Defense

It is unlikely that such a broad-based move into international telecommunications was simply a fortuitous consequence

of China’s transition to a free market economy. Several interesting questions arise. First, to what extent was the Beijing leadership behind this acquisition spree (even though most of the

action took place in Hong Kong)? Second, and perhaps more

importantly, how will this purchase of assets by national Chinese

network services providers enable Chinese interests to control

the telecommunications domain in Asia, and how this will impact

U.S.-China relations in the areas of military competition and foreign policy? And, third, how will an expanding international

telecommunications capability affect internal political and economic developments in China?

Background and Context

In terms of telecommunications, the world is moving beyond

the traditional state system in which governments controlled their

network assets. The new model, still developing, is an environment

of transregional technical empires. Yet, most networks that describe

themselves as global still depend for their core revenues, and hence

their capability for international effectiveness, on national and

regional economies. In a very real sense, networks mirror the

national power aspirations, diplomatic influence, and technical

capability of their dominant economy.2

International telecommunications networks operate on two aspirational levels. First, they follow national economic predominance. If

China’s economy continues to develop along recent growth rates, its

power and influence will be facilitated and strengthened by ownership

of telecommunications networks in its geographic region. Secondly,

beyond the region, the network will develop according to the perceptions of core economy strength. Therefore, if America is economically

preponderant in the arc of business that includes Frankfurt, London,

New York, Hong Kong, and Singapore, the United States will find it

easier to influence the telecom policies of Indonesia, Thailand, and

other countries with small but financially attractive groups of network

customers that U.S. network services companies might find as

Overview

In most countries, expansion of the telecommunications network

beyond national borders has followed diplomatic and business

expansion. On this basis, an informed practitioner might be

expecting the Chinese telecommunications system to spread

beyond its borders sometime in the later part of this decade.

However, Chinese authorities have been quick to act upon a series

of unexpected opportunities for acquiring international telecommunications assets. This article discusses the international security implications of Chinese telecommunications expansion.

Since the telecommunications collapse of 2001, Chinese buyers have purchased several large telecommunications networks in

Asia previously owned by U.S. investors. Among these are:

■ PSINet, which was one of the early developers of the Internet.

Hong Kong assets were purchased by CITIC, a company reported to have

close relations with the People’s Liberation Army.

■ Level 3, which was sold to a joint venture including Pacific Century CyberWorks, a company run by Richard Li, the son of Hong Kong billionaire Li Ka Shing—both of whom maintain close contacts with central

government authorities in Beijing.

■ Asia Global Crossing assets, which was purchased by China Netcom, the newly renamed northern division of the incumbent carrier China

Telecom.

■ Global Crossing, Inc., which claims its own Asian assets in a

highly publicized pending deal including a direct investment by Hutchinson Whampoa and Singapore Telemedia. Hutchinson eventually backed

out, leaving Singapore Telemedia as the sole potential owner. But, as this

paper argues, the deal still facilitates China’s expanding network capability and influence.

These assets, previously paid for by American investors at a

cost of up to $20 billion, were bought for an average cost of as little as 3 cents on the dollar, representing a huge loss of American

capital value.1 Each company had extensive networks covering

several Asian countries with large capacity circuits and direct

connectivity into the United States.

Beyond the Mainland: Chinese

Telecommunications Expansion

Robert C. Fonow

A publication of the

Center for Technology and National Security Policy

National Defense University

JULY 2003

Number 29

Horizons

July 2003 Defense Horizons 1
interesting commercial targets. In the same way, if China succeeds in

becoming the Asia economic hegemon, it will find it easier to bend regulatory authorities to its requirements in the Middle East and

Europe—imitating the models of the United States Trade Representative, Department of Commerce, and Federal Communications Commission (FCC), which work on behalf of the U.S. Government in promoting policies advantageous to American companies.

Historically, the term telecommunications means the international voice network, the Public Switched Telephone Network

(PSTN). But the definition of telecommunications is expanding by

the introduction of convergence technologies to incorporate data

communications, including the Internet and cable television (CATV)

networks. All major modern networks typically can carry voice, data,

and video over a unified broadband architecture and infrastructure.

The Chinese telecommunications system parallels this development, but, unlike other developing countries, has an international

political component. This is based on the underlying assumption that

there is a relationship between overseas Chinese (huaqiao) investment in China and diplomatic and commercial support from Beijing

for huaqiao interests in environments that are sometimes hostile. 

China increasingly sees itself as responsible for its regional

diaspora, in particular the emigration caused by 20th-century revolutionary spasms, and the benefits that derive from offering diplomatic

security to a very wealthy ethnic clientele. Thus, the combined capabilities of transnational Chinese interests contribute to Chinese economic power in a way that is something more than mere economic

interest. China’s control of its own regional and eventually global

telecommunications assets furthers its diplomatic and internal

development agenda.

