and the U.S. government has said it would welcome other candidates if they visit theUnited States.175 In addition to meeting with senior members ofCongress, Chairperson Tsai visited the White House and U.S. Department of State for a series of ‘‘very successful, very positive’’
closed-door meetings.† 176 In response to the visit, a spokesperson* Participants included Australia, Canada, France, Germany, Hungary, Japan, the Netherlands, Norway, Sweden, Switzerland, and the United States. U.S. Department of Homeland Security, ‘‘Cyber Storm: Securing Cyber Space,’’ June 17, 2015; UN Terminology Database, ‘‘International Watch and Warning Network.’’† Due to the unofficial nature of the U.S.-Taiwan relationship, the U.S. government limits contacts between U.S. and Taiwan officials at certain levels (for example, the United States rarely
sends cabinet-level officials to Taiwan, and the Commission has been told that some senior level
U.S. government officials are unable to visit Twin Oaks, Taiwan’s de facto embassy in Washington, DC).

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for China’s Taiwan Affairs Office said, ‘‘The [meetings] went
against the peace and stability of the Taiwan Strait and harmed
peaceful development of cross-Strait ties. [They] sent a wrong signal to the island’s separatist forces.’’ 177 Beijing’s response demonstrated its uneasiness regarding the DPP.
Economic and Trade Relations
In 2014, U.S.-Taiwan trade reached a record high, increasing by
6 percent to $67.4 billion.178 Also in 2014, Taiwan became thetenth largest trading partner of the United States, passing both
India and Saudi Arabia. In addition, the United States moved
ahead of Japan to become Taiwan’s second largest trading partner.179 Taiwan exports to the United States mostly consist of manufactured parts and accessories, including cell phones, motor vehicle parts and accessories, and office machine parts and accessories.
By contrast, U.S. exports to Taiwan are diversified across a number of sectors; they mainly include machinery to manufacture semiconductors and liquid crystal display (LCD) panels; agriculture;
and arms sales.180 (For more information on arms sales, see ‘‘Military and Security Relations’’ below.)
Although U.S.-Taiwan economic ties remain strong, substantive
progress on ongoing trade and investment negotiations has
slowed.181 In the absence of official relations, both sides discuss bilateral economic issues through the Trade and Investment Framework Agreement (TIFA), a framework established in 1994. Taiwan
Economic Affairs Minister John Deng said the U.S. focus on completing TPP and trade promotion authority negotiations postponed
the TIFA meeting scheduled for April 2015.182 Nevertheless, Assistant Secretary of State for Economic and Business Affairs
Charles Rivkin, the most senior State Department official to visit
Taiwan since his predecessor visited in 2012, said in a June 2015
visit to Taipei that unofficial talks about how to enhance bilateral
economic cooperation occur daily.183 TIFA talks had been on holdfrom 2007 to 2012 due to Taiwan’s refusal to import U.S. beef containing ractopamine, a common feed additive, but resumed in 2013
when the Taiwan legislature partially lifted restrictions.184
In October 2015, U.S. and Taiwan officials held a TIFA meetingin Taipei, which included discussions on a range of bilateral economic issues, including agriculture, pharmaceuticals and medical
devices, intellectual property rights, trade barriers, and investment.185 In addition to these issues, the talks also covered a potential bilateral investment agreement and Taiwan’s aspirations tojoin TPP. The meeting reportedly did not include a discussion
about Taiwan’s restrictions on U.S. pork imports, which remains acontentious area in ongoing negotiations.186 Although Taiwan loosened some restrictions on residual levels of ractopamine in U.S.
beef imports, it maintains these restrictions on pork imports. Since
2012, members of Congress have raised concerns about Taiwan restrictions on U.S. pork. Several key roadblocks to overturning restrictions include pressure from Taiwan’s pork industry and Taiwan citizens’ aversion to the use of ractopamine in pork production.187 Progress on TIFA negotiations could be further constrainedby Congressional demands for the removal of Taiwan’s pork restrictions.

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Military and Security Relations
Taiwan continues to be one of the world’s largest buyers of U.S.
defense exports. Over the last decade, Taiwan has agreed to buy
U.S. arms worth approximately $22.7 billion (see Table 1). However, the Obama Administration has not notified Congress of any
arms sales to Taiwan since 2011. In December 2014, President
Obama signed legislation authorizing the transfer of four PERRYclass frigates to Taiwan, but as of the writing of this Report, theAdministration has yet to notify Congress and, per Taiwan’s request, complete the sale of two of the frigates worth approximately$179 million.188
Table 1:dkrause on DSKHT7XVN1PROD with USCC

Year of
Notification toCongress

U.S. Arms Sales to Taiwan (2005–2015)

Weapon, Item, orService *Projected
Value
(US$
millions)†

Status ‡Delivery2005

10 AIM–9M Sidewinderand 5 AIM–7M Sparrow
air-to-air missiles; continued pilot training andlogistical support for F–16
fighters at Luke Air Force
Base

280

Delivered

2006–2007

2007

218 AMRAAMs and 235
Maverick air-to-ground
missiles for F–16 fighters

421

Delivered

2012

2007

60 AGM–84L Harpoon
Block II antiship missiles

125

Delivered

2010–20122007

144 SM–2 Block IIIA
Standard air-defense missiles for KIDD-class destroyers

272

Delivered

2010–20122007

12 P–3C maritime patrol/
antisubmarine warfare
aircraft

1,960

In progress

2012–2015 189

2007

Patriot configuration 2
ground systems upgrade

939

Unknown

Unknown

2008

330 PAC–3 missiles andfiring units

3,100

In progress

Began in2014 190

2008

32 UGM–84L sublaunched Harpoon Block
II antiship missiles

200

Delivered2013 191

2008

Spare parts for F–5E/F C–
130H, F–16A/B, and Indigenous Defense Fighter
aircraft

334

In progress

N/A* These are the weapons, items, and services as presented to Congress at the time of notification, which may differ from the actual weapons, items and services that the United States
ultimately sells to Taiwan.
† These values represent amounts as presented to Congress at the time of notification, which
may differ from the actual amount Taiwan pays for the weapon, item, or service.
‡ This indicates the most current status as notified to Congress or indicated in media reports, which may differ from the actual status of the sale.

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Table 1:
Year of
Notification toCongress

U.S. Arms Sales to Taiwan (2005–2015)—Continued

Weapon, Item, orService *Projected
Value
(US$
millions)†

Status ‡Delivery2008

182 Javelin missiles andcommand launch units

47

Delivered

2011

2008

Four E–2T aircraft refurbishment and upgrades

250

Delivered2011–2013 192

2008

30 AH–64 Apache helicopters and related ordnance

2,532

Six delivered

2013

2010

114 PAC–3 missiles andfiring units

2,810

In progress

Began in2014 193

2010

60 UH–60M Black Hawk
utility helicopters

3,100

In progress

2014–2019 194

2010

12 ATM–84L and RTM–
84L Harpoon Block II
antiship telemetry missiles

37

Unknown

Unknown

2010

60 MIDS/LVT–1 terminals to improve F–16A/B
C4ISR § systems

340

Unknown

Unknown2010

2 OSPREY-class mine
hunting ships (refurbishment and upgrades)

105

Delivered2012 1952011

145 F–16AB aircraft refurbishment and upgrades

5,300

Not delivered

2016–20172011

F–16 pilot training

500

In progress

N/A

2011

Spare parts for F–16A/B,
F–5E/F, C–130H, and IDF
aircraft

52

In progress

N/Adkrause on DSKHT7XVN1PROD with USCC

* These are the weapons, items, and services as presented to Congress at the time of notification, which may differ from the actual weapons, items and services that the United States
ultimately sells to Taiwan.
† These values represent amounts as presented to Congress at the time of notification, which
may differ from the actual amount Taiwan pays for the weapon, item, or service.
‡ This indicates the most current status as notified to Congress or indicated in media reports, which may differ from the actual status of the sale.
§ C4ISR refers to command, control, communications, computers, intelligence, surveillance,and reconnaissance.
Source: Except where indicated, this information is compiled from the following sources:
Shirley Kan, ‘‘Taiwan’s Major U.S. Arms Sales since 1990,’’ Congressional Research Service,
August 29, 2014, 58–59; Piin-Fen Kok and David J. Firestein, ‘‘Threading the Needle: Proposals for U.S. And Chinese Actions on Arms Sales to Taiwan,’’ East West Institute, September
2013, 78–79; and U.S.-Taiwan Business Council and Project 2049 Institute, ‘‘Chinese Reactions
to Taiwan Arms Sales,’’ March 2012, 26–28.

In 2014, military collaboration between the United States andTaiwan continued to increase. More than 3,000 U.S. Department of
Defense personnel visited Taiwan in 2014,196 a 50 percent increaseover 2013. In 2012, only 1,500 officers conducted visits to Taiwan.197 However, as Russell Hsiao, former non-resident senior fellow at the Project 2049 Institute, points out,

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Unfortunately, few U.S. military officers conduct in-country
training in Taiwan, and there are no known [U.S. military
officers] attending Taiwan’s National Defense University orother intermediate and senior service schools. More educational exchanges between the two defense establishments
are warranted, particularly for junior and noncommissioned officers. 198
Nevertheless, momentum on increased military cooperation continued over the past year. As of September 2015, nearly 2,000 U.S.
defense personnel conducted visits to Taiwan, on pace with 2014
numbers.199 In addition to visits, the U.S. military in June 2015 established two ‘‘sister units’’ to increase exchanges between units in
the U.S. military and their counterparts in the Taiwan military.200
Some observers assert the United States could do more to support Taiwan’s defense in order to fulfill U.S. obligations under the
Taiwan Relations Act, which requires the United States to provide‘‘defense articles and defense services in such quantity as may benecessary to enable Taiwan to maintain sufficient self-defense capabilities.’’ 201 For example, Van Jackson, visiting fellow at theCenter for a New American Security, proposed shifting U.S. arms
sales from F–16 upgrades and similar platforms to weapons thatenable antiaccess/area denial capabilities,* such as undersea
mines, air and missile defense, and land-based antiship cruise missiles. According to Mr. Jackson, this would be relatively inexpensive for Taiwan; have a lower profile, which would be less likely toanger China; and provide Taipei with more effective options to impose costs on China in a potential conflict.202 Aside from arms
sales, Randall Schriver, president and chief executive officer of the
Project 2049 Institute, and Ian Easton, research fellow at the
Project 2049 Institute, argue that the United States should increase its defense engagement with Taiwan by taking a range ofactions, such as supporting Taiwan’s indigenous submarine program by signaling its intentions to approve licenses for potential
U.S. defense industry participants; inviting Taiwan to the biannual
multinational Rim of the Pacific Exercise (RIMPAC) and other bilateral and multilateral exercises; and sending high-level military
officials to visit their counterparts in Taiwan.203

dkrause on DSKHT7XVN1PROD with USCCThe Role of Taiwan in the U.S. Rebalance to Asia
In response to written questions from the House Foreign Affairs
Committee in March 2015 on the 36th anniversary of the Taiwan
Relations Act, U.S. Secretary of State John Kerry described Taiwan
as ‘‘a key component of U.S.-Asia Pacific policies, including the
Asia rebalance.’’ 204 Since the Obama Administration announced its
rebalance to Asia strategy in 2011, other U.S. officials have mentioned Taiwan’s role in the rebalance but have not detailed how* According to the U.S. Department of Defense, ‘‘antiaccess’’ actions are intended to slow the
deployment of an adversary’s forces into a theater or cause them to operate at distances farther
from the conflict than they would prefer. ‘‘Area denial’’ actions affect maneuvers within a theater, and are intended to impede an adversary’s operations within areas where friendly forces
cannot or will not prevent access. China, however, uses the term ‘‘counterintervention,’’ reflecting its perception that such operations are reactive. U.S. Department of Defense, Air Sea Battle:
Service Collaboration to Address Anti-Access & Area Denial Challenges, May 2013, 2; U.S. Department of Defense, Military and Security Developments Involving the People’s Republic ofChina 2013, 2013, i, 32, 33.

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521
Taiwan fits into the strategy. This lack of clarity could be due toconcerns about how China would perceive U.S. officials’ calls for increased U.S. engagement with Taiwan, particularly on militaryissues. The Obama Administration may feel constrained by the unofficial nature of U.S.-Taiwan relations and concerned about the
impact on U.S.-China relations of openly emphasizing Taiwan in
the rebalance policy.
Some analysts and security experts in the United States and Taiwan argue the United States is not fully leveraging Taiwan’s
strengths in the rebalance and could benefit from further cooperation. According to Mr. Easton and Mr. Schriver, Taiwan can play
an important maritime role in the rebalance:

dkrause on DSKHT7XVN1PROD with USCC

Large numbers of maritime domain awareness capabilities
fielded by Taiwan have the potential to contribute important [indications and warning] information. However, it is
not clear how closely Taiwan’s capabilities are linked to,and integrated with, U.S. Navy and other allies’ systems in
the Western Pacific. . . . Taiwan’s ISR could drastically improve U.S. and other allied nations’ situational awarenessin the Taiwan Strait and South China Sea where their capabilities are constrained by distance and basing limitations . . . [but] there are significant shortcomings when it
comes to human ‘‘software’’ components . . . .205
In addition to improving maritime cooperation, the United States
can tap Taiwan’s strengths by reimagining U.S.-Taiwan defense
policy coordination, according to Andrew Yang, Taiwan deputy minister of defense from 2009 to 2013 and minister of national defense
briefly in 2013. Mr. Yang outlines three levels of his proposed new
military-to-military coordination dialogue: (1) policy-level: developing shared views of the security environment and identifying policy guidelines to deal with the evolving security situation; (2) planning-level: based on Taiwan’s 2013 quadrennial defense review,
evaluating Taiwan’s defense needs and, if needed, planning for U.S.
assistance; and (3) service-level: focus on jointness between the
U.S. and Taiwan militaries with particular emphasis on Taiwan’srole in participating in regional humanitarian assistance and disaster relief operations.206
Together with defense cooperation, increasing U.S. trade and investment in the Asia Pacific is an important piece of the rebalance
strategy. President Ma has called for Taiwan to join TPP by 2020,
but has not provided a detailed roadmap to achieve that goal.207
Although senior U.S. officials said they welcome Taiwan to join
TPP,208 potential roadblocks could impede Taiwan’s entry as amember. Taiwan would probably face Chinese opposition, complicating Taiwan’s entry.209 While Taiwan has made significant
progress reforming its economy in recent years, Taiwan’s economy
would likely need to further reform and open to accommodate thetrade terms of TPP. The U.S. Chamber of Commerce in Taipei’s‘‘2015 Taiwan White Paper’’ cites problems in Taiwan’s regulatory
process, including rules that deviate from standard global businesspractices and a lack of transparency, that still require reform.210

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Implications for the United States

dkrause on DSKHT7XVN1PROD with USCCThe U.S.-Taiwan relationship remains robust, despite the limitations posed by the lack of formal relations between the two governments. It is built on common democratic values, strong commercial
ties, and a U.S. commitment under the Taiwan Relations Act to aid
in Taiwan’s defense. Taiwan remains vital to U.S. geopolitical interests in Asia and important for regional security. For example,
the United States relies on Taiwan as a bastion of democracy inEast Asia and as a like-minded force for peace and security. From
providing humanitarian assistance and disaster relief resources ina region that often faces natural disasters to peacefully managing
its maritime disputes in the East and South China seas, Taiwan
contributes to regional security and the maintenance of peace andprosperity in the Asia Pacific.
Since 2008, Taipei and Beijing have taken steps to reduce crossStrait tension and increase economic, cultural, and educationalties. Seven years of cross-Strait rapprochement have been beneficial to the United States by reducing cross-Strait tensions and allowing U.S. policymakers to address other priorities in the U.S.China and U.S.-Taiwan relationships.
Two factors could change cross-Strait ties, however, complicating
U.S. interests, its important security ties with Taiwan, and its relationship with China.
• The inherent uncertainty surrounding the transition to a newadministration in Taiwan makes China uneasy, and it is unclear how Beijing would approach relations with Taipei if the
DPP wins the upcoming presidential election. Should the DPPwin, it is unclear how it might pursue cross-Strait relations
differently from the current KMT government. According to
Ms. Glaser and Ms. Vitello, ‘‘All of [DPP Chairperson Tsai’s]
statements indicate that she is unlikely to pursue provocative
policies. . . . She has made a concerted effort to articulate astrategy aimed at maintaining the status quo.’’ 211 Chairperson
Tsai’s comments suggest a pragmatic approach that, in a departure from the last DPP president, would not seek to overtly
promote pro-independence policies. On the other hand, Alan
Romberg of the Stimson Center argued that ‘‘[Chairperson
Tsai] will not embrace the ‘‘1992 Consensus’’ (or any other explicit form of ‘one China’) and will not oppose Taiwan independence, as Beijing insists.’’ He noted that, ‘‘In this circumstance, Beijing’s anxiety regarding a Tsai government
could result in a measured approach continuing to support[certain] people-to-people aspects of cross-Strait ties while [simultaneously] taking a hardline approach reducing government-level cross-Strait interactions.’’ 212• China’s modernizing military presents a significant challenge
to Taiwan’s ability to defend itself and to the U.S. military’s
ability to effectively intervene in a cross-Strait conflict should
it decide to do so. With the cross-Strait military balance ofpower continuing to shift in Beijing’s favor, Taipei’s stagnating
defense budget and capabilities, and China’s improving
antiaccess/area denial capabilities threatening to keep U.S.

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forces farther from China’s shores, Beijing has increasing advantages in a Taiwan contingency, raising the cost for theUnited States to intervene in a crisis or conflict.
Conclusions• Taiwan and China have enjoyed seven years of increased economic and trade ties, but fears among Taiwan citizens about economic coercion and China’s political encroachment over Taiwan
are more widespread than in the past.
• The younger generation of Taiwan citizens appears to view itself
increasingly as Taiwanese rather than Chinese, and to be willingto take visible and substantial steps to assert their national identity. This has the potential to disrupt the diplomatic narrativethat has allowed China and Taiwan to coexist without armed
conflict. At the same time, Taiwan may not have the will or ability to counterbalance the growing Chinese military advantage. Inview of China’s growing power in the region as a whole, thesetrends have the potential to create stress on the ability of theUnited States to meet its obligations to Taiwan under the Taiwan Relations Act.
• Although China restricts Taiwan’s ability to join multilateral institutions, Taiwan continues to make some progress on issues affecting its international space. Were Taiwan to succeed in its efforts to participate in emerging regional economic mechanisms
like the Asian Infrastructure Investment Bank, Regional Comprehensive Economic Partnership, and Trans-Pacific Partnership,
its integration in the region and ability to make a positive contribution to the international community would increase further.
• In response to China’s increasingly assertive actions in the Eastand South China seas, Taiwan has initiated diplomatic frameworks and signed agreements with claimants to encourage the
shelving of territorial disputes and promotion of joint resource
development. Through an updated fisheries agreement withJapan and steps taken to clarify its claims in the South China
Sea over the past year, Taiwan continues to play a role in helping preserve regional stability.

dkrause on DSKHT7XVN1PROD with USCC

• The United States and Taiwan share a close relationship basedon common democratic values, strong commercial ties, and a U.S.
commitment to aid in Taiwan’s defense. U.S.-Taiwan trade is at
a record high, underlying Taiwan’s increasing importance as aclose economic partner. Furthermore, the United States continues to support Taiwan’s defense through increasing militaryto-military contact and other discreet defense cooperation.
• China’s military modernization continues to focus on its ability
to conduct military operations against Taiwan and deter theUnited States from defending Taiwan in a potential conflict. Although Taiwan has improved its defense capabilities through a
combination of domestic production and acquisition of arms fromthe United States, the cross-Strait military balance of power continues to shift strongly in China’s favor.

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 3
1. U.S. Census Bureau.
2. J. Michael Cole, ‘‘Sunflowers End Occupation of Taiwan’s Legislature,’’ Diplomat, April 11, 2014.
3. Alan D. Romberg, ‘‘The Times They Are A-Changin’,’’ China Leadership
Monitor 46 (Winter 2015): 1.
4. Matthew Southerland and Kevin Rosier, ‘‘Taiwan’s 2014 Local Elections: Implications for Cross-Strait Relations,’’ U.S.-China Economic and Security Review
Commission, December 30, 2014, 2; Rupert Hammond-Chambers, ‘‘Taiwan Elections: Opposition Wins by a Landslide,’’ U.S.-Taiwan Business Council, December 1,
2014.
5. Austin Ramzy, ‘‘Taiwan’s President Resigning as Party Chief after Election
Losses,’’ New York Times, December 2, 2014; Alan Fong, ‘‘KMT’s ‘Shellacking’ Is
Worse than Expected,’’ China Post (Taiwan), November 30, 2014.
6. National Chengchi University Election Study Center, ‘‘Changes in Taiwanese/Chinese Identity of Taiwanese as Tracked in Surveys by the Election Study
Center, NCCU (1992–2015.06),’’ June 2015.
7. National Chengchi University Election Study Center, ‘‘Changes in Taiwanese/Chinese Identity of Taiwanese as Tracked in Surveys by the Election Study
Center, NCCU (1992–2015.06),’’ June 2015.
8. Alan D. Romberg (Distinguished Fellow and Director of East Asia Program,the Stimson Center), interview with Commission staff, July 16, 2015.
9. Andrew Hsia, ‘‘Advancing Steadily and Consolidating Foundations for Sustainable Peace’’ (Brookings Institution Conference on Relations across the Taiwan
Strait: Retrospective and Prospects for Future Development, Washington, DC, July13, 2015).
10. Xinhua (Chinese edition), ‘‘Authorized Release: National Security Law of thePeople’s Republic of China,’’ July 1, 2015. Staff translation; China Law Translate,‘‘National Security Law’’ (unofficial translation), July 1, 2015.
11. Taiwan Today, ‘‘MAC Protests Mainland China’s New Security Law,’’ July2, 2015; Stephanie Chao, ‘‘China’s National Security Law Disrespectful of Taiwan:
DPP,’’ China Post (Taiwan), July 2, 2015.
12. Yuan-Ming Chiao, ‘‘China’s ID Cards for Taiwan Residents Start Today,’’
China Post (Taiwan), September 21, 2015; Xinhua, ‘‘Chinese Mainland Lifts Entry
Permits for Taiwan Residents,’’ June 18, 2015; and Agence France-Presse, ‘‘China
to Lift Entry Permit Requirement for Taiwanese,’’ June 15, 2015.
13. Agence France-Presse, ‘‘China to Lift Entry Permit Requirement for Taiwanese,’’ June 15, 2015.
14. Xinhua (English edition), ‘‘1992 Consensus Vital to Cross-Strait Relations,’’
April 29, 2015; Xinhua (English edition), ‘‘Premier Li Keqiang Meets the Press,’’
March 16, 2015; and Xinhua (English edition), ‘‘Xi Stresses Cross-Strait Development, Urges Vigilance against Taiwan Independence,’’ March 4, 2015.
15. Matthew Strong, ‘‘Tsai 17% Ahead of Chu: TVBS Poll,’’ Taiwan News, October 20, 2015. Staff translation; Tseng Wei-chen, ‘‘Taiwan Indicators Survey Research: Tsai 44%, Chu 21%, Soong 12%,’’ Liberty Times (Taiwan), October 15, 2015.
Staff translation.
16. Richard C. Bush III, ‘‘The Return of the Taiwan Issue to U.S.-China Relations,’’ Brookings Institution, September 21, 2015; Bonnie S. Glaser and Jacqueline
Vitello, ‘‘PacNet #41: Tough Times Ahead if the DPP Returns to Power?’’ Pacific
Forum CSIS, July 20, 2015; and Alan D. Romberg, ‘‘Squaring the Circle: Adheringto Principle, Embracing Ambiguity,’’ China Leadership Monitor 47 (Summer 2015):
7–10.
17. Bonnie S. Glaser and Jacqueline Vitello, ‘‘PacNet #41: Tough Times Ahead
if the DPP Returns to Power?’’ Pacific Forum CSIS, July 20, 2015.
18. Central News Agency (Taiwan), ‘‘Maintaining Status Quo Means Keeping
Cross-Strait Peace: DPP Chair,’’ May 9, 2015.
19. Taiwan Affairs Office, ‘‘Director Zhang Zhijun’s Speech at the 12th Annual
Symposium on Cross-Strait Relations,’’ August 6, 2015. Staff translation; Ben Blanchard and Michael Gold, ‘‘China Warns Taiwan Opposition as It Names Presidential
Candidate,’’ Reuters, April 15, 2015; and Robert G. Sutter, Chinese Foreign Relations: Power and Policy since the Cold War, Rowman & Littlefield Publishers, 2012,
157–161.
20. Xinhua (English edition), ‘‘1992 Consensus Vital to Cross-Strait Relations,’’
April 29, 2015; Xinhua (English edition), ‘‘Premier Li Keqiang Meets the Press,’’
March 16, 2015; and Xinhua (English edition), ‘‘Xi Stresses Cross-Strait Development, Urges Vigilance against Taiwan Independence,’’ March 4, 2015.

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525
21. Richard C. Bush, Uncharted Strait: The Future of China-Taiwan Relations,
Brookings Institution Press, 2013, 120–122; Taipei Economic and Cultural Office inCanada, ‘‘The 1992 Consensus: Foundation for Cross-Strait Peace and Stronger
International Links,’’ September 7, 2011; and Xinhua (English edition), ‘‘Backgrounder: 1992 Consensus on ‘One-China’ Principle,’’ October 13, 2004.
22. Shih Hsiu-chuan, ‘‘1992 Consensus Foundation for Ties: Ma,’’ Taipei Times,
April 30, 2015; Parris Chang, ‘‘Moving the Consensus Goalposts,’’ Taipei Times,
March 12, 2015.
23. Chou Yi-ling and Evelyn Kao, ‘‘Ma Reiterates ‘1992 Consensus’ Vital to
Cross-Strait Relations,’’ Focus Taiwan, May 14, 2015; Ma Ying-jeou, ‘‘Reconciliation,
Cooperation, and Peace’’ (Presidential Office Building, Taipei, Taiwan, January 1,2015).
24. Ma Ying-jeou, ‘‘The 1992 Consensus: Ensuring Cross-Strait Peace and Prosperity’’ (Mainland Affairs Council, Taipei, Taiwan, April 29, 2015).
25. Yuan-Ming Chiao, ‘‘Few Surprises at Chu-Xi Meeting,’’ China Post (Taiwan),
May 5, 2015; Shih Hsiu-chuan, ‘‘Eric Chu Inaugurated as KMT Chairman,’’ Taipei
Times, January 20, 2015.
26. Central News Agency (Taiwan), ‘‘Maintaining Status Quo Means Keeping
Cross-Strait Peace: DPP Chair,’’ May 9, 2015.
27. Tsai Ing-wen, ‘‘Taiwan Meeting the Challenges Crafting a Model of New
Asian Value’’ (CSIS, Washington, DC, June 4, 2015).
28. Alan D. Romberg, ‘‘Squaring the Circle: Adhering to Principle, Embracing
Ambiguity,’’ China Leadership Monitor, 47 (Summer 2015): 2–3.
29. Democratic Progressive Party, ‘‘DPP China Affairs Committee: Maintain
Cross-Strait Status Quo,’’ April 10, 2015; Agence France-Presse, ‘‘Resurgent Taiwan
Opposition Says China Strategy Must Change,’’ January 21, 2015.
30. China Post (Taiwan), ‘‘Cross Strait Oversight Bill Calls for Long-term Planning,’’ April 7, 2015.
31. China Post (Taiwan), ‘‘Cross Strait Oversight Bill Calls for Long-term Planning,’’ April 7, 2015.
32. Alison Hsiao, ‘‘Legislature Stalled over Cross-Strait Mechanism Bill,’’ Taipei
Times, May 9, 2015; Alan D. Romberg, ‘‘The Times They Are A-Changin’,’’ China
Leadership Monitor 46 (Winter 2015): 12–13.
33. Taiwan’s Ministry of Economic Affairs, Department of Statistics, ‘‘Structureof Domestic Production’’ (updated as of second quarter, 2015), October 2015; Taiwan’s Bureau of Statistics, ‘‘Employed Persons by Industry’’ (updated as of August2015), October 2015.
34. JoAnn Fan, ‘‘The Economics of the Cross-Strait Services Agreement,’’ Diplomat, April 18, 2014.
35. Democratic Progressive Party, ‘‘President Ma’s Willful Misrepresentation of
Facts Regarding Service Trade Agreement Controversy,’’ June 27, 2014; JoAnn Fan,‘‘The Economics of the Cross-Strait Services Agreement,’’ Diplomat, April 18, 2014;
and Chen Yen-ting, ‘‘Block Service Trade Pact, Activists Urge,’’ Taipei Times, March
5, 2014.
36. Ralph Jennings, ‘‘China, Taiwan Pull Back on Talks to Cut Import Tariffs,’’
South China Morning Post (Hong Kong), April 19, 2015; Central News Agency (Taiwan), ‘‘Trade-in-Goods Pact with China Unlikely this Year: Duh,’’ June 10, 2014.
37. Kevin Chen, ‘‘Secrecy Surrounds Restart of Trade Talks,’’ Taipei Times, September 11, 2014; Central News Agency (Taiwan), ‘‘Two Cross-Strait Pacts Progressing: Chinese Official,’’ October 28, 2013.
38. Lauly Li, ‘‘Trade Talks with China Show Little Progress,’’ Taipei Times,
April 3, 2015; Taiwan Today, ‘‘Taipei and Beijing Hold Trade in Goods Talks,’’
March 31, 2015.
39. Hsieh Ai-chu, ‘‘Concerns in Taiwan over Cross-Strait Trade Pact,’’ Want
China Times (Taiwan), May 2, 2015.
40. Central News Agency (Taiwan), ‘‘Taiwan Aims to Wrap Trade In Goods
Talks with China Soon: MAC,’’ September 30, 2015; Tang Pei-chun and Scully
Hsiao, ‘‘Cabinet Urges Faster Trade Talks as China, S. Korea Sign FTA,’’ Focus Taiwan, June 1, 2015.
41. China Daily, ‘‘Xi Meets Visiting KMT Chairman,’’ May 4, 2015.
42. Jamil Anderlini, ‘‘China-Taiwan Ties in Focus as Xi Jinping Meets KMTChairman,’’ Financial Times, May 4, 2015; Deutsche Welle, ‘‘Xi-Chu Meeting ‘Consolidated Sino-Taiwanese Cooperation Framework,’ ’’ May 4, 2015.
43. Xinhua (English edition), ‘‘Xi Meets Visiting KMT Chairman,’’ May 4, 2015.
44. Central News Agency (Taiwan), ‘‘MAC Minister to Review Issues with His
Mainland Counterpart,’’ October 2, 2015; Lawrence Chung, ‘‘Island Visit Keeps Up
Momentum for Mainland’s Ties with Taiwan,’’ South China Morning Post (HongKong), May 25, 2015.

