[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]


                                     

 
                         [H.A.S.C. No. 113-69] 
                     2013 REPORT TO CONGRESS OF THE 
           U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION

                               __________

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                              HEARING HELD

                           NOVEMBER 20, 2013


                                     
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                      COMMITTEE ON ARMED SERVICES
                    One Hundred Thirteenth Congress

            HOWARD P. ``BUCK'' McKEON, California, Chairman

MAC THORNBERRY, Texas                ADAM SMITH, Washington
WALTER B. JONES, North Carolina      LORETTA SANCHEZ, California
J. RANDY FORBES, Virginia            MIKE McINTYRE, North Carolina
JEFF MILLER, Florida                 ROBERT A. BRADY, Pennsylvania
JOE WILSON, South Carolina           ROBERT E. ANDREWS, New Jersey
FRANK A. LoBIONDO, New Jersey        SUSAN A. DAVIS, California
ROB BISHOP, Utah                     JAMES R. LANGEVIN, Rhode Island
MICHAEL R. TURNER, Ohio              RICK LARSEN, Washington
JOHN KLINE, Minnesota                JIM COOPER, Tennessee
MIKE ROGERS, Alabama                 MADELEINE Z. BORDALLO, Guam
TRENT FRANKS, Arizona                JOE COURTNEY, Connecticut
BILL SHUSTER, Pennsylvania           DAVID LOEBSACK, Iowa
K. MICHAEL CONAWAY, Texas            NIKI TSONGAS, Massachusetts
DOUG LAMBORN, Colorado               JOHN GARAMENDI, California
ROBERT J. WITTMAN, Virginia          HENRY C. ``HANK'' JOHNSON, Jr., 
DUNCAN HUNTER, California                Georgia
JOHN FLEMING, Louisiana              COLLEEN W. HANABUSA, Hawaii
MIKE COFFMAN, Colorado               JACKIE SPEIER, California
E. SCOTT RIGELL, Virginia            RON BARBER, Arizona
CHRISTOPHER P. GIBSON, New York      ANDRE CARSON, Indiana
VICKY HARTZLER, Missouri             CAROL SHEA-PORTER, New Hampshire
JOSEPH J. HECK, Nevada               DANIEL B. MAFFEI, New York
JON RUNYAN, New Jersey               DEREK KILMER, Washington
AUSTIN SCOTT, Georgia                JOAQUIN CASTRO, Texas
STEVEN M. PALAZZO, Mississippi       TAMMY DUCKWORTH, Illinois
MARTHA ROBY, Alabama                 SCOTT H. PETERS, California
MO BROOKS, Alabama                   WILLIAM L. ENYART, Illinois
RICHARD B. NUGENT, Florida           PETE P. GALLEGO, Texas
KRISTI L. NOEM, South Dakota         MARC A. VEASEY, Texas
PAUL COOK, California
JIM BRIDENSTINE, Oklahoma
BRAD R. WENSTRUP, Ohio
JACKIE WALORSKI, Indiana

                  Robert L. Simmons II, Staff Director
                Kimberly Shaw, Professional Staff Member
                        Spencer Johnson, Counsel
                           Aaron Falk, Clerk


                            C O N T E N T S

                              ----------                              

                     CHRONOLOGICAL LIST OF HEARINGS
                                  2013

                                                                   Page

Hearing:

Wednesday, November 20, 2013, 2013 Report to Congress of the 
  U.S.-China Economic and Security Review Commission.............     1

Appendix:

Wednesday, November 20, 2013.....................................    41
                              ----------                              

                      WEDNESDAY, NOVEMBER 20, 2013
2013 REPORT TO CONGRESS OF THE U.S.-CHINA ECONOMIC AND SECURITY REVIEW 
                               COMMISSION
              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

McKeon, Hon. Howard P. ``Buck,'' a Representative from 
  California, Chairman, Committee on Armed Services..............     1
Smith, Hon. Adam, a Representative from Washington, Ranking 
  Member, Committee on Armed Services............................     2