This implies that Chinese business and cultural hegemony in

Asia is growing and that the extension of Chinese-owned network

assets is a part of the process since telecommunications development is a function of national capabilities. Previously, the major

international telecommunications services companies were predominantly American, including AT&T, Worldcom, Sprint, and Infonet,

initially following the expansion of U.S. multinational corporate

development from the middle 1970s. However, in the last 5 years,

AT&T’s international expansion has been weakened by its association with British Telecom in Concert; Worldcom’s by its financial and

reporting problems; and Sprint’s by its unhappy joint venture with

Deutsche Telekom and France Telecom in Global One. British Telecom and Cable & Wireless until recently had pretensions of developing their own global networks but have retired in most part to their

national markets. Only Infonet and Equant (which is owned by

France Telecom) remain intact according to their original business

plans. So by serendipity more than planning, Chinese telecommunications have been presented with, by any measure, a once-in-a-generation opportunity that they would be foolish to pass by. This

strengthens Chinese capabilities while weakening U.S. technological

and commercial capability. Moreover, on any scale of national and

international telecommunications investments, Chinese companies

and their proxies got these assets for free.

Telecommunications expansion has always been a synergism of

technology development and the internationalization and then globalization of finance, manufacture, and services provision. Beginning

with the Cold War, U.S. military interests in secure network technology have facilitated technical development. The obvious example is

the underlying technology of the Internet, developed initially by the

U.S. Department of Defense. The technology was commercialized,

and today, military telecommunications depend to a large degree on

commercial networks, including Chinese-owned and -operated networks, for long-range transport of telecommunications and data

communications traffic.

In expanding its telecommunications capability, China is doing

nothing more than following the example of its capitalist competitors.

This is consistent with recent Chinese political developments. The

current Chinese political system is best described as post-Marxist

pragmatism. “Socialism with market characteristics” or “historical

pragmatism” are other descriptions used by commentators in China

and abroad. As aptly put by former premier Deng Xiaoping, “Whether

a black cat or white cat, the one who catches the rat is best.” These

descriptors identify the dominant subtext of Chinese political activity: a desire to protect the national interest, based on a pragmatic

awareness of the ebb and flow of Chinese history. And given the

extremely rapid development of modern infrastructure in many parts

of China, a renewed sense of capability provides the Chinese with evidence that they are in the flow of renewed historical greatness.

China’s leaders and intelligentsia are concerned about competition with the United States, but they generally believe that history

is on their side. This belief is based on a chronological historical

viewpoint with a Marxist overlay—not just that China is the beneficiary of the Marxist doctrine of historical materialism, but that all

countries with a long history are subjected to historical vicissitudes.

At this time in history, despite the recent flush of a victorious military campaign, the United States is weakening itself without external assistance—as China did in its long history—by making damaging social, political, and foreign policy choices that are a result and

function of its economic and social system. The ability to buy U.S.

telecommunications interests on the cheap strengthens the Chinese

argument that unfettered, free-market capitalism is dysfunctional

and, without the beneficent guidance of a socialist component, contributes to the weakening of American commercial and economic

power, which will weaken U.S. military capability. The smart thing

for China to do is to take advantage of the situation.

Technology and Management

At the beginning of the 1990s, China’s telecommunications system was rudimentary, based on voice service, telex, and telegraphy.

Phone service was provided for fewer than 3 per 100 people—one of

the lowest rates in the world. China had a small X.25 packet switching system for business and government data communications connecting only the major commercial centers. This network was interconnected to the outside world via one connection to Italcable (now

part of Telecom Italia) and another to Sprint International, based in

Reston, Virginia.

What happened in the 1990s in China was nothing short of a

social miracle. In the space of 10 years, China has developed one of

2 Defense Horizons July 2003

Robert C. Fonow is managing director of Revenue Growth International, Ltd.

Mr. Fonow may be contacted at rcf@rgiltd.com.
the most advanced telecommunications infrastructures in the world.

Within a few years, it is likely to have the single most advanced

telecommunications infrastructure in the world.

Today, China boasts a sophisticated fiber optics manufacturing

and installation capability that spans the country and is the second

largest fiber network in the world. Even more impressive, at the end

points of the fiber network is arguably the largest Internet network

in the world; the largest commercial X.25, frame relay, and asynchronous network for business data communications services; the

most highly developed voice over Internet protocol system in the

world; the largest cellular phone network in the world using both the

Global System for Mobile Communication (GSM—the European and

international standard) and Code Division Multiple Access

(CDMA—Qualcomm of the United States) technologies; and the

largest CATV network in the world.

The system has grown at an exponential rate. Each year, China

adds the equivalent of one of the regional Bell operating companies

(RBOCs) to the national infrastructure, services that have taken

decades to develop in the United States. This is not a just a measure

of lines in services. It means the technical capability of an RBOC is

added to China’s telecommunications capability every year in terms

of trained engineers, system management, customer care, billing systems, software development, and sophisticated convergence and

broadband services—the information technology underpinnings of a

modern telecommunications society.3

The Regulatory Apparatus

While the network infrastructure is large and—in Beijing,

Shanghai, Guongdong, and the coastal regions—quite sophisticated,

it is also messy, a consequence of rapid and in some ways uncontrolled expansion. This mess is endemic to the system. China

remains today a command economy, albeit a decentralized one, at

least in terms of telecommunications investment and development.