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526
45. Zep Hu and Y.F. Low, ‘‘Taiwan, China Sign Taxation, Flight Safety Pacts,’’
Focus Taiwan, August 25, 2015; South China Morning Post (Hong Kong), ‘‘China
and Taiwan Sign Tax, Aviation Deals after 18-month Hiatus,’’ August 25, 2015.
46. Stacy Hsu, ‘‘Chinese Transit Proposal Not on Agenda: MAC,’’ Taipei Times,
August 19, 2015.
47. Aries Poon, ‘‘Taiwan Says Agreement Reached in China Flight Path Dispute,’’ Wall Street Journal, March 3, 2015.
48. David G. Brown and Kevin Scott, ‘‘China-Taiwan Relations: Looking to a Different Future,’’ Comparative Connections (CSIS e-journal), May 2015, 2.
49. Bureau of Foreign Trade (Taiwan), ‘‘Trade Statistics.’’
50. Bureau of Foreign Trade (Taiwan), ‘‘Trade Statistics.’’
51. Want China Times (Taiwan), ‘‘Taiwan’s Economics Ministry to Address Falling Exports to China,’’ March 23, 2015.
52. Bureau of Foreign Trade (Taiwan), ‘‘Trade Statistics.’’
53. Bureau of Foreign Trade (Taiwan), ‘‘Trade Statistics.’’
54. PWC, ‘‘A Decade of Unprecedented Growth: China’s Impact on the Semiconductor Industry 2014 Update,’’ December 2014, 15–20; Jimmy Goodrich (Director of
Global Policy, Information Technology Industry Council), interview with Commission staff, August 27, 2014.
55. Bureau of Foreign Trade (Taiwan), ‘‘Trade Statistics.’’
56. Daniel H. Rosen and Zhi Wang, The Implications of China-Taiwan Economic
Liberalization, Peterson Institute for International Economics, 2011, 29–32.
57. Ministry of Economic Affairs, Overseas Chinese and Foreign Investment
Commission (Taiwan), Monthly Report, December 2014.
58. Ministry of Economic Affairs, Overseas Chinese and Foreign Investment
Commission (Taiwan), Monthly Report, August 2015.
59. Lauly Li, ‘‘MOEA Eases China Investment Rule,’’ Taipei Times, August 14,
2015.
60. Ministry of Economic Affairs, Overseas Chinese and Foreign Investment
Commission (Taiwan), Monthly Report, August 2015.
61. Ministry of Economic Affairs, Overseas Chinese and Foreign Investment
Commission (Taiwan), Monthly Report, March 2015; Ministry of Economic Affairs,
Overseas Chinese and Foreign Investment Commission (Taiwan), Monthly Report,
February 2014.
62. Ministry of Economic Affairs, Overseas Chinese and Foreign Investment
Commission (Taiwan), Monthly Report, August 2015.
63. Bonnie S. Glaser and Jacqueline A. Vitello, ‘‘Taiwan’s Marginalized Role inInternational Security: Paying a Price,’’ Center for Strategic and International Studies, January 2015, 1–52; Bonnie S. Glaser, ‘‘Taiwan’s Quest for Greater Participation in the International Community,’’ Center for Strategic and International Studies, November 2013, 1–43.
64. Taiwan Today, ‘‘Taiwan Dispatches Medical Aid to Nepal,’’ May 1, 2015;
Tseung Ying-yu and Jay Chen, ‘‘Nepal Rejects Taiwan’s Offer to Send Help in Rescue Effort,’’ Focus Taiwan, April 27, 2015.
65. Winnie Nham, ‘‘Prospects for Expanding Taiwan’s International Role,’’ Asia
Report (Sigur Center for Asian Studies, September 2015); Simon Denyer, ‘‘The Aftermath of Nepal’s Earthquake Exposes Asia’s Geopolitical Fault Lines,’’ Washington
Post, April 28, 2015; and Tseung Ying-yu and Jay Chen, ‘‘Nepal Rejects Taiwan’s
Offer to Send Help in Rescue Effort,’’ Focus Taiwan, April 27, 2015.
66. William Lowther, ‘‘Focus on Relief, Not China: Expert,’’ Taipei Times, August 3, 2015.
67. Alan D. Romberg (Distinguished Fellow and Director of East Asia Program,the Stimson Center), interview with Commission staff, July 16, 2015; Wall Street
Journal, ‘‘Beijing’s Disaster Politics,’’ April 28, 2015; and J. Michael Cole, ‘‘Nepal
Puts Politics Ahead of Lives,’’ Thinking Taiwan, April 27, 2015.
68. Shih Hsiu-chuan and Alison Hsiao, ‘‘Ma Makes Unexpected Visit to Singapore,’’ Taipei Times, March 25, 2015; Central News Agency (Taiwan), ‘‘President Ma
Gets Warm Welcome in LA during Transit Stop after Diplomatic Tour,’’ January 30,
2014.
69. Taipei Times, ‘‘Taiwan, Japan Amend Territory Fishing Rules,’’ March 9,
2015.
70. John Liu, ‘‘ROC, S. Korea Ink Agreement on Patent Cooperation,’’ China
Post (Taiwan), June 16, 2015; Lauly Li, ‘‘Taiwan, South Korea Ink Patent Prosecution MOU,’’ Taipei Times, June 16, 2015.
71. House Subcommittee on Asia and the Pacific, Hearing on The U.S. Rebalance in East Asia: Budget Priorities for FY 2016, oral testimony of Daniel R. Russel,
April 23, 2015.

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72. Yuan-Ming Chiao, ‘‘Ma Throws Status Quo Back in Tsai’s Direction,’’ China
Post (Taiwan), April 30, 2015; Central News Agency (Taiwan), ‘‘Taiwan Should Takea More Active Role in AIIB: Ma,’’ March 27, 2015.
73. Lawrence Chung, ‘‘KMT Chief Eric Chu Hopes for Bigger Global Role for
Taiwan,’’ South China Morning Post (Hong Kong), May 4, 2015.
74. CNTV, ‘‘Premier Li: China Aims to Conclude RCEP Talks by 2015,’’ November 13, 2014; Want China Times (Taiwan), ‘‘Taiwan’s Exports Will Suffer if Regional
Integration Fails,’’ May 15, 2014; and Rohit Sinha and Geethanjali Nataraj, ‘‘Regional Comprehensive Economic Partnership (RCEP): Issues and Way Forward,’’Diplomat, July 30, 2013.
75. Richard C. Bush III, ‘‘Taiwan and Asia,’’ Brookings Institution, December 2,
2014; Kwei-Bo Huang, ‘‘Beyond the Cross-Strait Trade in Services Agreement: Seeking a 2014 Consensus for Taiwan,’’ Brookings Institution, April 2014.
76. Alan D. Romberg (Distinguished Fellow and Director of East Asia Program,the Stimson Center), interview with Commission staff, July 16, 2015; Jenny W. Hsu,‘‘China Thwarts Taiwan’s Bid to be a Founding Member of AIIB,’’ Wall Street Journal, April 13, 2015.
77. Reuters, ‘‘China Says Taiwan Welcome to Join AIIB with Appropriate
Name,’’ April 1, 2015; Taiwan Today, ‘‘Ma Eyes AIIB Membership for Taiwan,’’March 27, 2015.
78. Enru Liu, ‘‘AIIB Membership to Boost Taiwan’s Chances for RCEP: Finance
Ministry,’’ China Post (Taiwan), April 2, 2015.
79. Katherine Wei, ‘‘DPP to Rethink Joining the AIIB Practically,’’ China Post
(Taiwan), April 7, 2015.
80. Yin Chun-chieh and Christine Chen, ‘‘Taiwan Should Not Be Absent from‘One Belt, One Road’: China Official,’’ Focus Taiwan, June 3, 2015; Chi-hao JamesLo, ‘‘Beijing Stresses ‘One Belt, One Road’ in Taipei,’’ China Post (Taiwan), January
30, 2015.
81. Chou Yi-ling and S.C. Chang, ‘‘Taiwan Would Join China’s ‘One Belt, One
Road’ Project: Official,’’ Focus Taiwan, June 5, 2015; Yin Chun-chieh and Lilian Wu,‘‘MAC Cautions against ‘One Belt, One Road’ Initiative,’’ Focus Taiwan, March 28,
2015.
82. Andrew Hsia, Minister of the Mainland Affairs Council, roundtable discussion at the Project 2049 Institute, Washington, DC, July 14, 2015; Central News
Agency (Taiwan), ‘‘MAC Sees No Room for Cross-Strait Cooperation on Territorial
Issues,’’ May 15, 2014.
83. Kimberly Hsu and Matthew Southerland, ‘‘Taiwan’s Global Fisheries Modestly Advance Its ‘International Space,’ ’’ U.S.-China Economic and Security Review
Commission, July 27, 2015, 3.
84. Taiwan’s Ministry of Foreign Affairs, ‘‘The Republic of China (Taiwan) Proposes: The East China Sea Peace Initiative,’’ August 12, 2012.
85. Taiwan’s Ministry of Foreign Affairs, ‘‘Republic of China (Taiwan) Signs
Fisheries Agreement with Japan,’’ April 15, 2013.
86. U.S.-Japan Exchange Program, ‘‘The Alliance Toward a Stronger U.S.-Japan
Partnership,’’ Project 2049 Institute and Sasakawa Peace Foundation, July 18, 2014;
Lucio Blanco Pitlo III, ‘‘Taiwan: Fishing for a Fishing Agreement with the Philippines,’’ East Asia Forum, June 14, 2013; and Joel Atkinson, ‘‘With Japan Fishing
Deal, Taiwan Scores a Win in East China Sea Disputes,’’ World Politics Review,
May 7, 2013.
87. John Kerry, ‘‘U.S. Vision for Asia-Pacific Engagement,’’ (East-West Center,
Honolulu, Hawaii, August 13, 2014).
88. Taipei Times, ‘‘Taiwan Japan Amend Territory Fishing Rules,’’ March 9,
2015.
89. Lynn Kuok, ‘‘Times of Change: Taiwan’s Evolving Position in the South
China Sea and Why Other Actors Should Take Notice,’’ Brookings Institution, May
2015, 2; Central News Agency (Taiwan), ‘‘ROC Will Not Give Up Territory in South
China Sea: President Ma,’’ April 8, 2015.
90. Taiwan’s Ministry of Foreign Affairs, ‘‘The Republic of China (Taiwan) Proposes: The East China Sea Peace Initiative,’’ August 12, 2012.
91. Taiwan’s Office of the President, ‘‘South China Sea Initiative—Shelving Sovereignty Disputes, Jointly Developing Resources, and Peacefully Resolving Disagreements,’’ May 26, 2015.
92. S.M. Yang and Lillian Lin, ‘‘Taiwan-Philippines Fisheries Talks Stuck on
Contiguous Zone Issue,’’ Focus Taiwan, October 7, 2015; Kimberly Hsu and Matthew Southerland, ‘‘Taiwan’s Global Fisheries Modestly Advance Its ‘International
Space,’ ’’ U.S.-China Economic and Security Review Commission, July 27, 2015, 6–
7.

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93. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, written testimony of Bonnie Glaser, May 13, 2015;
Joseph Yeh, ‘‘ ‘Nine-dash Line’ Sovereignty Claims Make No Sense: Ex-AIT Chief,’’
China Post (Taiwan), September 14, 2014; and Jeffrey Bader, ‘‘The U.S. and China’s
Nine-dash Line: Ending the Ambiguity,’’ Brookings Institution, February 6, 2014.
94. U.S.-China Economic and Security Review Commission, Hearing on China’s
Relations with Southeast Asia, oral testimony of Bonnie Glaser, May 13, 2015.
95. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, May 2015, 59.
96. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, May 2015, 8; U.S.
Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2012, May 2012, 29.
97. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, May 2015, 59–60.
98. IHS Jane’s, ‘‘Air Force, Taiwan,’’ June 1, 2015; U.S. Department of Defense,
Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, May 2015, 11.
99. J. Michael Cole, ‘‘Alarm over China’s S–400 Acquisition Is Premature,’’ Diplomat, April 22, 2015; Wendell Minnick, ‘‘S–400 Strengthens China’s Hand in the
Skies,’’ Defense News, April 18, 2015.
100. Zackary Keck, ‘‘Putin Approves Sale of S–400 to China,’’ Diplomat, April 11,
2014.
101. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2014, June 2014, 10.
102. U.S. Office of Naval Intelligence, The PLA Navy: New Capabilities and Missions for the 21st Century, April 2015, 14.
103. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, May 2015, 79.
104. Ridzwan Rahmat, ‘‘China Debuts Zubr LCAC in Show of Amphibious Forcein South China Sea,’’ IHS Jane’s, July 21, 2015; U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s
Republic of China 2015, May 2015, 58–59.
105. Reuters, ‘‘China to Hold Live-fire Drills in Taiwan Strait,’’ September 10,
2015; Richard D. Fisher and James Hardy, ‘‘China Practices Taiwan Invasion with
Civilian Ferries, Bomber Flights in Bashi Channel,’’ IHS Jane’s, June 16, 2015.
106. Victor Robert Lee, ‘‘Satellite Imagery: China Staging Mock Invasion of Taiwan?’’ Diplomat, August 9, 2015; Chun Han Wong, ‘‘Palace Intrigue: Chinese Soldiers Storm Replica of Taiwan Presidential Palace,’’ China Real Time (Wall Street
Journal blog), July 23, 2015.
107. Saibal Dasgupta, ‘‘Taiwan Protests Chinese Troop Drill on Presidential
Building Replica,’’ Times of India, July 26, 2015.
108. Chun Han Wong, ‘‘Palace Intrigue: Chinese Soldiers Storm Replica of Taiwan Presidential Palace,’’ China Real Time (Wall Street Journal blog), July 23,
2015.
109. China Post (Taiwan), ‘‘Taiwan’s Proposed Defense Budget for 2015 Sees $330
Million Increase,’’ August 30, 2014; Shirley Kan, ‘‘Taiwan: Major U.S. Arms Sales
since 1990,’’ Congressional Research Service, August 29, 2014, 34.
110. Craig Caffrey, ‘‘Taiwan Announces Modest Defense Spending Rise,’’ IHS
Jane’s, September 23, 2015.
111. Bonnie Glaser and Anastasia Mark, ‘‘Taiwan’s Defense Spending: The Security Consequences of Choosing Butter over Guns,’’ Asia Maritime Transparency Initiative, March 18, 2015; Shirley Kan, ‘‘Taiwan: Major U.S. Arms Sales since 1990,’’
Congressional Research Service, August 29, 2014, 34–38; and Craig Murray andKyle Churchman, ‘‘Taiwan’s Declining Defense Spending Could Jeopardize MilitaryPreparedness,’’ U.S.-China Economic and Security Review Commission, June 11,2013, 3.
112. IHS Jane’s World Defence Industry, ‘‘Taiwan–Defence Industry,’’ November
27, 2014, 4–6.
113. Joseph Yeh, ‘‘CSIST Confirms Upgrades for Local Missiles,’’ China Post (Taiwan), December 30, 2014; Agence France-Presse, ‘‘Taiwan Develops New Missiles toCounter China’s Threat,’’ December 2, 2014; and Wendell Minnick, ‘‘Taiwan Retires
Hawk Missiles,’’ Defense News, September 15, 2014.
114. Joseph Yeh, ‘‘CSIST Confirms Upgrades for Local Missiles,’’ China Post (Taiwan), December 30, 2014; Agence France-Presse, ‘‘Taiwan Develops New Missiles toCounter China’s Threat,’’ December 2, 2014.
115. Agence France-Presse, ‘‘Taiwan Develops New Missiles to Counter China’s
Threat,’’ December 2, 2014.

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529116. Taipei Times, ‘‘Navy Debuts Logistical Support Ship Panshih,’’ January 24,
2015.
117. Gavin Phipps and James Hardy, ‘‘Taiwan Commissions First-in-Class Missile Corvette, Combat Support Ship,’’ IHS Jane’s, March 30, 2015; Michael Pilger,‘‘Taiwan’s Improving Patrol Fleet Could Enhance its Ability to Defend against a
Chinese Invasion,’’ U.S.-China Economic and Security Review Commission, February 3, 2015; and Agence France-Presse, ‘‘Taiwan Launches Its Largest-Ever Missile Ship,’’ December 23, 2014.
118. Ridzwan Rahmat, ‘‘Taiwan Commissions Two 3,000-tonne Coastguard Cutters,’’ IHS Jane’s, June 8, 2015.
119. Charles Au, ‘‘New Cutters Expand Taiwan’s Coast Guard,’’ Shephard Media,
June 16, 2015.
120. Agence France-Presse, ‘‘Taiwan Unveils Its Biggest Ever Military Drone,’’August 12, 2015.
121. J. Michael Cole, ‘‘Taiwan Unveils New Long-Endurance Drone, New Weapons at Defense Trade Show,’’ Diplomat, August 13, 2015; Agence France-Presse,‘‘Taiwan Unveils Its Biggest Ever Military Drone,’’ August 12, 2015; and Wendell
Minnick, ‘‘Taiwan Defense Show Exhibits New Weapons,’’ Defense News, August 12,2015.
122. Central News Agency (Taiwan), ‘‘Taiwan Takes Delivery of Four More Black
Hawk Helicopters from US,’’ May 27, 2015.
123. James Hardy, ‘‘Second Batch of UH–60s Arrive in Taiwan,’’ IHS Jane’s, May
25, 2015.
124. Central News Agency (Taiwan), ‘‘Taiwan Takes Delivery of Four More Black
Hawk Helicopters from US,’’ May 27, 2015; Joseph Yeh, ‘‘Taiwan Takes Delivery of
Its 1st Black Hawks,’’ China Post (Taiwan), December 4, 2014.
125. Army Technology, ‘‘US Delivers Second Batch of UH–60 Black Hawk Helicopters to Taiwan,’’ May 28, 2015; Military.com, ‘‘UH–60A/L Black Hawk Helicopter.’’
126. William Lowther, ‘‘Royce Pushes for Frigates’ Transfer,’’ Taipei Times, July2, 2015; Aries Poon, ‘‘U.S. Approves Sale of Ships to Taiwan,’’ Wall Street Journal,
December 19, 2014.
127. Aries Poon, Eva Dou, and Fanny Liu, ‘‘Taiwan Cuts Back Order for Secondhand U.S. Warships,’’ Wall Street Journal, April 15, 2014.
128. Elaine Hou and Lu Hsin-hui, ‘‘Taiwan Navy Retires Two Knox-class Frigates,’’ Focus Taiwan, May 1, 2015; China Post (Taiwan), ‘‘Taiwan Prepares to Take
2 U.S. Perry-class Frigates,’’ January 15, 2015.
129. Naval Technology, ‘‘Oliver Hazard Perry Class Frigates, United States ofAmerica’’; Military.com, ‘‘FFG 7 Oliver Hazard Perry Class Missile Frigate.’’130. Wendell Minnick, ‘‘Taiwan F–16 Radar Upgrade Moving Forward,’’ Defense
News, December 21, 2014.
131. Joseph Yeh, ‘‘Northrop Delivers First SABR Radar for Taiwan F–16s Upgrade: Report,’’ China Post (Taiwan), December 17, 2014.
132. Northrop Grumman, ‘‘Active Electronically Scanned Array (AESA) Fire Control Radars’’; Joe Pappalardo, ‘‘Russian-Made Tech vs. America’s Stealth Warplanes,’’ Popular Mechanics, October 9, 2012.
133. Jason Pan, ‘‘Navy to Run with Domestic Submarine Program,’’ Taipei Times,
April 2, 2015.
134. Wendell Minnick, ‘‘Taiwan Pushes for New Weapons on All Fronts,’’ Defense
News, May 27, 2015; Want China Times (Taiwan), ‘‘European Firms Interested in
Taiwan’s Submarine Program: Official,’’ April 2, 2015; and Jason Pan, ‘‘Navy to Run
with Domestic Submarine Program,’’ Taipei Times, April 2, 2015.
135. Want China Times (Taiwan), ‘‘Taiwan to Send P–3C to Patrol South China
Sea,’’ April 21, 2015.
136. Want China Times (Taiwan), ‘‘Taiwan to Send P–3C to Patrol South China
Sea,’’ April 21, 2015; Gavin Phipps and James Hardy, ‘‘Taiwan to Deploy P–3C to
Spratlys,’’ IHS Jane’s, April 20, 2015.
137. U.S. Department of Defense, Annual Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015, May 2015, 61; Ministry of National Defense (Taiwan), National Defense Report 2013, October 2013, 79.
138. Katherine Wei, ‘‘Military’s Budget Should Favor Weapons over Recruitment:
DPP,’’ China Post (Taiwan), May 9, 2013; U.S.-Taiwan Business Council, ‘‘Defense
and Security Report: Annual Review 2012,’’ January 2013; and Ministry of National
Defense (Taiwan), Quadrennial Defense Review 2009, March 2009.
139. Joseph Yeh, ‘‘Plans for Downsizing of Military Not Yet Finalized: MND,’’
China Post (Taiwan), May 29, 2014.
140. Central News Agency (Taiwan), ‘‘Taiwan’s Military Denies Report of Delay
in Downsizing Program,’’ March 1, 2015.

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530141. J. Michael Cole, ‘‘Taiwan’s All-Volunteer Force Pains: There’s a Way Out,’’
Diplomat, April 24, 2015; Peter Enav, ‘‘Taiwan Short of Volunteers for the Military,’’
Associated Press, May 13, 2013.
142. J. Michael Cole, ‘‘Taiwan’s All-Volunteer Force Pains: There’s a Way Out,’’
Diplomat, April 24, 2015; Central News Agency (Taiwan), ‘‘Military in Transition
Sees Progress in Recruitment,’’ December 26, 2014.
143. Elaine Hou, ‘‘Stipends Granted for Servicemen to Attract More Enlistees,’’
Focus Taiwan, April 1, 2015; Taipei Times, ‘‘Military Offering Incentives to Form
All-Volunteer Force,’’ March 11, 2015.
144. China Post (Taiwan), ‘‘Defense Ministry Cancels Plan to End Conscription,’’
August 26, 2015.
145. See the U.S.-Taiwan Business Council’s list of all 12 blue papers here: U.S.Taiwan Business Council, ‘‘The DPP’s National Defense Agenda,’’ May 26, 2015.
146. New Frontier Foundation, Defense Blue Paper #9: Taiwan’s Military Capacities in 2025, May 2015, 22.
147. New Frontier Foundation, Defense Blue Paper #7: Bolstering Taiwan’s Core
Defense Industries, October 2014, 49.
148. New Frontier Foundation, Defense Blue Paper #7: Bolstering Taiwan’s Core
Defense Industries, October 2014, 71–79.
149. New Frontier Foundation, Defense Blue Paper #9: Taiwan’s Military Capacities in 2025, May 2015, 19, 49; New Frontier Foundation, Defense Blue Paper #7:
Bolstering Taiwan’s Core Defense Industries, October 2014, 63, 65, 79.
150. New Frontier Foundation, Defense Blue Paper #9: Taiwan’s Military Capacities in 2025, May 2015, 17–21.
151. New Frontier Foundation, Defense Blue Paper #9: Taiwan’s Military Capacities in 2025, May 2015, 17.
152. Gavin Phipps, ‘‘Taiwan MND Says US Support on Subs, F–16s Limited byConcerns about Chinese Response,’’ IHS Jane’s, January 6, 2015; Jason Pan, ‘‘ ‘Tuo
Jiang’ Joins Naval Combat Exercise,’’ Taipei Times, January 2, 2015.
153. Jason Pan, ‘‘ ‘Tuo Jiang’ Joins Naval Combat Exercise,’’ Taipei Times, January 2, 2015.
154. Want China Times (Taiwan), ‘‘Taiwan to Send P–3C to Patrol South China
Sea,’’ April 21, 2015.
155. Kuomintang, ‘‘President Ma Presides over Live-Fire Exercise,’’ April 18,
2013.
156. Elaine Hou, ‘‘Taiwan’s Computer-aided War Games Simulate China Attacks,’’ Focus Taiwan, May 5, 2015; Central News Agency (Taiwan), ‘‘Military Exercise to Focus on Emergency Response,’’ May 4, 2015.
157. Elaine Hou, ‘‘Taiwan Concludes Han Kuang Exercises That Simulated China
Attack,’’ Focus Taiwan, September 11, 2015.
158. Jason Pan and Lo Tien-pin, ‘‘US to Help Plan, Appraise Han Kuang Drills:
Source,’’ Taipei Times, May 19, 2015.
159. Jason Pan and Lo Tien-pin, ‘‘US to Help Plan, Appraise Han Kuang Drills:
Source,’’ Taipei Times, May 19, 2015.
160. Chang Kuo-Wei, ‘‘China Steps Up Spying Activities against Taiwan,’’ Want
China Times (Taiwan), April 18, 2015; Wendell Minnick, ‘‘Chinese Spies Expand Operations in Taiwan,’’ Defense News, January 24, 2015.
161. J. Michael Cole, ‘‘The Spies Are Coming! The Spies Are Coming to Taiwan!’’
Diplomat, January 22, 2015.
162. Jason Pan, ‘‘Chinese Spy Ring Leader Gets Four-Year Prison Term,’’ Taipei
Times, September 2, 2015.
163. Chien Li-chung, ‘‘Two More Arrested in Chinese Spy Ring,’’ Taipei Times,
April 10, 2015; Wendell Minnick, ‘‘Chinese Spies Expand Operations in Taiwan,’’Defense News, January 24, 2015.
164. Central News Agency (Taiwan), ‘‘Retired Navy Brass to Serve 14 Months in
Jail for Espionage,’’ March 16, 2015; Jason Pan, ‘‘Top Navy Brass Gets 14 Months
in Prison for Spying for China,’’ Taipei Times, October 3, 2014.
165. Central News Agency (Taiwan), ‘‘New Taiwan Defense Minister Calls for
Vigilance Over Chinese Espionage,’’ January 31, 2015.
166. Chang Kuo-wei, ‘‘China Steps Up Spying Activities against Taiwan,’’ Want
China Times (Taiwan), April 18, 2015; J. Michael Cole, ‘‘The Spies Are Coming! The
Spies Are Coming to Taiwan!’’ Diplomat, January 22, 2015.
167. Jenny W. Hsu, ‘‘Taiwan Spy Affair Shines Light on Military Morale,’’ WallStreet Journal, January 27, 2015.
168. Lo Tien-pin and Jason Pan, ‘‘PLA Cyberunit Targeting Taiwan Named,’’ Taipei Times, March 10, 2015; Mark A. Stokes, Jenny Lin, and L.C. Russel Hsiao, ‘‘The
Chinese People’s Liberation Army Signals Intelligence and Cyber Reconnaissance
Infrastructure,’’ Project 2049 Institute, November 11, 2011, 2–3, 6–11.

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169. Lo Tien-pin and Jason Pan, ‘‘PLA Cyberunit Targeting Taiwan Named,’’ Taipei Times, March 10, 2015; J. Michael Cole, ‘‘China’s Shifting Cyber Focus on Taiwan,’’ Diplomat, April 30, 2013.
170. Lo Tien-pin and Chen Wei-han, ‘‘NSB to Set Up Cybersecurity Arm to Fend
Off China,’’ Taipei Times, February 24, 2015.
171. Michael Gold and J.R. Wu, ‘‘Taiwan Seeks Stronger Cyber Security Ties with
U.S. to Counter China Threat,’’ Reuters, March 30, 2015.
172. U.S. Department of Homeland Security, ‘‘Cyber Storm: Securing CyberSpace,’’ June 17, 2015.
173. Lawrence Chung, ‘‘U.S. Issues Diplomatic-like Plates for Cars of Taiwanese
Officials,’’ South China Morning Post (Hong Kong), February 27, 2015.
174. Central News Agency (Taiwan), ‘‘ROC, U.S. sign MOU to Extend Partnership in Global Health, Aid,’’ June 2, 2015.
175. Joseph Yeh, ‘‘US Willing to Treat Hung Same as Tsai If She Visits,’’ China
Post (Taiwan), June 18, 2015.
176. Nadia Tsao, Chen Hui-ping, and Chen Wei-han, ‘‘DPP’s Tsai Visits WhiteHouse, U.S. State Department,’’ Taipei Times, June 6, 2015; William Lowther, ‘‘Tsai
Has Very Successful U.S. Meetings,’’ Taipei Times, June 4, 2015.
177. Xinhua (English edition), ‘‘China Reprimands U.S. Over Taiwan Meeting,’’June 10, 2015.
178. U.S. Census Bureau.
179. Bureau of Foreign Trade (Taiwan), ‘‘Trade Statistics.’’
180. Bureau of Foreign Trade (Taiwan), ‘‘Trade Statistics.’’
181. Elaine Hou, ‘‘Timing of Next Taiwan-U.S. TIFA Talks Undecided: Official,’’
Focus Taiwan, April 14, 2014.
182. Elaine Hou, ‘‘Timing of Next Taiwan-U.S. TIFA Talks Undecided: Official,’’
Focus Taiwan, April 14, 2014.
183. Elaine Hou, ‘‘Taiwan, U.S. Aiming for TIFA Talks by Year End: U.S. Official,’’ Focus Taiwan, June 2, 2015; Taiwan Today, ‘‘Ma Lauds Enhanced TaiwanU.S. Cooperation,’’ June 2, 2015.
184. Helen Ku and Shih Hsiu-chuan, ‘‘U.S, Taiwan to Resume TIFA Talks,’’ Taipei Times, February 2, 2013.
185. American Institute in Taiwan, ‘‘United States and Taiwan Deepen Dialogue
on Trade and Investment Priorities,’’ October 2, 2015; Robert Holleyman, ‘‘Press
Conference for the Ninth Trade and Investment Framework Agreement Council
Meeting’’ (Taipei, Taiwan, October 1, 2015).
186. Jeffrey Wu, ‘‘Meat Issue Complicating BIA Talks with Taiwan: U.S. Trade
Official,’’ Focus Taiwan, October 1, 2015; Jeffrey Wu, ‘‘U.S. Welcomes Taiwan’s Interest in Joining TPP: Trade Official,’’ Focus Taiwan, October 1, 2015; and Tien Yuping and Lilian Wu, ‘‘U.S. Pork Not to Be Included in Upcoming TIFA Talks: Minister,’’ Focus Taiwan, September 16, 2015.
187. Central News Agency (Taiwan), ‘‘Taiwan to Stand Firm on US Pork
Ractopamine Ban: Official,’’ October 3, 2015; Shirley A. Kan and Wayne M. Morrison, ‘‘U.S.-Taiwan Relationship: Overview of Policy Issues,’’ Congressional ResearchService, December 11, 2014, 34–36; Central News Agency (Taiwan), ‘‘U.S. Raises
Taiwan Pork Issues at WTO Meeting,’’ September 18, 2014; and Economist, ‘‘Taiwan, America, and Meat Wars: Gored,’’ March 8, 2012.
188. Christopher P. Cavas, ‘‘U.S. Frigates Approved for Transfer – Finally,’’ Defense News, December 19, 2014; J. Michael Cole, ‘‘To Buy or Not to Buy? A Dilemma
for Taiwan’s Navy,’’ Diplomat, April 19, 2014.
189. Gavin Phipps and James Hardy, ‘‘Taiwan to Deploy P–3Cs to Spratlys,’’ IHS
Jane’s, April 20, 2015.
190. Lockheed Martin, ‘‘Lockheed Martin Receives $755 Million Contract for Production of PAC–3 Missiles,’’ January 10, 2013.
191. Wendell Minnick, ‘‘Taiwan’s Sub-launched Harpoons Pose New Challenge to
China’s Invasion Plans,’’ Defense News, January 6, 2014.
192. Central News Agency (Taiwan), ‘‘Military Receives New E–2K Early Warning Aircraft,’’ March 10, 2013.
193. Lockheed Martin, ‘‘Lockheed Martin Receives $755 Million Contract for Production of PAC–3 Missiles,’’ January 10, 2013.
194. Elaine Hou, ‘‘Taiwan Takes Delivery of Four More Black Hawk Helicopters,’’
Focus Taiwan, May 26, 2015.
195. Joseph Yeh, ‘‘Navy’s 2 New Minehunters Arrive at Kaohsiung,’’ China Post
(Taiwan), August 3, 2012.
196. U.S. government official, interview with Commission staff, September 9,
2015.