                               WITNESSES

Bartholomew, Carolyn, Commissioner, U.S.-China Economic and 
  Security Review Commission.....................................     8
Reinsch, Hon. William A., Chairman, U.S.-China Economic and 
  Security Review Commission.....................................     3
Shea, Hon. Dennis C., Vice Chairman, U.S.-China Economic and 
  Security Review Commission.....................................     5
Wortzel, Dr. Larry M., Commissioner, U.S.-China Economic and 
  Security Review Commission.....................................     6

                                APPENDIX

Prepared Statements:

    Bartholomew, Carolyn.........................................   111
    McKeon, Hon. Howard P. ``Buck''..............................    45
    Reinsch, Hon. William A......................................    48
    Shea, Hon. Dennis C..........................................    78
    Smith, Hon. Adam.............................................    46
    Wortzel, Dr. Larry M.........................................    89

Documents Submitted for the Record:

    [There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

    [There were no Questions submitted during the hearing.]

Questions Submitted by Members Post Hearing:

    [There were no Questions submitted post hearing.]

2013 REPORT TO CONGRESS OF THE U.S.-CHINA ECONOMIC AND SECURITY REVIEW 
                               COMMISSION

                              ----------                              

                          House of Representatives,
                               Committee on Armed Services,
                      Washington, DC, Wednesday, November 20, 2013.
    The committee met, pursuant to call, at 10:02 a.m., in room 
2118, Rayburn House Office Building, Hon. Howard P. ``Buck'' 
McKeon (chairman of the committee) presiding.

    OPENING STATEMENT OF HON. HOWARD P. ``BUCK'' MCKEON, A 
 REPRESENTATIVE FROM CALIFORNIA, CHAIRMAN, COMMITTEE ON ARMED 
                            SERVICES

    The Chairman. The committee will come to order. I would 
like to welcome everyone to today's hearing on the 2013 Report 
to Congress of the U.S.-China Economic and Security Review 
Commission. This hearing is part of a larger oversight effort 
focus on the Asia-Pacific rebalance led by Mr. Forbes and Ms. 
Hanabusa, who are providing strong bipartisan leadership on 
this important topic. We have met with the U.S. Pacific Command 
officials and last week heard from key ambassadors representing 
allied and partner nations. However, we cannot consider the 
rebalance without examining China.
    The Commission has undertaken a comprehensive assessment of 
Chinese military capabilities, economic developments, and 
political and foreign policy objectives. Their annual report, 
which was released earlier this morning, is a superb resource 
for Congress and the public. While we continue to warn about 
our military's readiness and the dangerous effects of budget 
cuts and sequestration, China's military spending continues to 
rise and its new leadership seeks to increase combat readiness. 
Its current pace of military modernization shows that Beijing 
is developing the ability to project power and influence 
further abroad. I look forward to hearing the Commission's 
assessment of the key military and foreign policy developments 
made by China in the past year and the implications for our own 
policies and posture in the region. China can play a 
constructive role in the region and the world, but for those of 
us focused on security issues, recent trends in their anti-
access and area denial capabilities and cyber espionage 
campaigns in particular give us cause for concern.
    The committee is pleased to welcome the Commission, which 
is represented today by the Honorable William Reinsch--did I 
get that close?
    Mr. Reinsch. Well done, Mr. Chairman, yes.
    The Chairman. Thank you. Chairman of the U.S. Economic and 
Security Review Commission; the Honorable Dennis Shea, vice 
chairman of the Commission; Ms. Carolyn Bartholomew, 
commissioner; and Dr. Larry Wortzel, commissioner. I appreciate 
all of the work that they and their staff have done, and I look 
forward to hearing their testimony.
    Mr. Smith.
    [The prepared statement of Mr. McKeon can be found in the 
Appendix on page 45.]