The Ministry of Information Industry (MII), under the direction of

the State Council, controls national investment policies. But much

purchasing power was devolved to the provincial Post and Telecommunications Authorities (PTAs), at the expense of central control in

the mid-1990s, to speed up infrastructure development when it

became apparent that MII budgets would not be sufficient to fund

accelerated and politically mandated network growth.

For example, MII might decide that the most advanced digital

fabric is required for a particular hierarchical element of the

PSTN—perhaps transit switches that route long distance calls

between major cities. The local PTA is permitted to make purchases

from vendors of their choice at a level consistent with annual funding that is not only allocated for this purpose by the central government but is also in line with the local government’s ability to generate loans from local or foreign banks or from preferential payment

plans and vendor financing.

Each of the 27 regional PTAs has aggressive development targets

based on numbers of additional customers added, new technology

introduced, and so forth, rather than on revenue and profitability targets, as would be the case in an RBOC. During the 1990s, mainland

manufacturing and software development was insufficient to meet

growth targets, and no one or two major international manufacturers

of switching equipment were able to meet the demand. The result

was a panoply of technologies from Lucent, Alcatel, Siemens, Ericsson, Nortel, Fujitsu, NEC, Daewoo, and others. Each system was built

according to international standards, but with enough proprietary

differentiation to give them unique selling propositions. This often

led to interconnection and compatibility problems, especially in network management capability.

In my experience as the general manager of Scientific Atlanta

Shanghai, which in the mid-1990s was the largest foreign manufacturer of CATV systems in China, the buying process was highly fragmented. CATV companies and regional telephone companies competed for investment from central funds and were never sure when

the funds would be allocated. So a provisional order was placed and

equipment purchased when money became available—often just

before a major holiday to increase numbers of subscribers, thus proving the beneficence of the local party officials. At the time there was

little sense that a regional or local services provider might get the

funds for network development by charging customers. Typically, the

CATV companies would buy head-end and transmission equipment

and not bother with billing systems. Of course, this changed as China

became more interested in developing a market economy, and the

purchasing process today more closely approximates that within

large American corporations and government agencies. This change

coincides with improvements in engineering and network operations.

Management

In parallel with the advancements in technology and business

processes has been a marked improvement in management and

executive capability. This explains the ability of the Chinese

telecommunications system to manage its enormous growth.

Until recently, the Chinese management class was bifurcated

between older managers, whose technical educations were often

interrupted during the Cultural Revolution, and younger, professionally educated managers, who see themselves as part of a global technological elite and management class. The older managers viewed

decisionmaking as a political act, where power lies in party membership and control of staff. Connections were paramount, and the operating doctrine was to keep one’s head down and push decisionmaking

to the next higher level whenever possible. The group was served by

a sales force from Western countries that was adept at manipulating

the personal desires of the older managers, with trips, gifts, and a

sense of style that was missing from their often boring and impoverished lives in bleak Chinese telecommunications facilities.

The younger managers make decisions on the basis of profit

projections and financial management. They are often trained in

American or European graduate programs after their undergraduate engineering degrees, which often are from one of the 13 posts

and telecommunications universities or 30 Chinese universities

that are considered to have excellent undergraduate information

technology programs.4

The younger Chinese management class mirrors very closely

the younger global management class in the sector of the telecommunications industry concerned with international telecommunications. They are bilingual, highly educated, and aggressive in their

July 2003 Defense Horizons 3
pursuit of a lifestyle that is promoted in magazines, such as Fortune

and Business Week, both of which have Asian versions. They are more

likely to have a broader international outlook than many of their

Western contemporaries, and they epitomize the spirit of the nowworn cliché, “China’s had a bad couple hundred years, but now we’re

back.” This group of telecommunications professionals, trained at

the same business schools as their American and European counterparts in the arts of mergers and acquisition as a tool of growth, is

leading the international expansion of Chinese telecommunications

beyond its traditional shores.

One sees the dynamic of this new generation of management

class in action across Asia in conferences, seminars, and Asia Pacific

Economic Cooperation Telecom working group meetings. Asian participants seem to me to be significantly younger than their Western

counterparts. This reflects a particular management bias. In Western companies, foreign travel, particularly to conferences and government-sponsored meetings, is seen as a benefit of rank, whereas in

Malaysia, Singapore, and China, it is seen as a learning or training

experience, where the people attending should do the detailed work

of negotiating. An American executive often views the same conference as a place to meet and greet and turns the real work over to a

subordinate back at headquarters, who then has to deal with his

counterparts by email. The result is that many countries around the

world have young managers with a much better understanding of the

dynamics of the international telecommunications system than do

Americans, especially at the director of operations level of expertise.

This experience gap has widened in the past 2 years due to travel

cuts in virtually every American telecommunications company.

Technical Capability

One can assume that China is now on a path to restore its historical great power status throughout North, South, and East Asia.

Why bet otherwise, given its economic performance in the last two

decades? To assure its continuing development, China needs sophisticated telecommunications to support an increasingly dynamic

technology trade strategy. This undergirds an accelerating and

dynamic technical culture that potentially is capable of rivaling the

United States in selected fields in a few years.5

China’s telecommunication trade policy is based on two pillars

(in the Chinese idiom, “walking on two legs”): first, bring in new

technology as quickly as possible, study it, imitate it, and improve it.