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197. U.S.-China Economic and Security Review Commission, Hearing on Recent
Developments in China’s Relations with Taiwan and North Korea, written testimonyof Ian Easton, June 5, 2014.
198. Russell Hsiao, ‘‘U.S.-Taiwan Relations: Hobson’s Choice and the False Dilemma,’’ in Ashley Tellis, Abraham M. Denmark, and Greg Chaffin, eds., Strategic
Asia 2014–15: U.S. Alliances and Partnerships at the Center of Global Power, National Bureau of Asian Research, December 2014, 283.
199. U.S. government official, interview with Commission staff, September 9,2015.
200. Jason Pan, ‘‘Taiwan US Set Up Military Sister Units,’’ Taipei Times, June
5, 2015.
201. Taiwan Relations Act § 2479, Pub. L. No. 96–8, 93 STAT. 14 (1979), codified
at 22 U.S.C. § 3301 (1979).
202. Van Jackson, ‘‘Forget F–16s for Taiwan: It’s All about A2/AD,’’ Diplomat,
April 8, 2015.
203. Elaine Hou, ‘‘U.S. Urged to Strengthen Maritime Military Cooperation with
Taiwan,’’ Focus Taiwan, December 12, 2014; Ian Easton and Randall Schriver,‘‘Standing Watch: Taiwan and Maritime Domain Awareness in the Western Pacific,’’
Project 2049 Institute, December 2014, 17–19.
204. Question for the Record Submitted by Representative Gerald Connolly, Secretary of State John F. Kerry, House Committee on Foreign Affairs, February 25,
2015.
205. Ian Easton and Randall Schriver, ‘‘Standing Watch: Taiwan and Maritime
Domain Awareness in the Western Pacific,’’ Project 2049 Institute, December 2014,15–16.
206. Andrew Nien-Dzu Yang, ‘‘Game Change in the Western Pacific and R.O.C.’s
Self-Defense Effort,’’ China Brief, May 1, 2015.
207. Richard C. Bush and Joshua Meltzer, ‘‘Taiwan and the Trans-Pacific Partnership: Preparing the Way,’’ Brookings Institution, January 2014, 1–2.
208. Central News Agency (Taiwan), ‘‘Kerry to Taiwan: Step Up Market Reforms
If You Want to Join TPP,’’ November 16, 2014.
209. Richard C. Bush, ‘‘Taiwan and the Trans-Pacific Partnership: The Political
Dimension,’’ Brookings Institution, January 2014, 10–12.
210. American Chamber of Commerce in Taipei, ‘‘2015 Taiwan White Paper,’’June 2015, 5–8.
211. Bonnie S. Glaser and Jacqueline Vitello, ‘‘PacNet #41: Tough Times Ahead
If the DPP Returns to Power?’’ Pacific Forum CSIS, July 20, 2015.
212. Alan D. Romberg (Distinguished Fellow and Director of East Asia Program,the Stimson Center), interview with Commission staff, August 19, 2015.

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SECTION 4: HONG KONG
Introduction
In the wake of political turmoil and widespread protests surrounding implementation of reform in Hong Kong’s 2017 chief executive election, Hong Kong society remains politically divided. Thissection examines developments in Hong Kong’s electoral reform
process; declining press, expression, and academic freedoms; andthe deepening economic relationship between Hong Kong andmainland China. Findings in this section are based on the Commission’s July trip to Hong Kong, meetings with government officials
and experts, think tank and media reports, and official statistics.
The section concludes with a discussion of the implications of Hong
Kong’s political and economic development for the United States.
Constitutional Relationship between Hong Kong and Mainland China

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Constitutionally, Hong Kong is a special administrative region of
the People’s Republic of China (PRC).1 While central authorities in
Beijing are explicitly charged with managing Hong Kong’s foreign
affairs and defense, Hong Kong is otherwise entitled to conduct its
own administrative affairs in accordance with the Basic Law, theregion’s mini-constitution, which grants it a ‘‘high degree of autonomy.’’ 2 This autonomy allows Hong Kong to exercise executive, legislative, and independent judicial power. Hong Kong’s autonomy
was established in accordance with the ‘‘one country, two systems’’principle—introduced by Deng Xiaoping to realize the peaceful reunification of China—under which the region’s capitalist systemand ‘‘way of life’’ would remain unchanged for 50 years after the
1997 turnover from British rule.3 Taken together, the laws andpolicies that govern the relationship between Hong Kong and mainland China dictate that the region’s autonomous powers are authorized through the Basic Law in accordance with the PRC constitution—the ultimate legal and political ground for Hong Kong’s
high degree of autonomy.4
Under this constitutional framework, provisions in the Basic Lawthat govern the democratic development of Hong Kong’s electoral
process are subject to interpretation by the Standing Committee of
the National People’s Congress (NPC), China’s de facto legislativebody.5 According to the Basic Law, Hong Kong’s leader, the chief
executive, is to be selected ‘‘by election or through consultations
held locally,’’ but is accountable to and appointed by China’s central government.6 While the precise method for selecting the chief
executive was left legally ambiguous at the time the Basic Law was
implemented, the law set forth the intention to one day select theregion’s leader ‘‘by universal suffrage upon nomination by a broadly(533)

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representative nominating committee in accordance with democratic procedures.’’ 7
Developments in Hong Kong’s Electoral Reform

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In 2007, the NPC Standing Committee first announced that universal suffrage—defined by the Hong Kong and central governments as election on a ‘‘one person, one vote’’ basis—may be instituted in the 2017 chief executive election.8 Current Chief Executive
Leung Chun-ying (known as CY Leung) in July 2014 formally initiated the five-step process for amending the Basic Law when hesubmitted a report to the Standing Committee affirming the needto reform Hong Kong’s electoral method in the 2017 chief executive
election.9 In August 2014, the Standing Committee completed thesecond step of the constitutional development process when it put
forth an electoral framework with strict conditions on the adoptionof universal suffrage, intensifying widespread and politicallycharged protests that grew out of public anger over a June policy
paper.* According to one Hong Kong lawmaker, the policy paper,
which was published by China’s State Council, ‘‘eliminate[d] thepossibility that the state would restrain itself’’ and ‘‘sen[t] a clear
message to Hong Kong that Beijing is omnipotent—all power comesfrom the National People’s Congress.’’ 10
The conditions on universal suffrage under the Standing Committee’s framework included a restrictive nomination mechanismthat effectively precluded the nomination of prodemocracy candidates. Under the Standing Committee’s framework, only two or
three candidates could be nominated to stand for election, and eachcandidate must be supported by more than 50 percent of the nominating committee, compared with 12.5 percent in the 2012 election.11 Because the new ‘‘broadly representative’’ nominating committee was to be formed ‘‘in accordance with the number of members, composition, and formation method of the [current] election
committee,’’ it was expected to maintain the same Beijing-friendly
bias as the current election committee.12 The Standing Committee’s
framework also stipulated that the chief executive must be a ‘‘patriot’’ who ‘‘loves the country and loves Hong Kong.’’ 13
These constraints were met with fierce opposition among prodemocracy voices in Hong Kong. After Beijing unveiled its framework, all of Hong Kong’s 27 prodemocracy legislators (known inHong Kong as pan-democrats) vowed to vote down what they believed to be a ‘‘fake’’ democratic model.14 Prodemocracy activists
participated in extended protests throughout Hong Kong startingin mid-2014, with some arguing the proposed ‘‘rigid’’ voting framework was ‘‘unacceptable to the average voter.’’ 15 As the protests
dragged on, however, public frustration with the disruption caused
by protests resulted in a partial loss of support and splintering ofpolitical views. The movement successfully delayed to January thesecond round of public consultation, but failed to cause the central
government to alter or scrap the plan. Hong Kong Chief Secretaryfor Administration Carrie Lam stated, ‘‘There is no room for any
concessions or compromises to be made’’ with regard to the NPC* For details on the 2014 prodemocracy protests in Hong Kong, see U.S.-China Economic andSecurity Review Commission, 2014 Annual Report to Congress, November 2014, 516–545.

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Standing Committee’s decision.16 In the aftermath, actors acrossthe political spectrum in Hong Kong have become further fragmented in their interpretations of the concept of universal suffrageand its application in the 2017 and future chief executive and Legislative Council (LegCo) elections.17

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Legislative Council Rejects Electoral Reform Proposal
After the protests dispersed in December 2014, the impetus forelectoral reform shifted from grassroots activists to members of
LegCo. After a second round of public consultation, Chief Secretary
Lam on April 22 announced the main elements of the electoral reform legislation that would be introduced to LegCo and would require support from two-thirds of members to pass.18 Building on
the Standing Committee’s framework, the legislation included thefollowing elements:• The composition of the nominating committee shall follow thecurrent composition of the 1,200-member election committee,
in which seats are divided among four ‘‘sectors’’ and 38 ‘‘subsectors.’’ 19 Allocation of seats among subsectors, the method
for selecting the members of each subsector, and the electorateof each subsector shall remain largely unchanged.20• The nominating committee shall approve nominees in twostages: first, potential candidates shall be recommended forconsideration; second, the two or three individuals who garnerthe most recommendations shall be selected as official candidates and stand for election.21 This procedure differs fromthe current arrangement, under which members of the election
committee jointly nominate candidates.
Æ In the first stage, each committee member may recommend
one person for consideration to become a candidate.22 To
be eligible, a potential candidate must be endorsed by
120—or 10 percent of—nominating committee members.
Under this system, at least five and at most ten potential
candidates can seek nomination.23
Æ In the second stage, each committee member shall vote forat least two candidates from among those who secured therecommendation of 10 percent of the committee. The twoor three candidates who win the most votes and secure endorsement of more than half of members shall be the official candidates to stand election.24• All eligible Hong Kong voters shall select a chief executive
from among the two or three candidates chosen by the nomination committee in accordance with the ‘‘first-past-the-post’’ system (i.e., the candidate with the most votes wins).25
Hong Kong government officials and other pro-establishment
voices * argued that even with its limitations, the reform package
should be approved in LegCo to serve as the foundation from whichfurther democratic reform of the electoral process in future elections could be pursued. Although the April reform package—by re* For example, see Isabella Steger, Edward Ngai, and Charles Clover, ‘‘Hong Kong Government Rejects Activists’ Demands for Electoral Reforms,’’ Wall Street Journal, July 15, 2014.

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quiring a lower endorsement threshold for potential candidates—
presented a slightly greater chance over the Standing Committee
framework that a democratic candidate could be nominated, pandemocrats still considered the plan tantamount to giving the central government a backdoor to screen out candidates it does not
like.26 During the Commission’s July trip to Hong Kong, former
Hong Kong Chief Secretary for Administration Anson Chan said allowing Hong Kong voters to choose only among candidates approved by Beijing is not true universal suffrage, but rather ‘‘gives
fake legitimacy to the whole election process.’’ 27 According to Martin Lee, founder of Hong Kong’s Democratic Party and a former
legislator, even if there were one acceptable candidate to emerge
under the Standing Committee’s framework, ‘‘it would not beenough’’ to grant the chief executive any true legitimacy.28
On June 18, 2015, all 27 pan-democrats—a bloc representing justover one-third of the legislators—and one pro-establishment lawmaker voted against the motion, rejecting the package as promisedin August 2014. Shockingly, only eight pro-establishment lawmakers voted in favor of the plan, allegedly due to a miscommunication when 31 LegCo members walked out in a botched attempt
to delay the vote while they waited for a prominent pro-establishment member who was stuck in traffic.29 The failure of pro-establishment LegCo members to vote was considered an ‘‘embarrassing
joke,’’ according to one pro-establishment legislator who met with
the Commission in July.30
As a result of LegCo’s defeat of the electoral reform proposal, thecurrent election framework—whereby the chief executive is chosen
by a committee representing only 0.02 percent of eligible voters—
will be used in the 2017 chief executive election.31 China’s NPC
blamed pan-democrat lawmakers for ‘‘insisting on their stubborn
confrontation against the central authorities,’’ and reiterated that
its August decision on Hong Kong’s electoral reform ‘‘will remain
in force in the future.’’ 32
The governments of the United States and United Kingdom (UK)both expressed disappointment at the outcome of the electoral reform process. Scott Robinson, spokesman for the U.S. consulate inHong Kong, reiterated the U.S. government position that ‘‘the legitimacy of the chief executive would be greatly enhanced if the chief
executive were selected through universal suffrage and if Hong
Kong’s residents had a meaningful choice of candidates.’’ 33 Likewise, a UK government representative called for a ‘‘constructive
dialogue on future reforms . . . reflecting the aspirations of the people of Hong Kong and in accordance with the Basic Law.’’ 34
Looking Ahead: Shifting Priorities
Hong Kong’s 2017 chief executive election is no longer open to
substantial, if any, amendment, and the 2022 electoral method—
likely to resemble the plan vetoed in June, according to the central
government—is a distant thought for some Hong Kongers. Now, political actors in Hong Kong face the question of how to move forward with constitutional development. Chief Executive Leung andZhang Xiaoming, director of the Liaison Office of the Central People’s Government in Hong Kong, suggested Hong Kong should notcontinue to debate its political reforms, but instead refocus on eco-

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nomic and livelihood issues.35 Public opinion in Hong Kong appears
to reflect a similar sentiment: according to a survey * conducted by
the University of Hong Kong Public Opinion Program from June2014 to July 2015, the number of respondents who named politicaldevelopments as their top concern fell 4 percentage points, from
21.8 percent to 17.7 percent, while the number of respondents wholisted livelihood problems as their top concern rose 5 percentage
points, from 55.1 percent to 60.8 percent.36
Because the window has closed for amending Annex I to the
Basic Law, which governs the method for choosing the chief executive, constitutional reform of Hong Kong’s electoral method will not
be possible in time for the 2017 chief executive election or the 2020
LegCo elections.† The Hong Kong government, should it choose to
do so, could make the 2017 election more inclusive through local
legislation—thereby sidestepping the constitutional development
process and not requiring approval from the central government.
During the Commission’s trip to Hong Kong, Mrs. Chan proposed
the election committee could be reconfigured to be somewhat more
representative by widening the voting base and opening up seats
to underrepresented groups; alternatively, the government could
reduce the number of directly elected seats on the election committee, with the aim of ‘‘eventual abolition of functional constituencies.’’ 37 Several LegCo members expressed pessimism about theprospect of achieving any progress on electoral reform before the2017 election. Alice Mak, legislator with the pro-establishment Federation of Trade Unions party, explained that because two-thirds
consensus in LegCo is needed to make any changes to the composition of the election committee as Mrs. Chan suggested, ‘‘it would
not be easy to get support.’’ 38 According to Ms. Mak, there are ‘‘nosteps forward’’ on a timetable for achieving universal suffrage infuture elections because the central government may not offer itagain.39 Lee Cheuk-yan, pan-democrat LegCo member with theLabor Party, expressed concern that pan-democrats may not beable to promote further electoral reform legislation if they lose
their one-third minority in LegCo in 2020.40
Even Hong Kong’s organized university students, the driving
force behind the prodemocracy protests, are shifting their priorities.
Nathan Law, president of the Hong Kong Federation of Students,
explained to the Commission that members of the student organization are no longer focused on 2017, but rather are looking ahead
to 2047 when the ‘‘one country, two systems’’ arrangement governing Hong Kong’s handover to the PRC will expire. Those students who are concerned with the relationship between the PRC
and Hong Kong are more focused on ideological discourse regarding
Hong Kong’s future than on concrete action plans.41 Mr. Law said
many students are now focusing on threats to academic freedom in
Hong Kong.42* The respondent sample size in June 2014 was 1,018, and in July 2015 was 1,037.
† Under the Basic Law, universal suffrage cannot be implemented in LegCo elections until it
is implemented in the chief executive election. Standing Committee of the National People’s
Congress, Decision of the Standing Committee of the National People’s Congress on Issues Relating to the Methods for Selecting the Chief Executive of the Hong Kong Special Administrative
Region and for Forming the Legislative Council of the Hong Kong Special Administrative Region
in the Year 2012 and on Issues Relating to Universal Suffrage (Adopted at the 31st Session of
the Standing Committee of the Tenth National People’s Congress on December 29, 2007).

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Press, Information, and Academic Freedoms under Pressure
Declining Freedom of Press
Although local media remain relatively active in criticism of theregion’s government and, to a lesser extent, China’s central government, press freedom in Hong Kong continued an overall downward
trend in 2015, according to a number of press freedom watchdog organizations (see Figure 1).* 43 Freedom House, a U.S.-based independent advocacy organization, found Hong Kong fell nine spots to
83rd worldwide in its press freedom ranking in 2015, noting theenormous economic and political influence Beijing wields to exert
indirect pressure on media, resulting in growing self-censorship.44
Reporters Without Borders, an international nonprofit, also reported a nine-position decline from 2014, ranking Hong Kong 70th
among 180 countries and regions evaluated, primarily due to erosions of information and press freedoms throughout the prodemocracy protests in late 2014.45 Major contributors to the lower ranking include increasing violence against journalists, cyberattacks onpolitically active media outlets, and businesses withdrawing advertising from openly prodemocracy media outlets.46
Figure 1: Hong Kong’s Global Press Freedom Ranking, 2005–2015(global ranking out of approximately 190)

Note: Due to a change in methodology, Reporters Without Borders (RWB) published one setof global scores for 2011–2012 rather than two separate sets of scores. RWB published its firstworld press freedom index report in 2002, while Freedom House did not consistently report thestatus of press freedom in Hong Kong until 2005.
Source: Freedom House, ‘‘2015 Freedom of the Press Data’’; Reporters Without Borders, ‘‘Details about Hong Kong,’’ in 2015 World Press Freedom Index.

* For more details on the state of press freedom in Hong Kong in 2014, see U.S.-China Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 531–
534.

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Legally, press freedom in Hong Kong is safeguarded by the Basic
Law, the Hong Kong Bill of Rights, and the International Covenant

539
on Civil and Political Rights.47 Specifically, Article 27 of the Basic
Law provides for ‘‘freedom of speech, of the press and of publication; freedom of association, of assembly, of procession, and of demonstration; and the right and freedom to form and join tradeunions, and to strike.’’ 48 Hong Kong’s Bill of Rights incorporates
the International Covenant provisions on press freedom into Hong
Kong law; under those provisions, freedom of expression protects
both ‘‘the dissemination of news and the process of newsgathering,’’
as well as informal journalism such as blogging.49

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Violence against Journalists
Local journalists and members of the general public in Hong
Kong highlighted violence in reports of the deteriorating press freedom environment there. Slightly more than half of respondents
surveyed by the Hong Kong Journalists Association (HKJA) expressed concern about increasing reports of violence against journalists.50 More than 90 percent of Hong Kong journalists surveyed
said they perceived an increase in the number of attacks by law enforcement officers in 2014 compared with the previous year, while
87 percent perceived an increase in the number of attacks by proestablishment supporters.51
The uptick in violence and violations of freedom of press and expression in 2014 coincided with local media coverage and supportof the prodemocracy movement Occupy Central and criticism of theHong Kong and central Chinese governments. While attacks
against journalists and press members have seemingly escalated in
Hong Kong for decades—the HKJA last year pointed to unresolved
prior attacks on media actors in 1985, 1994, 1996, 1998, and2013—the February 2014 maiming of Kevin Lau, then editor of
Chinese-language newspaper Ming Pao, and the March 2014 beating of two news media executives brought concern over Hong
Kong’s press freedoms to new heights.* 52 Mr. Lau’s two attackers
were found guilty of ‘‘causing grievous bodily harm’’ and stealinga motorcycle, and on August 21 were sentenced to 19 years in prison for accepting around $12,900 to carry out the attack, though it
was never disclosed who ordered the attack and why.53 The fourindividuals arrested for the March attack pleaded not guilty; thecase is still pending.54 Failure to adequately address physical violence against journalists and other media actors in Hong Kong has
contributed to a worsening environment for press members there,
especially those associated with the prodemocracy movement.
The HKJA recorded accounts of 24 alleged attacks on journalists
from September 22, 2014, to October 29, 2014, in connection withthe protests, with physical and verbal assaults inflicted by actors
ranging from unidentified assailants to police.† Aside from outrightattacks, the HKJA reported continuous, unjustified ‘‘violent behav* For more details on violence against journalists and other press freedom violations in Hong
Kong through October 2014, see U.S.-China Economic and Security Review Commission, 2014
Annual Report to Congress, November 2014, 531–534.
† A full list of the alleged attacks reported to the HKJA can be found in PEN American Center, ‘‘Threatened Harbor: Encroachments on Press Freedom in Hong Kong,’’ January 16, 2015,
40–44. The Hong Kong Government maintains the Hong Kong Police Force is politically neutraland does not consider the political stance of arrestees in carrying out duties. Letter from Millie
Ng (Secretary for Security, Hong Kong Security Bureau) to Betty Ma (Clerk to the LegCo Panelon Security), June 1, 2015.

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ior’’ by police, including arrests without cause, assault, and use of
pepper spray against journalists carrying out legitimate reporting
duties during the protests.* 55 Another prominent target is Jimmy
Lai, outspoken prodemocracy supporter and former head of outlet
Next Media and news tabloid Apple Daily, whose home and NextMedia headquarters were attacked with firebombs in January
2015.56 Mr. Lai had previously suffered various threats and attacks, including a failed assassination attempt, presumably for his
prodemocracy stance.57
Politically Motivated Censorship
Since the outbreak of prodemocracy protests in mid-2014, news
media outlets and journalists in Hong Kong continue to face political and economic pressure to self-censor, sometimes at the risk of
shutting down or job loss. Journalists are particularly concerned:
537 journalists surveyed by the HKJA rated self-censorship inHong Kong as averaging 7 out of 10, with 10 denoting the problem
is very common.58 Seventy-one percent of those surveyed stated theHong Kong government was one of the sources of press freedom
suppression.59 Some media organizations, including television andprint news outlets, faced accusations of self-censorship over coverage of the prodemocracy movement, raising concerns about the
publications’ credibility.60 This trend is highlighted by the shufflingof senior management and editors and controversial editorial practices at several of Hong Kong’s most prominent news outlets, as described below:• In 2013, the Hong Kong Economic Journal, one of the more influential publications in Hong Kong, underwent major seniorlevel staffing changes after receiving letters of complaint about
critical reporting on the chief executive.61 Throughout 2014,
several Journal reporters and columnists reported receiving
editorial guidance to withdraw or alter content critical of thechief executive or related to political matters.62

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• In May 2014, Chong Tien-siong became de facto principal editor of Ming Pao, a position formerly held by Mr. Lau (who wasassaulted shortly after his departure from the publication),raising suspicion that Mr. Chong’s appointment was related tohis status as a prominent businessman on the Mainland.63
Under Mr. Chong’s management, an editorial director violated
standard editorial procedures by making middle-of-the-nightchanges to the headline of a front-page story about the July 1,
2014, rally for universal suffrage. The headline wording—originally composed by the editing team in accordance with established practice—was altered to downplay the politically sensitive event. More than 190 Ming Pao staff members signed ajoint statement calling on the editor to apologize for violating
editorial practices, and the HKJA and the Independent Com* For example, seven Hong Kong police officers on October 15 were charged with causing bodily harm and common assault for the beating—which was caught on video—of Ken Tsang, a prodemocracy activist and Civic Party member, during the 2014 prodemocracy demonstrations.
Alan Wong, ‘‘Hong Kong Police Officers Are Charged in Beating of Protester,’’ New York Times,
October 15, 2015.

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mentators Association in Hong Kong condemned the editor’s
action for ‘‘seriously undermining’’ editorial independence atthe paper.64• In February 2015, Mr. Chong was responsible for a unilateral
editorial decision at Ming Pao to drop a front-page story on a
Canadian government report about the 1989 Tiananmen
Square Massacre and run it on an inside page, despite strong
objections from senior editorial staff.65• In April 2015, it was announced that an undisclosed stake in
Young Lion Holdings—the controlling shareholder of 26 percent of shares of Television Broadcasts (TVB), the dominant
free-to-air televised news channel in Hong Kong known for its
pro-Beijing reporting—was sold to a company controlled by Li
Ruigang, nicknamed ‘‘China’s Rupert Murdoch’’ for his status
as a media mogul.66 Acquisition of the TVB shares by Mr. Li,former deputy secretary general of the Shanghai Communist
Party’s administration office, marks a further injection of
mainland capital into the local media, according to the
HKJA.67

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• In May 2015, Wang Xiangwei, chief editor of prominent
English-language newspaper South China Morning Post, notified all columnists featured on its Opinion and Insight pages
that regular column submissions were no longer required, andthat columnists must instead submit proposals for topics to the
op-ed editor for preapproval, marking a departure from the paper’s long-established policy of allowing regular columnists
ample scope to decide what to write.68 As a result, several
widely read regular columns have disappeared. After morethan 40 years combined writing for the Post, four veteran columnists—three of whom had written government-critical columns in the past—were reportedly dismissed from the paperin May.69 The Post cited its updated op-ed policy as the reason
for the change.70
Control of the media in Hong Kong is influenced by ownership.
According to HKJA’s 2013 annual report, the influence of the Chinese and Hong Kong governments over major news outlets in Hong
Kong is on the rise—media owners ‘‘controlled,’’ directly or indirectly, by the Hong Kong or central government hold leading positions in an estimated 86.7 percent of Hong Kong’s 30 major media
outlets.71 Moreover, as of 2013, the owners of 36.7 percent of outlets had been appointed to China’s main political assemblies, the
NPC and the Chinese People’s Political Consultative Conference.72
The HKJA’s research shows only four of the 30 outlets ‘‘escape[d]mainland or Hong Kong government favor’’ as of 2013; two of thesefour outlets were published by Next Media Group, known for its
prodemocracy stance.73 Revelations that ‘‘some China-funded companies had pulled their advertisements from some Chinese-language newspapers,’’ including Apple Daily, the free daily am730,
and the Hong Kong Economic Journal, stoked concerns about growing mainland interference in Hong Kong’s media.74

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In a positive development, some newly established Hong Kong
news outlets are pursuing crowdfunding in order to avoid the political and economic influence associated with media ownership.
These outlets include bilingual investigative news agency FactWire,
English-language news website Hong Kong Free Press, and Chinese-language site Initium Media, which seeks to ‘‘provide neutral,
free, and professional news to the Chinese community around theglobe.’’ 75
Freedom of Information Legislation
No law in Hong Kong governs the management of official archives, which results in stifled government transparency and accountability and generates concerns that certain documents andrecords made during the Occupy Central movement may be destroyed.76 Local journalists have consistently and strongly supported implementation of freedom of information legislation to ensure they and the general public have a legal right to access information held by the government and public entities; 89 percent ofmedia workers surveyed by the HKJA indicated the government
needed to protect press freedom through enactment of the legislation.77 In a 2014 report released after concluding a year-long study,
Hong Kong’s Office of the Ombudsman recommended the enactment of such legislation after finding key components of freedomof information laws are ‘‘missing or are not adequately manifested’’in the existing administrative code governing public requests for information.78 Despite this report, the legislative process has been
held up by two relevant subcommittees, which were established by
the Law Reform Commission of Hong Kong to make recommendations on options for reform.79 According to Freedom House, theHong Kong government stated it would defer a decision on such
legislation until the release of a report on the issue from a Law Reform Commission subcommittee.80 Stephen Wong Kai-yi, secretaryof the Law Reform Commission, said the subcommittee’s report was
expected before 2016.81 Despite signing a pledge to do so, Chief Executive Leung has not taken any action to promote freedom of information legislation.82

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Academic Freedom Challenged
Unlike in mainland China, universities in Hong Kong enjoy ahigh degree of academic freedom, autonomy, and freedom of expression. But the role of academics has come under government scrutiny following last year’s prodemocracy protests, organized by student groups and other academics. In 2015, this treatment extended
to leadership at Hong Kong’s most prestigious university. In December 2014, a University of Hong Kong (HKU) search committee
unanimously recommended former HKU law school dean Johannes
Chan Man-mun for the position of pro-vice chancellor at the university.83 Mr. Chan was critical of the government during the prodemocracy protests (Benny Tai, leader of the Occupy Central movement, was one of Mr. Chan’s law school faculty members), and isa member of Hong Kong 2020, a prodemocracy group led by Anson
Chan.84 But Mr. Chan’s appointment was postponed twice and ultimately blocked in September 2015 at the insistence of HKU’s 24-

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member governing council, seven of whom—including the chairman—are appointed by the chief executive, and up to 80 percentof whom are members of the pro-establishment camp, according toFung Wai-wah, president of the Professional Teachers’ Union in
Hong Kong.85 The Hong Kong chief executive not only serves aschancellor of all eight Hong Kong higher education institutions
funded by the University Grants Committee (UGC),* which advises
the government on university funding and development, but also
appoints members of the UGC.86
According to one student representative present during the council’s deliberations, Mr. Chan was not appointed based on criticismsthat he was not qualified because he lacked a Ph.D., had not published a sufficient number of academic works, and lacked integrity.87 However, some council members, academics, and students
have claimed the prolonged delay and ultimate rejection of Mr.
Chan’s appointment involved interference from the central andHong Kong government.88 In February, Mr. Lau wrote that ‘‘some
extremely influential people in the government’’ had contacted
HKU council members, urging them to reject Mr. Chan’s promotion.89 The same month, two central government-run newspapers in Hong Kong, Wen Wei Po and Ta Kung Pao, published‘‘Cultural Revolution-style’’ attacks on Mr. Chan spanning several
pages, prematurely releasing an ‘‘extremely confidential’’ assessment by the UGC that HKU faculty’s research quality was lower
than that of the Chinese University of Hong Kong, and attacking
Mr. Chan for his ‘‘poor performance.’’ 90 One Hong Kong journalist
estimated the two newspapers alone published more than 300 articles targeting Mr. Chan since November 2014.91
Students, professors, and alumni of Hong Kong’s universities
have shown strong opposition to the council’s delay and ultimate
rejection of Mr. Chan’s appointment and the flawed governancestructure at higher education institutions there. On July 29, agroup of students stormed the council’s meeting room after thecouncil again voted to delay Mr. Chan’s appointment, while morethan 100 alumni gathered there in support of academic freedom.92
More than 1,400 HKU alumni and members of the public signed
a petition titled ‘‘Safeguard HKU,’’ calling for the preservation of
the university’s independence and timely resolution of Mr. Chan’sappointment.93 In August, nearly 300 academics voiced opposition
in a joint petition—at least the third major petition filed—in support of Mr. Chan out of concern that the government is interferingin university affairs.94 During the Commission’s July trip to Hong
Kong, Nathan Law, president of the Hong Kong Federation of Students, expressed that the student organization wants to pursue reform of the university governance structure, but that such legislation is unlikely to garner LegCo or chief executive support. At anannual convocation of HKU alumni in September, 9,298 alumni
overwhelmingly voted to revise the law so the Hong Kong chief executive is no longer chancellor of the university.95* The chief executive is chancellor of all eight UGC-funded institutions in Hong Kong. The
UGC is a non-statutory advisory committee responsible for advising the Hong Kong Governmenton the development and funding needs of its funded institutions. Its members are appointed by
the chief executive and comprise local and overseas academics, higher education administratorsand community leaders. University Grants Committee, ‘‘Brief History.’’ http://www.ugc.edu.hk/
eng/ugc/about/overview/history.htm.

