China Will Vet Tech Firms After Threatening U.S. Retaliation

May 22, 2014 11:28 pm ET

(Adds analyst comment in fourth paragraph.)

May 23 (Bloomberg) -- China will vet technology companies operating in the country for potential national-security breaches after the government threatened retaliation for a U.S. indictment of Chinese officers on cyberspying claims.

The checks, announced yesterday by the State Internet Information Office, are meant to stop suppliers from using their products “to illegally control, disrupt or shut down their clients’ systems,” the official Xinhua News Agency said, citing a statement from the office. On May 20, a spokesman from the same office said the U.S. indictment was groundless and China would take countermeasures if the U.S. “goes its own way.”

Such checks would mark a major escalation in tensions between China and the U.S. after prosecutors indicted five Chinese military officers for allegedly stealing secrets of American companies. That may put at risk U.S. sales in the world’s largest market for personal computers, where Forrester Research Inc. estimates purchases of hardware and other information technology products will rise 11 percent this year to $125 billion.

“This statement shows the increasing concerns on the information security by the Chinese government,” Charlie Dai, a Beijing-based Forrester analyst, said by e-mail today. “More and more state-owned enterprises, especially in the public sector, such as government, power utilities, healthcare and the financial services industry, will be more likely to adopt domestic products, solutions and services.”

Western Giants

While yesterday’s Xinhua story didn’t mention specific companies or the U.S. indictment, it quoted the office spokesman as saying governments of “a few countries” have taken advantage of their monopoly status and technological edge to collect sensitive information.

“Nothing like what the U.S. has just done can get swept under the carpet,” said Mark Natkin, managing director of Marbridge Consulting in Beijing. “There needs to be some response from China that is commensurately toothful.”

A commentary on the website of the China Daily newspaper supporting the new controls said Internet attacks “could be fatal” to China in part because it depends on imported computer components.

“Its IT markets, meanwhile, have been dominated by Western giants, such as Microsoft, Cisco, IBM and Intel,” the commentary said.

Accelerate Buildup

“We have served our customers in China for 20 years and look forward to continuing to do so,” John Earnhardt, a spokesman for Cisco, wrote in an e-mailed statement. “Our products are reviewed by customers and governments around the world and they meet the highest global, quality and security requirements and standards.”

Chuck Mulloy, a spokesman for Intel, declined to comment, as did Microsoft through Kim Kuresman, an outside spokeswoman with Waggener Edstrom Inc. Representatives for IBM and Intel didn’t respond to requests for comment.

Revelations by former U.S. National Security Agency contractor Edward Snowden “served as a catalyst for China to accelerate its cybersecurity buildup,” the commentary said.

The U.S. indictment, announced May 19, led China to suspend its involvement in a cybersecurity working group and drew formal protests from the ministries of defense and foreign affairs. The State Internet Information Office likened the U.S. actions to “a thief yelling ‘Catch the thief.’”

China’s new controls will vet products and services from both foreign and domestic providers, Xinhua said, citing Li Jingchun, chief engineer with the National Research Center for Information Technology Security.

The Xinhua story said China had been considering such a system for years and added that a U.S. House of Representatives committee conducted a security investigation into Chinese technology firms in 2012.

--With assistance from Scott Moritz in New York and Jordan Robertson in San Francisco.