Second, develop indigenous technology capabilities equal to the

West’s and use them as a base to develop a greater capacity for technological innovation.

Several features are notable in China’s technical policy, including import substitution to protect domestic industries by subsidizing

local firms, financial support for indigenous technology products,

and increasingly open policies designed to attract foreign investment

and technology flows.

Chinese technical policy seems to be a modified replication of

Japanese acquisition policies of the 1960s through the 1980s. It is not

good policy simply to import; every effort must be made to assimilate,

remold, and innovate using the imported technology in a healthy

cycle. This cycle is considered a special case of developmental activity, which includes importing advanced technology, assimilating it

into national networks, and creating and eventually exporting

advanced equipment in competition with global rivals. The state

plays a special role in all of this and is needed to guide national interests. These include providing appropriate macro-economic policies

and infrastructure, maintaining restrictions on imports and other

industrial promotions, formulating long-term national plans for

investment and industrial developments needed to guide markets,

and controlling the context and pace of industrialization. The technological emphasis in China is to build sophisticated telecommunications systems with Chinese components, reducing both size and cost.

Rather than totally replicating supplier capabilities and displacing the supplier, China believes its best course is continuing

engagement with external developers to stay in touch with global

developments. Whereas the Western practice is to respond immediately to competitive threats across the broadest spectrum, Chinese

officials think that developing countries may be better off acquiring

partial competencies in specific high-tech fields, since replicating

the entire Western (in particular, U.S.) production capability would

be economically impossible. With this strategy, China can use its relatively limited resources to be the best in some, but not all, areas of

technology. This explains the interest (discussed below) in asymmetric and information warfare.

In China, this means an increasing emphasis on the importation and replication of configuration technologies rather than a

reliance on complete systems, which include proprietary knowledge

that is more difficult to reengineer. Configuration technologies are

modular and use open standards, which facilitate substitution of

national components. They also extend the scope of developing

countries’ technical innovation and provide the advantage of commodity pricing for many of the components. So the terms of foreign

technology transfers must allow technology to be configured locally

according to local criteria. 

The development of the HJD–40 digital switch that began in

the late 1980s is an example of all of the above. One of the two legs

was a deal with Belgium and France for System 12 technology, a digital PSTN switch developed by ITT in Europe in the early 1980s. The

other leg was a project financed by a research and development laboratory of the People’s Liberation Army to build an indigenous digital switch. At a time when China was still manufacturing cross-bar

electromechanical PSTN switches, the HJD–40 project incorporated

all aspects of the two legs model, made possible by selective purchase of foreign components, including cheap standardized microprocessors and design tools in combination with locally available

expertise in computer design and knowledge of the Chinese telecommunications systems.

Using, operating, adapting, and learning the elements of System 12 and other switches, Chinese engineers began copying and

eventually creating and innovating digital switch technologies. A

technology leap of two generations to stored program control and out

of band signal switching resulted. The HJD–40 was installed across

China and exported to several countries.

The project had an important effect on coordination of largescale project management in China. Until the late 1980s, there was

little innovation in China, with poor links between research and

4 Defense Horizons July 2003
development institutes, producers, and customers (primarily Post

and Telecommunications Authorities). The HJD–40 provided a transition project for market forces and government policies to combine.

The project provided new avenues for these players to seek opportunities to develop new technologies, get involved in technology learning, and collaborate.6

An example of how this works occurred in Scientific Atlanta

Shanghai in the mid 1990s. The joint venture’s Chinese engineers

repeatedly reengineered Scientific Atlanta products manufactured

in the United States, reducing costs and increasing performance. In

each step, the engineers, in consultation with research institutes in

the Shanghai area, made a leap in technology, starting first with

basic amplifiers and moving up the technology curve to sophisticated

fiber optic receivers, each time reducing costs, improving performance, and adding to the technical knowledge and capability of the

country using technology first developed elsewhere.

More recent development highlights the continued effectiveness of the two legs policy. In the late 1990s, Chinese companies

installed CDMA mobile communications from the United States on a

limited scale while joining Siemens in Germany on developing an

updated Chinese version, td-scdma. Some commentators expect the

Chinese version for mobile wireless to become the dominant preference of third-world network services providers, reestablishing China

as a major player in this market.7

Perhaps even more important, Huawei Corporation is now producing routers, the central component of the Internet, at 50 percent

of the price of U.S. competitors. Cisco Systems has challenged

Huawei in U.S. courts, noting a remarkable similarity in their products. Huawei denies the allegation and proceeds to market worldwide, selling $100 million of advanced telecommunications product

to Russia alone in the last year.

The Foreign Policy Challenge

China’s expansion into international telecommunications will

make it more difficult for U.S. diplomats and trade negotiators to

mold economic policies in Asia. Without stronger trade diplomacy,

China will eventually usurp the advantages held by the United States

in controlling the telecommunications environment in Asia and

between the United States and Asia.