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The controversy surrounding alleged government interference in
HKU’s appointment procedures is only one example of Beijing’s interference in Hong Kong academia. Hong Kong legislators told theCommission that the central government is worried about Hong
Kong universities producing ‘‘rebellious’’ students, especially after
seeing the impact scholars like Benny Tai and student protest leaders like Joshua Wong had on the prodemocracy movement.96 As aresult, there appears to be an effort to control the research topics,
activities, and funding of liberal academics in Hong Kong. Joseph
Cheng Yu-shek, a political science professor at the City Universityof Hong Kong, describes a phenomenon whereby pressure on academics to toe the Party line ‘‘trickles down’’ from top-level management to influence faculty promotion.97 Meanwhile, according to Mr.
Cheng, academics loyal to Beijing are rewarded with honors andposts at mainland universities, but ‘‘if [academics] are perceived
unfavorably, there are distinct difficulties.’’ 98 Mr. Cheng, whofounded a group called Alliance for True Democracy that was active
during the Occupy Central protests, was attacked in Wen Wei Po
and demoted from his position as chairman of the political science
department at his university three months before his retirement.99
Hong Kong’s Economic Ties with Mainland China

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For the 21st consecutive year, Hong Kong in 2015 retained its
ranking as the world’s freest economy * for its efficient regulatory
framework, simple and low taxation, and sophisticated capital markets, according to the U.S. think tank Heritage Foundation.100
With global foreign direct investment (FDI) inflows of $103 billion
in 2014, Hong Kong was the second-largest recipient of FDI in Asia
after China ($129 billion), while FDI outflows from Hong Kongreached $143 billion, ranking second highest behind U.S. outflows.101 Due to its status as a global financial hub,† Hong Kong’s
total stock of inward FDI by the end of 2013 reached $1.34 trillion—about 4.9 times its gross domestic product (GDP) that year—
largely driven by incoming capital from tax haven economies likethe British Virgin Islands (33.7 percent), the Netherlands (6.6 percent), and Bermuda (5.9 percent).102 Overall, Hong Kong’s economic growth moderated in 2014—real GDP growth fell from 3.1
percent in 2013 to 2.5 percent in 2014, and is projected to land between 2 and 3 percent in 2015—primarily due to the global economic recovery, slowing growth in China, and weaker tourist arrivals and spending, including on luxury goods, in Hong Kong.103
The bilateral economic relationship between the United Statesand Hong Kong is strong. During the Commission’s July trip toHong Kong, U.S. Consulate officials reported 85,000 Americans areliving in Hong Kong, and around 1,300 U.S. businesses operate
there.104 U.S. companies have 800 regional headquarters and offices in Hong Kong—the largest number of any country.105 As of* The Index of Economic Freedom is measured based on four categories of factors—rule of law,
limited government, regulatory efficiency, and open markets—and is calculated by the Heritage
Foundation, a conservative U.S. think tank based in Washington, DC.
† In accordance with the Basic Law, Hong Kong maintains its status as a free port and separate customs territory. However, it participates in international economic agreements as ‘‘Hong
Kong, China,’’ as in the World Trade Organization. Hong Kong Special Administrative Region,‘‘Hong Kong as Asia’s World City,’’ in The Basic Law and Hong Kong—The 15th Anniversaryof Reunification with the Motherland, 142–143.

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2014, cumulative U.S. FDI in Hong Kong measured $66.2 billion,
according to official U.S. data, while total Hong Kong FDI into theUnited States measured $7.6 billion.106 Additionally, Hong Kong isa key U.S. trading partner. The United States maintains its largest
trade surplus with Hong Kong: at $35.1 billion in 2014, the U.S.
surplus with Hong Kong measured more than $12 billion greaterthan its trade surplus with the Netherlands, the second largest.107
Hong Kong is the tenth-largest market for U.S. exports and a top
ten export market for U.S. agricultural products, led by tree nuts,
beef, pork, fruit, and wine.108
The region’s economy remains highly integrated with that ofmainland China in terms of bilateral trade and investment. Hong
Kong is the second-largest trading partner of mainland China after
the United States, accounting for 8.7 percent of China’s total tradein 2014, according to China’s Customs statistics.109 Hong Kong
plays the most important role in intermediating trade between
China and the rest of the world by distributing a large fraction ofChina’s exports: according to Hong Kong government statistics, in
2014, 60 percent of re-exports were of Chinese origin, and 54 percent were destined for the Chinese mainland.110 Cross-border investment shows an even stronger trend: in 2014, Hong Kong was
the largest source of overseas FDI in mainland China, with cumulative capital inflow from Hong Kong reaching $745.9 billion, or
49.3 percent of total FDI on the Mainland.111 Similarly, mainland
China remains a leading investor in Hong Kong, with $428 billion
in Chinese investment—or 31.9 percent of the total stock—flowing
into Hong Kong at the end of 2013.112
Hong Kong’s Role in Mainland China’s Financial Reforms
Historically, Hong Kong has played a pivotal role in pushing
through mainland China’s economic and financial reform objectives. Aside from its significant role as a trade and direct investment partner, Hong Kong is the center for cross-border renminbi(RMB) trade settlement and offshore RMB business. In addition,
mainland Chinese enterprises increasingly pursue listings on the
Stock Exchange of Hong Kong (SEHK) to access foreign capital. In
its capacity as an international financial center and offshore RMBhub, Hong Kong is being used by the Mainland to push through reforms, including development of its domestic financial market, improvement of the international competitiveness of its firms, andmanaged liberalization of its capital account.113 These developments are expected to enhance market transparency and foreign investor access on the Mainland, and enhance cross-border fund flows
and complement the mature financial services industry in HongKong. Moreover, growing trade between the two markets will accelerate the RMB’s internationalization. But increasing Hong Kong’s
exposure to the risks inherent in China’s underdeveloped equity
market, such as recent stock market volatility and subsequent policy intervention by the central government, calls into question thepace of China’s future financial reforms and presents operationalrisks for some investors.114 Aside from systemic risks, foreign investment into mainland markets through Hong Kong faces structural limitations, especially given the incremental deployment ofreform programs.

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Trade Settlement
As the premier offshore RMB hub, Hong Kong plays a vital rolein the Mainland’s capital account liberalization. (For more on China’s financial reforms, see Chapter 1, Section 3, ‘‘China’s State-Led
Market Reform and Competitiveness Agenda,’’ of this Report.) In
China’s 12th Five-Year Plan for financial development and reform(2011–2015), the central government set policy directives for freer
cross-border capital flow and a higher degree of RMB capital account convertibility, with the ultimate aim of internationalizing the
RMB.115 To achieve these goals, Chinese financial authorities employ Hong Kong as a testing ground for use of the RMB as a settlement, investment, and funding currency.116 As of December 2014,
a total of 149 authorized banking institutions in Hong Kong engaged in RMB business, with RMB deposits worth more than $161
billion (RMB 1 trillion), accounting for approximately 24 percent offoreign currency deposits among authorized institutions there (seeFigure 2).117 At year-end 2014, the value of outstanding RMB-denominated debt instruments and bonds lodged with the Central
Moneymarkets Unit of the Hong Kong Monetary Authority reached$65.4 billion (RMB 407 billion)—52 percent of the total value ofoutstanding debt issues—representing a 6 percent increase yearon-year.118
Figure 2: RMB Deposits in Hong Kong Banking Institutions, 2005–2015

Source: Hong Kong Monetary Authority, Monthly Statistical Bulletin, Issue No. 251, July2015.

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Hong Kong also serves as a platform for enterprises and financial
institutions all over the world to conduct RMB trade settlement,
payments, financing, and investments. In the first half of 2015,
total RMB trade settlement conducted through banks in Hong
Kong reached $513.4 billion (RMB 3.2 trillion) (see Figure 3).119

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Figure 3: Cross-Border RMB Trade Settlement through Hong Kong Banks(monthly)

Source: Hong Kong Monetary Authority, Monetary Statistics.

Stock Exchange Listings

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Hong Kong’s active international securities market has consolidated its position as the second-largest initial public offering (IPO)
market in the world—in 2014, nearly $30 billion (Hong Kong dollar(HKD) 232.5 billion) was raised, a 38 percent increase from theprevious year.120 In line with China’s ‘‘going global’’ strategy, which
encourages Chinese firms to both invest abroad and expand overseas operations, mainland firms are increasingly participating in
Hong Kong’s equity market: among the $30 billion in IPO funds
raised last year on the SEHK, Chinese firms contributed approximately 86 percent.121 As of December 31, 2014, 876 mainland enterprises were listed on the SEHK—50 percent of the total numberof listed companies—accounting for 60 percent of the total market
capitalization (see Figure 4).122 Mainland enterprises benefit fromraising capital in a freely convertible currency and taking advantage of the Hong Kong market’s greater liquidity and more effective
and better regulated risk management investment instruments.123

548
Figure 4: Market Capitalization of Mainland Firms Listed in Hong Kong

Note: ‘‘Mainland firms’’ refers to the following: (1) H-share companies, which are incorporated
on the Mainland and controlled by either mainland government entities or individuals; (2) red
chip companies, which are incorporated outside of the Mainland and controlled by mainland government entities; and (3) mainland private enterprises, which are incorporated outside of theMainland and controlled by mainland individuals. Hong Kong Exchanges and Clearing, ‘‘Market
Statistics 2014,’’ January 8, 2015, 14.
Source: Hong Kong Exchanges and Clearing, ‘‘Market Statistics 2014,’’ January 8, 2015, 16.

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Shanghai-Hong Kong Stock Connect
Another pillar of China’s currency internationalization efforts is
the Shanghai-Hong Kong Stock Connect, a mutual market accessservice between the Shanghai and Hong Kong stock exchanges
launched in November 2014. The link enables institutional or retail
foreign investors for the first time to trade A-shares—shares inmainland China-based companies traded on Chinese exchanges—
which were previously only available to certain investors licensed
under China’s Qualified Foreign Institutional Investor (QFII) andRMB QFII programs.124 For Hong Kong, the Stock Connect provides additional liquidity and supports the region’s offshore RMB
business and its role as a financial gateway to China.125
The northbound link—referring to funds flowing north from
Hong Kong to China—allows investors outside the Mainland to
trade selected equities on the Shanghai Stock Exchange (SSE),
routed through Hong Kong brokers; the southbound link—referring
to funds flowing south from China to Hong Kong—allows investors
in mainland China to trade selected equities on the SEHK, throughmembers of the SSE (see Table 1).126

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Table 1:

Framework of the Shanghai-Hong Kong Stock Connect
NorthboundSouthboundAsset Classes

Selected SSE A-shares

Selected SEHK stocks

Investors

International and Hong Kong
institutional and retail investors

Domestic institutional investors and qualified retail investors

Brokers

SEHK members who fulfill
eligibility requirements

SSE members who fulfill eligibility requirements

Currency

Traded and settled in offshore
RMB

Traded in HKD and settled in
RMB

Trading Venue

SSE

SEHK

Clearing House

ChinaClear

Hong Kong Securities Clearing Co.

Source: Hong Kong Exchanges and Clearing, ‘‘Shanghai-Hong Kong Stock Connect,’’ March
26, 2015.

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RMB internationalization is still in the early stages, largely due
to the deliberate and incremental pace of China’s regulators intheir efforts to control potential risks. For this reason, trading issubject to a maximum cross-border investment quota (i.e., aggregate quota), together with a daily quota. The northbound aggregate
quota is set at $49 billion (RMB 300 billion)—less than 1 percentof the total A-share market—and the southbound aggregate quota
is set at $41 billion (RMB 250 billion).127 The daily quota limits the
maximum net buy value of any cross-border trades under the program each day: the northbound daily quota is set at $2.1 billion(RMB 13 billion), and the southbound daily quota is set at $1.7 billion (RMB 10.5 billion).128 The program’s initial northbound aggregate quota of $49 billion is equivalent to 9 percent of all offshore
RMB assets ($548 billion as of 2014) (see Figure 5).129 Before thelaunch of the Stock Connect, quotas for the QFII and RMB QFII
programs—the only available channels for international investment
in China’s A-shares—were $67 billion and $48 billion respectively
in 2014, according to China’s State Administration of Foreign Exchange.130

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Figure 5: International RMB Holdings, 2014

Note: Dim sum bonds are bonds issued outside of China but denominated in RMB. RQFII denotes the RMB QFII program.
Source: Neil Katkov and Hua Zhang, ‘‘Shanghai-Hong Kong Stock Connect: It’s Just the Beginning,’’ Celent, June 2015, 14.

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Given the previous limits on access, the initial response frominternational investors was strong: northbound trading on thelink’s first day attained 100 percent usage of the daily quota (seeFigure 6). While subsequent months of operation saw less active
northbound daily trading, Chinese investors for the first time usedthe entire southbound daily quota in April 2015, reaching a record
high in turnover for the link at $4.8 billion (RMB 29.9 billion) andmaking the Hong Kong exchange the highest market capitalizationexchange in the world.131 Some analysts credit the allowance by
Chinese regulators for mutual funds to buy Hong Kong shares
under the program the preceding week for the surge, a change thatmade it easier to get around southbound barriers like high capitalthresholds.132

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Figure 6: Daily Trading Quota Usage Rate

Source: Hong Kong Stock Exchange and Clearing Limited; Shanghai Stock Exchange via
CEIC database.

* Celent, a division of management consulting firm Oliver Wyman, is a research and consulting firm focused on information technology in the financial services industry.

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A June 2015 report from research and consulting firm Celent *identified a number of restrictive features of the stock link that
may create operational complexity and introduce risk.133 These include a complex settlement cycle, no day trading and limited support for short selling, a requirement to settle in RMB, asset
fungibility issues, and onerous shareholder risk and reporting requirements.134 Despite these risks, however, the report predicts
that forthcoming improvements to the program will enable greater
participation by institutional investors and initiate inclusion of Ashares in global equity benchmark indices within the next few
years.135 If Chinese regulators remain committed and active inopening the country’s capital account, quotas are expected to be expanded to meet investor demand. The Celent report estimatesthese factors will drive international holdings of A-shares to $428
billion by 2017, setting the stage for other similar joint initiatives
such as a stock link between Shenzhen and Hong Kong.136 Whilea Shenzhen-Hong Kong stock link was initially slated to launch by
year-end 2015, the project was reportedly put on hold in June due
to technical difficulties.137 During the Commission’s July trip toHong Kong, Andrew Wong, Permanent Secretary of Hong Kong’s
Financial Services and the Treasury Bureau, said the technicalissues had been sorted out, and China’s State Council would determine the best time to launch the program. In spite of the fluctuation in the mainland stock markets since late June, according to
the Financial Services and the Treasury Bureau, ‘‘the Hong Kong
securities markets have been trading and operating in an orderly
and smooth manner.’’ 138
Because the level of trading through the Stock Connect is low,
Hong Kong is not expected to suffer contagion from the downturnin the Mainland’s equity markets through that channel, according
to Mr. Wong.139 But markets in the two economies tend to move552
in tandem. Since the Hang Seng index—the main indicator of overall market performance in Hong Kong—hit a seven-year high in
April, it has fallen 25.5 percent as of September 1, following Shanghai’s plummeting index, which has fallen more than 38 percent asof September 1 since it peaked this year in mid-June amid massive
Chinese government intervention.140 Given the strong presence ofChinese companies listed on the SEHK—mainland firms accountfor 60 percent of market capitalization there—it is not surprisingthat falling valuations in Shanghai would affect the prices of theirshares in Hong Kong.141 Overall, according to Mr. Wong, volatility
in the mainland markets is partly related to the prevalence of margin financing (i.e., borrowing money to invest) among China’s retailinvestor-dominated traders.*
During the Commission’s July trip to Hong Kong, U.S. Consulate
officials indicated Hong Kong’s strict rules on transparency andstrong regulatory capabilities highlight the maturity of its financial
markets and enhance the ability of the SEHK to withstand sharp
fluctuations in the mainland markets.142 Hong Kong has also introduced a host of measures to control risks. When the Stock Connect
was established in late 2014, Hong Kong and Chinese regulators
signed a memorandum of understanding to enforce information disclosure and sharing.143 In July 2015, Hong Kong Exchanges &Clearing Limited, the holding company of the SEHK, announced
the introduction of volatility curbs that will use an auction at theend of the trading day to reduce volatility when calculating closing
prices—a measure used by all major stock exchanges—when it goes
into effect in mid-2016.144

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Mutual Recognition of Funds
In a move to further deepen financial cooperation and promote
the joint development of the Hong Kong and mainland capital markets, the China Securities Regulatory Commission and Hong Kong
Securities and Futures Commission jointly announced the introduction of a long-awaited ‘‘Mutual Recognition of Funds’’ initiative,
giving international asset managers a channel to access mainland
China’s growing and previously untapped retail investor market—
the number of new individual investor accounts on the SSE grew
thirty-fold year-on-year in June 2015—boosted by a growing middle
class and a huge pool of domestic savings.145 Implemented on July
1, 2015, the Mutual Recognition of Funds initiative enables mainland China and Hong Kong funds to be distributed in each other’smarkets through a streamlined vetting process, enabling non-mainland Chinese retail investors and fund managers to enter the Chinese retail fund market through Hong Kong.146 The move is expected to increase the diversity of asset management activities inHong Kong’s asset management industry, which previously relegated fund management services largely to sales and marketing,by incentivizing fund managers to base their funds in the city.147
The initiative is intended to further expand cross-border RMB
flows and facilitate China’s efforts to open up its capital markets
and internationalize the RMB by providing an avenue to convert* For more details on fluctuations in the mainland stock markets, see Chapter 1, Section 1,‘‘Year in Review: Economics and Trade,’’ of this Report.

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domestic savings in mainland China into cross-border investments.148
Implications for the United States

dkrause on DSKHT7XVN1PROD with USCCThe United States has a long history of positive bilateral relations with Hong Kong and is committed to the region’s stability,
prosperity, and continued success as an international trade and financial center. The United States and Hong Kong share many values, including respect for rule of law and for civil liberties. To bolster Hong Kong’s stability and prosperity, the U.S. government encourages Beijing and Hong Kong to continue to work together tofurther Hong Kong’s democratic development in accordance with
the Basic Law and the aspirations of the people of Hong Kong.149
Hong Kong’s high degree of autonomy and economic freedom
make it a valuable and preferable destination for U.S. investors
and an important U.S. trading partner. Approximately 1,300 U.S.
businesses operate in Hong Kong, drawn in part by the region’s
openness, transparency, free market, and strong rule of law.150
After mainland China, the United States is Hong Kong’s secondlargest trading partner. The United States maintains its largest
trade surplus with Hong Kong and its tenth-largest goods export
market.151 Moreover, Hong Kong and the United States continue tocooperate economically in a number of bilateral and multilateralfora, including the World Trade Organization, the Asia-Pacific Economic Cooperation, and the Financial Action Task Force. The two
also maintain a strong law enforcement partnership in areas including customs, intellectual property rights protection, financial
fraud, counterterrorism, and immigration.
In line with the Commission’s recommendation in its 2014 Annual Report to Congress, the Hong Kong Policy Act report was updated in 2015 after an eight-year hiatus pursuant to H.R. 5013, theState, Foreign Operations, and Related Programs Appropriations
Bill, 2015, which mandated the Secretary of State report to Congress on key developments in Hong Kong.152 According to the report, Hong Kong has maintained a sufficiently high degree of autonomy under the ‘‘one country, two systems’’ model to justify continued special economic treatment by the United States for bilateral agreements and programs.153 But recent trends have sparked
U.S. concern over growing constrictions of Hong Kong’s press andmedia freedoms, including increasing reports of political pressure
to self-censor, violent assaults against members of the press, firingof journalists critical of the central government, and cyberattacks
against prodemocracy media.154
As the economies of Hong Kong and mainland China become
even more integrated through liberalization efforts like the Shanghai-Hong Kong Stock Connect, U.S. investors will look to Hong
Kong’s regulators to uphold rule of law and international financial
standards and best practices to minimize risks to the global financial system to the highest degree possible.
Conclusions• In June 2015, Hong Kong’s Legislative Council voted down electoral reform legislation based on a framework designed by Chi-

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na’s central government. This framework would have limited thecandidates eligible for chief executive nomination to those acceptable to Beijing. As a result, election of the chief executive in 2017
will employ the same method as the 2012 chief executive election, whereby a 1,200 member committee elects the leader.
• Members of the general public, legislators, students, and othervested parties lack consensus on how to pursue electoral reformin Hong Kong’s future chief executive and Legislative Council
elections.
• Press freedom in Hong Kong is increasingly under pressure due
to recent instances of violence against journalists, increasing political and economic pressure to self-censor, and use of economic
coercion to disrupt independent reporting. The absence of a freedom of information law in Hong Kong also contributes to a lackof transparency with regard to open access to and preservationof government records.
• Hong Kong’s world-class economy, particularly its capital markets, is playing an increasingly pivotal role in mainland China’s
efforts to push through financial reforms, including developmentof its domestic financial market, improvement of the international competitiveness of its firms, and liberalization of its capital account.
• In an effort to internationalize the renminbi, among other objectives, Hong Kong and mainland China have jointly established anumber of pilot programs, including the Shanghai-Hong Kong
Stock Connect and the Mutual Recognition of Funds initiative, toboost international participation in China’s markets. These developments are expected to enhance market transparency andforeign investor access on the Mainland and enhance cross-border fund flows.
• Deepening integration exposes Hong Kong to the risks inherent
in China’s volatile equity markets, presenting operational risks
for some investors. Moreover, foreign investment into mainlandmarkets through Hong Kong still faces structural and quantitative limitations.

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dkrause on DSKHT7XVN1PROD with USCCENDNOTES FOR SECTION 4
1. Hong Kong Special Administrative Region, The Basic Law of the Hong Kong
Special Administrative Region of the People’s Republic of China, Chapter II, Article
12.
2. Hong Kong Special Administrative Region, The Basic Law of the Hong Kong
Special Administrative Region of the People’s Republic of China, Chapter II, Articles
12–16.
3. China’s State Council Information Office, Full Text: The Practice of the ‘OneCountry, Two Systems’ Policy in the Hong Kong Special Administrative Region,
Xinhuanet, June 10, 2014.
4. Michael Li Jia, review of Insider Story: A Learned Evaluation of ‘One Country, Two Systems’ in Hong Kong, by Albert Chen Hung-Yee, Harvard-Yenching Institute (Blog).
5. Hong Kong Special Administrative Region, The Basic Law of the Hong Kong
Special Administrative Region of the People’s Republic of China, Introduction to the
Basic Law and Principles of Constitutional Development.
6. Hong Kong Special Administrative Region, The Basic Law of the Hong Kong
Special Administrative Region of the People’s Republic of China, Chapter IV, Articles
43, 45.
7. Hong Kong Special Administrative Region, The Basic Law of the Hong Kong
Special Administrative Region of the People’s Republic of China, Chapter IV, Article45.
8. Standing Committee of the National People’s Congress, Decision of theStanding Committee of the National People’s Congress on Issues Relating to the
Methods for Selecting the Chief Executive of the Hong Kong Special Administrative
Region and for Forming the Legislative Council of the Hong Kong Special Administrative Region in the Year 2012 and on Issues Relating to Universal Suffrage (Adopted by the Standing Committee of the Tenth National People’s Congress at its 31st
Session on December 29, 2007).
9. Michael Martin, ‘‘Prospects for Democracy in Hong Kong: The 2017 Election
Reforms,’’ Congressional Research Service, June 9, 2015; Carrie Lam, ‘‘CS: The
Rules for Hong Kong Electoral Reform,’’ Hong Kong Special Administrative Region
Government, July 28, 2014.
10. Alan Leong, LegCo member, discussion with Commission, Hong Kong Special Administrative Region, July 29, 2015.
11. Standing Committee of the National People’s Congress, Decision of theStanding Committee of the National People’s Congress on Issues Relating to the Selection of the Chief Executive of the Hong Kong Special Administrative Region by
Universal Suffrage and on the Method for Forming the Legislative Council of theHong Kong Special Administrative Region in the Year 2016 (Adopted at the Tenth
Session of the Standing Committee of the 12th National People’s Congress on August 31, 2014), published as ‘‘Full Text of NPC Decision on Universal Suffrage for
HKSAR Chief Selection,’’ Xinhua (English edition), August 31, 2014.
12. Standing Committee of the National People’s Congress, Decision of theStanding Committee of the National People’s Congress on Issues Relating to the Selection of the Chief Executive of the Hong Kong Special Administrative Region by
Universal Suffrage and on the Method for Forming the Legislative Council of theHong Kong Special Administrative Region in the Year 2016 (Adopted at the Tenth
Session of the Standing Committee of the 12th National People’s Congress on August 31, 2014), published as ‘‘Full Text of NPC Decision on Universal Suffrage for
HKSAR Chief Selection,’’ Xinhua (English edition), August 31, 2014; U.S.-China
Economic and Security Review Commission, 2014 Annual Report to Congress, November 2014, 518.
13. China’s Information Office of the State Council, The Practice of the ‘‘OneCountry, Two Systems’’ Policy in the Hong Kong Special Administrative Region,
June 10, 2014, published as ‘‘Full Text: Chinese State Council White Paper on ‘OneCountry, Two Systems’ Policy in Hong Kong,’’ South China Morning Post, June 10,2014; Standing Committee of the National People’s Congress, Decision of the Standing Committee of the National People’s Congress on Issues Relating to the Selectionof the Chief Executive of the Hong Kong Special Administrative Region by Universal
Suffrage and on the Method for Forming the Legislative Council of the Hong Kong
Special Administrative Region in the Year 2016 (Adopted at the Tenth Session of
the Standing Committee of the 12th National People’s Congress on August 31,
2014), published as ‘‘Full Text of NPC Decision on Universal Suffrage for HKSAR
Chief Selection,’’ Xinhua (English edition), August 31, 2014.
14. James Pomfret and Yimou Lee, ‘‘Hong Kong Debates Election Reform Plan
with Veto Likely,’’ Reuters, June 17, 2015.

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15. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 518; Anson Chan, former Chief Secretary of Administration of Hong Kong Special Administrative Region, discussion with Commission,
Hong Kong Special Administrative Region, July 29, 2015.
16. Hong Kong Special Administrative Region, Transcript of Remarks at Press
Conference on Method for Selecting the Chief Executive by Universal Suffrage Public
Consultation, January 7, 2015.
17. Civil Society Joint Action, ‘‘The People’s Public Sentiment Report,’’ March 3,2015, 16.
18. Michael Martin, ‘‘Prospects for Democracy in Hong Kong: The 2017 Election
Reforms,’’ Congressional Research Service, June 9, 2015, 13.
19. Hong Kong Special Administrative Region, LC: Statement by CS on Consultation Report and Proposals on the Method for Selecting the Chief Executive by
Universal Suffrage, April 22, 2015; Hong Kong Special Administrative Region, The
Basic Law of the Hong Kong Special Administrative Region of the People’s Republicof China, Chapter III.
20. Michael Martin, ‘‘Prospects for Democracy in Hong Kong: The 2017 Election
Reforms,’’ Congressional Research Service, June 9, 2015, 13.
21. Hong Kong Special Administrative Region, LC: Statement by CS on Consultation Report and Proposals on the Method for Selecting the Chief Executive by
Universal Suffrage, April 22, 2015.
22. Michael Martin, ‘‘Prospects for Democracy in Hong Kong: The 2017 Election
Reforms,’’ Congressional Research Service, June 9, 2015, 13.
23. Hong Kong Special Administrative Region, LC: Statement by CS on Consultation Report and Proposals on the Method for Selecting the Chief Executive by
Universal Suffrage, April 22, 2015.
24. Hong Kong Special Administrative Region, LC: Statement by CS on Consultation Report and Proposals on the Method for Selecting the Chief Executive by
Universal Suffrage, April 22, 2015.
25. Hong Kong Special Administrative Region, LC: Statement by CS on Consultation Report and Proposals on the Method for Selecting the Chief Executive by
Universal Suffrage, April 22, 2015.
26. Richard C. Bush, ‘‘Hong Kong Government Announces Electoral Reform Details,’’ Brookings Institution, April 23, 2015.
27. Anson Chan, former Chief Secretary of Administration of Hong Kong Special
Administrative Region, discussion with Commission, Hong Kong Special Administrative Region, July 29, 2015.
28. Martin Lee, Founding Chairman of Hong Kong’s Democratic Party, discussion with Commission, Hong Kong Special Administrative Region, July 29, 2015.
29. South China Morning Post, ‘‘Hong Kong Reform Package Rejected as ProBeijing Camp Walk out in ‘Miscommunication,’ ’’ June 19, 2015.
30. Alice Mak, LegCo member, discussion with Commission, Hong Kong Special
Administrative Region, July 29, 2015.
31. Hong Kong Special Administrative Region, Questions and Answers on Constitutional Development.
32. Catherine Wong Tsoi-lai, ‘‘NPC Condemns Hong Kong Veto of Election
Plan,’’ Global Times (China), June 19, 2015.
33. Gary Cheung and Andrea Chen, ‘‘Hong Kong Reform to Feature in HighLevel U.S. Talks with Chinese Officials,’’ South China Morning Post, June 20, 2015.
34. UK Foreign and Commonwealth Office, UK Response to Hong Kong Vote on
Electoral Reform, June 18, 2015.
35. Shannon Van Sant, ‘‘Hong Kong CEO Tries to Shift Focus from Election Reform,’’ Voice of America, May 29, 2015; Jeffie Lam and Gary Cheung, ‘‘Forget Political Reform and Move on, Top Beijing Official Tells Hongkongers,’’ South China
Morning Post, June 30, 2015.
36. University of Hong Kong Public Opinion Program, ‘‘People’s Most Concerned
Problems (Per Poll) 1992–2015.’’
37. Anson Chan, former Chief Secretary of Administration of Hong Kong Special
Administrative Region, discussion with Commission, Hong Kong Special Administrative Region, July 29, 2015.
38. Alice Mak, LegCo member, discussion with Commission, Hong Kong Special
Administrative Region, July 29, 2015.
39. Alice Mak, LegCo member, discussion with Commission, Hong Kong Special
Administrative Region, July 29, 2015.
40. Lee Cheuk-yan, LegCo member, discussion with Commission, Hong Kong
Special Administrative Region, July 29, 2015.
41. Nathan Law, President of the Hong Kong Federation of Students, discussion
with Commission, Hong Kong Special Administrative Region, July 30, 2015.