STATEMENT OF HON. ADAM SMITH, A REPRESENTATIVE FROM WASHINGTON, 
          RANKING MEMBER, COMMITTEE ON ARMED SERVICES

    Mr. Smith. Thank you, Mr. Chairman. I, too, welcome the 
report and appreciate the commissioners being here to present 
it today. I think it is very important that we on this 
committee keep up to date on developments in China, both in 
terms of their foreign policy aims and also, most importantly, 
their military buildup. I think it is something obviously we 
need to be aware of, but I also agree with the chairman's 
comments that there is no reason that we should have China as 
an enemy. We should certainly look for ways to work together. I 
think we have an increasing number of common interests in terms 
of peace and stability certainly in Asia but globally. China 
has become more and more involved economically throughout the 
world, and I think the most important thing is they actually 
step up and start assuming that role.
    Most recently with the typhoon in the Philippines, we have 
seen once again that they are not there yet. Right in their 
backyard, second largest economy in the world, and they really 
have done nothing to be helpful; whereas the U.S. from all the 
way across the Pacific has in large numbers proven once again 
that we are the one indispensable nation in terms of helping 
people in times of crisis. I very much would like to have help 
in that regard. I think the world would be better served if a 
nation like China were to step up and begin to take those sorts 
of greater responsibilities, and I think we need to look for 
ways to build that partnership and that relationship, ways we 
can work together. We already, we do some joint military 
exercises, and I certainly think the world over the course of 
the next five decades will be a much, much better place if 
China and the U.S. found more places to be partners and avoided 
any sort of conflict. And I think that is distinctly possible, 
but we have to be aware of what is going on.
    This report and the work that you all have done is part of 
that effort, and I look forward to your presenting it and to 
our questions as we grow in our understanding of China's role 
in the world.
    Thank you.
    I yield back, Mr. Chairman.
    [The prepared statement of Mr. Smith can be found in the 
Appendix on page 46.]
    The Chairman. Thank you.
    Mr. Reinsch.
    Mr. Reinsch. Thank you very much, Mr. Chairman.
    The Chairman. Excuse me. All of your testimonies, without 
objection, will be entered in the record in their entirety, and 
now if you could go ahead.

