Xi says corruption 'biggest threat' to Communist Party, anti-graft probes expanded

Janet Yellen raises concern about PRC's 'malicious cyber activity' amid reports of Chinese hackers breaching the Committee on Foreign Investment in the US (CFIUS)

Welcome back to What’s Happening in China, your weekly update on the latest news and developments from the country.

This week: Xi Jinping reaffirmed corruption as the Communist Party’s “biggest threat” amidst new probes, while Washington reiterated alarm over PRC cyber activities. Plus: the tragic toll of Tibet’s recent earthquake rises to 126.

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Let’s jump in.

— PC

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Keywords: anti-corruption • cybersecurity • Tibet earthquake • Trump 2.0 • population aging • Lunar New Year • Foxconn • TikTok ban • Pentagon blacklist • Arctic • UK-China relations • Wang Yi in Africa • Chinese pension system • stock market • PBOC • government bonds • deflation • AI unicorns

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Through the Lens

Shepherd with his herd. Tiger Leaping Gorge, Yunnan Province.

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In Focus

I. “Once blacklisted, it is nearly impossible for individuals to start another business.”

Chinese venture capitalists are hounding failed founders, pursuing personal assets and adding the individuals to a national debtor blacklist when they fail to pay up, in moves that are throwing the country’s start-up funding ecosystem into crisis.

The hard-nosed tactics by risk capital providers have been facilitated by clauses known as redemption rights, included in nearly all the financing deals struck during China’s boom times.

“My investors verbally promised they wouldn’t enforce them, that they had never enforced them before — and in ’17 and ’18 that was true — no one was enforcing them,” said Neuroo Education founder Wang Ronghui, who now owes investors millions of dollars after her childcare chain stumbled during the pandemic.

While they are relatively rare in US venture investing, more than 80 per cent of venture and private equity deals in China contain redemption provisions, according to Shanghai-based law firm Lifeng Partners estimates.

They typically require companies, and often their founders as well, to buy back investors’ shares plus interest if certain targets such as an initial public offering timeline, valuation goals or revenue metrics are not met.

“It’s causing huge harm to the venture ecosystem because if a start-up fails, the founder is essentially facing asset seizures and spending restrictions,” said a Hangzhou-based lawyer who has represented several indebted entrepreneurs and asked not to be named. “They can never recover.”

Lifeng, in its recent report on redemption rights, said they had turned entrepreneurship into a “game of unlimited liability”. In 90 per cent of investor lawsuits, the firm said, founders were named as defendants alongside companies, with 10 per cent of the individuals ultimately added to China’s debtor blacklist.

Once blacklisted, it is nearly impossible for individuals to start another business. They are also blocked from a range of economic activities, such as taking planes or high-speed trains, staying in hotels or leaving China. The country lacks a personal bankruptcy law, making it extremely difficult for most to escape the debts.

Read: Chinese venture capitalists force failed founders on to debtor blacklist (Financial Times)

II. We're in.

China’s hackers were once thought to be interested chiefly in business secrets and huge sets of private consumer data. But the latest hacks make clear they are now soldiers on the front lines of potential geopolitical conflict between the U.S. and China, in which cyberwarfare tools are expected to be powerful weapons.

U.S. computer networks are a “key battlefield in any future conflict” with China, said Brandon Wales, a former top U.S. cybersecurity official at the Department of Homeland Security, who closely tracked China’s hacking operations against American infrastructure. He said prepositioning and intelligence collection by the hackers “are designed to ensure they prevail by keeping the U.S. from projecting power, and inducing chaos at home.”

[…]

In the infrastructure attacks, which began at least as early as 2019 and are still taking place, hackers connected to China’s military embedded themselves in arenas that spies usually ignored, including a water utility in Hawaii, a port in Houston and an oil-and-gas processing facility.

Investigators, both at the Federal Bureau of Investigation and in the private sector, found the hackers lurked, sometimes for years, periodically testing access. At a regional airport, investigators found the hackers had secured access, and then returned every six months to make sure they could still get in. Hackers spent at least nine months in the network of a water-treatment system, moving into an adjacent server to study the operations of the plant. At a utility in Los Angeles, the hackers searched for material about how the utility would respond in the event of an emergency or crisis. The precise location and other details of the infrastructure victims are closely guarded secrets, and couldn’t be fully determined.

American security officials said they believe the infrastructure intrusions—carried out by a group dubbed Volt Typhoon—are at least in part aimed at disrupting Pacific military supply lines and otherwise impeding America’s ability to respond to a future conflict with China, including over a potential invasion of Taiwan.

[…]

U.S. officials have warned for more than a decade about fast-evolving threats in cyberspace, from ransomware hackers locking computers and demanding payments to state-directed thefts of valuable corporate secrets. They also raised concerns about the use of Chinese equipment, including from telecom giants Huawei and ZTE, arguing they could open a back door to unfettered spying. In December, the Journal reported that U.S. authorities are investigating whether the popular home-internet routers made by China’s TP-Link, which have been linked to cyberattacks, pose a national-security risk.

But Beijing didn’t need to leverage Chinese equipment to accomplish most of its goals in the massive infrastructure and telecom attacks, according to U.S. officials and others familiar with the investigation. In both hacks, China exploited a range of aging telecom equipment that U.S. companies have trusted for decades.

Read: How Chinese Hackers Graduated From Clumsy Corporate Thieves to Military Weapons (WSJ)

III. Evan Medeiros: How Beijing is preparing for Trump 2.0

Beijing’s planned responses to Trump fall into three baskets: retaliation, adaptation and diversification. Mirroring US policies, Beijing in recent years has created a range of export controls, investment restrictions and regulatory investigations capable of hurting US companies. Beijing is unable to match tariff for tariff, so it will seek to impose costs in ways that inflict maximum pain. For China, failing to retaliate would signal weakness domestically and only encourage Trump.

This has already started. In late 2024, Beijing blocked the export to the US of critical minerals used for chipmaking, squeezed the supply chain for US-made drones, threatened to blacklist a high-profile US apparel company and launched an antitrust probe into Nvidia. By taking such actions, Beijing is previewing its capabilities and creating future bargaining chips.

China’s second strategy is adaptation. From autumn 2023, Beijing began a vigorous fiscal and monetary stimulus to help businesses and now consumers. This policy shift is generating some positive, though uneven, impacts. It was certainly badly needed, but its scope and nature were also developed with a possible trade war in mind.

Beijing’s third strategy involves expanding its economic ties. It is debating unilateral tariff cuts on imports from non-US partners. On his Peru trip, Xi inaugurated a deep-water port that could reshape China’s trade with Latin America, a key non-US source of food, energy and minerals. In late 2024, Xi also participated for the first time in meetings with the heads of 10 major international economic organisations. His message was clear: China will be the leading force for global economic stability, prosperity and openness, and opposes all forms of protectionism.

Much could go wrong. Beijing’s confidence is matched by the Trump team. Both sides believe they possess the upper hand, can impose more costs and withstand more pain. The stage is set for a complicated, destabilising dynamic which, at best, results in a ceasefire. And that’s only on economic issues, not on Taiwan, the South China Sea, tech competition or nuclear force modernisation. The cold war is starting to look quaint in comparison.

Read: Xi has a plan for retaliating against Trump’s gamesmanship (Financial Times)

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