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557
42. Nathan Law, President of the Hong Kong Federation of Students, discussion
with Commission, Hong Kong Special Administrative Region, July 30, 2015.
43. Freedom House, ‘‘Hong Kong,’’ in Freedom of the Press 2015.
44. Freedom House, ‘‘Hong Kong,’’ in Freedom of the Press 2015.
45. Reporters Without Borders, ‘‘Details about Hong Kong,’’ in 2015 World Press
Freedom Index; Reporters Without Borders, ‘‘Occupy Central and the Fight for Information Freedom,’’ October 10, 2014.
46. Freedom House, ‘‘Hong Kong,’’ in Freedom of the Press 2015.
47. PEN American Center, ‘‘Threatened Harbor: Encroachments on Press Freedom in Hong Kong,’’ January 16, 2015, 7.
48. Hong Kong Special Administrative Region, The Basic Law of the Hong Kong
Special Administrative Region of the People’s Republic of China, Article 27.
49. PEN American Center, ‘‘Threatened Harbor: Encroachments on Press Freedom in Hong Kong,’’ January 16, 2015, 7.
50. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 13.
51. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 11.
52. PEN American Center, ‘‘Threatened Harbor: Encroachments on Press Freedom in Hong Kong,’’ January 16, 2015, 10.
53. Austin Ramzy, ‘‘2 Who Attacked Hong Kong Journalist Are Sentenced to 19
Years,’’ New York Times, August 21, 2015.
54. PEN American Center, ‘‘Threatened Harbor: Encroachments on Press Freedom in Hong Kong,’’ January 16, 2015, 11.
55. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 11.
56. Austin Ramzy, ‘‘Firebombs Thrown at Jimmy Lai’s Home and Company inHong Kong,’’ Sinosphere (New York Times blog), January 12, 2015.
57. U.S.-China Economic and Security Review Commission, 2014 Annual Reportto Congress, November 2014, 533–534.
58. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 22.
59. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 2.
60. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 22.
61. PEN American Center, ‘‘Threatened Harbor: Encroachments on Press Freedom in Hong Kong,’’ January 16, 2015, 17.
62. PEN American Center, ‘‘Threatened Harbor: Encroachments on Press Freedom in Hong Kong,’’ January 16, 2015, 17–18.
63. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 22.
64. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 22.
65. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 23.
66. Hong Kong Communications Authority, ‘‘Changes in Shareholding Structureof Television Broadcasts Limited,’’ April 22, 2015; Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’ July 2015, 22.
67. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 17.
68. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 25.
69. Ben Kwok, ‘‘SCMP Ditches Veteran Columnists Bowring, Rafferty and Vines,’’
EJ Insight, Hong Kong Economic Journal (May 20, 2015); Asia Sentinel, ‘‘Leading
Columnists Purged at Hong Kong’s Paper of Record,’’ May 20, 2015.
70. Ben Kwok, ‘‘SCMP Ditches Veteran Columnists Bowring, Rafferty and Vines,’’
EJ Insight, Hong Kong Economic Journal (May 20, 2015).
71. Hong Kong Journalists Association, ‘‘Dark Clouds on the Horizon,’’ July 2013,15–16.
72. Hong Kong Journalists Association, ‘‘Dark Clouds on the Horizon,’’ July 2013,15–16.
73. Hong Kong Journalists Association, ‘‘Dark Clouds on the Horizon,’’ July 2013,16.
74. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 5.
75. Yaqiu Wang, ‘‘In Hong Kong, Kevin Lau’s Resiliency Reflected in New Independent Media,’’ Committee to Protect Journalists (blog), August 24, 2015.

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558
76. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 21.
77. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 21, 2.
78. Hong Kong Office of the Ombudsman, Direct Investigation into the Access toInformation Regime in Hong Kong, March 20, 2014, 1.
79. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 21.
80. Freedom House, ‘‘Hong Kong,’’ in Freedom of the Press 2015.
81. Freedom House, ‘‘Hong Kong,’’ in Freedom of the Press 2015.
82. Hong Kong Journalists Association, ‘‘Journalists Caught between Two Fires,’’
July 2015, 21.
83. Simon Denyer, ‘‘Is Hong Kong’s Academic Freedom under Chinese Attack?’’
Washington Post, March 13, 2015.
84. Stuart Lau, ‘‘ ‘Cultural Revolution Style’ Attacks on HKU Threaten Academic
Freedom: Former Law Dean,’’ South China Morning Post, February 3, 2015.
85. James Pomfret, ‘‘Fears for Hong Kong Academic Freedom as Top Legal
Scholar Barred from Job,’’ Reuters, September 29, 2015; Tony Cheung, ‘‘ ‘Academic
Freedom Is under Threat’: 300 Hong Kong Academics Petition over Delay in HKU’s
Pro-Democracy Appointment,’’ South China Morning Post, August 24, 2015.
86. Virginia Chang, ‘‘With HKU under Fire, Who Is Meddling with Hong Kong’s
Academic Freedom?’’ Hong Kong Free Press, July 25, 2015; David Matthews, ‘‘Unsafe Harbour? Academic Freedom in Hong Kong,’’ Times Higher Education, September 10, 2015.
87. Michael Forsythe, ‘‘Vote at Hong Kong University Stirs Concern over Beijing’s Influence,’’ New York Times, September 30, 2015.
88. Tony Cheung, ‘‘ ‘Academic Freedom Is under Threat’: 300 Hong Kong Academics Petition over Delay in HKU’s Pro-Democracy Appointment,’’ South China
Morning Post, August 24, 2015.
89. Virginia Chang, ‘‘With HKU under Fire, Who Is Meddling with Hong Kong’s
Academic Freedom?’’ Hong Kong Free Press, July 25, 2015.
90. Stuart Lau, ‘‘ ‘Cultural Revolution Style’ Attacks on HKU Threaten Academic
Freedom: Former Law Dean,’’ South China Morning Post, February 3, 2015.
91. Alvin Y.H. Cheung, ‘‘The University of Hong Kong’s Academic Freedom Crisis: A Blot on Its Coat of Arms,’’ Hong Kong Free Press, September 25, 2015.
92. Associated Press, ‘‘Hong Kong Students Say Administrator’s Stalled Appointment Shows Freedom under Attack,’’ July 29, 2015.
93. Virginia Chang, ‘‘With HKU under Fire, Who Is Meddling with Hong Kong’s
Academic Freedom?’’ Hong Kong Free Press, July 25, 2015.
94. Tony Cheung, ‘‘ ‘Academic Freedom Is under Threat’: 300 Hong Kong Academics Petition over Delay in HKU’s Pro-Democracy Appointment,’’ South China
Morning Post, August 24, 2015.
95. Ng Kang-chung and Lai Ying-kit, ‘‘HKU Alumni Vote to Stop Delaying Liberal Scholar’s Appointment and End Role of Chief Executive as Chancellor,’’ South
China Morning Post, September 2, 2015.
96. Emily Lau, Alan Leong, and Lee Cheuk-yan, LegCo members, discussion
with Commission, Hong Kong Special Administrative Region, July 29, 2015.
97. Simon Denyer, ‘‘Hong Kong Fears Beijing Crackdown on Academic Freedom,’’
Washington Post, March 17, 2015.
98. Simon Denyer, ‘‘Hong Kong Fears Beijing Crackdown on Academic Freedom,’’
Washington Post, March 17, 2015.
99. Suzanne Salatine, ‘‘Hong Kong’s Academic Freedom under Fire,’’ Boston
Globe, August 14, 2015.
100. Heritage Foundation, ‘‘2015 Index of Economic Freedom (Hong Kong).’’101. UN Conference on Trade and Development, ‘‘World Investment Report
2015—Reforming International Investment Governance,’’ June 2015, 5–8.
102. Hong Kong Trade Development Council, ‘‘Economic and Trade Informationon Hong Kong,’’ June 26, 2015.
103. Hong Kong Special Administrative Region Government, Economic Situationand Updated GDP and Price Forecasts, August 14, 2015.
104. U.S. official, Consulate General of the United States in Hong Kong and
Macau, discussion with Commission, Hong Kong Special Administrative Region,
July 29, 2015.
105. U.S. Department of State, 2015 Investment Climate Statement—Hong Kong,
May 2015.
106. U.S. Department of Commerce Bureau of Economic Analysis.
107. U.S. Census Bureau, Year-to-Date Surpluses, December 2014.

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559108. U.S. Census Bureau, Year-to-Date Surpluses, December 2014; Office of the
U.S. Trade Representative, Hong Kong, August 21, 2014.
109. Hong Kong Trade Development Council, ‘‘Economic and Trade Informationon Hong Kong,’’ June 26, 2015.
110. Hong Kong Trade Development Council, ‘‘Economic and Trade Informationon Hong Kong,’’ June 26, 2015.
111. Hong Kong Trade Development Council, ‘‘Economic and Trade Informationon Hong Kong,’’ June 26, 2015.
112. Hong Kong Trade Development Council, ‘‘Economic and Trade Informationon Hong Kong,’’ June 26, 2015.
113. David Richardson, John Chrisman, and Alan Lee, ‘‘Hong Kong’s Role in China’s Financial Reform—Punching above Its Weight—Part 1,’’ Dorsey & Whitney LLP,
September 2, 2014.
114. Fitch Ratings, ‘‘Fitch: China Equity Sell-off Highlights Reform Challenges,
Risks,’’ July 16, 2015.
115. China Securities Regulatory Commission et al., Five-Year Plan for the Development and Reform of the Financial Industry, 2012.
116. John Chrisman, David Richardson, and Alan Lee, ‘‘Hong Kong’s Role in China’s Financial Reform—the Era of the ‘New Normal’—Part 2,’’ Dorsey & Whitney LLP,May 1, 2015.
117. Hong Kong Monetary Authority, ‘‘Customer Deposits by Type,’’ in Monthly
Statistical Bulletin, Issue No. 251, July 2015.
118. Hong Kong Monetary Authority, ‘‘Central Moneymarkets Unit (CMU),’’ inMonthly Statistical Bulletin, Issue No. 251, July 2015.
119. Hong Kong Special Administrative Region, Financial Services, April 2015.
120. Hong Kong Exchanges and Clearing, ‘‘The Year 2014 in Review,’’ in HKEx
Fact Book 2014, March 12, 2015.
121. Hong Kong Exchanges and Clearing, ‘‘The Year 2014 in Review,’’ in HKEx
Fact Book 2014, March 12, 2015; CY Leung, ‘‘Speech at the Opening Session of the
Asian Financial Forum’’ (Asian Financial Forum, January 19, 2015).
122. Hong Kong Exchanges and Clearing, ‘‘Market Statistics 2014,’’ January 8,
2015, 15.
123. Hong Kong Exchanges and Clearing, ‘‘Fact Sheet on the Listing of H-Shares,’’
August 6, 2013.
124. Neil Katkov and Hua Zhang, ‘‘Shanghai-Hong Kong Stock Connect: It’s Just
the Beginning,’’ Celent, June 2015, 3.
125. Neil Katkov and Hua Zhang, ‘‘Shanghai-Hong Kong Stock Connect: It’s Just
the Beginning,’’ Celent, June 2015, 13.
126. Neil Katkov and Hua Zhang, ‘‘Shanghai-Hong Kong Stock Connect: It’s Just
the Beginning,’’ Celent, June 2015, 4.
127. Hong Kong Exchanges and Clearing, ‘‘Shanghai-Hong Kong Stock Connect,’’
March 26, 2015, 8.
128. Hong Kong Exchanges and Clearing, ‘‘Shanghai-Hong Kong Stock Connect,’’
March 26, 2015, 8.
129. Neil Katkov and Hua Zhang, ‘‘Shanghai-Hong Kong Stock Connect: It’s Just
the Beginning,’’ Celent, June 2015, 2.
130. Neil Katkov and Hua Zhang, ‘‘Shanghai-Hong Kong Stock Connect: It’s Just
the Beginning,’’ Celent, June 2015, 13.
131. Samuel Shen et al., ‘‘Shanghai-Hong Kong Stock Connect Sees Record Turnover,’’ Reuters, April 8, 2015.
132. Samuel Shen et al., ‘‘Shanghai-Hong Kong Stock Connect Sees Record Turnover,’’ Reuters, April 8, 2015.
133. Neil Katkov and Hua Zhang, ‘‘Shanghai-Hong Kong Stock Connect: It’s Just
the Beginning,’’ Celent, June 2015.
134. Neil Katkov and Hua Zhang, ‘‘Shanghai-Hong Kong Stock Connect: It’s Just
the Beginning,’’ Celent, June 2015, 2.
135. Neil Katkov and Hua Zhang, ‘‘Shanghai-Hong Kong Stock Connect: It’s Just
the Beginning,’’ Celent, June 2015, 2.
136. Neil Katkov and Hua Zhang, ‘‘Shanghai-Hong Kong Stock Connect: It’s Just
the Beginning,’’ Celent, June 2015, 2.
137. Saikat Chatterjee, ‘‘Hong Kong-Shenzhen Connect Launch Date Announcement Delayed-Sources,’’ Reuters, June 16, 2015.
138. Financial Services and the Treasury Bureau, interview with Commission
staff, September 29, 2015.
139. Andrew Wong, Permanent Secretary, Financial Services and the Treasury
Bureau, discussion with Commission, Hong Kong Special Administrative Region,
July 31, 2015.
140. Yahoo! Finance, ‘‘Hang Seng Index’’; Yahoo! Finance, ‘‘SSE Composite Index.’’

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141. Economist, ‘‘Opportunity in Crisis,’’ July 13, 2015.
142. U.S. official, Consulate General of the United States in Hong Kong and
Macau, discussion with Commission, Hong Kong Special Administrative Region,
July 29, 2015.
143. Shanghai Stock Exchange, ‘‘Regulatory Cooperation and General Rules.’’144. Reuters, ‘‘Hong Kong Stock Exchange to Introduce Volatility Controls fromMid-2016,’’ July 4, 2015.
145. Shanghai Stock Exchange via CEIC database; Hong Kong Securities and Futures Commission, Joint Announcement of China Securities Regulatory Commission
and Securities and Futures Commission, May 22, 2015; Choo Lye Tan, ‘‘Launch of
Mutual Recognition of Funds between Mainland China and Hong Kong,’’ K&L
Gates, June 2015.
146. Choo Lye Tan, ‘‘Launch of Mutual Recognition of Funds between Mainland
China and Hong Kong,’’ K&L Gates, June 2015.
147. Zhang Xiaochong, Samuel Shen, and Pete Sweeney, ‘‘China Says to Launch
Mutual Fund Recognition with Hong Kong on July 1,’’ Reuters, May 22, 2015.
148. Choo Lye Tan, ‘‘Launch of Mutual Recognition of Funds between Mainland
China and Hong Kong,’’ K&L Gates, June 2015.
149. Gary Cheung and Andrea Chen, ‘‘Hong Kong Reform to Feature in HighLevel US Talks with Chinese Officials,’’ South China Morning Post, June 20, 2015.
150. U.S. Department of State, Hong Kong Policy Act Report, April 10, 2015.
151. U.S. Census Bureau, Year-to-Date Surpluses, December 2014; Office of the
U.S. Trade Representative, Hong Kong, August 21, 2014.
152. U.S. Department of State, Hong Kong Policy Act Report, April 10, 2015.
153. U.S. Department of State, Hong Kong Policy Act Report, April 10, 2015.
154. U.S. Department of State, Hong Kong Policy Act Report, April 10, 2015.

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China and Central Asia
The Commission recommends:• Congress request classified briefings from the U.S. Intelligence
Community on the nature of U.S.-China cooperation on counterterrorism to ensure the U.S. government is not inadvertently
supporting Chinese counterterror policies and tactics that undermine human rights.
• Congress direct the U.S. Government Accountability Office toprepare a report assessing the U.S. New Silk Road policy. This
report should evaluate the New Silk Road’s strengths and weaknesses and its current status and future prospects for meeting
U.S. policy objectives in Central Asia. This report should investigate how U.S. policy toward Central Asia intersects and interacts with U.S. policy toward China more broadly, and how the
U.S. and Chinese Silk Road initiatives interact in Central Asia.
• Members of Congress and their staffs consider traveling to Central Asia, and, when doing so, engage with U.S. business community and nongovernmental organizations to discuss ways of improving human rights, rule of law, environmental protection, andbusiness environment.
China and Southeast Asia
The Commission recommends:• Congress direct the U.S. Government Accountability Office toprepare a report assessing the effectiveness of recent U.S. efforts
to enhance the maritime security capabilities of allies and partners in Southeast Asia and identifying the remaining challenges
and opportunities.
• Congress urge the Administration to enhance its support for regional information sharing institutions focused on maritime security in Southeast Asia.

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• Congress direct the U.S. Government Accountability Office to expand its August 2015 report Southeast Asia: Trends in U.S. andChinese Economic Engagement to evaluate whether Chinese government funded investment and assistance projects in Southeast
Asia negatively affect U.S.-funded projects in Southeast Asia.
(561)

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TaiwanThe Commission recommends:• Congress urge the Administration to make available to Taiwan,
consistent with the Taiwan Relations Act, defense articles andservices required to address the continuing shift in the crossStrait military balance toward China.
• Congress direct the Administration to invite Taiwan to participate at least as an observer at U.S.-led bilateral and multilateral
military and security exercises, including future Rim of the Pacific (RIMPAC) and Cyber Storm exercises.
• Congress encourage the Administration to increase its public
support of Taiwan’s participation in international organizations,*
which would help Taiwan expand its status and legitimacy in theinternational community.
• Congress require the U.S. Department of State, the U.S. Department of Defense, and the U.S. Department of Commerce to jointly prepare a classified report on Taiwan’s role in the U.S. strategy in Asia. The report should include an overview of Taiwan’s
current role in the strategy; U.S.-Taiwan defense cooperation anda description of all joint programs; and opportunities for Taiwan’s inclusion in U.S. Asia strategy.
Hong Kong
The Commission recommends:• Members of Congress, when visiting mainland China, also visit
Hong Kong, and that Congress encourage senior Administration
officials, including the secretaries of State, Defense, and Commerce, to make visits to Hong Kong part of their travel.
• Congress sustain the language in the Department of State, Foreign Operations, and Related Programs Appropriations Act of2016 reauthorizing the report requirement under the U.S.-Hong
Kong Policy Act of 1992 supporting human rights and democracyin accordance with the Sino-British Joint Declaration.
• Congress urge the Department of State to increase its public diplomacy efforts in Hong Kong in support of press freedom, media
independence, and academic freedom.

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• Congress engage parliamentarians from the United Kingdom in
an interparliamentary review of China’s adherence to the Basic
Law since the handover of Hong Kong to China in 1997, withspecific attention to rule of law, progress in achieving universal
suffrage, and press freedom.

* These organizations may include: the United Nations Framework Convention on Climate
Change, International Atomic Energy Agency, International Civil Aviation Organization, International Maritime Organization, and International Criminal Police Organization (Interpol).

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COMPREHENSIVE LIST OF
THE COMMISSION’S RECOMMENDATIONS
Chapter 1: U.S.-China Economic and Trade Relations

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Section 2: Foreign Investment Climate in China
The Commission recommends:
1. Congress assess the ability of, and if necessary amend, existing
U.S. trade laws to address China’s industrial policies, abusive
legal or administrative processes, and discriminatory treatmentof foreign investors, and to determine the consistency of thesepractices with China’s World Trade Organization commitments.
2. Congress consider legislation requiring the President to submit
a request to Congress for approval before any change occurs,
either for the country as a whole or for individual sectors orentities, in China’s status as a non-market economy. Under
such legislation, any change to the designation of China could
not proceed without the consent of both Houses of Congress.
3. Congress consider legislation conditioning the provision of market access to Chinese investors in the United States on a reciprocal, sector-by-sector basis to provide a level playing field for
U.S. investors in China.
4. Congress direct U.S. antitrust enforcement agencies to conduct
an analysis and legal assessment of alleged anticompetitive behavior by Chinese antitrust enforcers, and report in full on enforcement activities.
5. Congress expand the guidelines for consultation and transparency relating to trade negotiations covered by Trade Promotion Authority to include negotiations on a Bilateral Investment Treaty between the United States and China.
6. Congress require the Administration to provide a comprehensive, publicly-available assessment of Chinese foreign direct investments in the United States prior to completion of negotiations on a Bilateral Investment Treaty. This assessment should
include an identification of the nature of investments, whether
investments received support of any kind from the Chinese
government and at which level (national, provincial, or municipal), and the sector in which the investment was made.
7. Congress urge the U.S. Trade Representative to initiate consultations with China’s Ministry of Commerce to identify theextent to which China’s policy regarding subsidies and otherincentives for purchases of domestically-produced new energy
vehicles may violate its World Trade Organization commitments and what steps should be taken to address any inconsistencies with those commitments.
(563)

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Section 3: China’s State-Led Market Reform and Competitiveness Agenda
The Commission recommends:
8. Congress direct the U.S. Government Accountability Office toprepare a report that analyzes U.S. exposure to China’s financial sector, the progress of China’s financial sector reforms, andthe effect of China’s financial sector reforms on the U.S. andglobal financial systems, and identifies the policies the U.S.
government is adopting to protect U.S. interests in light of thischanging environment.
9. Congress urge the U.S. Department of Commerce to undertakea comprehensive review and prepare a report on China’s Madein China 2025 and Internet Plus initiatives, including theirforced localization of manufacturing and research and development requirements, to determine their potential impact on domestic U.S. production and market access for U.S. firms.
10. Congress direct the U.S. Environmental Protection Agency,
U.S. Department of Energy, and U.S. Department of Commerce
to jointly prepare a report that outlines China’s stated targets
to address pollution and climate change, and evaluates whether the Chinese government has allocated sufficient resources(including expenditures) to meet those commitments.
Section 4: Commercial Cyber Espionage and Barriers to Digital Trade in China
The Commission recommends:
11. Congress assess the coverage of U.S. law to determine whether
U.S.-based companies that have been hacked should be allowed
to engage in counterintrusions for the purpose of recovering,erasing, or altering stolen data in offending computer networks. In addition, Congress should study the feasibility of aforeign intelligence cyber court to hear evidence from U.S. victims of cyber attacks and decide whether the U.S. government
might undertake counterintrusions on a victim’s behalf.
12. Congress require the Administration to prepare an annualclassified report on foreign government-sponsored cyber attacks
against all Federal Government agencies, including but notlimited to an assessment of the damage and the affected agencies’ plans to secure their networks against further attacks.
13. Congress consider legislation amending the Federal Information Security Modernization Act of 2014 to require an annual
review by the U.S. Department of Homeland Security of thesteps taken by all federal agencies to ensure that adequate systems are in place to protect cyber assets.
14. Congress pass legislation to require the Securities and Exchange Commission (SEC) to make clear to publicly traded
companies and their investors the circumstances under which
the theft of intellectual property through a computer network
intrusion may be a material fact that might affect a company’s
revenues and should therefore be required to be disclosed to
the SEC.

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15. Congress evaluate existing consumer right-to-know laws to determine whether a cloud-based computing company has an affirmative duty to identify the physical location of its cloudbased assets.
Chapter 2: Security and Foreign Policy Issues
Involving China
Section 2: China’s Space and Counterspace Programs
The Commission recommends:
16. Congress continue to support the U.S. Department of Defense’s
efforts to reduce the vulnerability of U.S. space assets throughcost-effective solutions, such as the development of smaller andmore distributed satellites, hardened satellite communications,and non-space intelligence, surveillance, and reconnaissanceassets such as unmanned aerial vehicles.
17. Congress direct the U.S. Department of Defense, U.S. Air
Force, and relevant agencies within the U.S. Intelligence Community to jointly prepare a classified report that performs a
net assessment of U.S. and Chinese counterspace capabilities.
The report should include a strategic plan for deterring, withactive and passive systems, strikes against U.S. assets in lightof other countries’ rapid advancements in kinetic and non-kinetic counterspace technology.
18. Congress direct appropriate jurisdictional entities to undertakea review of (1) the classification of satellites and related articles on the U.S. Munitions List under the International Trafficking in Arms Regulations and (2) the prohibitions on exportsof Commerce Control List satellites and related technologies toChina under the Export Administration Regulations, in orderto determine which systems and technologies China is likely tobe able to obtain on the open market regardless of U.S. restrictions and which are critical technologies that merit continued
U.S. protection.
19. Congress allocate additional funds to the Director of National
Intelligence Open Source Center for the translation and analysis of Chinese-language technical and military writings, inorder to deepen U.S. understanding of China’s defense strategy, particularly related to space.

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Section 3: China’s Offensive Missile Forces
The Commission recommends:
20. Congress direct the U.S. Department of Defense to provide an
unclassified estimate of the People’s Liberation Army Second
Artillery Force’s inventory of missiles and launchers, by type,in future iterations of its Annual Report to Congress: Military
and Security Developments Involving the People’s Republic ofChina, as included previously but suspended following the2010 edition.

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21. Congress direct the U.S. Department of Defense to prepare areport on the potential benefits and costs of incorporating
ground-launched short-, medium-, and intermediate-range conventional cruise and ballistic missile systems into the UnitedStates’ defensive force structure in the Asia Pacific, in order toexplore how such systems might help the U.S. military sustain
a cost-effective deterrence posture.
22. Congress continue to support initiatives to harden U.S. basesin the Asia Pacific, including the Pacific Airpower Resiliency
Initiative, in order to increase the costliness and uncertainty of
conventional ballistic and cruise missile strikes against thesefacilities, and thereby dis-incentivize a first strike and increase
regional stability.
23. Congress continue to support ‘‘next-generation’’ missile defense
initiatives such as directed energy and rail gun technologies,
and require the U.S. Department of Defense to report to committees of jurisdiction on the status of current component
sourcing plans for the development and production of directedenergy weapons.
Chapter 3: China and the World
Section 1: China and Central Asia

dkrause on DSKHT7XVN1PROD with USCCThe Commission recommends:
24. Congress request classified briefings from the U.S. Intelligence
Community on the nature of U.S.-China cooperation on
counterterrorism to ensure the U.S. government is not inadvertently supporting Chinese counterterror policies and tactics
that undermine human rights.
25. Congress direct the U.S. Government Accountability Office toprepare a report assessing the U.S. New Silk Road policy. This
report should evaluate the New Silk Road’s strengths andweaknesses and its current status and future prospects formeeting U.S. policy objectives in Central Asia. This report
should investigate how U.S. policy toward Central Asia intersects and interacts with U.S. policy toward China more broadly, and how the U.S. and Chinese Silk Road initiatives interact
in Central Asia.
26. Members of Congress and their staffs consider traveling toCentral Asia, and, when doing so, engage with U.S. business
community and nongovernmental organizations to discuss waysof improving human rights, rule of law, environmental protection, and business environment.
Section 2: China and Southeast Asia
The Commission recommends:
27. Congress direct the U.S. Government Accountability Office toprepare a report assessing the effectiveness of recent U.S. efforts to enhance the maritime security capabilities of allies andpartners in Southeast Asia and identifying the remaining challenges and opportunities.

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28. Congress urge the Administration to enhance its support forregional information sharing institutions focused on maritime
security in Southeast Asia.
29. Congress direct the U.S. Government Accountability Office toexpand its August 2015 report Southeast Asia: Trends in U.S.
and Chinese Economic Engagement to evaluate whether Chinese government funded investment and assistance projects inSoutheast Asia negatively affect U.S.-funded projects in Southeast Asia.
Section 3: Taiwan
The Commission recommends:
30. Congress urge the Administration to make available to Taiwan,
consistent with the Taiwan Relations Act, defense articles andservices required to address the continuing shift in the crossStrait military balance toward China.
31. Congress direct the Administration to invite Taiwan to participate at least as an observer at U.S.-led bilateral and multilateral military and security exercises, including future Rim of
the Pacific (RIMPAC) and Cyber Storm exercises.
32. Congress encourage the Administration to increase its public
support of Taiwan’s participation in international organizations,* which would help Taiwan expand its status and legitimacy in the international community.
33. Congress require the U.S. Department of State, the U.S. Department of Defense, and the U.S. Department of Commerce tojointly prepare a classified report on Taiwan’s role in the U.S.
strategy in Asia. The report should include an overview of Taiwan’s current role in the strategy; U.S.-Taiwan defense cooperation and a description of all joint programs; and opportunities for Taiwan’s inclusion in U.S. Asia strategy.
Section 4: Hong Kong

dkrause on DSKHT7XVN1PROD with USCCThe Commission recommends:
34. Members of Congress, when visiting mainland China, also visit
Hong Kong, and that Congress encourage senior Administration officials, including the secretaries of State, Defense, andCommerce, to make visits to Hong Kong part of their travel.
35. Congress sustain the language in the Department of State,
Foreign Operations, and Related Programs Appropriations Act
of 2016 reauthorizing the report requirement under the U.S.Hong Kong Policy Act of 1992 supporting human rights and democracy in accordance with the Sino-British Joint Declaration.
36. Congress urge the U.S. Department of State to increase its
public diplomacy efforts in Hong Kong in support of press freedom, media independence, and academic freedom.
* These organizations may include: the United Nations Framework Convention on Climate
Change, International Atomic Energy Agency, International Civil Aviation Organization, International Maritime Organization, and International Criminal Police Organization (Interpol).

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37. Congress engage parliamentarians from the United Kingdom
in an interparliamentary review of China’s adherence to the
Basic Law since the handover of Hong Kong to China in 1997,
with specific attention to rule of law, progress in achieving universal suffrage, and press freedom.

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dkrause on DSKHT7XVN1PROD with USCCDISSENTING VIEWS OFWILLIAM A. REINSCH, COMMISSIONER
With regret, I must dissent from this year’s report. I believe itis, on the whole, a good report which accurately details the Commission’s work in 2015 and the recommendations supported by amajority of commissioners. However, one of those recommendations
represents, in my judgment, such poor policy that it is impossible
for me to support a report that includes it. I address that issue
below.
Last year, my additional views were more pessimistic about the
U.S.-China relationship than in previous years. Reaction to thatwas largely, ‘‘It’s about time,’’ or ‘‘What took you so long?’’ The answer is that I have never viewed China as a single entity
monolithically opposing our interests. Instead, its government is acomplicated structure of competing and disparate elements that
can and do challenge and change policies. The China of Xi Jinping
is very different from the China of Jiang Zemin and Zhu Rongji,
and my comments last year were intended to highlight the changes
that have occurred for the worse while acknowledging the possibility of future change for the better.
Change for the better, however, has not arrived yet. Business,labor, numerous nongovernmental organizations and the U.S. government itself are all dissatisfied with aspects of the bilateral relationship—economic, military and political.
Many of us had hoped Xi Jinping would launch reforms thatwould improve the multilateral climate. So far not only is thatprospect unrealized, but his regime is proving itself far more aggressive against its neighbors, less cooperative in multilateral fora,
and much quicker to suppress alternative voices inside China thanits predecessors. Historians and political scientists are already beginning to find echoes of traditional Chinese imperial policies in
the new leadership’s bullying approach to its neighbors and its discriminatory actions against foreigners doing business inside thecountry. The latter have led more and more companies, both American and European, to reconsider their presence in China. Whilemost will not leave, some will reduce their profile there, and many
will begin to put the larger share of their new investment dollars
or euros elsewhere.
This is disappointing. I have spent a good part of my professional
life studying China and arguing for greater efforts at mutual understanding that focus on the benefits of cooperation rather thangive in to the mutual suspicion that is rapidly enveloping both ofus. I have always been an optimist about the relationship, but thatview is becoming increasingly untenable, as China asserts itself inways that are inevitably going to bump up against our interests in
the region and in multilateral fora. It is common knowledge that
there is no shortage of people in each country who believe the otheris an existential threat, and I have thought for some time the fundamental policy goal for each country should be to keep those people out of power. I have not changed my view about that, but it
does not appear to be happening in China, which will only makeit harder to prevent it from happening here.