  STATEMENT OF HON. WILLIAM A. REINSCH, CHAIRMAN, U.S.-CHINA 
            ECONOMIC AND SECURITY REVIEW COMMISSION

    Mr. Reinsch. Thank you, Mr. Chairman, Mr. Smith, members of 
the committee. As noted, I am Bill Reinsch, I am the chairman 
during this year's hearing and report cycle. I am going to 
provide an overview of our annual report, and Vice Chairman 
Dennis Shea was going to address China's maritime disputes and 
cross-strait military issues. Commissioner Larry Wortzel will 
discuss China's military modernization, U.S.-China security 
relations and China's cyber activities, and Commissioner 
Carolyn Bartholomew will address China's foreign policy and 
Middle East issues.
    The most significant development over the past year in the 
bilateral relationship has been the change in China's 
leadership. Xi Jinping took over as president and party general 
secretary and Li Keqiang as premier and party secretary of the 
State Council. China's leadership change has raised 
expectations that the government will implement the economic 
reforms that Beijing has long acknowledged are necessary.
    Many of those changes have been advocated as well by the 
Commission, by the Congress, and by the administration. Most 
recently the new leadership in Beijing provided unusual level 
of detail of its intended reforms. Among them were promises to 
raise taxes on state-owned companies, provide Chinese 
depositors with insurance against loss of principal and to open 
state-controlled sectors of the economy to competition.
    China's economic growth has slowed to a pace of 7.66 
percent so far this year. China's new leadership has pledged to 
at least maintain that rate by shifting China's industrial 
policy away from its dependence on exports and massive debt-
financed infrastructure projects to an economy more dependent 
on domestic consumption. This would be a welcome change, one 
that the United States has been urging for some time and one 
that would greatly benefit Chinese citizens.
    Developments in the national security sphere have not been 
so benign. Under its new political leadership, China's actions 
in the East and South China Seas continue to increase tensions 
in the region. It is becoming clear that China does not intend 
to resolve its maritime disputes through multilateral 
negotiations or the application of international laws and 
adjudicative processes but prefers to use its growing power in 
support of coercive tactics to pressure its neighbors to 
concede China's claims.
    Meanwhile, China continued to develop and field advanced 
military platforms and weapons systems. China's comprehensive 
military modernization is altering the balance of power in 
Asia, challenging decades of U.S. military preeminence in the 
region. During China's leadership transition, President Xi also 
was appointed Central Military Commission [CMC] chairman. The 
commission, China's highest military decisionmaking body, 
ensures Communist Party control of the PLA [People's Liberation 
Army], sets military policy and strategy, interprets party 
guidance for the military, and oversees the daily operations of 
the massive PLA bureaucracy.
    President Xi is the key link between the party and the 
military and embodies civilian control of the PLA at the 
highest level. Since his promotion to CMC chairman, President 
Xi has moved quickly to highlight broad military policy themes. 
These themes include the importance of a strong military to 
fulfill Xi's China Dream goals, increasing China's combat 
readiness, and reducing corruption in the PLA. Because of 
historic ties to the PLA, President Xi is well positioned to 
take on this wide-reaching and potentially contentious agenda 
during his tenure and may be more active than his predecessor 
in managing China's military policy. President Xi has recently 
begun to enhance civilian control over the PLA by creating an 
agency that in some respects will be analogous to our National 
Security Council.
    It is important to note that policy changes in China 
sometimes require years of effort by the leadership to create a 
consensus for action once the general policy has been agreed 
to. Typically, central government pronouncements filter down to 
agency levels and provincial and local bodies for 
implementation, overseen by the ubiquitous party officials. The 
recently concluded third plenum provides a window into that 
process. For example, the new leadership apparently takes 
seriously the goal of moderating the nation's growing 
inequality between rich and poor, urban and rural, and coastal 
and interior regions. One step in the right direction is the 
proposed extension of land rights to China's farmers, who 
currently face seizure of their collectively owned land by 
local government authorities.
    Now comes the hard part for China's leadership, which is 
implementation of these proposed reforms. Reforming the economy 
by empowering consumers is one necessary step in a process that 
will require many changes. Some of those changes were topics of 
the Commission's hearing. For example, China's state-owned 
enterprises must be weaned from their long dependence on the 
state-owned financial system. China's banks must be allowed to 
compete for depositors by offering market rate interest 
payments and reasonable credit terms to China's entrepreneurs 
and consumers. China's government should also open its closed 
financial services industry to foreign investors.
    At the same time, China needs to meet Western standards of 
auditing in order to list Chinese companies on U.S. stock 
exchanges. The Commission also examined China's interest in 
investing in the United States. While such investment is small 
relative to America's other major trading partners, China's 
acquisition of U.S. companies is growing exponentially. With 
$3.66 trillion in foreign currency reserves, China has the 
potential to become a major investor in U.S. companies and real 
estate. This past year, China made its largest purchase to date 
of an American company, Smithfield Foods, for $7.1 billion U.S. 
dollars.
    The Commission also considered the strong evidence that the 
Chinese Government is directing and executing a large scale 
cyber espionage campaign against the United States. China to 
date has compromised a range of U.S. networks, including those 
in the Department of Defense, defense contractors, and private 
enterprises. These activities are designed to achieve a number 
of China's broad security, political, and economic objectives, 
such as gathering intelligence, providing Chinese firms with an 
advantage over their competitors worldwide, advancing long-term 
research and development objectives, and gaining information 
that could enable future military operations. My colleagues 
will discuss this issue in greater depth as well as China's 
military modernization efforts, and China's activities in the 
East and South China Seas. Thank you all for your interest in 
our work. When my colleagues have concluded, we would be happy 
to respond to your questions.
    [The prepared statement of Mr. Reinsch can be found in the 
Appendix on page 48.]

