High-Tech Hunger

Don't be fooled by Wang Xiaoyun's demure demeanor. The 39-year-old mathematician is an instrument of China's campaign to become a tech power. She is also a legend among Western cryptographers. "Please don't write too much about my research; it's so difficult for journalists to get the technical details right," Wang pleads in rapid-fire English and Shandong dialect. She has a point: let's just say she and two colleagues shocked the cryptography world last year when they exposed a weakness in a key U.S. government encryption code called SHA-1, thought to be virtually unbreakable. Renowned MIT cryptographer Robert Rivest, who helped develop the SHA-1 algorithm, calls the breakthrough "stunning." (The SHA-1 "hash" is used, among other things, in technologies that transmit credit-card numbers over the Internet.)

Which explains why experts from Wall Street to Washington, from Downing Street to Delhi, are beginning to pay attention to Chinese scientists like Wang--and the government campaign that helps sponsor their work. The "863 Program"--so named because in March 1986 Deng Xiaoping decreed Beijing would begin bankrolling key science and technology research--aims to vault China into the ranks of developed nations. When Deng, eager to make China a high-tech power, asked how much funding should be earmarked to jump-start the effort, some scientists suggested 5 billion yuan (about $625 million today), recalls People's University professor Mao Shoulong, who was involved at that stage. "But Deng said the program needed 10 billion yuan. So that's what was invested."

Since then, Beijing has funneled 863 funds to new cutting-edge projects each year, boosting research on everything from aviation systems to mapping the rice genome. Nanjing University professor Wang Yuanqing, who won funding for his work on 3-D computer monitors, believes individual 863 projects are now "too numerous to be counted." During the same period, China's economy has racked up white-hot growth rates--in 2005 GDP expanded 9.8 percent. Beijing's boom has prompted some Western strategists to warn that China might supplant the United States as a tech leader in the not-too-distant future, and threaten Washington's Asian friends militarily. As China continues its economic rise, senior U.S. officials are asking publicly whether Beijing can become a "responsible stakeholder" in the international community.

More to the point, many analysts fear that Beijing, in order to feed its high-tech hunger, is promoting not just legal research but economic espionage and violations of intellectual-property rights (IPR). Consultant James McGregor, author of "One Billion Customers: Lessons From the Front Lines of Doing Business in China," argues that "the biggest issue in [Sino-U.S.] commercial relations should be IPR, IPR, IPR."

To be sure, China currently lags behind the United States in most if not all tech industries. Investment from multinationals such as Motorola, Nokia, Microsoft and Cisco Systems has driven much of China's high-tech growth. Although China recently supplanted America as the world's biggest exporter of information and communications technology, fully 80 percent of the mainland's high-tech and patented exports last year were produced by foreign-controlled firms. Tellingly, many foreign giants don't bring their cutting-edge tech to China; some who do expect it to be copied within five years, says an expert with one of the Big Four accounting firms. And although glittering high-tech zones and incubator parks have proliferated, "not many of them have actually produced science and technology projects yet," admits Professor Mao. He says the United States outshines China because it "has more money, more talent and more marketable products."

But 863 is transforming China. It's why China has more than 700 multinational R&D centers, compared with fewer than 50 eight years ago. Why 59 percent of Chinese undergrads pursue science and engineering degrees, compared with 32 percent in the United States. Why a year ago Chinese computer giant Lenovo purchased IBM's PC unit. Why foreign governments now worry about the overseas acquisition efforts of other Chinese behemoths such as telecom-equipment maker Huawei or the oil firm Cnooc, which dropped its bid to buy the U.S. company Unocal after fierce opposition last year. And why FBI officials fret that a small but worrisome proportion of the Chinese firms and students in America may be engaged in covert tech-acquisition schemes. Former head of FBI counterintelligence operations David Szady says espionage has helped Beijing acquire in just a couple of years what would normally take a decade to achieve.