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With respect to specific recommendations, the Commission has
unfortunately succumbed to fears of Chinese investment in the
U.S. through its inclusion of a recommendation that suggests Congress consider legislation that would essentially mandate reciprocity in our investment approval process—that those sectors
closed to foreign investment in China should likewise be closed toChinese investment here. On its face, this is an attractive policy.
Who can be against reciprocity? It’s the modern version of theGolden Rule, but a closer look suggests such an approach is misguided.
First, from a national security perspective, the U.S. has adequatemeans in place via the Committee on Foreign Investment in the
United States to review a foreign investment’s national security
implications, which is the appropriate criterion, and to block it if
it poses a risk. A reciprocity criterion means that we conform ourpolicy to China’s definition of national security, protecting a sector
because the Chinese have decided to protect it. It is far better for
us to decide for ourselves what is in our security interest and notleave it to others to define.
Second, the proposal rejects our decades-old policy of welcoming
investment in favor of an approach that will significantly expand
the universe of investments subject to review, signal uncertainty
about the likelihood of approval, and as a result drive investorsaway, including those who are not Chinese. That, in turn, means
foregoing the badly needed boost in economic growth that goesalong with new investment. The reality is that significant economic
activity and wealth accumulation goes on outside our borders. If welimit inward investment, we are simply exporting growth and job
opportunities to other countries that will be happy to receive them.
Third, over the years the Commission has had many witnesses
who have strongly criticized Chinese policies, including investment
restrictions, and then advised that we do the same thing in response. If it is bad policy for China, it is hard to see how it would
be good policy for the United States.
The Chinese have pushed us to this point because they typically
respond in a ‘‘tit for tat’’ manner, making it easy for others to justify the same approach. It is, however, not a very mature or creative policy approach. It risks bogging us down in a cycle of retaliation in which it is all too easy to lose sight of our interests along
the way.
One of our interests is maintaining our global leadership to ensure stability of the international trading system. The Chinese
seem less interested in that and have pursued policies that may
have served them well in the short term but have not reinforced
the principles of open trade and rule of law. In today’s complicatedworld we best lead by good example. Adopting reciprocity proposals
copies China’s bad example, which does not help the U.S. or the
trading system.

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dkrause on DSKHT7XVN1PROD with USCCADDITIONAL VIEWS OF
COMMISSIONER TALENTJOINED BY COMMISSIONERS BARTHOLOMEW,FIEDLER, SLANE, TOBIN, AND WESSELI am pleased to join in supporting the Report, which is anotherstrong contribution to Congressional and public understanding ofwhat is happening in China. I wanted to write separately to highlight my views on the economic reform agenda in China and its implications for the United States.
In 2013 at its Third Plenum, the Chinese government announced
an ambitious set of economic reforms, signaling, on its face, the desire of the leadership to move to a freer economy. That was not thefirst time the Chinese Communist Party (CCP) has proclaimed
such goals; they did the same thing ten years ago in a different
Plenum and have since periodically reaffirmed their official commitment to the effort.
The Commission’s Report, as has been its practice, assesses theamount of actual progress towards the CCP’s stated goals. As in
the past, the Report finds that the actions of the Chinese leadership have not lived up to their promises.
The CCP says that it wants a private stock market, but then engages in the rankest kind of government manipulation when themarket drops.
The CCP says that it wants to lessen the power of State Owned
Enterprises, but its actual policy is not to sell off the SOEs but tomerge them into even bigger conglomerates that the State stillowns and manages.
The CCP says that it wants a real banking system that serves
the private sector, but the state banks continue to control most financial assets and to lend almost exclusively to SOEs, and the government refuses to permit anything like real competition or market
rates of interest on deposits.
The CCP says that it wants the kind of impartial legal systemthat is the foundation of free economies, but ruthlessly suppresses
its own legal reformers and engages in arbitrary and discriminatory enforcement of vague regulatory laws against foreign competitors.
The CCP says that it wants to rebalance the economy towards
services and consumer spending, but focuses less on reducing overcapacity at home than financing infrastructure projects in foreigncountries using Chinese companies and Chinese workers, with aview towards securing resources, and gaining captive markets, for
its uncompetitive heavy industries. Whether the costs of the ‘‘Silk
Road’’ and similar grand schemes will eventually outweigh the benefits remains to be seen, but such policies can hardly be described
as rebalancing the economy.
The list goes on and on. It’s easy to write the pattern off as taking ‘‘two steps forward and one back’’; but I think it could more accurately be described as taking ‘‘one step forward and two steps
back’’ while proclaiming, for the benefit of foreign ears, that the ultimate destination has not changed.

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In short, it is time to judge the CCP’s intentions by its actions
rather than its words, and to question whether its leaders are stillseeking, if they ever did, a transformation of the Chinese economy.
As the Commission has repeatedly recognized, the CCP is notand never has been committed in principle to political or economic
liberty. It wants growth, not freedom, and it wants growth forpurely utilitarian ends—chiefly to fund the ambitions of the Stateand to convince the Chinese people, or enough of them for the regime to remain in power, that CCP stewardship is producing a better standard of living.
The leaders may well believe that they can get enough growth,even without fundamental reform, to achieve those ends. The structural weaknesses of the Chinese economy have not to this pointcaused any reduction in the government’s military spending, or inhibited other foreign initiatives, like the Asian Infrastructure Investment Bank, by which the regime is seeking greater influenceand prestige in world affairs. And though the Chinese people arerestive, the CCP has means other than economic reform to deal
with that.
To be sure, there are officials within the CCP who want to push
for a broad economic reform agenda. But based on the record sofar, I believe the Party’s top leaders have concluded that it ischeaper, safer, and more consistent with the authoritarian impulse
to suppress dissent through repression and propaganda, than to finance a broad social safety net for a billion people, or risk the consequences of allowing a culture of freedom to take hold, even in theeconomic sphere.
If that turns out to be the case, the implications for the UnitedStates will be profound. The CCP will still seek as much economic
growth as possible, but without fundamentally restructuring the
economy. That will mean more of the outlier activity which theCommission’s Report documents so thoroughly: more commercial
cyberespionage, more pressure and discrimination against foreigncompanies, more theft of intellectual property, more evasion of China’s WTO obligations, and potentially, more use of China’s growing
regional power to seek economic advantage in violation of international norms.
Nothing about China is certain, but it clearly is time to stop giving China’s leaders the benefit of the doubt. Their actions to thispoint don’t justify it, and worse days may well be coming.

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dkrause on DSKHT7XVN1PROD with USCCADDITIONAL VIEWS OF
COMMISSIONERS WESSEL AND TALENTJOINED BY
COMMISSIONERS BARTHOLOMEW AND TOBIN
U.S.-China relations have reached a critical juncture. The accession of China to the World Trade Organization signaled, to many,
that China had decided to abide by Western concepts of market-oriented economics. Unfortunately, in the fifteen years since China
was granted Permanent Normal Trade Relations by Congress,
China has proven, time and time again, that it is pursuing a different path.
China’s economic policies have had a profound impact upon the
United States, its producers, their workers and its citizens. The
partial melt-down of China’s stock markets this summer, whilesomewhat contained, identified that our economies are increasingly
linked. China’s economic slowdown has had broader repercussions
on the economies of other nations across the globe. China is now
exporting its economic problems.
It is time to recognize that China is not interested in playing by
the rules or conforming to economic theories advanced by elite academics and policy makers. When China’s leaders pronounce that it
wishes to reform its economy, as President Xi did at the Third Plenum and in subsequent statements, they do not mean ‘‘reform’’ as
we envision it. We must stop simply hoping for the best or China’sreformation to Western ideals. Rather, we must deal with the hardreality of the unique characteristics of state-led capitalism.
Reform, to most, is a positive concept. We must carefully analyze
and respond to Chinese policies if they adversely impact upon ourinterests. China’s reform efforts may not necessarily advance U.S.
interests. Already we have seen that China’s economic slowdown
has adversely affected U.S. corporate interests in achieving greater
market access. China’s claimed economic ‘‘rebalancing’’ may not result in new market opportunities for Western firms. China’s ‘‘reforms’’ of its state-owned entities are not designed to reduce therole of the state or diminish the preferential treatment they receive
but rather to strengthen them at home and in world markets.
Other nations are watching and learning, from China. Vietnam,
Brazil, India and other countries are advancing industrial policies,
led by state interventions, to support their industries. China’s currency manipulation, essentially unaddressed by U.S. policymakers,
is being mimicked by other countries.
The critical juncture we face is whether a more realistic, pragmatic, self-interested and self-assured policy will be advanced by
U.S. government officials or whether they will continue to engage
in endless dialogue while U.S. economic and security interests continue to be undermined. The U.S. must more effectively and consistently address China’s failure to be a responsible international
stakeholder. Failing to respond sends a dangerous message to theChinese that their economic policies, diplomatic approaches, territorial assertiveness and military buildup may continue without significant cost. That is no longer acceptable. A clear, comprehensive
and consistent policy towards China is needed that recognizes that

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China is a great country, entitled to its place on the world stage
but that it has a greater responsibility to advance, rather than undermine, the policies and approaches that have been the foundationof the international system since the end of the Cold War.

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APPENDIX I
CHARTERThe Commission was created on October 30, 2000 by the Floyd D.
Spence National Defense Authorization Act for 2001 § 1238, P.L.
106–398 (codified at 22 U.S.C.§ 7002 (2001)), as amended by:• The Treasury and General Government Appropriations Act for2002 § 645 (regarding employment status of staff), P.L. 107–67(Nov. 12, 2001);• Division P of the ‘‘Consolidated Appropriations Resolution,
2003,’’ P.L. 108–7 (Feb. 20, 2003) (regarding Commission namechange, terms of Commissioners, and responsibilities of Commission);• P.L. 109–108 (enacted Nov. 22, 2005) (regarding responsibilities of Commission and applicability of FACA);• Division J of the ‘‘Consolidated Appropriations Act, 2008,’’ P.L.
110–161 (Dec. 26, 2007) (regarding responsibilities of the Commission and changed annual report due date from June to December);• The Carl Levin and Howard P. ‘‘Buck’’ McKeon National Defense Authorization Act for Fiscal Year 2015, P.L. 113–291(Dec. 19, 2014) (regarding responsibilities of the Commission).

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22 U.S.C. § 7002—United States-China Economic and Security Review Commission(a) Purposes. The purposes of this section are as follows:(1) To establish the United States-China Economic and Security
Review Commission to review the national security implications oftrade and economic ties between the United States and the People’s
Republic of China.
(2) To facilitate the assumption by the United States-China Economic and Security Review Commission of its duties regarding thereview referred to in paragraph (1) by providing for the transfer tothat Commission of staff, materials, and infrastructure (including
leased premises) of the Trade Deficit Review Commission that areappropriate for the review upon the submittal of the final reportof the Trade Deficit Review Commission.
(b) Establishment of United States-China Economic and Security
Review Commission.
(1) In general. There is hereby established a commission to be
known as the United States-China Economic and Security Review
Commission (in this section referred to as the ‘‘Commission’’).
(2) Purpose. The purpose of the Commission is to monitor, investigate, and report to Congress on the national security implicationsof the bilateral trade and economic relationship between the UnitedStates and the People’s Republic of China.
(575)

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576(3) Membership. The United States-China Economic and Security
Review Commission shall be composed of 12 members, who shallbe appointed in the same manner provided for the appointment ofmembers of the Trade Deficit Review Commission under section
127(c)(3) of the Trade Deficit Review Commission Act (19 U.S.C.
2213 note), except that—(A) Appointment of members by the Speaker of the House of Representatives shall be made after consultation with the chairman of
the Committee on Armed Services of the House of Representatives,in addition to consultation with the chairman of the Committee onWays and Means of the House of Representatives provided forunder clause (iii) of subparagraph (A) of that section;(B) Appointment of members by the President pro tempore of the
Senate upon the recommendation of the majority leader of the Senate shall be made after consultation with the chairman of the Committee on Armed Services of the Senate, in addition to consultation
with the chairman of the Committee on Finance of the Senate provided for under clause (i) of that subparagraph;(C) Appointment of members by the President pro tempore of the
Senate upon the recommendation of the minority leader of the Senate shall be made after consultation with the ranking minority
member of the Committee on Armed Services of the Senate, in addition to consultation with the ranking minority member of theCommittee on Finance of the Senate provided for under clause (ii)of that subparagraph;(D) Appointment of members by the minority leader of the Houseof Representatives shall be made after consultation with the ranking minority member of the Committee on Armed Services of theHouse of Representatives, in addition to consultation with theranking minority member of the Committee on Ways and Means of
the House of Representatives provided for under clause (iv) of thatsubparagraph;(E) Persons appointed to the Commission shall have expertise innational security matters and United States-China relations, in addition to the expertise provided for under subparagraph (B)(i)(I) of
that section;(F) Each appointing authority referred to under subparagraphs(A) through (D) of this paragraph shall—(i) appoint 3 members to the Commission;(ii) make the appointments on a staggered term basis, suchthat—(I) 1 appointment shall be for a term expiring on December 31,
2003;(II) 1 appointment shall be for a term expiring on December 31,
2004; and(III) 1 appointment shall be for a term expiring on December 31,
2005;(iii) make all subsequent appointments on an approximate 2-year
term basis to expire on December 31 of the applicable year; and(iv) make appointments not later than 30 days after the date on
which each new Congress convenes.
(G) Members of the Commission may be reappointed for additional terms of service as members of the Commission; andVerDate Sep 11 201409:25 Nov 12, 2015

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577(H) Members of the Trade Deficit Review Commission as of thedate of the enactment of this Act [enacted Oct. 30, 2000] shallserve as members of the United States-China Economic and Security Review Commission until such time as members are first appointed to the United States-China Economic and Security Review
Commission under this paragraph.
(4) Retention of support. The United States-China Economic andSecurity Review Commission shall retain and make use of such
staff, materials, and infrastructure (including leased premises) of
the Trade Deficit Review Commission as the United States-China
Economic and Security Review Commission determines, in the
judgment of the members of the United States-China Economic andSecurity Review Commission, are required to facilitate the readycommencement of activities of the United States-China Economic
and Security Review Commission under subsection (c) or to carryout such activities after the commencement of such activities.
(5) Chairman and vice chairman. The members of the Commission shall select a Chairman and Vice Chairman of the Commission
from among the members of the Commission.
(6) Meetings.
(A) Meetings. The Commission shall meet at the call of the
Chairman of the Commission.
(B) Quorum. A majority of the members of the Commission shallconstitute a quorum for the transaction of business of the Commission.
(7) Voting. Each member of the Commission shall be entitled to
one vote, which shall be equal to the vote of every other memberof the Commission.
(c) Duties.
(1) Annual report. Not later than Dec. 1 each year [beginning in2008], the Commission shall submit to Congress a report, in both
unclassified and classified form, regarding the national security implications and impact of the bilateral trade and economic relationship between the United States and the People’s Republic of China.
The report shall include a full analysis, along with conclusions andrecommendations for legislative and administrative actions, if any,of the national security implications for the United States of the
trade and current balances with the People’s Republic of China ingoods and services, financial transactions, and technology transfers. The Commission shall also take into account patterns of trade
and transfers through third countries to the extent practicable.
Contents of report. Each report under paragraph (1) shall include, at a minimum, a full discussion of the following:(A) The portion of trade in goods and services with the UnitedStates that the People’s Republic of China dedicates to militarysystems or systems of a dual nature that could be used for military
purposes.
(B) The acquisition by the People’s Republic of China of advanced
military or dual-use technologies from the United States by trade(including procurement) and other technology transfers, especiallythose transfers, if any, that contribute to the proliferation of weapons of mass destruction or their delivery systems, or that undermine international agreements or United States laws with respect
to nonproliferation.

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578(C) Any transfers, other than those identified under subparagraph (B), to the military systems of the People’s Republic of China
made by United States firms and United States-based multinational corporations.
(D) An analysis of the statements and writing of the People’s Republic of China officials and officially-sanctioned writings that bearon the intentions, if any, of the Government of the People’s Republic of China regarding the pursuit of military competition with, andleverage over, or cooperation with, the United States and the Asian
allies of the United States.
(E) The military actions taken by the Government of the People’s
Republic of China during the preceding year that bear on the national security of the United States and the regional stability of the
Asian allies of the United States.
(F) The effects, if any, on the national security interests of theUnited States of the use by the People’s Republic of China of financial transactions and capital flow and currency manipulations.
(G) Any action taken by the Government of the People’s Republicof China in the context of the World Trade Organization that is adverse or favorable to the United States national security interests.
(H) Patterns of trade and investment between the People’s Republic of China and its major trading partners, other than the
United States, that appear to be substantively different from tradeand investment patterns with the United States and whether thedifferences have any national security implications for the UnitedStates.
(I) The extent to which the trade surplus of the People’s Republicof China with the United States enhances the military budget of
the People’s Republic of China.
(J) An overall assessment of the state of the security challenges
presented by the People’s Republic of China to the United States
and whether the security challenges are increasing or decreasingfrom previous years.
(3) Recommendations of report. Each report under paragraph (1)shall also include recommendations for action by Congress or the
President, or both, including specific recommendations for theUnited States to invoke Article XXI (relating to security exceptions)of the General Agreement on Tariffs and Trade 1994 with respect
to the People’s Republic of China, as a result of any adverse impact
on the national security interests of the United States.
(d) Hearings.
(1) In general. The Commission or, at its direction, any panel ormember of the Commission, may for the purpose of carrying out
the provisions of this section, hold hearings, sit and act at times
and places, take testimony, receive evidence, and administer oaths
to the extent that the Commission or any panel or member considers advisable.
(2) Information. The Commission may secure directly from the
Department of Defense, the Central Intelligence Agency, and anyother Federal department or agency information that the Commission considers necessary to enable the Commission to carry out its
duties under this section, except the provision of intelligence information to the Commission shall be made with due regard for theprotection from unauthorized disclosure of classified information

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relating to sensitive intelligence sources and methods or other exceptionally sensitive matters, under procedures approved by the Director of Central Intelligence.
(3) Security. The Office of Senate Security shall—(A) provide classified storage and meeting and hearing spaces,
when necessary, for the Commission; and(B) assist members and staff of the Commission in obtaining security clearances.
(4) Security clearances. All members of the Commission and appropriate staff shall be sworn and hold appropriate security clearances.
(e) Commission personnel matters.
(1) Compensation of members. Members of the United StatesChina Economic and Security Review Commission shall be compensated in the same manner provided for the compensation ofmembers of the Trade Deficit Review Commission under section
127(g)(1) and section 127(g)(6) of the Trade Deficit Review Commission Act (19 U.S.C. 2213 note).
(2) Travel expenses. Travel expenses of the United States-China
Economic and Security Review Commission shall be allowed andconducted under the rules and procedures applying to travel bymembers of the House of Representatives and its staff. [House Rule25]
(3) Staff. An executive director and other additional personnel for
the United States-China Economic and Security Review Commission shall be appointed, compensated, and terminated in the samemanner provided for the appointment, compensation, and termination of the executive director and other personnel of the Trade
Deficit Review Commission under section 127(g)(3) and section
127(g)(6) of the Trade Deficit Review Commission Act [19 USCS
§ 2213 note]. The executive director and any personnel who are employees of the United States-China Economic and Security Review
Commission shall be employees under section 2105 of title 5,
United States Code, for purposes of chapters 63, 81, 83, 84, 85, 87,
89, and 90 of that title [language of 2001 amendment, Sec. 645].
Compensation for the executive director may not exceed the rate
payable for level II of the executive schedule [5 U.S.C. 5314](4) Detail of government employees. Federal Government employees may be detailed to the United States-China Economic and Security Review Commission in the same manner provided for the detail of Federal Government employees to the Trade Deficit Review
Commission under section 127(g)(4) of the Trade Deficit Review
Commission Act [19 USCS § 2213 note].
(5) Foreign travel for official purposes. Foreign travel for official
purposes by members and staff of the Commission may be authorized by either the Chairman or the Vice Chairman of the Commission.
(6) Procurement of temporary and intermittent services. The
Chairman of the United States-China Economic and Security Review Commission may procure temporary and intermittent services
for the United States-China Economic and Security Review Commission in the same manner provided for the procurement of temporary and intermittent services for the Trade Deficit Review Com-

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580
mission under section 127(g)(5) of the Trade Deficit Review Commission Act [19 USCS § 2213 note].
(f) Authorization of appropriations.
(1) In general. There is authorized to be appropriated to theCommission for fiscal year 2001, and for each fiscal year thereafter,such sums as may be necessary to enable the Commission to carryout its functions under this section.
(2) Availability. Amounts appropriated to the Commission shallremain available until expended.
(g) Federal Advisory Committee Act. The provisions of the Federal Advisory Committee Act (5 U.S.C. App.) shall not apply to theCommission.
(h) Effective date. This section shall take effect on the first dayof the 107th Congress.

dkrause on DSKHT7XVN1PROD with USCCAMENDMENT: Enacted into law by Public Law 107–67:
SEC. 645. (a) Section 1238(e)(3) of the Floyd D. Spence National
Defense Authorization Act for Fiscal Year 2001 (as enacted by Public Law 106–398) is amended by adding at the end the following:‘‘The executive director and any personnel who are employees of
the United States-China Economic and Security Review Commission shall be employees under section 2105 of title 5, United States
Code, for purposes of chapters 63, 81, 83, 84, 85, 87, 89, and 90 ofthat title.’’ (b) The amendment made by this section shall take effect on January 3, 2001.’’
AMENDMENT: Enacted into law by Division P of Public
Law 108–7:
SECTION 1. SHORT TITLE.—This division may be cited as the‘‘United States-China Economic and Security Review Commission’’.
SEC. 2. (a) APPROPRIATIONS.—There are appropriated, out of
any funds in the Treasury not otherwise appropriated, $1,800,000,
to remain available until expended, to the United States-China
Economic and Security Review Commission.
(b) NAME CHANGE.—(1) IN GENERAL.—Section 1238 of the Floyd D. Spence National
Defense Authorization Act of 2001 (22 U.S.C. 7002) is amended—(A) in the section heading by inserting ‘‘ECONOMIC AND’’ before ‘‘SECURITY’’;(B) in subsection (a)—(i) in paragraph (1), by inserting ‘‘Economic and’’ before ‘‘Security’’; and(ii) in paragraph (2), by inserting ‘‘Economic and’’ before ‘‘Security’’;(C) in subsection (b)—(i) in the subsection heading, by inserting ‘‘ECONOMIC AND’’before ‘‘SECURITY’’;(ii) in paragraph (1), by inserting ‘‘Economic and’’ before ‘‘Security’’;(iii) in paragraph (3)—(I) in the matter preceding subparagraph (A), by inserting ‘‘Economic and’’ before ’’Security’’; and(II) in subparagraph (H), by inserting ‘‘Economic and’’ before ‘‘Security’’; andVerDate Sep 11 201409:25 Nov 12, 2015

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581(iv) in paragraph (4), by inserting ‘‘Economic and’’ before ‘‘Security’’ each place it appears; and(D) in subsection (e)—(i) in paragraph (1), by inserting ‘‘Economic and’’ before ‘‘Security’’;(ii) in paragraph (2), by inserting ‘‘Economic and’’ before ‘‘Security’’;(iii) in paragraph (3)—(I) in the first sentence, by inserting ‘‘Economic and’’ before ‘‘Security’’; and(II) in the second sentence, by inserting ‘‘Economic and’’ before‘‘Security’’;(iv) in paragraph (4), by inserting ‘‘Economic and’’ before ‘‘Security’’; and(v) in paragraph (6), by inserting ‘‘Economic and’’ before ‘‘Security’’ each place it appears.
(2) REFERENCES.—Any reference in any Federal law, Executive
order, rule, regulation, or delegation of authority, or any documentof or relating to the United States-China Security Review Commission shall be deemed to refer to the United States-China Economic
and Security Review Commission.
(c) MEMBERSHIP, RESPONSIBILITIES, AND TERMS.—(1) IN GENERAL.—Section 1238(b)(3) of the Floyd D. Spence
National Defense Authorization Act of 2001 (22 U.S.C. 7002) isamended by striking subparagraph (F) and inserting the following:‘‘(F) each appointing authority referred to under subparagraphs(A) through (D) of this paragraph shall—‘‘(i) appoint 3 members to the Commission;‘‘(ii) make the appointments on a staggered term basis, suchthat—‘‘(I) 1 appointment shall be for a term expiring on December 31,
2003;‘‘(II) 1 appointment shall be for a term expiring on December 31,
2004; and‘‘(III) 1 appointment shall be for a term expiring on December 31,
2005;‘‘(iii) make all subsequent appointments on an approximate 2year term basis to expire on December 31 of the applicable year;
and‘‘(iv) make appointments not later than 30 days after the date on
which each new Congress convenes;’’.
(2) RESPONSIBILITIES OF THE COMMISSION.—The UnitedStates-China Commission shall focus, in lieu of any other areas ofwork or study, on the following:(A) PROLIFERATION PRACTICES.—The Commission shall analyze and assess the Chinese role in the proliferation of weapons ofmass destruction and other weapons (including dual use technologies) to terrorist-sponsoring states, and suggest possible steps
which the United States might take, including economic sanctions,to encourage the Chinese to stop such practices.
(B) ECONOMIC REFORMS AND UNITED STATES ECONOMIC TRANSFERS.—The Commission shall analyze and assess
the qualitative and quantitative nature of the shift of UnitedStates production activities to China, including the relocation of

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582
high-technology, manufacturing, and R&D facilities; the impact ofthese transfers on United States national security, including political influence by the Chinese Government over American firms, dependence of the United States national security industrial base on
Chinese imports, the adequacy of United States export control
laws, and the effect of these transfers on United States economic
security, employment, and the standard of living of the American
people; analyze China’s national budget and assess China’s fiscal
strength to address internal instability problems and assess thelikelihood of externalization of such problems.
(C) ENERGY.—The Commission shall evaluate and assess how
China’s large and growing economy will impact upon world energy
supplies and the role the United States can play, including joint
R&D efforts and technological assistance, in influencing China’s energy policy.
(D) UNITED STATES CAPITAL MARKETS.—The Commission
shall evaluate the extent of Chinese access to, and use of UnitedStates capital markets, and whether the existing disclosure andtransparency rules are adequate to identify Chinese companies
which are active in United States markets and are also engaged inproliferation activities or other activities harmful to United States
security interests.
(E) CORPORATE REPORTING.—The Commission shall assess
United States trade and investment relationship with China, including the need for corporate reporting on United States investments in China and incentives that China may be offering toUnited States corporations to relocate production and R&D to
China.
(F) REGIONAL ECONOMIC AND SECURITY IMPACTS.—The
Commission shall assess the extent of China’s ‘‘hollowing out’’ of
Asian manufacturing economies, and the impact on United States
economic and security interests in the region; review the triangulareconomic and security relationship among the United States, Taipei and Beijing, including Beijing’s military modernization andforce deployments aimed at Taipei, and the adequacy of UnitedStates executive branch coordination and consultation with Congress on United States arms sales and defense relationship with
Taipei.
(G) UNITED STATES–CHINA BILATERAL PROGRAMS.—The
Commission shall assess science and technology programs to evaluate if the United States is developing an adequate coordinating
mechanism with appropriate review by the intelligence community
with Congress; assess the degree of non-compliance by China andUnited States-China agreements on prison labor imports and intellectual property rights; evaluate United States enforcement policies; and recommend what new measures the United States Government might take to strengthen our laws and enforcement activities and to encourage compliance by the Chinese.
(H) WORLD TRADE ORGANIZATION COMPLIANCE.—The
Commission shall review China’s record of compliance to date with
its accession agreement to the WTO, and explore what incentives
and policy initiatives should be pursued to promote further compliance by China.

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dkrause on DSKHT7XVN1PROD with USCC(I) MEDIA CONTROL.—The Commission shall evaluate Chinese
government efforts to influence and control perceptions of theUnited States and its policies through the internet, the Chinese
print and electronic media, and Chinese internal propaganda.
(3) EFFECTIVE DATE.—This section shall take effect on thedate of enactment of this Act.
AMENDMENT: Enacted into law by SEC. 635 of Public Law
109–108
SEC. 635. (a) MODIFICATION OF RESPONSIBILITIES.—Notwithstanding any provision of section 1238 of the Floyd D. Spence
National Defense Authorization Act for Fiscal Year 2001 (22 U.S.C.
7002), or any other provision of law, the United States-China Economic and Security Review Commission established by subsection(b) of that section shall investigate and report exclusively on eachof the following areas:(1) PROLIFERATION PRACTICES.—The role of the People’s Republic of China in the proliferation of weapons of mass destruction
and other weapons (including dual use technologies), including actions the United States might take to encourage the People’s Republic of China to cease such practices.
(2) ECONOMIC TRANSFERS.—The qualitative and quantitative
nature of the transfer of United States production activities to thePeople’s Republic of China, including the relocation of high technology, manufacturing, and research and development facilities,
the impact of such transfers on United States national security, theadequacy of United States export control laws, and the effect ofsuch transfers on United States economic security and employment.
(3) ENERGY.—The effect of the large and growing economy of
the People’s Republic of China on world energy supplies and therole the United States can play (including through joint researchand development efforts and technological assistance) in influencing the energy policy of the People’s Republic of China.
(4) ACCESS TO UNITED STATES CAPITAL MARKETS.—Theextent of access to and use of United States capital markets by the
People’s Republic of China, including whether or not existing disclosure and transparency rules are adequate to identify People’s
Republic of China companies engaged in harmful activities.
(5) REGIONAL ECONOMIC AND SECURITY IMPACTS.—The
triangular economic and security relationship among the UnitedStates, Taipei, and the People’s Republic of China (including themilitary modernization and force deployments of the People’s Republic of China aimed at Taipei), the national budget of the People’s Republic of China, and the fiscal strength of the People’s Republic of China in relation to internal instability in the People’s Republic of China and the likelihood of the externalization of problems arising from such internal instability.
(6) UNITED STATES–CHINA BILATERAL PROGRAMS.—
Science and technology programs, the degree of non-compliance by
the People’s Republic of China with agreements between the
United States and the People’s Republic of China on prison labor
imports and intellectual property rights, and United States enforcement policies with respect to such agreements.

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584(7) WORLD TRADE ORGANIZATION COMPLIANCE.—Thecompliance of the People’s Republic of China with its accessionagreement to the World Trade Organization (WTO).
(8) FREEDOM OF EXPRESSION.—The implications of restrictions on speech and access to information in the People’s Republicof China for its relations with the United States in the areas of economic and security policy.
(b) APPLICABILITY OF FEDERAL ADVISORY COMMITTEE
ACT.—Subsection (g) of section 1238 of the Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 is amended
to read as follows:‘‘(g) APPLICABILITY OF FACA.—The provisions of the Federal
Advisory Committee Act (5 U.S.C. App.) shall apply to the activities of the Commission.’’.
SEC. 636. Section 635 of division B of Public Law 108–447 isamended by striking ‘‘balance’’ and inserting ‘‘and unexpended balances’’.
SEC. 637. None of the funds made available in this Act may be
used to pay expenses for any United States delegation to any specialized agency, body, or commission of the United Nations if suchcommission is chaired or presided over by a country, the government of which the Secretary of State has determined, for purposesof section 6(j)(1) of the Export Administration Act of 1979 (50
U.S.C. App. 2405(j)(1)), has provided support for acts of international terrorism.

dkrause on DSKHT7XVN1PROD with USCCAMENDMENT: Enacted into law by Title I of Public Law
110–161
For necessary expenses of the United States-China Economic andSecurity Review Commission, $4,000,000, including not more than
$4,000 for the purpose of official representation, to remain available until September 30, 2009: Provided, That the Commission
shall submit a spending plan to the Committees on Appropriations
no later than March 1, 2008, which effectively addresses the recommendations of the Government Accountability Office’s audit of
the Commission (GAO–07–1128): Provided further, That the Commission shall provide to the Committees on Appropriations a quarterly accounting of the cumulative balances of any unobligatedfunds that were received by the Commission during any previous
fiscal year: Provided further, That for purposes of costs relating toprinting and binding, the Commission shall be deemed, effective on
the date of its establishment, to be a committee of Congress: Provided further, That compensation for the executive director of theCommission may not exceed the rate payable for level II of the Executive Schedule under section 5314 of title 5, United States Code:Provided further, That section 1238(c)(1) of the Floyd D. Spence
National Defense Authorization Act for Fiscal Year 2001, is amended by striking ‘‘June’’ and inserting ‘‘December’’: Provided further,That travel by members of the Commission and its staff shall bearranged and conducted under the rules and procedures applying
to travel by members of the House of Representatives and its staff.