  STATEMENT OF HON. DENNIS C. SHEA, VICE CHAIRMAN, U.S.-CHINA 
            ECONOMIC AND SECURITY REVIEW COMMISSION

    Mr. Shea. Mr. Chairman, Ranking Member Smith, distinguished 
members of the committee, thank you for allowing me to testify 
today. As Chairman Reinsch stated, I will be focusing on 
China's maritime disputes and the cross-strait relationship. I 
have submitted written testimony to the committee, and this is 
a very abridged version of what that written testimony says.
    This year, commissioners held public hearings and met with 
the leaders of the Armed Forces and political bodies in Japan 
and Taiwan to sharpen our understanding of the East China Sea 
dispute and the current state of the cross-strait relationship. 
Those conversations served as the basis of two sections in this 
year's report, one on China's maritime disputes and one on 
Taiwan. China's strategy in the East and South China Seas 
involves delaying the resolution of its maritime disputes while 
strengthening its maritime and air forces to better assert its 
claims. By using its military and maritime law enforcement 
forces to react to perceived challenges to its sovereignty, 
China seeks to change the status quo of its maritime disputes 
in its own favor. China applied this approach in the South 
China Sea effectively and with some success in the East China 
Sea in the past year. As Beijing has escalated rhetoric 
surrounding the dispute, it also has sharply increased air and 
maritime activity near the contested Senkaku Islands.
    Our report also identifies popular nationalism, economic 
development, and China's sense of sovereignty as key drivers 
underlying China's maritime disputes, suggesting the complex 
and intractable nature of these issues. These factors, combined 
with China's inconsistent adherence to internationally accepted 
norms of air and maritime operations, contribute to an 
environment in the East and South China Seas that is both 
politically and operationally tense.
    Turning to Taiwan, China and Taiwan enjoyed generally 
positive relations this year, characterized by growing economic 
ties and relatively amicable political relations. Despite these 
positive trends, China's cross-strait policy remains focused on 
pursuing balance.
    The Chairman. We don't know what that is. Until we find 
out, please continue.
    Mr. Shea. Okay. I apologize if I said anything offensive to 
anyone.
    Well, turning to Taiwan, China and Taiwan enjoyed generally 
positive relations this year, characterized by growing economic 
ties and relatively amicable political relations. Despite these 
positive trends, China's cross-strait policy remains focused on 
pursuing a balance of economic, political, and military power 
that heavily favors China with the eventual goal of eventually 
unifying with Taiwan. China is more prepared than in the past 
to conduct several different military campaigns against Taiwan, 
including a partial naval blockade and a limited air and 
missile campaign. In my view, a strong U.S. military presence 
in the western Pacific and the deterrent and stability effect 
it provides is critical to preserving peace in the region.
    At the top of the Commission's list of recommendations this 
year is a recommendation that Congress fund the U.S. Navy 
shipbuilding and operational efforts to increase its presence 
in the Asia-Pacific to at least 60 ships and rebalance home 
ports to 60 percent in the region by 2020. I think my 
colleague, Commissioner Wortzel, will get into this, but China 
is undergoing an incredible naval modernization effort, and by 
2020, they may have the largest fleet of modern submarines and 
surface combatants in the western Pacific.
    Other recommendations focus on the need for the United 
States to help our partners and allies improve maritime domain 
awareness in the East and South China Seas and the need to 
deepen strategic trust between the United States and China. In 
environments as potentially explosive as the East and South 
China Seas, strategic trust provides the foundation to reduce 
the potential of miscalculation at sea. To further develop the 
U.S.-Taiwan relationship, we recommend Congress urge Cabinet-
level officials to visit Taiwan in order to promote commercial, 
technological, and people-to-people exchanges. We further 
recommend Congress direct the administration to permit official 
travel to Taiwan for senior Defense and State Department 
officials.
    Finally, I would like to highlight a recommendation to 
Congress to direct the administration to transmit an 
unclassified report on U.S. arms sales to Taiwan. Taiwan's 
diminishing ability to maintain a credible deterrent capability 
could incentivize China to pressure Taiwan toward political 
talks or to use military force to achieve political objectives. 
The report we recommend would not only provide accountability 
on the progress of planned sales, it would also, I believe, 
support U.S. strategic interests in the Taiwan Strait.
    Again, members of the committee, Mr. Chairman, Ranking 
Member Smith, thank you for this opportunity to testify.
    [The prepared statement of Mr. Shea can be found in the 
Appendix on page 78.]