The FBI isn't the only agency worrying.

A Japanese magazine recently reported that tech secrets were a factor in the mysterious 2004 suicide of a Japanese consul in Shanghai. A Chinese intelligence agent threatened to make public a relationship the Japanese official had with a karaoke hostess unless the consul divulged information on Tokyo's diplomatic encryption system, the Shukan Bunshun reported; the consul decided to hang himself instead.

In 2001, U.S. intel sources reportedly alerted their Indian counterparts to "suspicious" activities by the Chinese firm Huawei (next story). Telecom software developed at Huawei's Bangalore R&D center allegedly wound up in the hands of the Pakistan government, New Delhi's archrival, by way of Huawei's Afghan operations. (Huawei has denied the allegations.) Indian intelligence officials, in particular, oppose allowing Huawei to expand its presence in their country because they fear strategic telecom networks would become vulnerable to China.

Beijing denies that it engages in high-tech theft, attributing such charges to a "cold-war mentality." In fact, China may be able to feed the bulk of its high-tech appetite through legal means. Chinese state-owned enterprises pressure foreign partners to share advanced technology. Foreign nuclear-reactor suppliers, for example, are required to allow local technicians to work alongside their foreign counterparts. While Western suppliers are reluctant to share software codes that actually run the reactors, they routinely divulge construction and operation details. U.S. firms generally consider such tech transfers the "price for admission" to the China market, states a November 2005 congressional report, which asserts that technology transfers are "a major source of advanced technology for the PRC." Former U.S. military intelligence officer Larry Wortzel, now with the conservative Heritage Foundation, contends 863 is part of a "climate inside China that rewards stealing secrets." He says centralized Chinese government efforts, "such as the 863 Program, are specifically designed to acquire foreign high technology with military application."

To deter spies, FBI agents find themselves eyeballing a confusing welter of Chinese students, academics, business travelers, tourists and some 3,000 "front companies" in the United States, says former FBI official Szady. At present, the United States is prosecuting about a dozen cases involving individuals alleged to have smuggled technologies--such as night-vision systems or the proprietary source code for seismic imaging--to China. In one of the most recent cases, U.S. authorities detained mainland-born electronics engineer Mak Chi, his brother and his wife in late October. Mak worked for Power Paragon, a top U.S. defense contractor, and he had access to classified technology related to quiet electronic drive (QED) submarine propulsion systems--secrets that could prove valuable to Chinese strategists in the event of conflict in the Taiwan Strait. During phone calls tapped by the FBI, the three suspects allegedly discussed smuggling QED data, which Washington bans for export to the mainland, to Guangzhou on an encrypted disc. They were indicted only for illegally "acting as agents for a foreign government," however, since the smuggled disc didn't contain classified information. "I believe [they] are foreign intelligence operatives," wrote FBI Special Agent James Gaylord in an affidavit. (The three have pleaded not guilty.)

Tech advances make it easier to steal some secrets. For the past two years a group of Chinese hackers suspected of intelligence-gathering cyber-attacks have assaulted U.S. government computer systems. Nicknamed "Titan Rain," they have vacuumed up data on everything from aerospace propulsion systems to flight-planning software used by the U.S. Army and Air Force. (China calls reports of Titan Rain "groundless and irresponsible.")

The big question is whether such efforts are government-sponsored or freelance. The answer is probably both. One Beijing hacker says two Chinese officials approached him a couple of years ago requesting "help in obtaining classified information" from foreign governments. He says he refused the "assignment," but admits he perused a top U.S. general's personal documents once while scanning for weaknesses in Pentagon information systems "for fun." The hacker, who requested anonymity to avoid detection, acknowledges that Chinese companies now hire people like him to conduct industrial espionage. "It used to be that hackers wouldn't do that because we all had a sense of social responsibility," says the well-groomed thirtysomething, "but now people do anything for money." If that principle takes hold, China's high-tech appetite may well be cause for concern.