2017 Report to Congress of the U.S. China Economic & Security Commission Annual Report To Congress

This Report responds to the mandate for the Commission “to monitor, investigate, and report to Congress on the national secu- rity implications of the bilateral trade and economic relationship between the United States and the People’s Republic of China.” The Commission reached a broad and bipartisan consensus on the con- tents of this Report, with all 12 members voting to approve and submit it to Congress. In accordance with our mandate, this Report, which is current as of October 6, includes detailed treatment of our investigations of the areas identified by Congress for our examination and recommendation

Transmittal Letter to the Congress .................................................................. iii

Commissioners Approving the Report ................................................................. vi

Executive Summary ................................................................................................. 1

Key Recommendations ..................................................................................... 29

Introduction ............................................................................................................. 31

2017 Report To Congress of the U.S.-China Economic and Security Review Commission

Chapter 1: U.S.-China Economic and Trade Relations ............................. 35

Section 1: Year in Review: Economics and Trade .............................................. 35

Key Findings ...................................................................................................... 35

Introduction ........................................................................................................ 36

U.S.-China Bilateral Trade ............................................................................... 37

China’s Domestic Economic Rebalancing ....................................................... 42

U.S.-China Bilateral Economic Engagement .................................................. 53

United States and China at the WTO ........................................................... 58

Section 2: Chinese Investment in the United States ........................................ 71

Key Findings ...................................................................................................... 71

Recommendations .............................................................................................. 72

Introduction ........................................................................................................ 73

Chinese Investment in the United States ..................................................... 73

Chinese Companies on U.S. Stock Exchanges ............................................... 91

Implications for the United States ................................................................. 101

Section 3: U.S. Access to China’s Consumer Market ......................................... 112

Key Findings ...................................................................................................... 112

Recommendations .............................................................................................. 113

Introduction ........................................................................................................ 113

E-Commerce ....................................................................................................... 114

Logistics .............................................................................................................. 124

Financial Services ............................................................................................. 128

Implications for the United States ................................................................. 140

Chapter 2: U.S.-China Security Relations ..................................................... 153

Section 1: Year in Review: Security and Foreign Affairs .................................. 153

Key Findings ...................................................................................................... 153

Introduction ........................................................................................................ 154

Major Developments in China’s Security and Foreign Affairs in 2017 ...... 154

China’s Global Security Activities in 2017 .................................................... 170

U.S.-China Security Relations in 2017 ........................................................... 179

Section 2: China’s Military Modernization in 2017 ........................................... 199

Key Findings ...................................................................................................... 199

Recommendations .............................................................................................. 199

Introduction ........................................................................................................ 200

China’s 2017 Defense and Security Budget ................................................... 200

Overview of Guidance for Military Modernization ........................................ 201

PLA Army .......................................................................................................... 202

PLA Navy ........................................................................................................... 203

PLA Air Force .................................................................................................... 207

PLA Rocket Force .............................................................................................. 211

PLA Strategic Support Force ........................................................................... 212

Implications for the United States ................................................................. 214

Section 3: Hotspots along China’s Maritime Periphery ..................................... 232

Key Findings ...................................................................................................... 232

Recommendations .............................................................................................. 233

Introduction ........................................................................................................ 234

Security Environment ....................................................................................... 235

Chinese Strategists’ Thinking about Hotspots .............................................. 239

Contingency Planning ....................................................................................... 245

Contingency Operations along China’s Maritime Periphery ........................ 250

Regional Responses and Implications for the United States ....................... 256

Chapter 3: China and the World ...................................................................... 281

Section 1: China and Continental Southeast Asia ............................................. 281

Key Findings ...................................................................................................... 281

Recommendations .............................................................................................. 283

Introduction ........................................................................................................ 283

Chinese Economic Engagement with Continental Southeast Asia ............. 284

China’s Relations with Burma ......................................................................... 294

China’s Relations with Cambodia ................................................................... 305

China’s Relations with Laos ............................................................................ 307

China’s Relations with Thailand ..................................................................... 309

Implications for the United States ................................................................. 314

Section 2: China and Northeast Asia .................................................................. 326

Key Findings ...................................................................................................... 326

Recommendations .............................................................................................. 327

Introduction ........................................................................................................ 327

China-North Korea Relations .......................................................................... 328

China-South Korea Relations .......................................................................... 342

China-Japan Relations ...................................................................................... 349

South Korea-Japan Relations and Trilateral Security Cooperation ............ 355

Implications for the United States ................................................................. 357

Section 3: China and Taiwan ................................................................................ 371

Key Findings ...................................................................................................... 371

Recommendations .............................................................................................. 372

Introduction ........................................................................................................ 372

Cross-Strait Relations ....................................................................................... 373

Taiwan’s Economy and Cross-Strait Trade and Investment ........................ 382

Taiwan’s International Engagement ............................................................... 386

Taiwan Military and Security Issues .............................................................. 389

U.S.-Taiwan Relations ....................................................................................... 397

Implications for the United States ................................................................. 401

Section 4: China and Hong Kong ........................................................................ 414

Key Findings ...................................................................................................... 414

Recommendations .............................................................................................. 415

Introduction ........................................................................................................ 415

Hong Kong’s Political Developments ............................................................... 416

Beijing’s Degradation of Rule of Law in Hong Kong ................................... 425

Declining Freedom of Expression in Hong Kong .......................................... 427

Economic Relations with Mainland China ..................................................... 435

Implications for the United States ................................................................. 439

Section 5: China’s Domestic Information Controls, Global Media Influence, and Cyber Diplomacy ........................................................................................ 452

Key Findings ...................................................................................................... 452

Recommendations .............................................................................................. 452

Introduction ........................................................................................................ 453

China’s Domestic Information Controls .......................................................... 454

China’s Global Media Influence ....................................................................... 467

Beijing’s Concept of “Internet Sovereignty” ................................................... 482

Implications for the United States ................................................................. 484

IX Page Chapter 4: China’s High-Tech Development ................................................. 507

Section 1: China’s Pursuit of Dominance in Computing, Robotics, and Biotechnology ............................................................................................. 507

Key Findings ...................................................................................................... 507

Recommendations .............................................................................................. 508

Introduction ........................................................................................................ 508

China’s Industrial Policies ................................................................................ 509

Computing .......................................................................................................... 515

Industrial Robotics ............................................................................................ 523

Artificial Intelligence ......................................................................................... 525

Nanotechnology .................................................................................................. 527

Biotechnology ..................................................................................................... 528

Implications for the United States ................................................................. 531

Section 2: China’s Pursuit of Advanced Weapons .............................................. 553

Key Findings ...................................................................................................... 553

Introduction ........................................................................................................ 554

Drivers of China’s Advanced Weapons Programs .......................................... 554

China’s Advanced Weapons Programs ............................................................ 557

Inputs to China’s Advanced Weapons Programs ........................................... 577

Implications for the United States ................................................................. 580

Comprehensive List of the Commission’s Recommendations .................. 597

Additional Views of Commissioners ................................................................ 602

Appendices: Appendix I: Charter ........................................................................................... 605

Appendix II: Background of Commissioners .................................................... 613

Appendix III: Public Hearings of the Commission During 2017 .................... 625

Appendix IIIA: List of Witnesses Testifying Before the Commission During 2017 .......................................................................................................... 629

Appendix IV: List of Research Material ............................................................ 633

Appendix V: Conflict of Interest and Lobbying Disclosure Reporting .......... 637

Appendix VI: Acronyms and Abbreviations ....................................................... 639

2017 Commission Staff and Acknowledgements .......................................... 643

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