  STATEMENT OF DR. LARRY M. WORTZEL, COMMISSIONER, U.S.-CHINA 
            ECONOMIC AND SECURITY REVIEW COMMISSION

    Dr. Wortzel. Mr. Chairman, Ranking Member Smith, members of 
the committee, I want to thank you for the opportunity to 
testify today, and what I am going to do is present some of the 
Commission's findings on China's military modernization, U.S.-
China security relations, and cyber activities from this 2013 
report to Congress.
    The extensive modernization of the People's Liberation Army 
enables the PLA to conduct operations farther from China's 
coast and makes the PLA more formidable in all of the 
dimensions of war--air, space, land, sea, and the 
electromagnetic spectrum, which includes cyber.
    Major elements of PLA modernization are really designed to 
restrict U.S. freedom of action throughout the western Pacific. 
China already has 65 submarines that can employ 
intercontinental ballistic missiles, torpedoes, mines, or anti-
ship cruise missiles. The PLA Navy's surface combatant force 
has modernized, and its 77 major surface combatants are 
networked and capable of conducting multiple missions, and they 
are supported by a growing combat logistics force that can 
sustain them at sea. The PLA Air Force is getting new bomber 
aircraft that will carry long-range land-attack cruise 
missiles, and China is also developing new stealth fighters.
    While China's military is growing, our own is shrinking. 
China's firing of a rocket into nearly geosynchronous Earth 
orbit in 2013 probably tested the vehicle component of a new 
high-altitude anti-satellite capability, and that would 
threaten our GPS [Global Positioning System] satellites and our 
SBIRS [Space-Based Infrared System] infrared missile launch 
detection satellite.
    Bilateral military-to-military relations deepened and 
expanded in 2013 between China and the U.S. To date, there have 
been eight rounds of Track 1.5 U.S.-China strategic dialogue 
that address critical issues, like nuclear strategic stability. 
I see this as one of the most productive dialogues that takes 
place with China. Still, I think military contacts with China 
require constant congressional oversight.
    For China's military, cyberspace is an important component 
in national power, and it is a critical element of its 
strategic competition with the United States. The Chinese 
Government is directing and executing a large-scale cyber 
espionage campaign that poses a major threat to U.S. industry, 
critical infrastructure, military operations, personnel, 
equipment, and readiness.
    Looking at some of the Commission's recommendations, it 
looks like the Department of Defense is already taking some 
action to make at least information technology in the supply 
chain more secure. They just passed a new--they will pass a new 
directive. On November 18th, they finally took some action, but 
we need further work on supply chain security.
    The Commission recommends a careful examination of the 
Federal use of cloud computing platforms and services with 
attention to where the data storage and computing services are 
located. If they are located in the Third Department of the 
People's Liberation Army, it may present a little bit of a 
security risk. It is clear that naming the perpetrators in 
China in an attempt to shame the Chinese Government will not 
deter cyber espionage. Mitigating these problems will require a 
well-coordinated approach across the government and with 
industry.
    The Commission recommends Congress clarify the actions that 
U.S. companies may take regarding tracking intellectual 
property and amend the Economic Espionage Act to permit a 
private right of action when trade secrets are stolen.
    My personal view is the President already has some powerful 
authority to sanction Chinese people and companies through the 
International Emergency Economic Powers Act. If the magnitude 
of Chinese espionage is causing the amount of damage to the 
U.S. economy that the NSA [National Security Agency] Director 
tells us is the case, then the President ought to exercise that 
authority.
    In closing, I would like to address the U.S. rebalance to 
Asia. The Navy aims to increase its presence in Asia to 60 
ships and 60 percent of home ports by 2020. However, Chief of 
Naval Operations, Admiral Greenert, has recently warned that 
budget constraints would delay or prevent the Navy from 
achieving those objectives in a rebalance. So you can have 60 
percent of something out there, but by 2020, China's navy and 
air force will outnumber and almost match the technical 
capabilities of our own forces in the Asia and Pacific. A 
shrunken military may be insufficient to deter China or to 
reassure our friends and allies in the region. I thank you for 
the opportunity to appear today, and I am happy to respond to 
any questions you may have.
    [The prepared statement of Dr. Wortzel can be found in the 
Appendix on page 89.]