Already there is more than a little truth to the claim that the

United States makes weapons and China makes the things people

want to buy. This is a national security problem, since China’s commercial strength, based on current growth rates, will eventually lead

to a Chinese economy larger than that of the United States. This

accumulating wealth, argues John Mearsheimer, will be used to purchase weapons to prohibit the United States from interfering with

Chinese hegemony in Asia and eventually will lead to conflict, perhaps in less than 20 years. Such a scenario is clearly contrary to

recent formulations of U.S. grand strategy.8

In the last 20 years, as American corporations and military

facilities have expanded abroad, trade diplomacy has risen from low

to high politics, with its own summitry. But unless addressed at a

high level more consistently, problematic internal and external

dimensions of America foreign policy will arise from China’s growing

telecommunications and technological sophistication.

The first part of the external problem also has an internal

dimension: the American telecommunications manufacturing industry has already moved to China. Even Cisco and Dell, two industry

leaders in networking and information technology, are often

described as the marketing agents of Chinese manufacturers and,

increasingly, software developers.9

The move to China also includes telecommunications services

companies. Call centers, for example, until now a mainstay of

employment in the Plains states, are moving offshore to a number of

countries, including China. More significantly, Asian- and Europeanfunded telecommunications business plans are purposely avoiding

the United States, now considered a high-cost country, for anything

other than sales and marketing. Any function performed by any U.S.

telecommunications company can be done in China for a fraction of

the cost. Verizon could run its entire back office systems in China if

it chose to do so. Only the face-to-face salesperson and customer

engineer need to be in the United States. Is this is a national security problem? Only if one considers economic security to be part of

national security.

The foreign policy options are complex in such an environment.

U.S. trade diplomats and commercial service officials must persist in

challenging China to level the playing field. For example, sure to

become an increasing problem for American network services

providers is the disparity of market access between China and the

United States. No U.S.-based carrier or value-added service provider

can offer services in China without constraint. The conditions under

the World Trade Organization (WTO) agreements are entirely preferential to Chinese interests. Services joint ventures are prohibited

or so severely constrained as to be untenable.

The Shanghai Symphony (UNISITI) joint venture is often

touted as an example of a successful undertaking between AT&T

and Shanghai Telecom. However, the Chinese regulatory process

resulted in 7 years of negotiations before a license was granted, limiting the company to Pudong, across the Huangpu River from the

main Shanghai commercial areas. Pudong is a purpose-built area

that houses, among other things, a financial district with wired and

intelligent high-rise buildings. But Pudong is considered somewhat

of a backwater by many Shanghainese and has a very low occupancy

rate. This may change in time if the government forces businesses

to move there and opinions of Pudong’s attractiveness change. At

present, it has the same allure to Shanghainese and many Western

companies that Secaucus, New Jersey, has to Manhattan dwellers

and Wall Street bankers. The point is that the only functional services joint venture between a Western company and Chinese company is a political artifact to support Pudong development policy,

rather than an attempt to promote market economics in the

telecommunications industry or adhere to competition principles

outlined in WTO agreements.10

This disparity is unfair for another reason that furthers the hollowing out of the American telecom services industry. China Telecom

is permitted unfettered market access in the United States. It has several switches and fiber optic leases in the United States and a license

from the FCC to provide both domestic and international services to

business customers. As more and more American companies move

manufacturing and customer service operations to China, American

telecom services providers are at a tremendous disadvantage.

July 2003 Defense Horizons 5
China Telecom almost certainly will undertake an aggressive

commercial policy to convince American companies doing business

in China that they will be better off using China Telecom as their

service provider, to assure seamless services between their U.S.

headquarters and China operations. Any China Telecom sales manager, most likely American, who does not use this strategy would be

remiss under present winner-take-all Western marketing methods,

which take their imperative from Sun Tzu, Machiavelli, and Clausewitz—not necessarily in that order.

China Telecom will be imitating American services providers

who also market seamless international services over their own

global networks. It is a safe bet that multinational companies will at

least divide their telecommunications applications requirements to

assure a certain percentage to China Telecom, which will cause

American companies to lose revenue and jobs.

U.S. diplomatic and trade negotiators have been stonewalled

repeatedly by their Chinese counterparts. Even a cursory reading of

the results of the WTO and other bilateral telecommunications negotiations indicates that U.S. negotiating teams have been less than

successful in prying open Chinese markets. A stronger effort is

needed to assure the United States is positioned to maintain at least

parity with Chinese telecommunications resources and personnel

trained in global network management and development.11

Five years ago the argument might have been that Chinese

companies could not compete with Western companies in China on

equal terms or that massed Western capital would install a modern

telecommunications system that would be technically superior and

steal millions of customers from the incumbent carrier. This is no

longer the case. Chinese telecommunications are technically equal

to the public network in the United States. China has the same hardware and software as any American company. Their people are

trained to equally high standards.

The future of the global telecommunications business is in

converged, value-added services, which offer business and other

organizations useful combinations of voice, data, and video services.