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585
AMENDMENT: Enacted into law by Public Law 113–291
Sec. 1259B—Modification of matters for discussion in annual reports of the United States-China Economic and Security Review
Commission.
(a) MATTERS FOR DISCUSSION.—Section 1238(c)(2) of the
Floyd D. Spence National Defense Authorization Act for Fiscal
Year 2001 (as enacted into law by Public Law 106–398; 22 U.S.C.
7002(c)(2)) is amended by striking subparagraphs (A) through (J)and inserting the following new subparagraphs:(A) The role of the People’s Republic of China in the proliferationof weapons of mass destruction and other weapon systems (including systems and technologies of a dual use nature), including actions the United States might take to encourage the People’s Republic of China to cease such practices.
(B) The qualitative and quantitative nature of the transfer ofUnited States production activities to the People’s Republic ofChina, including the relocation of manufacturing, advanced technology and intellectual property, and research and development facilities, the impact of such transfers on the national security of theUnited States (including the dependence of the national security industrial base of the United States on imports from China), the economic security of the United States, and employment in the UnitedStates, and the adequacy of United States export control laws in
relation to the People’s Republic of China.
(C) The effects of the need for energy and natural resources in
the People’s Republic of China on the foreign and military policiesof the People’s Republic of China, the impact of the large and growing economy of the People’s Republic of China on world energy andnatural resource supplies, prices, and the environment, and therole the United States can play (including through joint researchand development efforts and technological assistance) in influencing the energy and natural resource policies of the People’s Republic of China.
(D) Foreign investment by the United States in the People’s Republic of China and by the People’s Republic of China in the UnitedStates, including an assessment of its economic and security implications, the challenges to market access confronting potential
United States investment in the People’s Republic of China, andforeign activities by financial institutions in the People’s Republicof China.
(E) The military plans, strategy and doctrine of the People’s Republic of China, the structure and organization of the People’s Republic of China military, the decision-making process of the People’s Republic of China military, the interaction between the civilian and military leadership in the People’s Republic of China, thedevelopment and promotion process for leaders in the People’s Republic of China military, deployments of the People’s Republic ofChina military, resources available to the People’s Republic ofChina military (including the development and execution of budgets and the allocation of funds), force modernization objectives andtrends for the People’s Republic of China military, and the implications of such objectives and trends for the national security of theUnited States.

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dkrause on DSKHT7XVN1PROD with USCC(F) The strategic economic and security implications of the cybercapabilities and operations of the People’s Republic of China.
(G) The national budget, fiscal policy, monetary policy, capital
controls, and currency management practices of the People’s Republic of China, their impact on internal stability in the People’s
Republic of China, and their implications for the United States.
(H) The drivers, nature, and implications of the growing economic, technological, political, cultural, people-to-people, and security relations of the People’s Republic of China’s with other countries, regions, and international and regional entities (including
multilateral organizations), including the relationship among theUnited States, Taiwan, and the People’s Republic of China.
(I) The compliance of the People’s Republic of China with its commitments to the World Trade Organization, other multilateral commitments, bilateral agreements signed with the United States,
commitments made to bilateral science and technology programs,
and any other commitments and agreements strategic to theUnited States (including agreements on intellectual property rights
and prison labor imports), and United States enforcement policies
with respect to such agreements.
(J) The implications of restrictions on speech and access to information in the People’s Republic of China for its relations with theUnited States in economic and security policy, as well as any potential impact of media control by the People’s Republic of China
on United States economic interests.
(K) The safety of food, drug, and other products imported from
China, the measures used by the People’s Republic of China Government and the United States Government to monitor and enforce
product safety, and the role the United States can play (including
through technical assistance) to improve product safety in the People’s Republic of China.
(b) EFFECTIVE DATE.—The amendments made by subsection(a) shall take effect on the date of the enactment of this Act, andshall apply with respect to annual reports submitted under section
1238(c) of the Floyd D. Spence National Defense Authorization Act
for Fiscal Year 2001 after such date of enactment.

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APPENDIX IIBACKGROUND OF COMMISSIONERS

dkrause on DSKHT7XVN1PROD with USCCThe Honorable William A. Reinsch, Chairman
Chairman William Reinsch was reappointed to the Commission
by Senate Majority Leader Harry Reid for the two-year term expiring December 31, 2015. He was elected as Chairman of the Commission for the 2015 Report cycle effective January 1, 2015, andpreviously served as Vice Chairman of the Commission for the2014 Report cycle. Chairman Reinsch served as Under Secretaryfor Export Administration in the U.S. Department of Commerce. As
head of the Bureau of Export Administration, later named the Bureau of Industry and Security, Chairman Reinsch was charged withadministering and enforcing the export control policies of the U.S.
government, including its antiboycott laws. Major accomplishments
during his tenure included refocusing controls regarding economic
globalization, most notably on high-performance computers, microprocessors, and encryption, and completing the first full revision of
the Export Administration regulations in over forty years. In addition, he revised the interagency process for reviewing applications
and permitted electronic filing of applications over the Internet.
During this time, Chairman Reinsch delivered more than two
hundred speeches and testified fifty-three times before various committees of the Congress. Before joining the Department of Commerce, Chairman Reinsch was a senior legislative assistant to Senator John Rockefeller and was responsible for the senator’s work on
trade, international economic policy, foreign affairs, and defense.
He also provided staff support for Senator Rockefeller’s related efforts on the Finance Committee and the Commerce, Science, andTransportation Committee.
For fourteen years, Chairman Reinsch served on the staff of Senator John Heinz as chief legislative assistant, focusing on foreign
trade and competitiveness policy issues. During that period, Senator Heinz was either the chairman or the ranking member of the
Senate Banking Committee’s Subcommittee on International Finance. Senator Heinz was also a member of the International
Trade Subcommittee of the Finance Committee. Chairman Reinsch
provided support for the senator on both subcommittees. This work
included five revisions of the Export Administration Act and workon four major trade bills. Prior to joining Senator Heinz’s staff,
Chairman Reinsch was a legislative assistant to Representatives
Richard Ottinger and Gilbert Gude, acting staff director of theHouse Environmental Study Conference, and a teacher in Maryland.
Today Chairman Reinsch is president of the National Foreign
Trade Council. Founded in 1914, the council is the largest businessorganization dedicated solely to trade policy, international tax, and(587)

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human resources issues. The organization represents over two hundred companies through its offices in New York City and Washington.
In addition to his legislative and private sector work, Chairman
Reinsch serves as an adjunct associate professor at the Universityof Maryland’s School of Public Policy and, earlier, its University
College Graduate School of Management and Technology, teachinga course in international trade and trade policy. He is also a member of the boards of the Executive Council on Diplomacy and theCenter for International Private Enterprise (CIPE). Chairman
Reinsch’s publications include ‘‘Why China Matters to the Healthof the U.S. Economy,’’ published in Economics and National Security; ‘‘The Role and Effectiveness of U.S. Export Control Policy in
the Age of Globalization’’ and ‘‘Export Controls in the Age of
Globalization,’’ both published in The Monitor. In addition, Chairman Reinsch has published ‘‘Should Uncle Sam Control U.S. Technology Exports,’’ published in Insight magazine; ‘‘Encryption Policy
Strikes a Balance,’’ published in the Journal of Commerce, and‘‘Building a New Economic Relationship with Japan,’’ publishedwith others in Beyond the Beltway: Engaging the Public in U.S.
Foreign Policy.
The Honorable Dennis C. Shea, Vice Chairman
Vice Chairman Dennis Shea was reappointed by Senate Republican Leader Mitch McConnell for a term expiring December 31,
2016. An attorney with more than 25 years of experience in government and public policy, he is the founder of Shea Public Strategies
LLC, a public affairs firm based in Alexandria, Virginia. Before
starting the firm, he served as Vice President for Government Affairs—Americas for Pitney Bowes Inc., a Fortune 500 company.
Vice Chairman Shea’s government service began in 1988 when
he joined the Office of Senate Republican Leader Bob Dole as counsel, subsequently becoming the Senator’s deputy chief of staff in
the Office of the Senate Majority Leader. In these capacities, he advised Senator Dole and other Republican Senators on a broad
range of domestic policy issues, was involved in the drafting of numerous pieces of legislation, and was recognized as one of the mostinfluential staffers on Capitol Hill. In 1992, Vice Chairman Shea’sservice with Senator Dole was interrupted when he ran for Congress in the Seventh District of New York.
During the 1996 elections, Vice Chairman Shea continued to help
shape the national public policy debate as the director of policy for
the Dole for President Campaign. Following the elections, he entered the private sector, providing legislative and public affairs
counsel to a wide range of clients while employed at BKSH & Associates and Verner, Liipfert, Bernhard, McPherson, and Hand.
In 2003, Vice Chairman Shea was named the Executive Directorof the President’s Commission on the United States Postal Service.
Many of the Commission’s recommendations were subsequently
adopted in the landmark 2006 postal reform legislation.
In 2004, Vice Chairman Shea was confirmed as Assistant Secretary for Policy Development and Research at the U.S. Department of Housing and Urban Development. As Assistant Secretary,
Vice Chairman Shea led a team responsible for conducting much

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of the critical analysis necessary to support the Department’s mission. In 2005, Vice Chairman Shea left to serve as Senior Advisor
to Senator Elizabeth Dole in her capacity as chairman of the National Republican Senatorial Committee.
Vice Chairman Shea received a J.D., an M.A. in History, and a
B.A. in Government, from Harvard University. He is admitted tothe bar in New York and the District of Columbia. The Vice Chairman currently resides in Alexandria, Virginia with his wife Elizabeth and daughter Juliette.
Carolyn Bartholomew

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Carolyn Bartholomew was reappointed to the Commission by
House Democratic Leader Nancy Pelosi for a sixth two-year term
expiring on December 31, 2015. She previously served as the Commission’s chairman for the 2007 and 2009 Report cycles and served
as vice chairman for the 2010, 2008, and 2006 Report cycles.
Commissioner Bartholomew has worked at senior levels in the
U.S. Congress, serving as counsel, legislative director, and chief ofstaff to now House Democratic Leader Nancy Pelosi. She was aprofessional staff member on the House Permanent Select Committee on Intelligence and also served as a legislative assistant tothen U.S. Representative Bill Richardson.
In these positions, Commissioner Bartholomew was integrally involved in developing U.S. policies on international affairs and security matters. She has particular expertise in U.S.-China relations,
including issues related to trade, human rights, and the proliferation of weapons of mass destruction. Ms. Bartholomew led efforts
in the establishment and funding of global AIDS programs and thepromotion of human rights and democratization in countries
around the world. She was a member of the first Presidential Delegation to Africa to Investigate the Impact of HIV/AIDS on Children
and a member of the Council on Foreign Relations’ Congressional
Staff Roundtable on Asian Political and Security Issues.
In addition to U.S.-China relations, her areas of expertise include
terrorism, trade, proliferation of weapons of mass destruction,
human rights, U.S. foreign assistance programs, and international
environmental issues. She is a consultant to non-profit organizations and also serves on the board of directors of the Kaiser Aluminum Corporation and the nonprofit organization Asia Catalyst.
Commissioner Bartholomew received a Bachelor of Arts degreefrom the University of Minnesota, a Master of Arts in Anthropology
from Duke University, and a Juris Doctorate from Georgetown University Law Center. She is a member of the State Bar of California.
Peter Brookes
Commissioner Brookes was reappointed to the Commission by
House Republican Leader John Boehner for a two-year term expiring December 31, 2016. Commissioner Brookes served in the
George W. Bush Administration as the Deputy Assistant Secretaryof Defense for Asian and Pacific Affairs. Prior to joining the Bush
Administration, Commissioner Brookes was a Professional Staff
Member with the Committee on International Relations in the U.S.
House of Representatives. Before his service in the Congress, Com-

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missioner Brookes worked in the Central Intelligence Agency, for
the State Department at the United Nations, and in the private
sector.
Now, Commissioner Brookes is a Senior Fellow at The Heritage
Foundation and works to develop and communicate the Foundation’s stance on foreign policy and national security affairs throughmedia appearances, research, published articles, congressional testimony, and speaking engagements.
Commissioner Brookes is a decorated military veteran, having
served on active duty with the U.S. Navy in Latin America, Asia,and the Middle East. Dr. Brookes is a graduate of Georgetown
University, The Johns Hopkins University, the Defense Language
Institute, the Naval War College, and U.S. Naval Academy.
Robin Cleveland
Commissioner Cleveland was reappointed by Senate Republican
Leader Mitch McConnell for a two-year term expiring December 31,
2016. After three decades of government service, Commissioner
Cleveland is now serving as the Executive Director of the Office ofStudent Life at the Graduate School of Education and Human Development at The George Washington University. Having received
her Masters degree in school counseling, Ms. Cleveland also is pursuing her doctorate as a counselor educator. Previously, Commissioner Cleveland worked for U.S. Senator Mitch McConnell in a
number of positions in his personal office, on the Senate SelectCommittee on Intelligence, the Foreign Relations Committee, andthe Senate Appropriations Committee. In addition, Commissioner
Cleveland served as the Counselor to the President of the World
Bank, and as the Associate Director of the Office of Management
and Budget in the Executive Office of the President. During her
tenure serving President Bush, Commissioner Cleveland co-led theinteragency effort to develop and operationalize two Presidential
initiatives: the Millennium Challenge Corporation and the President’s Emergency Plan for AIDS Relief. These efforts reflect her
commitment to link policy, performance, and resource management.
Commissioner Cleveland graduated from Wesleyan University
with honors and received her M.A. in Education and Human Development from The George Washington University.

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Jeffrey L. Fiedler
Commissioner Fiedler was reappointed to the Commission by
House Democratic Leader Nancy Pelosi for a fifth term expiring
December 31, 2015. He is Assistant to the General President, andDirector, Special Projects and Initiatives, for the International
Union of Operating Engineers. Previously, he was President of Research Associates of America (RAA) and the elected president of
the Food and Allied Service Trades Department, AFL–CIO(‘‘FAST’’). This constitutional department of the AFL–CIO represented ten unions with a membership of 3.5 million in the UnitedStates and Canada. The focus of RAA, like FAST before it, was organizing and bargaining research for workers and their unions. He
served as a member of the AFL–CIO Executive Council committees
on International Affairs, Immigration, Organizing, and Strategic

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Approaches. He also served on the board of directors of the Consumer Federation of America and is a member of the Council on
Foreign Relations. In 1992, Mr. Fiedler co-founded the Laogai Research Foundation (LRF), an organization devoted to studying theforced labor camp system in China. When the foundation’s Executive Director, Harry Wu, was detained in China in 1995, Mr. Fiedler coordinated the campaign to win his release. He no longer
serves as director of the LRF.
Mr. Fiedler has testified on behalf of the AFL–CIO before the
Senate Foreign Relations Committee and the House International
Affairs Committee and its various subcommittees, as well as theTrade Subcommittee of the House Ways and Means Committee
concerning China policy. He attended three of the American Assembly conferences on China sponsored by Columbia University
and has participated in a Council on Foreign Relations task force
and study group on China. He has been interviewed on CBS, NBC,
ABC, CNN, and CNBC on China policy, international trade issues,
human rights, and child labor.
A Vietnam veteran, he served with the U.S. Army in Hue in
1967–68. He received his B.A. in Political Science from Southern Illinois University. He is married with two adult children and resides in Virginia.

dkrause on DSKHT7XVN1PROD with USCCThe Honorable Carte P. Goodwin
Senator Carte P. Goodwin was appointed to the Commission by
Senate Majority Leader Harry Reid for a second two-year term expiring on December 31, 2015.
He is an attorney with the Charleston, West Virginia, law firmof Goodwin & Goodwin, LLP. His practice includes commercial litigation, appellate advocacy, and intellectual property.
In July 2010, West Virginia Governor Joe Manchin III appointed
Senator Goodwin to the United States Senate to fill the vacancy
caused by the passing of Senator Robert C. Byrd, where he served
until a special election was held to fill the remainder of Senator
Byrd’s unexpired term.
From 2005 to 2009, Senator Goodwin served four years as General Counsel to Governor Manchin, during which time he alsochaired the Governor’s Advisory Committee on Judicial Nominations. In addition, Senator Goodwin chaired the West Virginia
School Building Authority and served as a member of the State
Consolidated Public Retirement Board. Following his return to private practice in 2009, Senator Goodwin was appointed to chair the
Independent Commission on Judicial Reform, along with former
Supreme Court Justice Sandra Day O’Connor, which was tasked
with evaluating the need for broad systemic reform to West Virginia’s judicial system.
Senator Goodwin also previously worked as a law clerk for the
Honorable Robert B. King of the United States Court of Appeals for
the Fourth Circuit. A native of Mt. Alto, West Virginia, Senator
Goodwin received his Bachelor of Arts degree in Philosophy fromMarietta College in Marietta, Ohio, in 1996 and received his Doctorof Law degree from the Emory University School of Law, graduating Order of the Coif in 1999.

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Senator Goodwin currently resides in Charleston, West Virginia,
with his wife, Rochelle; son, Wesley Patrick; and daughter, Anna
Vail.
Daniel M. Slane
Daniel Slane was reappointed to the Commission by Speaker ofthe House John Boehner for a fourth two-year term expiring on December 31, 2015. Commissioner Slane served as the Commission’s
Chairman for the 2010 Report cycle and as Vice Chairman for the2011 Report cycle.
Commissioner Slane served for two years on active duty as a
U.S. Army Captain in Military Intelligence; in addition he served
for a number of years as a Case Officer with the U.S. Central Intelligence Agency. Commissioner Slane worked in The White Houseduring the Ford Administration.
In 1996, Commissioner Slane became a member of the board oftrustees of The Ohio State University and was chairman from 2005
to 2006. The Ohio State University is the nation’s largest university, with an annual budget of over $4 billion. He is also the former
chairman of University Hospital, a 1,000-bed regional hospital in
Columbus, and the former chairman of the James Cancer Hospital,a National Cancer Institute Comprehensive Cancer Center. Commissioner Slane serves on the board of two financial institutions
and a number of nonprofit organizations.
Commissioner Slane is the founder and co-owner of the Slane
Company, whose principal business includes real estate development, lumber, and furniture. He has extensive international business experience, including operating a business in China. Prior to
becoming a member of the Commission, Commissioner Slane manufactured plywood and related wood products at factories in Harbin, Dalian, and Balu (Pizhou), China. In 2007, he sold his interestin that company.
Commissioner Slane received a Bachelor of Science in Business
Administration and a Juris Doctorate from The Ohio State University. He holds a Master’s Degree in International Law from the Europa Institute at the University of Amsterdam in The Netherlands.
Commissioner Slane is a member of the Ohio Bar and was formerlya partner in the law firm of Grieser, Schafer, Blumenstiel, andSlane.

dkrause on DSKHT7XVN1PROD with USCCThe Honorable James M. Talent
Senator Jim Talent is a national security leader who specializes
in issues related to the Department of Defense. He has been activein Missouri and national public policy for over 25 years.
Senator Talent’s public service began in 1984, when at the ageof 28 he was elected to the Missouri House of Representatives
where he served eight years, the last four as the Republican leader
in the Missouri House.
In 1992, he was elected to the first of four terms in the U.S.
House of Representatives where he represented Missouri’s Second
Congressional District. During his eight years in the U.S. House ofRepresentatives, Talent co-authored the historic welfare reformbill, championed national security issues on the House Armed Serv-

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ices Committee, and enacted legislation to help revitalize distressedneighborhoods, both urban and rural. He was the Chairman of theHouse Small Business Committee from 1997–2001, where heworked on regulatory reform issues and on legislation to lower
health care costs for small business people and their employees.
Under Senator Talent’s leadership, the Small Business Committee
became one of the most prolific and bi-partisan in the House ofRepresentatives, passing numerous bills without a single dissenting vote.
In 2002, Missourians elected Talent to serve in the United States
Senate where he worked with Republicans and Democrats toenact critical legislation for Missouri. He served on the Senate
Armed Services, Energy and Natural Resources, and Agriculture
Committees. Working with Oregon Democrat Ron Wyden, Senator
Talent was successful in securing critical funding through construction bonding in the highway bill. He and Senator Dianne
Feinstein (D–CA) succeeded in passing the most comprehensive
anti-methamphetamine bill ever enacted into law. Senator Talent
was a leader on energy issues and was instrumental in the passageof the renewable fuel standard.
After leaving the Senate in 2007, Senator Talent joined The Heritage Foundation as a Distinguished Fellow specializing in militaryaffairs and conservative solutions to poverty. In 2008, he served asVice Chairman of the Commission on Prevention of Weapons ofMass Destruction Proliferation and Terrorism. In 2010, he servedon the independent panel that reviewed the Quadrennial Defense
Review of the Department of Defense. He also served on the independent panel that reviewed the Quadrennial Defense Review of2014. He also has been a member of the executive panel advising
the Chief of Naval Operations. Senator Talent was the first national figure outside Massachusetts to endorse Governor Mitt Romney for president in 2007 and was Governor Romney’s senior policy
advisor in both the 2008 and 2012 campaigns for president.
Senator Talent is an attorney. He earned his B.A. from Washington University in St. Louis and his J.D. from the University of
Chicago Law School.
The Honorable Katherine C. Tobin, Ph.D.
Dr. Katherine Tobin was appointed to the U.S.-China Economic
and Security Review Commission by Senate Majority Leader Harry
Reid in December 2014 for a second two-year term expiring December 31, 2016. Dr. Tobin has fifteen years of experience as a business manager, market researcher and consultant in corporate
America at institutions including Hewlett-Packard Corporation,
IBM and Catalyst. She also has worked for fifteen years as a university faculty member and administrator.
In 2009, Dr. Tobin was appointed by President Obama as Deputy
Assistant Secretary for Performance Improvement at the U.S. Department of Education. She focused on strengthening the Department’s capacity to work more effectively with its political and educational partners at the national, state and local levels.
In 2006, Dr. Tobin was appointed by President George W. Bushand served as a member of the Board of Governors of the U.S.
Postal Service. Dr. Tobin provided strategic vision to the executive

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team, helped direct and control expenditures, reviewed businesspractices, conducted long-range planning and set policies on all
postal matters. She also chaired the Board’s Audit and FinanceCommittee at a critical time, when, due to Congress’s 2006 legislation, the U.S. Postal Service needed to strengthen its organizational and financial controls to become compliant by 2010 with the
Sarbanes-Oxley Act.
During her years at Hewlett-Packard, Dr. Tobin worked in
the Corporation’s Computer Systems Division and the Systems
Technology Division which were responsible for developing minicomputer systems purchased around the world for business, medical and scientific usage. Dr. Tobin worked closely with R&D andmarketing teams early in the product development life cycle to insure that customer needs were clearly understood and translated
into engineering and market specifications.
Working as a consultant with IBM’s senior leaders, Dr. Tobin
conducted research on the corporation’s values across all its global
operations, institutional brand awareness and preference, distribution channels management, and the creation of a new businessplan for IBM’s Global Financing business.
Dr. Tobin earned a Ph.D. and Master of Arts degree from Stanford University. She earned a Master of Arts degree in Teachingfrom the University of Massachusetts and a Bachelor of Arts in
English from Skidmore College. Currently, she also serves as amember of the U.S. Postal Service’s Citizens’ Stamp Advisory
Committee which recommends to the Postmaster General subjects
reflecting America’s values and achievements for portrayal on commemorative stamps.

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Michael R. Wessel
Commissioner Michael R. Wessel, an original member of the
U.S.-China Economic and Security Review Commission, was reappointed by House Democratic Leader Nancy Pelosi for a eighth
two-year term expiring on December 31, 2016.
Commissioner Wessel served on the staff of former House Democratic Leader Richard Gephardt for more than two decades, leaving
his position as general counsel in March 1998. In addition, Commissioner Wessel was Congressman Gephardt’s chief policy advisor,
strategist, and negotiator. He was responsible for the development,
coordination, management, and implementation of the Democratic
leader’s overall policy and political objectives, with specific responsibility for international trade, finance, economics, labor, and taxation.
During his more than 20 years on Capitol Hill, Commissioner
Wessel served in a number of positions. As Congressman Gephardt’s principal Ways and Means aide, he developed and implemented numerous tax and trade policy initiatives. He participatedin the enactment of every major trade policy initiative from 1978
until his departure in 1998. In the late 1980s, he was the executive
director of the House Trade and Competitiveness Task Force,
where he was responsible for the Democrats’ trade and competitiveness agenda as well as overall coordination of the Omnibus Tradeand Competitiveness Act of 1988.

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Commissioner Wessel was intimately involved in the development of comprehensive tax reform legislation in the early 1980s
and every major tax bill during his tenure. Beginning in 1989, hebecame the principal advisor to the Democratic leadership on economic policy matters and served as tax policy coordinator to the1990 budget summit. In 1995, he developed the Ten Percent Tax
Plan, a comprehensive tax reform initiative that would enableroughly four out of five taxpayers to pay no more than a ten percent rate in federal income taxes, the principal Democratic tax reform alternative.
In 1988, he served as national issues director for Congressman
Gephardt’s presidential campaign. During the 1992 presidential
campaign, he assisted the Clinton presidential campaign on abroad range of issues and served as a senior policy advisor to the
Clinton Transition Office. In 2004, he was a senior policy advisor
to the Gephardt for President Campaign and later co-chaired theTrade Policy Group for the Kerry presidential campaign. In 2008,
he was publicly identified as a trade and economic policy advisor
to the Obama presidential campaign.
He has coauthored a number of articles with Congressman Gephardt and a book, An Even Better Place: America in the 21st Century. Commissioner Wessel served as a member of the U.S. Trade
Deficit Review Commission in 1999–2000, a congressionally createdcommission charged with studying the nature, causes, and consequences of the U.S. merchandise trade and current account deficits.
Today, Commissioner Wessel is President of The Wessel Group
Incorporated, a public affairs consulting firm offering expertise ingovernment, politics, and international affairs. He was formerly the
Executive Vice President at the Downey McGrath Group, Incorporated. Commissioner Wessel holds a Bachelor of Arts and a Juris
Doctorate from The George Washington University. He is a member of the Bars of the District of Columbia and of Pennsylvania andis a member of the Council on Foreign Relations. He and his wife
Andrea have four children.
Larry M. Wortzel, Ph.D.
Larry Wortzel was reappointed by Speaker of the House John
Boehner for a term expiring on December 31, 2016. He was theCommission’s Chairman for the 2006 and 2008 Report cycles. A
leading authority on China, Asia, and national security, Commissioner Wortzel had a distinguished thirty-two-year career in the
U.S. Armed Forces. After three years as an infantryman in the
U.S. Marine Corps, Commissioner Wortzel enlisted in the U.S.
Army in 1970. His first assignment with the Army Security Agency
took him to Thailand, where as a signals intelligence collector hefocused on Chinese military communications in Vietnam and Laos.
Within three years, he had graduated from the Infantry Officer
Candidate School and the Airborne and Ranger schools.
After four years as an infantry officer in the 29th and 9th Infantry Regiments, Commissioner Wortzel shifted to military intelligence. Commissioner Wortzel traveled regularly throughout Asia
while serving in the U.S. Pacific Command’s intelligence centerfrom 1978 to 1982. The following year, he attended the National

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University of Singapore, where he studied advanced Chinese andtraveled in China and Southeast Asia. He next worked for theUnder Secretary of Defense for Policy, developing counterintelligence programs to protect emerging defense technologies from foreign espionage. Also, the Commissioner was active in programs togather foreign intelligence for the Army Intelligence and Security
Command.
From 1988 to 1990, Commissioner Wortzel was the AssistantArmy Attaché at the U.S. Embassy in Beijing, China. After assignments on the Department of the Army staff, he returned to China
in 1995 as the army attaché. In these assignments he represented
U.S. defense interests in China and traveled around the country
observing and reporting on military and political events for the
U.S. government.
In December 1997, Commissioner Wortzel joined the faculty of
the U.S. Army War College as Director of the Strategic Studies Institute. Concurrently he was professor of Asian studies. He retired
from the U.S. Army as a colonel at the end of 1999. After retirement, Commissioner Wortzel continued to be active in defense andAsia-related policy matters. He was director of the Asian Studies
Center at The Heritage Foundation and also vice president for foreign policy and defense studies at Heritage.
Commissioner Wortzel has written or edited ten books on China,
including Class in China: Stratification in a Classless Society; China’s Military Modernization: International Implications; Dictionaryof Contemporary Chinese Military History; and The Dragon Extends
its Reach: Chinese Military Power Goes Global.
A graduate of the U.S. Army War College, Commissioner Wortzel
earned his Doctor of Philosophy degree from the University of
Hawaii-Manoa. He and his wife live in Williamsburg, Virginia.

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Michael R. Danis, Executive Director
Formerly served as a senior intelligence officer with the DefenseIntelligence Agency. Mr. Danis managed the agency’s technology
transfer division; the U.S. government’s sole analytical entity
tasked with producing intelligence assessments regarding all aspects of foreign acquisition of U.S. controlled technology and hightech corporations. He also established and led a unique team ofChina technology specialists producing assessments on China’s
military-industrial complex, and the impact of U.S. export-controlled and other foreign technology on Chinese weapons development programs. While serving in the U.S. Air Force, Mr. Danis was
twice temporarily assigned to the office of the defense attaché in
Beijing.

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APPENDIX III
PUBLIC HEARINGS OF THE COMMISSION
Full transcripts and written testimonies are available online at
the Commission’s website: www.uscc.gov.
January 28, 2015: Public Hearing on ‘‘The Foreign
Investment Climate in China: Present Challenges andPotential for Reform’’Washington, DC
Commissioners present: Hon. William A. Reinsch, Chairman(Hearing Co-Chair); Hon. Dennis C. Shea, Vice Chairman; Carolyn
Bartholomew; Jeffrey L. Fiedler; Hon. Carte P. Goodwin; Daniel M.
Slane (Hearing Co-Chair); Hon. James M. Talent; Hon. Katherine
C. Tobin; Michael R. Wessel.
Witnesses: Maureen K. Ohlhausen, Federal Trade Commission;
Mark A. Cohen, U.S. Patent and Trademark Office; Oded Shenkar,*
The Ohio State University; Robert D. Atkinson, Information Technology and Innovation Foundation; Dan Harris, Harris Moure; Abbott Lipsky, Jr., Latham & Watkins; Elizabeth Xiao-Ru Wang,
Charles River Associates; William Kovacic, George Washington
University Law School; Lucille Barale, Georgetown University
School of Law; Joshua Eisenman, University of Texas at Austin;
Scott Kennedy, Center for Strategic and International Studies.
February 18, 2015: Public Hearing on ‘‘China’s Space andCounterspace Programs’’
Washington, DC
Commissioners present: Hon. William A. Reinsch, Chairman;
Hon. Dennis C. Shea, Vice Chairman; Carolyn Bartholomew; Jeffrey L. Fielder (Hearing Co-Chair); Hon. Carte P. Goodwin; Daniel
M. Slane; Hon. James M. Talent (Hearing Co-Chair), Hon. Katherine C. Tobin, Michael R. Wessel.

