Beijing's costly plans for cybersecurity 'self-sufficiency'

A new government initiative means potentially quadrupling multibillion-dollar domestic spend.

Workers in a Chinese office.

Workers in a Chinese office.

Photo: Getty Images

Amid China's multipronged efforts to command and secure its wealth of data, as well as hacking allegations being flung between the country and an alliance of Western nations and bodies including the U.S., the EU, Japan and NATO, Chinese regulators have announced plans to grow the country's cybersecurity industry as much as fourfold within less than three years.

The draft plan, published July 12 by China's Ministry of Industry and Information Technology, aims to grow the industry to 250 billion yuan ($38.7 billion) by 2023, citing growing demand from emerging technologies including 5G, IoT, the industrial internet, smart vehicles and cities, cloud and AI, as well as sectors including manufacturing, natural resources, health care, consumer products, finance, transportation, education and more.

Strengthening China's cybersecurity industry would support the country's 2017 Cyber Security Law and last month's Data Security Law, as well as the 14th Five-Year Plan released in March, an economic blueprint that dedicated an entire section on digitizing the nation and making everything from factories to cities "smart."

An ambitious goal

According to the draft industry plan, by 2023 telecom and other "crucial sectors" must also dedicate at least 10% of their IT budgets to cybersecurity investments. While the MIIT did not disclose its valuation of the existing market, it said the target would be achieved with a compound annual growth rate of "more than 15%," suggesting its estimate of the industry at present is around $29 billion.

But MIIT statements contrast starkly with analyst projections. According to figures released in May by the IDC, China's domestic cybersecurity market is worth only $10.2 billion in 2021. By comparison, the U.S.'s is worth $65 billion this year. While the market research firm predicts a high average compound growth rate of 16.8% for China's sector, it would still reach just $14.4 billion by 2023, less than half of what MIIT is expecting.

According to Samm Sacks, a cyber policy fellow at think tank New America, the MIIT sometimes sets overly ambitious goals, especially if, as in this case, it's able to influence both supply and demand.

"The growth of the digital economy has driven demand for cyber security," she told Protocol. "On demand, the spate of cybersecurity regulations and standards mean companies need to buy products and services to be compliant and keep up with best practices. On the supply side, state R&D subsidies and tax breaks create incentives for new entrants."

Already, cybersecurity startups have sprung up in response to a combination of venture capital and state support, with some looking to unseat industry incumbents such as Qihoo 360 Technology Co. Ltd. and Kingsoft, Sacks added.

While the plan does not include additional concrete measures for achieving growth, it outlines the need to ramp up education, funding and industrial incentives on both the national and local levels. For example, the draft plan says, funds earmarked for upgrades in the manufacturing sector could be used to purchase cybersecurity products. MIIT is also tasking local governments with facilitating the creation of pilot zones and asking companies to invest and pool their resources, such as via industry consolidation.

The plan's brief mention of promoting international cooperation focuses on the establishment of overseas research centers, joint laboratories and conferences.

"In other words, the plan refers more to the absorption of technology by Chinese entities from overseas sources rather than welcoming foreign companies to become players … in China," said Lester Ross, a partner and head of the Beijing office of WilmerHale, an international law firm. "China is indeed intent upon the pursuit of self-sufficiency in this industry which it regards as intimately linked to national security."

The bigger picture

On Tuesday, Chinese Foreign Ministry spokesperson Zhao Lijian hit back against the U.S., calling it "the world's largest source of cyber attacks" after the Biden administration and allies including the EU, Australia, the U.K., Canada, New Zealand, Japan and NATO jointly accused China of being behind a massive hack of Microsoft Exchange email servers.

Meanwhile, China's public, private and foreign sectors are grappling with an emerging national data governance regime that has seen the country's tech giants in the crosshairs of regulators for alleged misuse of data.

Earlier this month, just days after ride-hailing giant DiDi's $4.4 billion U.S. IPO, Chinese authorities announced a probe into the company over its collection and use of personal data, pulling dozens of its apps from app stores, fueling speculation that the company had transferred sensitive information to the U.S. despite a lack of clear charges and evidence. Sources close to DiDi have denied wrongdoing.

In the days that followed, the Cyberspace Administration of China, the country's internet regulator, ordered so-called "cybersecurity reviews" for any company with 1 million users or more that wants to list overseas, something some observers say is motivated by concerns over national security risks posed by firms offering IT products and services.

And according to a June report by the Wall Street Journal, Ant Group is in discussions with state-owned firms to create a credit-scoring company, effectively conceding its vast troves of consumer data to regulators after years of resistance.

These developments underline a recent seismic shift in the government's approach to data, which it now considers an essential economic resource to be tapped as well as protected.

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