Perhaps in its current state of economic development, China will

not support an RBOC-sized investment. But it will support smaller

value-added services companies specializing in new and innovative

mobile and fixed-line services, which are typically focused on specific industry applications. Perhaps Chinese policymakers would

like to keep this development to themselves. A stated policy of

China’s national economic policy is to lead in Internet and Internet

protocol (IP) services development.12 This is precisely where diplomatic initiatives demanding pro-competitive policies are important

to U.S. interests. In this area, it is also important to keep a close

watch on the contribution that American allies make to Chinese

technical capability. For example, Internet telephony and much IP

innovation come from Israel. China has embraced these services

and the technology that comes with them.

Strategic and Military Issues

Recent advances in Chinese commercial technology development indicate a capability for similar military advances. This is not

to say that an expanded telecommunications network becomes a

direct military asset, any more than the U.S. network could be used

by the military in a national emergency. But in China, national security is viewed through a panoramic lens and includes a wide range of

economic factors that the United States has only recently begun to

consider. For example, national economic development above 7 percent per year is considered a national security objective, since that

is the level considered necessary to maintain employment at a level

that will prevent public disorder. Telecommunications is a facilitator

of economic growth. It is a necessary ingredient in attracting foreign

direct investment, which enables the development of the technologies that will be the basis of a new Chinese initiative in warfare that

includes telecommunications technologies.13

The purchase of previously U.S.-owned telecommunications

assets by Chinese companies creates potential military threats in the

interception of military communications, coercive diplomacy, and

information warfare.

The operational dynamic of U.S. war planning should be to

assume that China has information and telecommunications warfare

capability equal to that of the United States and would be the most

capable military competitor the United States has faced since World

War II and therefore is not to be underestimated in any way.

Telecommunications and Information Warfare

Telecommunications networks are the delivery systems for

information and data communications-based weapons. Information

warfare involves information technology and computer science as

much as telecommunications. Most literature discusses Chinese

capability from a China-centric perspective (for example, the

response if U.S. forces, following an attack on Taiwan, targeted the

Chinese mainland). While this aspect is important, it misses that

wider implication of emerging information warfare threats to U.S.

interests. There are both national and international dimensions of

potential Chinese network capabilities.

The first question is to what degree can the former assets of

Global Crossing, Asia Global Crossing, Level 3, and PSINet be used to

control the Asian international telecom system or provide the capability for espionage and network warfare (netware). The answer is

that these assets enhance China’s capability to monitor and interdict

communications that travel across its network. Up to 95 percent of

Department of Defense telecommunications traffic uses the international telecommunications system.14 Most diplomatic or military traffic destined for North, East, and South Asia will traverse networks

now owned by Chinese interests. Indeed, some of this traffic passes

through facilities on the Chinese mainland.15

Is this traffic secure? Encryption systems are very powerful and

may indeed be indecipherable. But that assumes that the encrypted

information can reach its destination on a network or that a network

rerouting capability exists. Networks mimic the human organism.

One expects the network and information warfare equivalent of a

human stroke to be the weapon of choice for asymmetrical and information-based warfare in the future. 

Planners, whether in business or the military, base policies on

worst-case scenarios and work backward on the basis of existing or

projected resources. Because of its purchase of American assets,

China will have a sophisticated international network capable of projecting information or netwar capabilities beyond its border.

6 Defense Horizons July 2003
An even more important question for information warfare planners is what can China do in association with other countries that

might have an interest in limiting the forward projection of American military power. The prevailing attitude in the United Nations

forces this question to be asked. Planners sitting in Beijing, Moscow,

New Delhi, or even Western Europe, aware that their governments

are opposed to the unilateral projection of force, will be looking at

U.S. capabilities very closely.16

A sophisticated information warfare program might not involve

a confrontation of forces as much as the political coercion via networked public diplomacy, quarantine of resupply, or prevention of use

of satellite positioning systems, by hacking into their information

control systems or interfering with the international telecommunications switching architecture. Without an uninterrupted supply line,

troops would be vulnerable very quickly. Without global positioning

systems and other battlefield information resources, U.S. forces

would find themselves facing formidable enemies with close-in supply capabilities. For this reason, telecommunications and the information systems controlling them become important elements in coercive diplomacy, and possible use of force, if concern about projection

of U.S. forces becomes severe enough to force a counteralliance.

Such an attack on U.S. interests may seem unlikely, but it is

useful for planners to think of the worst-case scenario. In a situation

where opponents have limited force projection options, information

warfare becomes a major component of asymmetric warfare and the

mysterious and proverbial assassin’s mace.17

Telecommunications and data communications are the heart of

the revolution in military affairs. Based on China’s prodigious engineering education capability—almost equal that of the United States

at undergraduate level—China will become equal to the United

States in certain aspects of warfare. American planners must assume

that China possesses a sophisticated command and control and information resource capability. China will not compete against the United

States in the projection of forces, but it will compete in information

warfare, using its capability to exploit asymmetric differences in force

structure, assessing and attacking the maximum point of vulnerability in a model not much different, from a Chinese point of view, than

attacking the imperial Death Star in the first Star Wars movie, finding the one soft spot in an otherwise invulnerable foe.18

Impact on Governance of China 

The functionalist school of international relations argues that

services such as telecommunications contribute to democratic

processes. The more people can communicate freely, both nationally

and internationally, the more likely they are to engage in commerce

and the development of liberal democratic ideals.19

Today, penetration of telecommunications services in China is

estimated to be between 26 and 29 percent of the general population, with up to 70 percent having direct phone service in major metropolitan areas. But this underestimates the communal use of phone

systems, a pattern seen in many developing countries. In a village or

small town, which in China can be 1,000,000 people, fixed and mobile

phones and Internet access are often shared assets. In today’s China,

everyone in the country, with the exception perhaps of those in

remote mountain regions, has access to phone services and information resources.