  STATEMENT OF CAROLYN BARTHOLOMEW, COMMISSIONER, U.S.-CHINA 
            ECONOMIC AND SECURITY REVIEW COMMISSION

    Ms. Bartholomew. Thank you.
    Mr. Chairman, Ranking Member Smith, members of the 
committee, I join my colleagues in thanking you for the 
opportunity to testify today. I would like to start by 
expressing my condolences on the recent loss of former Chairman 
Skelton. His leadership, like yours, has supported our troops 
and protected our national interests in the great tradition of 
this distinguished committee.
    Like my colleagues, I have submitted my written statement 
for the record. Today I will be discussing China's foreign 
policy, particularly in regard to the Middle East and North 
Africa, which I will refer to today collectively as MENA, and 
also India and North Korea, all of which we examined in our 
2013 annual report.
    As China's global interests expand, Beijing is becoming 
increasingly assertive and active in its foreign affairs. This 
trend is apparent in MENA where China's ever-growing demand for 
energy imports has driven Beijing to pursue greater political 
and security engagement. Beijing's emergent influence in MENA 
has at times competed with or challenged U.S. strategic 
interests, particularly in Syria and Iran. As in other parts of 
the world, it remains to be seen whether China's stated 
interests in regional stability and peace will make a lasting 
positive impact in MENA. Given the United States deep security 
interests in the region, China's developing role there presents 
geostrategic opportunities and challenges for U.S. diplomats, 
policymakers, and Armed Forces.
    In the past decade China's trade and economic ties with 
MENA have grown substantially, driven primarily by China's 
demand for energy. Over half of China's crude oil imports are 
from MENA, and China's dependence on the region will only 
continue to grow in the coming decades. Given this trend, the 
Commission expects China will increasingly augment its already 
robust economic ties in the region with stronger political and 
security engagement in an effort to protect and enhance its 
energy security interests.
    Historically, China has avoided directly opposing U.S. 
power in the region, content to free ride on the U.S. security 
presence there. In recent years, however, Beijing appears 
increasingly willing to take positions on important regional 
issues that directly oppose or undermine U.S. interests and 
objectives. This is clearly the case with Syria. Despite its 
emphasis on neutrality and peaceful resolution in public 
statements, China repeatedly has used its veto power to prevent 
the U.N. from singling out, blaming, or imposing sanctions on 
the Syrian Government.
    In recent weeks, Beijing has slightly reoriented its policy 
to appear less supportive of Assad and more supportive of 
mainstream efforts to facilitate peace in Syria. For instance, 
China has made occasional efforts to reach out to the Syrian 
opposition, has called for talks between the regime and the 
opposition in Geneva, and has supported efforts to eliminate 
chemical weapons from the country. These recent efforts 
notwithstanding, China's fundamental position on the conflict 
does not seem to have changed.
    Another problematic element of China's MENA engagement is 
Beijing's continued ties with and support for Iran. As 
elsewhere in the region, energy interests are a primary driver 
of the Sino-Iranian relationship, although I would note that 
there has been a relationship that has been a millennium going 
between the two countries. China is Iran's top crude oil 
customer and sources about 8 percent of its crude oil imports 
from Iran. Although China seeks to prevent its ties with Iran 
from becoming a flash point in U.S.-China relations, China has 
not halted its energy trade with Iran, despite U.S. sanctions. 
Instead, Beijing maximizes its economic leverage over Tehran to 
secure advantageous oil trade deals, then seeks exemptions from 
or exploits loopholes in the sanctions to ensure steady access 
to energy.
    Concerns persist about the role of China in proliferation 
of weapons to Iran. In the past, China sold tactical ballistic 
and anti-ship cruise missiles to Iran. China may continue to 
provide support to Iran's advanced conventional weapons 
programs. Since 2009, the U.S. has sanctioned six Chinese 
entities for missile or weapons proliferation to Iran. 
Moreover, while Beijing insists it has not provided assistance 
to Iran's nuclear program since 1997, open source reporting 
suggests that Chinese assistance and components have continued 
to augment Iran's nuclear programs.
    China's growing assertiveness was on display in its 
relationship with India this year as well. Sino-Indian tensions 
flared in April when New Delhi claimed that 30 to 50 Chinese 
soldiers crossed the China-India border about 12 miles beyond 
the line of actual control, the effective border between the 
two countries, and stayed there for 3 weeks. While Beijing and 
New Delhi resolved the border impasse in May after a series of 
talks, the potential for periodic low-level confrontations 
between border patrols to escalate likely will persist.
    Turning finally to China's relations with North Korea, 
Beijing for decades has provided Pyongyang with economic and 
political support, shielding its neighbor from harsh punishment 
by the international community for its destabilizing rhetoric 