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Witnesses: Kevin Pollpeter, University of California, San Diego;
Joan Johnson-Freese, U.S. Naval War College; Dean Cheng, The
Heritage Foundation; Alanna Krolikowski, Harvard University;
Tate Nurkin, Jane’s IHS Aerospace, Defense and Security; Mark
Stokes, Project 2049 Institute; Richard D. Fisher, Jr., International
Assessment and Strategy Center; Roger Handberg, University ofCentral Florida; Phillip Saunders, National Defense University.
(597)

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March 18, 2015: Public Hearing on ‘‘Looking West: China
and Central Asia’’Washington, DC
Commissioners present: Hon. William A. Reinsch, Chairman;
Hon. Dennis C. Shea, Vice Chairman (Hearing Co-Chair); Carolyn
Bartholomew; Jeffrey L. Fiedler; Hon. Carte P. Goodwin; Daniel M.
Slane; Hon. James M. Talent; Hon. Katherine C. Tobin (Hearing
Co-Chair); Michael R. Wessel.
Witnesses: Marlene Laruelle, George Washington University; S.
Frederick Starr, Johns Hopkins University School of Advanced
International Studies; Raffaello Pantucci, Royal United Services Institute for Defence and Security Studies; Alexander Cooley, Columbia University; Sebastien Peyrouse, George Washington University;
Erica Downs, Eurasia Group; Michael Clarke, Griffith University;
Niklas Swanström, Institute for Security and Development Policy;
Andrew Small, German Marshall Fund of the United States.
April 1, 2015: Public Hearing on ‘‘China’s Offensive Missile
Forces’’Washington, DC
Commissioners present: Hon. William A. Reinsch, Chairman;
Hon. Dennis C. Shea, Vice Chairman (Hearing Co-Chair); Carolyn
Bartholomew; Jeffrey L. Fiedler; Hon. James M. Talent; Hon.
Katherine C. Tobin (Hearing Co-Chair).
Witnesses: Mark Stokes, Project 2049 Institute; Toshi Yoshihara,
U.S. Naval War College; Dennis Gormley, University of Pittsburgh;
Christopher Twomey, U.S. Naval Postgraduate School; Christopher
Yeaw, Louisiana Tech Research Institute; James Acton, Carnegie
Endowment for International Peace; Robert Haddick, U.S. Special
Operations Command–Joint Special Operations University; Evan
Montgomery, Center for Strategic and Budgetary Assessments; Elbridge Colby, Center for a New American Security.
April 22, 2015: Public Hearing on ‘‘China Ahead of the
13th Five-Year Plan: Competitiveness and Market Reform’’Washington, DC

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Commissioners present: Hon. William A. Reinsch, Chairman;
Hon. Dennis C. Shea, Vice Chairman; Carolyn Bartholomew, Robin
Cleveland (Hearing Co-Chair); Hon. Carte P. Goodwin; Daniel M.
Slane; Hon. James M. Talent; Hon. Katherine C. Tobin; Michael R.
Wessel (Hearing Co-Chair).
Witnesses: Stephen Roach, Yale University; Nicholas Consonery,
Eurasia Group; Oliver K. Melton, U.S. Department of State; Gary
H. Jefferson, Brandeis University; Xiaolan Fu, University of Oxford; Ernest Preeg, Manufacturers Alliance for Productivity and Innovation; David Frey, KPMG China; Eswar S. Prasad, Cornell University; Dali Yang, University of Chicago.

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599
May 13, 2015: Public Hearing on ‘‘China’s Relations with
Southeast Asia’’Washington, DC
Commissioners present: Hon. William A. Reinsch, Chairman;
Hon. Dennis C. Shea, Vice Chairman; Carolyn Bartholomew (Hearing Co-Chair); Jeffrey L. Fiedler; Hon. Carte P. Goodwin; Daniel M.
Slane (Hearing Co-Chair); Hon. James M. Talent; Hon. Katherine
C. Tobin; Michael R. Wessel.
Witnesses: Bonnie Glaser, Center for Strategic and International
Studies; Mira Rapp Hooper, Center for Strategic and International
Studies; Patrick Cronin, Center for a New American Security;
Chin-Hao Huang,* Yale-NUS College; Peter Chalk,* RAND Corporation; Robert Sutter, George Washington University; Meredith
Miller, National Bureau of Asian Research; David Dapice, Harvard
University; Priscilla Clapp, U.S. Institute of Peace and the Asia Society; Pek Koon Heng, American University; Murray Hiebert, Center for Strategic and International Studies.
June 15, 2015: Public Hearing on ‘‘Commercial Cyber
Espionage and Barriers to Digital Trade in China’’Washington, DC
Commissioners present: Hon. William A. Reinsch, Chairman;
Hon. Dennis C. Shea, Vice Chairman (Hearing Co-Chair); Jeffrey
L. Fiedler; Hon. Carte P. Goodwin (Hearing Co-Chair); Daniel M.
Slane; Hon. Katherine C. Tobin; Michael R. Wessel.

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Witnesses: Matthew Schruers, Computer & Communications Industry Association; Samm Sacks, Eurasia Group; Paul M. Tiao,
Hunton & Williams; Dennis F. Poindexter, author; Jen Weedon,
FireEye and Mandiant, Inc.

* Submitted material for the record.

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APPENDIX IIIA
LIST OF WITNESSES TESTIFYING BEFORETHE COMMISSION
2015 Hearings
Full transcripts and written testimonies are available online at
the Commission’s website: www.uscc.gov.
Alphabetical Listing of Panelists Testifying before theCommission

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Panelist Name

Panelist Affiliation

Commission
Hearing

Acton, James

Carnegie Endowment forInternational Peace

April 1, 2015

Atkinson, Robert D.

Information Technology andInnovation Foundation

January 28, 2015

Barale, LucilleGeorgetown University School of
Law

January 28, 2015

Chalk, Peter *RAND Corporation

May 13, 2015

Cheng, Dean

The Heritage Foundation

February 18, 2015

Clapp, Priscilla

U.S. Institute of Peace and theAsia Society

May 13, 2015

Clarke, Michael

Griffith University

March 18, 2015

Cohen, Mark A.

U.S. Patent and Trademark
OfficeJanuary 28, 2015

Colby, Elbridge

Center for a New American
Security

April 1, 2015

Consonery, Nicholas

Eurasia Group

April 22, 2015

Cooley, Alexander

Columbia University

March 18, 2015

Cronin, Patrick

Center for a New American
Security

May 13, 2015

Dapice, David

Harvard University

May 13, 2015

Downs, Erica

Eurasia Group

March 18, 2015

Eisenman, Joshua

University of Texas at Austin

January 28, 2015

(601)

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Alphabetical Listing of Panelists Testifying before theCommission—Continued

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Panelist Name

VerDate Sep 11 2014

Panelist Affiliation

Commission
Hearing

Fisher Jr., Richard D.

International Assessment andStrategy CenterFebruary 18, 2015

Frey, David

KPMG China

April 22, 2015

Fu, Xiaolan

University of Oxford

April 22, 2015

Glaser, Bonnie

Center for Strategic andInternational Studies

May 13, 2015

Gormley, Dennis

University of Pittsburgh

April 1, 2015

Haddick, Robert

U.S. Special Operations
Command–Joint Special
Operations University

April 1, 2015

Handberg, Roger

University of Central Florida

February 18, 2015

Harris, Dan

Harris Moure

January 28, 2015

Heng, Pek Koon

American University

May 13, 2015

Hiebert, Murray

Center for Strategic andInternational Studies

May 13, 2015

Huang, Chin-Hao *Yale-NUS College

May 13, 2015

Jefferson, Gary H.

Brandeis University

April 22, 2015

Johnson-Freese, Joan

U.S. Naval War College

February 18, 2015

Kennedy, Scott

Center for Strategic andInternational Studies

January 28, 2015

Kovacic, William

George Washington University
Law School

January 28, 2015

Krolikowski, Alanna

Harvard University

February 18, 2015

Laruelle, Marlene

George Washington University

March 18, 2015

Lipsky Jr., Abbott

Latham & Watkins

January 28, 2015

Melton, Oliver K.

U.S. Department of State

April 22, 2015

Miller, Meredith

National Bureau of Asian
Research

May 13, 2015

Montgomery, Evan

Center for Strategic andBudgetary Assessments

April 1, 2015

Nurkin, Tate

Jane’s IHS Aerospace, Defense
and Security

February 18, 2015

Ohlhausen, Maureen K.

Federal Trade Commission

January 28, 2015

Pantucci, RaffaelloRoyal United Services Institute for
Defence and Security Studies

March 18, 2015

Peyrouse, SebastienGeorge Washington University

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Alphabetical Listing of Panelists Testifying before theCommission—Continued
Panelist Name

Panelist Affiliation

Commission
Hearing

Poindexter, Dennis F.

authorJune 15, 2015

Pollpeter, Kevin

University of California,
San DiegoFebruary 18, 2015

Prasad, Eswar S.

Cornell University

April 22, 2015

Preeg, Ernest

Manufacturers Alliance for
Productivity and Innovation

April 22, 2015

Rapp Hooper, Mira

Center for Strategic andInternational Studies

May 13, 2015

Roach, Stephen

Yale University

April 22, 2015

Sacks, Samm

Eurasia Group

June 15, 2015

Saunders, Phillip

National Defense University

February 18, 2015

Schruers, Matthew

Computer & Communications
Industry Association

June 15, 2015

Shenkar, Oded *The Ohio State University

January 28, 2015

Small, Andrew

German Marshall Fund of theUnited States

March 18, 2015

Starr, S. Frederick

Johns Hopkins University Schoolof Advanced International
StudiesMarch 18, 2015

Stokes, Mark

Project 2049 InstituteFebruary 18, 2015
April 1, 2015

Sutter, Robert

George Washington University

May 13, 2015

Swanström, Niklas

Institute for Security andDevelopment Policy

March 18, 2015

Tiao, Paul M.

Hunton & Williams

June 15, 2015

Twomey, Christopher

U.S. Naval Postgraduate School

April 1, 2015

Wang, Elizabeth Xiao-Ru

Charles River Associates

January 28, 2015

Weedon, Jen

FireEye and Mandiant, Inc.

June 15, 2015

Yang, Dali

University of Chicago

April 22, 2015

Yeaw, Christopher

Louisiana Tech ResearchInstitute

April 1, 2015

Yoshihara, Toshi

U.S. Naval War College

April 1, 2015

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* Submitted material for the record.

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APPENDIX IVINTERLOCUTORS’ ORGANIZATIONSAsia Fact-Finding Trip
July 2015
CHINA, KAZAKHSTAN, UZBEKISTAN,
HONG KONG, JULY 2015

VIETNAM,AND

During the visit of Commission delegations to China,
Kazakhstan, Uzbekistan, Vietnam, and Hong Kong in July
2015, the delegations met with representatives of the following organizations:
In China
U.S. Government• U.S. Embassy in Beijing• U.S. Information Technology Office
Government of the People’s Republic of China• Academy of Military Sciences• Chinese People’s Institute of Foreign Affairs• Ministry of Commerce• National Development and Reform Commission of Xinjiang• Xinjiang Foreign Affairs Office• Xinjiang Provincial Government
Business Representatives• American Chamber of Commerce in China• China Great Wall Industrial Corporation• Sinopec
Research Organizations• China Center for International Economic Exchanges• Chinese Academy of Social Sciences• Institute of Central Asia, Xinjiang Academy of Social
Sciences

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U.S. Government• U.S. Embassy in Astana• United States Agency for International Development
Government of the Republic of Kazakhstan• Ministry of Energy• Ministry of Foreign Affairs• Ministry of Investment and Development• Presidential Library(605)

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606
Government of the People’s Republic of China• Chinese Embassy in AstanaBusiness Representatives• Bank of China• Citibank Kazakhstan• KazAtomProm• PricewaterhouseCoopers Kazakhstan
Research Organizations• Al-Farabi University
In Uzbekistan
U.S. Government• U.S. Embassy in Tashkent
Government of the Republic of Uzbekistan• Institute for Strategic and Regional Studies• Ministry of Foreign Affairs• Ministry of Foreign Economic Relations, Investment, and
TradeBusiness Representatives• American Chamber of Commerce in Uzbekistan• Avialeasing Aviation• BNZ Industral Support• Carlsberg Uzbekistan• GM Powertrain Uzbekistan• Uzbeknergo
In Vietnam
U.S. Government• U.S. Embassy in Hanoi
Government of Vietnam• Central Committee of the Communist Party of Vietnam• Ministry of Defense• Ministry of Foreign Affairs• Ministry of Public Security• National Assembly• National Border Commission
International Organizations• World Bank
Nongovernmental Organizations• Respect Vietnam
Private Citizens• Labor scholar
Research Organizations• Diplomatic Academy of Vietnam• Vietnam Academy of Social Sciences

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In Hong Kong
U.S. Government• U.S. Consulate in Hong Kong

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607

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Government of Hong Kong
• Financial Services and the Treasury Bureau• Legislative Council members
Business Representatives• American Chamber of Commerce in Hong Kong
• Citi Research
Nongovernmental Organizations• Hong Kong Federation of Students• Hong Kong Journalists Association• Various human rights organizations
Private Citizens• Retired Hong Kong administration official• Retired Democratic Party legislator• U.S. journalist

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APPENDIX V
LIST OF RESEARCH MATERIAL
Contracted and Staff Research Reports
Released in Support of the 2015 Annual Report
Disclaimer
The reports in this section were prepared at the request of theCommission to support its deliberations. They have been posted
to the Commission’s website in order to promote greater public
understanding of the issues addressed by the Commission in
its ongoing assessment of U.S.-China economic relations andtheir implications for U.S. security, as mandated by P.L. 106–398,
P.L. 108–7, P.L. 109–108, P.L. 110–161, and P.L. 113–291. The
posting of these reports to the Commission’s website does not
imply an endorsement by the Commission or any individual
Commissioner of the views or conclusions expressed therein.
Contracted Reports————————————
China Dream, Space Dream: China’s Progress in SpaceTechnologies and Implications for the United States
Prepared for the Commission by Kevin Pollpeter, Eric Anderson,
Jordan Wilson, and Fan Yang
University of California, Institute on Global Conflict and Cooperation
March 2015
http://origin.www.uscc.gov/sites/default/files/Research/China%20
Dream%20Space%20Dream_Report.pdf
China’s Incomplete Military Transformation: Assessing the
Weaknesses of the People’s Liberation Army (PLA)
Prepared for the Commission by Michael S. Chase, Jeffrey Engstrom,
Tai Ming Cheung, Kristen A. Gunness, Scott Warren Harold,
Susan Puska, and Samuel K. Berkowitz
RAND Corporation
February 2015
http://origin.www.uscc.gov/sites/default/files/Research/China%27s%20Incomplete%20Military%20Transformation_2.11.15.pdf

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Staff Research Reports, Issue Briefs, and Backgrounders———————————————————————————————–
China’s New YJ–18 Antiship Cruise Missile: Capabilities and
Implications for U.S. Forces in the Western Pacific
Written by Research Fellow Michael Pilger
October 2015
http://origin.www.uscc.gov/sites/default/files/Research/China%E2%80%99s%20New%20YJ-18%20Antiship%20Cruise%20Missile.pdf(609)

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Directed by Hollywood, Edited by China: How China’s
Censorship and Influence Affect Films Worldwide
Written by Research Fellows Sean O’Connor and Nicholas Armstrong
October 2015
http://origin.www.uscc.gov/sites/default/files/Research/Directed%20by%20Hollywood%20Edited%20by%20China.pdf
October Monthly Trade Bulletin
Written by Economics and Trade Staff
October 2015
http://origin.www.uscc.gov/sites/default/files/Research/October%20
Trade%20Bulletin%202015.pdf
September Monthly Trade Bulletin
Written by Economics and Trade Staff
September 2015
http://origin.www.uscc.gov/sites/default/files/Research/September%20
Trade%20Bulletin%202015.pdf
August Monthly Trade Bulletin
Written by Economics and Trade Staff
August 2015
http://origin.www.uscc.gov/sites/default/files/Research/August%20
Trade%20Bulletin%202015.pdf
Taiwan’s Global Fisheries Modestly Advance its‘‘International Space’’
Written by Policy Analysts Kimberly Hsu and Matthew Southerland
July 2015
http://origin.www.uscc.gov/sites/default/files/Research/Taiwan%20
Fisheries.pdf
China’s Stock Market Collapse and Government’s Response
Written by Senior Policy Analyst Nargiza Salidjanova
July 2015
http://origin.www.uscc.gov/sites/default/files/Research/China%E2%80%99s%20Stock%20Market%20Collapse%20and%20Government%E2%80%99s%20Response.pdf

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July Monthly Trade Bulletin
Written by Economics and Trade Staff
July 2015
http://origin.www.uscc.gov/sites/default/files/Research/July%202015%20Bulletin.pdf
Naming and Shaming: U.S. Surveillance over China’s Land
Reclamation Projects and Regional Reactions
Written by Senior Policy Analyst Caitlin Campbell
June 2015
http://origin.www.uscc.gov/sites/default/files/Research/June%202015%20Shaming_Issue%20Brief_6.10.15_0.pdf

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June Monthly Trade Bulletin
Written by Economics and Trade Staff
June 2015
http://origin.www.uscc.gov/sites/default/files/Research/July%202015%20bulletin.pdf
Highlights from China’s New Defense White Paper, ‘‘China’s
Military Strategy’’
Written by Senior Policy Analyst Caitlin Campbell
June 2015
http://origin.www.uscc.gov/sites/default/files/Research/Issue%20
Brief_Highlights%20from%20Chinas%20New%20Defense%20
White%20Paper_Campbell_6.1.15.pdf
China’s Trade Ambitions: Strategy and Objectives behind
China’s Pursuit of Free Trade Agreements
Written by Senior Policy Analyst Nargiza Salidjanova
May 2015
http://origin.www.uscc.gov/sites/default/files/Research/China%27s%20Trade%20Ambitions%20-%2005.28%2015.pdf
China’s Great Legal Firewall: Extraterritoriality of Chinese
Firms in the United States
Written by Senior Policy Analyst Kevin Rosier
May 2015
http://origin.www.uscc.gov/sites/default/files/Research/
Extraterritoriality%20of%20Chinese%20Firms_Research%20
Report_0.pdf
May Monthly Trade Bulletin
Written by Economics and Trade Staff
May 2015
http://origin.www.uscc.gov/sites/default/files/Research/May%202015%20bulletin%20-%206.2.15_updated.pdf
April Monthly Trade Bulletin
Written by Economics and Trade Staff
April 2015
http://origin.www.uscc.gov/sites/default/files/Research/April%202015%20Bulletin_0.pdf

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U.S. Allies Split with Washington, Bank of China
Written by Research Fellow Sabrina Snell
March 2015
http://origin.www.uscc.gov/sites/default/files/Research/Asian%20
Infrastructure%20Investment%20Bank_Issue%20Brief.pdf
Chinese Media Digest, Vol. 2, No. 4
Prepared by Staff
March 2015
http://origin.www.uscc.gov/sites/default/files/Research/CMD_
Vol%202_No%204_3%2027%2015_final.pdf

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Diminishing China-North Korea Exchanges: An Assessment
Written by Research Intern Michael Pilger andSenior Policy Analyst Caitlin Campbell
March 2015
http://origin.www.uscc.gov/sites/default/files/Research/Staff%20
Research%20Report_Diminishing%20China-North%20Korea%20Exchanges%20-%20An%20Assessment.pdf
China’s Economic Ties with ASEAN: A Country-by-Country
Analysis
Written by Senior Policy Analyst Nargiza Salidjanova,
Policy Analyst Iacob Koch-Weser, andResearch Intern Jason Klanderman
March 2015
http://origin.www.uscc.gov/sites/default/files/Research/China%27s%20Economic%20Ties%20with%20ASEAN.pdf
China’s Wind and Solar Sectors: Trends in Deployment,
Manufacturing, and Energy Policy
Written by Policy Analysts Iacob Koch-Weser and Ethan Meick
March 2015
http://origin.www.uscc.gov/sites/default/files/Research/Staff%20
Report_China%27s%20Wind%20and%20Solar%20Sectors.pdf
March Monthly Trade Bulletin
Written by Economics and Trade Staff
March 2015
http://origin.www.uscc.gov/sites/default/files/Research/March%20
2015%20Trade%20Bulletin_0.pdf
Chinese Media Digest, Issue No. 6
Prepared by Staff
February 2015
http://origin.www.uscc.gov/sites/default/files/Research/CMD6_2%2027%2015.pdf

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Chinese Investment in the United States: Recent Trends inReal Estate, Industry, and Investment Promotion
Written by Policy Analyst Iacob Koch-Weser andResearch Intern Garland Ditz
February 2015
http://origin.www.uscc.gov/sites/default/files/Research/Ch%20invt%20paper_2%2026%2015.pdf
Chinese Media Digest, Issue No. 5
Prepared by Staff
February 2015
http://origin.www.uscc.gov/sites/default/files/Research/Chinese%20
Media%20Digest_No5.pdf

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February Monthly Trade Bulletin
Written by Economics and Trade Staff
February 2015
http://origin.www.uscc.gov/sites/default/files/Research/February%20
2015%20bulletin%20FINAL%20-%202%205%2015%20FINAL.pdf
Taiwan’s Improving Patrol Fleet Could Enhance its Ability
to Defend against a Chinese Invasion
Written by Research Intern Michael Pilger
February 2015
http://origin.www.uscc.gov/sites/default/files/Research/Taiwan%20
Improving%20Patrol%20Fleet_Staff%20Report_0.pdf
Chinese Media Digest, Issue No. 4
Prepared by Staff
January 2015
http://origin.www.uscc.gov/sites/default/files/Research/Chinese%20
Media%20Digest_No4_0.pdf
China’s Position on the Sony Attack: Implications for the
U.S. Response
Written by Research Fellow Jordan Wilson
January 2015
http://origin.www.uscc.gov/sites/default/files/Research/China%27s%20Position%20on%20the%20Sony%20Attack_0.pdf
January Monthly Trade Bulletin
Written by Economics and Trade Staff
January 2015
http://origin.www.uscc.gov/sites/default/files/Research/January%20
2015%20Trade%20Bulletin.pdf
Taiwan’s 2014 Local Elections: Implications for Cross-Strait
Relations
Written by Policy Analysts Matthew Southerland and Kevin Rosier
December 2014
http://origin.www.uscc.gov/sites/default/files/Research/Staff%20
Report_Taiwan%27s%20Local%20Elections-Implications%20for%20Cross-Strait%20Relations%20_12%2030%202014.pdf

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China-India Relations: Tension Persist Despite Growing
Cooperation
Written by Policy Analysts Matthew Southerland andIacob Koch-Weser and Research Intern Angela Zhang
December 2014
http://origin.www.uscc.gov/sites/default/files/Research/Staff%20
Report_China-India%20Relations-Tensions%20Persist%20Despite%20Growing%20Cooperation_12%2022%202014.pdf
Chinese Media Digest, Issue No. 3
Prepared by Staff
December 2014
http://origin.www.uscc.gov/sites/default/files/Research/Chinese%20
Media%20Digest_No3.pdf

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China’s First Airstrip in the Spratly Islands Likely at Fiery
Cross Reef
Written by Policy Analyst Ethan Meick
December 2014
http://origin.www.uscc.gov/sites/default/files/Research/Staff%20
Report_China%27s%20First%20Airstrip%20in%20the%20
Spratly%20Islands%20Likely%20at%20Fiery%20Cross%20Reef_
12%2018%2014.pdf
December Monthly Trade Bulletin
Written by Economics and Trade Staff
December 2014
http://origin.www.uscc.gov/sites/default/files/Research/December%20
2014%20bulletin.pdf
Chinese Media Digest, Issue No. 2
Prepared by Staff
December 2014
http://origin.www.uscc.gov/sites/default/files/Research/Chinese%20
media%20digest_Dec4.pdf
First Modern Tanker Observed at Chinese Airbase
Written by Research Intern Michael Pilger
November 2014
http://origin.www.uscc.gov/sites/default/files/Research/StaffBulletin_
First%20Modern%20Tanker%20Observed%20at%20Chinese%20
Airbase_0.pdf
China’s Airspace Management Challenge
Written by Policy Analyst Kimberly Hsu
November 2014
http://origin.www.uscc.gov/sites/default/files/Research/China%27s%20Airspace%20Management%20Challenge.pdf
Chinese Media Digest, Issue No. 1
Prepared by Staff
November 2014
http://origin.www.uscc.gov/sites/default/files/Research/Ch%20
media%20digest_November%202014.pdf

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November Monthly Trade Bulletin
Written by Economics and Trade Staff
November 2014
http://origin.www.uscc.gov/sites/default/files/Research/November%20
2014%20Trade%20bulletin_0.pdf

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APPENDIX VI
ACRONYMS AND ABBREVIATIONS
ADB
ADIZ
AIIB
AIP
AmCham
AML
APSCO
APT
ASBM
ASCM
ASEAN
ATP
BEA
BIT
BRICS
C4ISR
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Asian Infrastructure Investment Bank
air-independent propulsion
American Chamber of Commerce
Anti-Monopoly Law (China)
Asia Pacific Space Cooperation Organization
advanced persistent threat
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antiship cruise missile
Association of Southeast Asian Nations
advanced technology products
U.S. Bureau of Economic Analysis
bilateral investment treaty
Brazil, Russia, India, China, and South Africa
command, control, communications, computers,
intelligence, surveillance, and reconnaissance
China Aerospace Science and Technology
Corporation
China Aerospace Science and Industry Corporation
China Banking Regulatory Commission
China Coast Guard
Chinese Communist Party
China Development Bank
China Satellite Launch and Tracking Control
GeneralChina National Space Administration
China Securities Finance Corporation
Center for Strategic and International Studies
China Securities Regulatory Commission
Cross-Strait Services Trade Agreement
distributed denial of service
U.S. Department of Defense
U.S. Department of Justice
Democratic Progressive Party (Taiwan)
development and reform commission
U.S. Export Administration Regulations
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gross domestic product
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humanitarian assistance/disaster relief
Hong Kong Journalists Association
University of Hong Kongintercontinental ballistic missile
information and communication technology
International Monetary FundIntermediate Range Nuclear Forces
intellectual property
intellectual property rights
intermediate-range ballistic missile
Islamic State in Iraq and the Levant/Islamic State in
Iraq and Syria
intelligence, surveillance, and reconnaissanceinformation technology
Information Technology Agreement
International Trade Administration
U.S. International Traffic in Arms Regulations
Joint Commission on Commerce and Trade
joint venture
kilometer
Kuomintang (Taiwan)
land-attack cruise missile
Legislative Council (Hong Kong)
local government financing vehicle
Long March
Lower Mekong Initiative
mergers and acquisitions
Mainland Affairs Council
maneuverable reentry vehicle
Mercator Institute for China Studies
mile
multiple independently-targetable reentry vehicle
Ministry of National Defense (Taiwan)
Ministry of Commerce (China)
Ministry of Science and Technology (China)
memorandum of understanding
medium-range ballistic missile
U.S. National Aeronautics and Space Administration
North Atlantic Treaty Organization
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National Development and Reform Commission

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Organization for Economic Co-operation andDevelopment
U.S. Office of Personnel Management
U.S. Office of Science and Technology Policy
People’s Bank of China
People’s Liberation Army
Purchasing Managers’ Index
positioning, navigation, and timing
People’s Republic of China
Qualified Domestic Institutional Investor
Qualified Foreign Institutional Investor
research and development
Regional Anti-Terrorist Structure
Regional Comprehensive Economic Partnership
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Strategic and Economic Dialogue
science and technology
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State Administration of Science, Technology, andIndustry for National Defense
Shanghai Cooperation Organization
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U.S. Securities and Exchange Commission
Stock Exchange of Hong Kongstandard essential patentsubmarine-launched ballistic missile
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Trans-Pacific Partnership
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619
2015 COMMISSION STAFFMICHAEL R. DANIS, Executive Director
KRISTIEN T. BERGERSON, Senior Policy Analyst, Security and Foreign Affairs
RICKISHA C. BERRIEN-LOPEZ, Human Resources and Administrative Specialist
CAITLIN E. CAMPBELL, Supervisory Senior Policy Analyst, Security and Foreign Affairs
ANTHONY J. DEMARINO, Congressional Liaison and Communications Director
CHRISTOPHER P. FIORAVANTE, Management Analyst
LAUREN E. GLOUDEMAN, Policy Analyst, Economics and Trade
KATHERINE E. KOLESKI, Research Director and Policy Analyst, Economics and Trade
ETHAN S. MEICK, Policy Analyst, Security and Foreign Affairs
KEVIN J. ROSIER, Senior Policy Analyst, Economics and Trade
NARGIZA S. SALIDJANOVA, Supervisory Senior Policy Analyst, Economics and Trade
MATTHEW SNYDER, Policy Analyst, Economics and Trade
MATTHEW O. SOUTHERLAND, Policy Analyst, Security and Foreign Affairs
KATHLEEN WILSON, Finance and Operations Director

ACKNOWLEDGEMENTS
The Commission would like to express its deep appreciation to those who testified
before the Commission as expert witnesses, the researchers and analysts who prepared research papers under contract to the Commission, and others who assistedwith the Commission’s work by briefing the Commissioners on a wide array of economic and security issues. The Commissioners are also grateful to the agencies of
the Intelligence Community and Department of Defense that briefed Commissioners
on key issues of importance to the U.S.-China relationship. All these efforts helped
inform the Commission’s and the public’s debates on issues vital to ongoing U.S.China relations.

dkrause on DSKHT7XVN1PROD with USCCThe Commission offers its special thanks to Assistant Secretary of State Daniel
R. Russel, Bureau of East Asian and Pacific Affairs, and Assistant Secretary ofState Nisha Desai Biswal, Bureau of South and Central Asian Affairs, and theirstaff for their support of the Commission’s fact-finding trip to China, Kazakhstan,
Uzbekistan, Vietnam, and Hong Kong in July 2015. The Commission owes a deep
debt of gratitude to the following officials of the U.S. Department of State for theiroutstanding support provided during the Commission’s travel to Asia, and for theirassistance in arranging the Commission’s meetings with government officials, business representatives, academics, journalists, and other experts, which was instrumental in the success of the Commission’s trips: Ambassador Max S. Baucus, U.S.
Embassy in Beijing, and staff, including James Hathaway and Douglas Ostertag;
Ambassador George A. Krol, U.S. Diplomatic Mission to Kazakhstan, and staff, including Patrick Horne; Ambassador Pamela L. Spratlen, U.S. Embassy in Tashkent,and staff, including Timothy Bugansky; Ambassador Ted Osius, U.S. Embassy in
Hanoi, and staff, including Brett Rose and Joseph Narus; and Consul General
Clifford A. Hart, Jr., U.S. Consulate in Hong Kong and Macau, and staff, including
Clare Orvis.
The Commissioners are especially grateful to Margaret Beresik and Erin Mulligan, who served as copyeditors of the Report, and to Victoria McLaughlin, who
served as transcriber for the Commission’s 2015 public hearings. The Commissioners also express their special thanks to former staff members Reed Eckhold,
Kimberly Hsu, Iacob Koch-Weser, Paul Magnusson, and Craig Murray. A special
thanks also to current and former interns and fellows, who assisted the Commissioners and staff during this Report cycle by preparing research material and background information and providing support for the 2015 briefings and public hearings. They include Nicholas Armstrong, Rolando Cuevas, Garland Ditz, Sean O’Connor, Michael Pilger, Sabrina Snell, Nicole Stroner, Teresa Vanfleet Barndt, and Jordan Wilson. Finally, the Commission expresses its thanks to the policy analyst staff
for their exemplary assistance in framing the debate and assisting in writing andediting the final Report, and to the administrative staff for ensuring the smooth operation of the Commission.

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