Telecommunications promotes communications capability, but

this is different from communications efficiency. For example, China

has the internal network capability to support epidemiological reporting of the severe acute respiratory syndrome (SARS) outbreak, but

bureaucratic inertia and pervasive fear of reporting bad news neutralized the benefits of years of massive investment. Telecommunications

is an instrument for information dissemination that supports commerce, economic development, and diverse political expression.

Telecommunications is also an instrument of political control, keeping

the existing regime firmly in charge. The balance is carefully monitored in today’s China. The negative economic impact of underreporting the SARS epidemic is likely to lead to greater openness and personal responsibility and less authoritative control from the center. 20

Predictions that the Internet, a subset of the telecommunications infrastructure, would bring revolutionary political change to

China have proven exaggerated, at least so far. In a telecommunications infrastructure as large as China’s, the government cannot control all Internet or telecommunications usage, but it can selectively

punish those who use the Internet for downloading politically contentious materials, especially those deemed threatening to the stability of the Communist Party. Internet cafes in China are required to

report client visits to subversive sites. Periodically, a known dissident or unlucky surfer is arrested, tried, and imprisoned for a

lengthy term for downloading contentious material. This promotes

self-censorship. Is reading information deemed subversive worth the

risk of imprisonment? As a result, the Internet is likely to support

change, but it will probably be evolutionary.21

China is no longer a Maoist tyranny. The most recent leadership

changes have placed people with no direct association with the Revolution or military campaigns in charge. They are essentially technocrats, many educated at Qinghua and Beijing universities, engineers more concerned with internal economic develop than

international adventures. One can argue that China will evolve into

a type of European socialist model. More likely is a modified Japanese model where the central government is firmly in control of ministries, the ministries are filled with officials obeisant to the government, and one party controls the government.

A recent restructuring of Chinese telecommunications companies has left China Telecom administratively in control of the country’s telecommunications assets roughly south of the Yangtze River,

with Shanghai Telecom virtually in control of its own assets and New

China Netcom in control of the North. It has been argued that China

could break up into three countries, with Taiwan, Hong Kong, Fujian,

and Guangdong provinces providing the economic engine for southern China; Shanghai and the Yangtze River basin for central China;

and Beijing and Tianjin for the north. The telecommunications network could be easily divided among these new state entities. But it

is hard to envision such a break-up short of a catastrophic event.22

Improving the U.S. Position

The United States is in the unfortunate position of trying to close

the barn door 10 years after many of its thoroughbred networking and

July 2003 Defense Horizons 7
telecommunications technologies bolted to China. Still, several steps

can be taken to improve the situation in the future.

First, a favorable competitive climate should be ensured within

the United States to accelerate technical innovation. The United

States has fallen behind Korea, Japan, and, in certain instances,

China in the societal use of advanced telecommunications technologies. It is noteworthy that each of these countries has government

policies that protect indigenous industries while promoting extreme

competition within its borders. The disappearance of investment

capital following the bursting of the technology bubble and the

aggregation of telecommunications services in the United States by

a handful of large corporations raises concerns that the United

States will fall further behind. The FCC must begin to recognize that

it is now an instrument of national security.

Second, in parallel with the acceleration of technical innovation should be a review of the geopolitical assumptions of the Committee on Foreign Investment in the United States (CFIUS).

Because it was perceived as being close to the Chinese government,

Hutchinson Whampoa was forced to back out of the Global Crossing

deal under CFIUS pressure, leaving Singapore Telemedia in full control. This is still a suspect deal under Exon-Florio provisions since

Telemedia is involved in joint ventures and cross directorships with

Asia Netcom, the Chinese incumbent carrier, through its recent purchase of Asia Global Crossing. The international telecommunications

industry is typified by complex partnering agreements. The majority

of these present no security problems, but if a standard is set, as it

was with Hutchinson Whampoa, then policymakers must become

more aware of the complexities and interlocking ownership of the

international telecommunications infrastructure.23

Finally, there seems to be little that the United States can do to

influence China’s internal political dynamic, which is based on the

necessity of keeping order in a country of 1.4 billion people, a plight

difficult for Americans to conceptualize. Since order is the primary

value in international affairs, it is in U.S. interests to continue to assist

the development of the civil telecommunications infrastructure in

China. At the same time, it is necessary to monitor and understand in

greater depth Chinese innovations in telecommunications and the

evolving relationships between civil uses and military potential.

