US sets sights on Next Generation Warfare with China investment controls, Plus record number of millionaires are leaving China -- China Boss 6.28.24

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What happened

China's Military Civil Fusion (MCF) program has always been a challenge for Western security officials to address as it is vast, poorly (and, often, fraudulently) documented, and operates on highly intricate local and global procurement networks.

However, last Friday, the commercial and national security regulatory landscape changed significantly when the US Treasury Department unveiled its new draft rules that would establish a regime of investment curbs around Biden's August 2023 executive order.

Although more narrowly tailored than early drafts, EO 14105, "Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern," imposed unprecedented restrictions on sharing US technology, capital, and expertise with entities linked to China's military.

The EO followed that with orders for Treasury and Commerce to consult on issuing a new set of supplementary restrictions curbing outbound investment.

According to the Global Sanctions and Export Controls blog, a blog by the consulting group Baker McKenzie, Treasury's draft rule "requires notification of certain investments into entities linked to China," in particular those relating to semiconductors and microelectronics, quantum information technologies, and artificial intelligence.

It's important to note that the new rule is a comprehensive policy that restricts outbound investment into the specified sensitive technologies by default rather than by exception, as in the case of sanctions.

The rule's broad scope is perhaps its most controversial feature, as there is no immediate exception for specific types of entities.

It applies to any entity in China, Hong Kong, or Macau, which, in the draft language, is called a "Person of a Country of Concern." This includes individuals and organizations - private, state, and non-profit.

But the rule "would also capture transactions involving a third-country entity that has a 'specified interest' (such as a voting interest, board seat, equity interest, or even certain contractual rights)," according to the blog's legal analysts.

For instance, the rule would apply if a third-country entity holds a significant equity interest in a Chinese company involved in sensitive technologies.

For China's MCF program, the comprehensive inclusivity of the rule is a crucial aspect of its design.

Why it matters

Next generation warfare

Treasury also released a press statement and an 8-page fact sheet to inform the public about the new measure's context and key elements.

Both publications unequivocally state that the Biden Administration's policy guiding the new measures was "keeping America safe and defending US national security by protecting technologies that are critical to the next generation of military innovation." (Emphasis added.)

"Next-generation warfare" refers to a new era of military conflict markedly different from earlier "generations" of battle, characterized by person-to-person, kinetic fighting.

"Next generation"—or "Fifth Generation"—warfare has a more Orwellian - and Sun Tzu's Art of War- which championed that war is won by those who do not have to fight - objective: "to control the adversary's population by distorting their worldview and threat perceptions, even without knowledge of the target," as experts at a public and security think tank in India recently described.

The concept of 'next-generation warfare' was first outlined in 2013 by Valery Gerasimov, Chief of the General Staff of the Russian Armed Forces and First Deputy Minister of Defence, in his Gerasimov Doctrine.

This doctrine, which Molly K. McKew, an expert on information warfare,  called the Kremlin's "new chaos theory of political warfare," is a strategic approach emphasizing non-military tactics as the preferred way to win a war rather than as an auxiliary to the use of force.

"The approach is guerrilla, and waged on all fronts with a range of actors and tools—for example, hackers, media, businessmen, leaks and, yes, fake news, as well as conventional and asymmetric military means. Thanks to the internet and social media … upending the domestic affairs of nations with information alone … are now plausible. The Gerasimov Doctrine builds a framework for these new tools, and declares that non-military tactics are not auxiliary to the use of force but the preferred way to win. That they are, in fact, the actual war,'" she wrote in a 2017 issue of Politico Magazine.

Since Gerasimov published his infamous 2000-word article, Chinese military watchers have noticed a clear correlation between Xi Jinping's prioritization of emerging technologies and the PLA's development of cognitive warfare and psychological ops.

Although melding military research and development with the ingenuity found in private commerce is standard across nations, China's MCF program has rapidly exploded into a hefty military-industrial complex accompanied by advanced capabilities.

The turning point in China's accelerated defense build-out occurred after the Third Taiwan Strait Crisis in 1996, in which Beijing, having fired missiles directly over Taipei to tip votes away from a popular presidential candidate set to transition the island into a fully-fledged democracy, was forced to back down after the US sent two carrier battle groups to the region. (Click here for a superb but chilling Washington Post read on the behind-the-scenes US-China nuclear tensions that played out during the crisis.)

Beijing lost face: To the Chinese people who have been taught since birth that Taiwan is an inherent part of China, the government's capitulation to US interference recalled the Century of Humiliation, the period between 1839 and 1949, where China was frequently invaded and occupied by foreign powers.

Still, China's entry into the WTO in the early 2000s gave Beijing a nearly unlimited cash injection, which it used to dramatically increase defense spending.

WTO membership also gave China unprecedented access to global supply chains and Western technologies.

Creating distance

Nowadays, US officials are most concerned over Xi Jinping's hyper-focus on the military applications of artificial intelligence (AI).

"The CCP sees MCF as critical to advancing its regional and global ambitions. It believes that artificial intelligence (AI) will drive the next revolution in military affairs and that the first country to apply AI to next-generation warfare will achieve military dominance," according to a 2020 US State Department one-pager, Military-Civil Fusion and the People's Republic of China.

In its 2022 and subsequent report(s) on China's military power, the Pentagon finally recognized how "China's rapid adoption of artificial intelligence (AI) to revolutionize warfare could accelerate [the US'] decline in global influence," as TRT World, a Turkish global news outlet, framed it.

Policymakers must now determine how to prevent China from gaining a decisive upper hand in "intelligentized warfare."

According to the Financial Times, the Treasury Department's proposed measures aim to cut the flow of US investment into China's MCF program and "would affect everything from equity investments to debt financing that is convertible to equity."

"It would also apply to greenfield investments and joint ventures. But it would exempt investments by limited partners (LP) — endowments and pension funds that seed venture capital and private equity groups — below a certain threshold," FT staff said.

But it would be foolhardy to assume that investment controls will cut China off from sensitive technologies.

Huawei's release of its Mate 60 Pro mobile phone in September 2023, which contains US-banned chip technology, already has analysts racing to figure out how China has circumvented US tech limits.

In June of the same year, Reuters staff investigated "China's underground market for high-end Nvidia AI chips" and found "two vendors" in the Chinese electronics hub of Shenzhen who "said they could provide small numbers of [restricted] A100 artificial intelligence chips made by the US chip designer" for a price.

The more practical solution is to create as much distance as possible between AI capabilities.

China is currently struggling with its AI program, and its military experts see several barriers to achieving Xi's Next Generation objectives.

Earlier this month, Sam Bresnick at Georgetown's Center for Security and Emerging Technology revealed "Chinese perspectives on their own progress, or lack thereof, in developing and fielding AI-related technologies and capabilities."

From his report, we discover that "[s]everal Chinese analysts are concerned about the PLA's ability to develop trustworthy AI systems, guarantee network and cyber security, and maintain communications in future high-intensity conflicts," and that there are "issues that may be unique to the PLA, including those related to military data collection, management, and analysis, and the development of high-end sensors."

However, Bresnick's report also shows that China's policymakers are keenly aware they are playing "catch-up" with the US. Nevertheless, they are reviewing "several technologies that Chinese experts believe may help the country develop and deploy military AI-enabled systems."

In sum, Biden's investment controls are not a quick fix for upending Xi's military tech ambitions.

But they will cut the rope Wall Street is using to asphyxiate American security and help extend the US' lead position.

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