Was the Pentagon’s Blacklist of Chinese Companies Justified?

When Defense Department officials released a list of companies it claimed were linked to Chinese military activity back in June, they didn’t provide much explanation or evidence. Naturally, some of the companies on the list protested, claiming unfair treatment and no involvement with the Chinese government. So who is right? 

An analysis from data analytics company Babel Street released on Tuesday shows that those companies not only have multiple links to the Chinese government but they also serve as a vehicle for expanding Chinese influence into the manufacturing sectors of other countries. What’s more, China and Russia are coordinating on investments in other countries in order to not interfere with one another, data shows. 

To understand how the companies on the Defense Department list got there you have to understand how the Chinese government exercises control of technology research and manufacturing through nominally private enterprises. The companies don’t just represent a sampling of Chinese technology and manufacturing activity, they’re the biggest players in those industries by far precisely because the Chinese government has selected them to be that. It's an example of a two-tiered form of capitalism. If you want to open a restaurant in China or an electronics store, you’ll face plenty of competition; but “when it comes to anything that’s next-generation technology... everything seems to be very controlled by the government. There’s no competition. The government wants to have control of who talks to who,” said Andres Fournier, director of special programs for Babel Street.

The companies on the Pentagon’s list are essentially state-selected monopolies, controlling the manufacturing capacity and underlying technology in the industries that they represent. “They [China] sort of practice an all-or-nothing, or whole-of-government, approach where, for instance, a state-owned ship building company makes all the ships for commercial and military,” he said.

One example Babel Street identified is China Railway Rolling Stock Corp, which, as its name implies, makes rail cars and parts. They also make polymer composite materials, robotic and machine parts for windmills, and other items that don’t play a role in rail transportation but that could play a role in military applications, like drone manufacturing. “Those indications point toward a core group of companies and then underneath those companies you have other functions that would serve military purposes, or potentially serve,” said Fournier.  

The listed companies also function as an entry point into the economies of other countries and regions. Another rail company on the list, China Railway Construction Corporation, has become one of the largest in the world by acquiring firms in other countries, such as the recent purchase of a Aldesa, a Madrid-based construction company. The purchase provided the Chinese government a new entry into Central and South America as well as Eastern Europe, as Aldesa had business in “Peru, Uruguay, Norway, Poland, Slovakia, Denmark, Romania, and India. Apart from maintenance of railway equipment, over 85% of CRCC’s revenue is generated through infrastructure and building projects,” according to the report.

Moreover, there may be coordination between Russia and China on investment strategy, according to Babel Street.

“China has been aggressively pursuing opportunities in Belarus. Beijing has increased investment in the Eastern European country by over 200 times the level of a decade ago, and the PRC plans to use Belarus as one of its hubs for the Belt and Road Initiative (BRI),” Babel Street said in a note to Defense One. “Moscow has been keen to limit outside influence in Belarus, especially Western influence, but Russia appears to be content with allowing Beijing’s continued and growing engagement with Minsk,” they said. “Interdependence in the energy and technology sectors is particularly deep (and significant).”

Much was made of the inclusion of Huawei on the original Defense Department after it was designated as essentially an arm of the Chinese military. But it’s not the only telecommunications company on that list. Communications, in particular, represent a growing area of interest for the Chinese government. “There’s a heavy investment in communication and especially quantum communications,” said Fournier. 

“Responsible stakeholders should understand that the scope of [People’s Liberation Army] and [Chinese Communist Party] involvement across the [People’s Republic of China] economy is pervasive and assuming its presence is simply prudent,” notes the report. “While the public record offers only a partial understanding of the economic and security realities at work in the PRC, the CCP’s whole-of-nation approach to national security must be considered.”