Notes1 The sequence of acquisitions and attempted acquisitions is reported in the

Financial Times, The Wall Street Journal, and telecommunications industry Web

sites, such as <www.carriersworld.com>, <www.americasnetwork.com>, <www.telecomasia.net>, and <www.cpcnet-hk.com>. See James C. Mulvenon, Soldiers of Fortune: The Rise and Fall of the Chinese Military Business Complex 1978–1998

(Armonk, NY: M.E. Sharpe, 2001), for a historical analysis of the relationship between

Chinese business and the People’s Liberation Army. 2 Kenichi Ohmae, The End of the Nation State (New York: McKinsey and Company and The Free Press, 1995), discusses the rise of regional economies. 3 See Pyramid Research, “Telecommunications Markets in China 2002” (Cambridge, MA, 2002) and “The Dynamic Dialogue: A China Case Study” (International

Institute for Strategic Studies Discussion, January 25, 2002), presented by APCO, a

telecommunications consulting firm based in Beijing. 4 Lin Jintong, Telecommunications in China: Development and Prospects

(Huntington, NY: Nova Science Publications, 2001). 5 Barry C. Lynn, “Trading with a Low-Wage Tiger: What Happens to Everyone Else

When China Sucks Up So Much of the World’s Economic Growth?” The American

Prospect 14, no. 2 (February 1, 2003). For a view questioning the strength of the Chinese

economy, see Joshua Kurlantzick, “Is China’s Economic Boom a Myth?” The New Republic (December 16, 2002). 6 This discussion of Chinese industrial policy relies heavily on Shen Xiaobai, The

Chinese Road to High Technology: A Study of Telecom Switching in the Economic

Transition (London: St. Martin’s Press, 1999). 7 Todd W. John, “The Next Generation: Will China Connect?” Asia Times

Online, November 7, 2002, accessed at <http://www.atimes.com/atimes/China/

DK07Ad05.html>. 8 John J. Mearsheimer, The Tragedy of Great Power Politics (New York: Norton,

2001).9 Barry Lynn, “Unmade in America: The True Cost of the Global Assembly Line,”

Harpers, June 2002, 33–41; Bruce Einhorn, “High Tech in China: Is It a Threat to Silicon Valley?” Business Week, October 28, 2002, 80–88. 10 “Telcos Steer Clear of China,” Reuters, September 12, 2002, accessed at

<http://www.telecomasia.net/telecomasia/article/articleDetail.jsp?id=40583>. 11 “China’s WTO Status Fails to Draw Telecoms Services Investment: MII,”

Reuters, August 21, 2002, accessed at <www.telecomasia.net/telecomasia/article/

articleDetail.jsp?id=28468>; “Telcos Steer Clear of China.” 12 Internet protocol (IP) refers to the sets of rules that govern the transfer of

information across the Internet. Innovations in IP can be in either hardware or software elements of the Internet. 13 Howard M. Krawitz, “China’s Trade Opening: Implications for Regional Stability,” Strategic Forum 193 (Washington, DC: National Defense University Press,

August 2002). 14 Lawrence Greenberg, “Danger.com: National Security in a Wired World,” in

Economic Strategy and National Security: A Next Generation Approach, ed. Patrick

J. DeSouza (Boulder, CO: Westview Press, 2000). 15 Discussion with undersea cable executive who requested anonymity, April

21, 2003. 16 Philip Andrews-Speed, Liao Xuanli, and Roland Dannreuther, “The Strategic

Implications of China’s Energy Needs,” Adelphi Paper 346, The International Institute

for Strategic Studies (Oxford: Oxford University Press, July 2002). 17 Michael Pillsbury and Larry Wortzel, testimony at the U.S.-China Security

Review Commission, Washington, DC, July 2002. For an apocalyptic view of China’s

potential, see Edward Timperlake and William C. Triplett II, Red Dragon Rising

(Washington, DC: Regnery, 1999). 18 John Arquilla and David Ronfeldt, eds., In Athena’s Camp: Preparing for Conflict in the Information Age (Santa Monica: RAND, 1997). Also, Arquilla and Ronfeldt,

Networks and Netwars (Santa Monica: RAND, 2001). 19 David Mitrany, The Functionalist Theory of Politics (London: St. Martin’s

Press, 1976). 20 Joan Kaufman, “Can China Cure Its Severe Acute Reluctance to Speak?” The

Washington Post, April 27, 2003, B1–B2. 21 Michael S. Chase and James C. Mulvenon, You’ve Got Dissent! Chinese Dissident

Use of the Internet and Beijing’s Counter Strategies (Santa Monica, CA: RAND, 2002). 22 Ibid. Also, see Ohmae.

23 For an explanation of CFIUS, see <http://www.ustreas.gov/offices/

international-affairs/exon-florio/>.

8 Defense Horizons July 2003

Defense Horizons is published by the Center for Technology and National Security Policy through the

Publication Directorate of the Institute for National Strategic Studies, National Defense University.

Defense Horizons and other National Defense University publications are available online at

http://www.ndu.edu/inss/press/nduphp.html.

The opinions, conclusions, and recommendations expressed or implied within are those of the

contributors and do not necessarily reflect the views of the Department of Defense or any other

department or agency of the Federal Government.

Center for Technology and National Security Policy

Hans Binnendijk

Director