[ISN] High-Tech Hunger

[InfoSec News]

http://msnbc.msn.com/id/10756796/site/newsweek/

By Melinda Liu
Newsweek International
Jan. 16, 2006 issue 

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

With Craig Simons In Beijing, Sudip Mazumdar In New Delhi And Hideko 
Takayama In Tokyo

© 2006 Newsweek, Inc.