New U.S. Curbs on China Target Supercomputers

Chinese firms engaged in nuclear test simulations, PLA hit with export controls

China's President Xi Jinping
China's President Xi Jinping / Getty Images

As President Donald Trump prepares to talk trade with Chinese President Xi Jinping, the Commerce Department blacklisted five Chinese entities linked to Beijing's large-scale nuclear arms buildup.

Commerce's Bureau of Industry and Security (BIS) added five Chinese companies and institutes to its "entities list," which is used to block sales of U.S. products to the firms based on threats to American security.

The action was announced June 18 and follows similar punitive action in May against Huawei Technologies, the telecommunications conglomerate facing federal charges for economic espionage and illegal financial dealings.

National Security Adviser John Bolton told the Free Beacon earlier this month that Trump would be meeting Xi in Osaka, Japan, at the upcoming G-20 summit set to begin Friday.

"Obviously the impasse in the trade talks will be a big issue," Bolton said of the meeting in Japan. "The president believes that China is under pressure and that Xi Jinping will want to make a deal. They need to do a lot in terms of structural reform in the economy. They need to stop pursuing mercantilist policies like stealing our intellectual property and forced technology transfer."

The first action taken by Trump was to issue a presidential order last month blocking American companies from buying telecommunications gear from foreign adversaries. The order did not name Huawei, but the company was added to the entities list, a move that has caused severe problems for the company.

Huawei is expected to lose $30 billion in revenue from the U.S. sanctions, CNBC reported.

Another Chinese telecom, ZTE, was placed on the entities list last year and nearly went bankrupt but was rescued after an appeal to Trump by Xi to take ZTE off the list. The company was fined instead $1 billion for doing business with Iran.

The latest BIS action identified three Chinese companies or institutes engaged in supercomputing development, including Sugon, the Wuxi Jiangnan Institute of Computing Technology, and the National University of Defense Technology (NUDT).

The decision to sanction the companies, including at least three involved in nuclear explosion simulations, comes as the Defense Intelligence Agency recently accused China of engaging in low-level nuclear tests and rapidly expanding its nuclear arsenal.

"Sugon has publicly acknowledged a variety of military end uses and end users of its high-performance computers," the Commerce notice said. "Wuxi Jiangnan Institute of Computing Technology is owned by the 56th Research Institute of the General Staff of China’s People’s Liberation Army. Its mission is to support China’s military modernization."

Those two firms also work with NUDT, which was sanctioned in 2015 for using U.S. components to support supercomputer nuclear explosion simulations and other military simulations.

The BIS action increased sanctions on NUDT by adding a front organization used by the university, Hunan Guofang Keji University, to the entities list.

Additionally, Sugon is a majority owner of another company called Higon that has interests in two other companies: Chengdu Haiguang Integrated Circuit, and Chengdu Haiguang Microelectronics Technology. Those three firms were also hit with placement on the entities list.

Higon makes integrated circuits, electronic information systems, software, and Chengdu Haiguang Integrated Circuit designs X86 architecture computer chips for network information servers. Chengdu Haiguang Microelectronics Technology is engaged in integrated circuit production including design and manufacturing and has a substantial ownership stake in Higon.

Higon relies on computer chips supplied by AMD, Intel, and Nvidia and is expected to be hit hard by the export controls. CNBC reported that stock in U.S. chip manufacturers fell following the new sanctions with Nvidia, Xilinx, and AMB losing between 1 and 2 percent.

Sugon suspended stock trading on the Shanghai Stock Exchange Monday, a sign the company will struggle with the U.S. export controls.

The notice said the five Chinese entities were "acting contrary to the national security or foreign policy interests of the United States."

Designation on the list means that any sales to those firms require a U.S. export license and that all such requests for goods to those entities includes "a presumption of denial."

A December 2016 study by the National Security Agency and Department of Energy warned that China had obtained "near-peer status" in high-performance computing with the United States.

"It is now clear that future U.S. leadership will be challenged by the Chinese," the report said. "National security requires the best computing available, and loss of leadership in [high-performance computing] will severely compromise our national security."

The South China Morning Post reported Tuesday that the United States and China currently are vying to develop the next-generation supercomputer, known as an exascale, that will be capable of performing one quintillion—or a billion billion—calculations per second.

The U.S. ban on Chinese supercomputing entities "will stall China’s move into next-generation supercomputing, but will not be able to restrain its rise as the country’s key supercomputing projects now use home-developed chips and technologies," An Hong, professor of computer science at the University of Science and Technology of China, told the newspaper.

Kevin Freeman, an expert on national-security financial affairs, said the BIS blacklisting puts the Chinese on notice that the U.S. is aware of their subversive efforts and knows about the scheme of using hidden shell companies and aliases.
"When the Chinese are denied access to our capital and trade markets, as this listing will require, they are denied one of their primary weapons of unrestricted warfare," Freeman said. "This is an important move by the Trump administration. For too long, what we’ve seen as a marketplace our enemies have viewed as a battlespace."

On China's nuclear program, DIA director Army Lt. Gen. Robert P. Ashley said last month that China appears to be violating its commitment to the 1996 Comprehensive Test Ban Treaty by conducting small nuclear tests. "That's our belief in terms of what we're seeing with the testing regime," he said.

Ashley said during a speech that the Chinese are preparing to operate their testing site year-round and have conducted nuclear tests using explosive containment chambers.

"The combination of these facts and China's lack of transparency on their nuclear testing activities raise questions as to whether China could achieve such progress without activities inconsistent with the Comprehensive Nuclear Test Ban Treaty," Ashley said.

The testing is part of a rapid expansion of the Chinese nuclear weapons program that Ashley said includes plans to double the size of its nuclear warhead stockpile in the next decade.

The sanctions on the Chinese entities were made after an interagency committee decided to impose them. The committee included representatives of the Commerce, State, Defense, Energy, and Treasury departments.

Bolton said he expects China to try and pressure the U.S. government to remove Huawei from the entities list. "But we've looked at this very carefully and we see the threat to telecommunications worldwide, not just sensitive government communications," he said.

Bolton said Huawei and other companies are "state actors," not privately held or traded companies as in the West.

"They're controlled by the People's Liberation Army or by some state agent in Beijing," he said. "These are not capitalist companies. We're not abandoning our free market principles. We're saying you're not going to use a state-owned enterprise basically to undercut us, to treat us unfairly, in competitive terms. Or to get back doors into our telecoms."

Bolton said the U.S. government awoke to the danger posed by Chinese telecommunications firms but is making "very, very rapid strides" in addressing the problems.

"We can see the growth and understanding in our friendly and allied countries around the world," he said. "We're still working through some of the technical issues."