and activities. While Beijing appeared increasingly 
dissatisfied with Pyongyang after a series of North Korean 
provocations in the past year, the Commission assesses Beijing 
is not likely to significantly alter its support for the 
country.
    In conclusion, the impact of China gradually taking on a 
more assertive global role will be significant. Beijing may 
become more willing to use its increasing political and 
economic clout to wield its influence. This trend has 
significant implications for the U.S., particularly if China's 
foreign policies undermine or challenge America's.
    Thank you for the opportunity to testify. Like my 
colleagues, I look forward to your questions.
    [The prepared statement of Ms. Bartholomew can be found in 
the Appendix on page 111.]
    Mr. Forbes [presiding]. Thank you all for your testimony. 
We appreciate you volunteering to do this effort. You do a 
wonderful job and produce a good report. It is my understanding 
that you also have with you several members of your staff who 
contribute so much on this today.
    And Mr. Chairman, I wonder if you would just ask them to 
stand up, any members that are here, so we can thank them for 
the good work that they do if you have anybody with you today.
    Mr. Reinsch. Go ahead, everybody.
    [Applause.]
    Mr. Forbes. Well, we want to thank you all for the good 
work that you guys do on that.
    And I just have a quick question for you. As we look at the 
capabilities, your report makes clear the enormous increase in 
capabilities that China is having. This weekend I was with a 
former member of the current administration who had been with 
the Pentagon and made an interesting observation that it didn't 
matter what the intentions of China might be, the capabilities 
are what we had to plan for, but having given that assumption, 
you guys are looking at this in a very careful way. Could you 
give us just your assessment of what you think the Chinese 
intentions are? We see these capabilities, and there is a huge 
dispute as to what their intentions are, but as we see this 
beginning to take shape more and more, I would just ask you to 
look in your crystal ball and give us your best assessment of 
what you think the intentions of all this military buildup is, 
and I will let you decide who wants to respond.
    Mr. Reinsch. You may find we don't all agree on that.
    Mr. Forbes. No, no that is what this is about. So we 
appreciate that.
    Mr. Reinsch. Dennis, go ahead.
    Mr. Shea. I will just very briefly--there are probably 
multiple, multiple intentions, but one of the intentions that 
particularly concerns me is they are trying to deny access to 
the western Pacific by U.S. forces and to extend military power 
out to the second island chain, which is about 1,800 nautical 
miles from the Chinese coast, and be able to operate freely in 
that area and basically remove the United States as the 
predominant military force in that region of the world.
    Mr. Forbes. Any other thoughts?
    Mr. Reinsch. Larry or Carolyn?
    Ms. Bartholomew. Larry, you can go.
    Dr. Wortzel. I think their goals are at two levels. I think 
in the western Pacific, that 1,800-mile range to prevent the 
United States from intervening in any contingencies is a very 
serious range, and it is a range that is roughly equal to the 
combat radius of carrier aircraft and the range of a Tomahawk 
cruise missile. They want to keep us far enough out that we 
can't get near their coast or their interior.
    But the greater charge that the previous Communist Party 
Chairman gave--Hu Jintao gave to the Chinese military, which Xi 
Jinping reinforced, is the ability to go out beyond that 
western Pacific and have a military capable of defending 
China's interests, global interests. Now, they look at about 
2050 before that comes about, but they are worried about sea 
lines of communication into the Indian Ocean. They are worried 
about their oil supplies. And they recognize that, yes, they 
have been free riders, as Ms. Bartholomew said, but they are 
not comfortable with that.
    Mr. Reinsch. My background is in trade and economics, so I 
defer to Larry and the others on particularly the short-term 
military issues.
    I guess I would say that I think in the medium term, their 
policy goal is to expand the range of influence in the region, 
particularly over that part of Asia to the south of them that 
has over thousands of years of history that they have 
historically tried to influence, and I think they want to, you 
know, recapture the historic relationship they have had with 
those parties. I don't think they intend to do that in a 
military way particularly. I think it is a combination of 
exercising a variety of means of influence, but that includes 
some fairly aggressive tactics in the South China Sea, as we 
have seen.
    I think one of the dilemmas they face, and Larry alluded to 
it, is whether they can successfully or whether they even want 
to make a transition from a regional power to a global power. 
They have been very tentative in looking outside their region. 
I thought their participation--and their participation is 
limited but still helpful--in the Somali anti-piracy effort, 
for example, is a very important step, it was a very important 
step for them. Their contribution to U.N. peacekeeping forces 
has been, I think, a significant contribution. Their efforts to 
reach out beyond their comfort zone, if you will, so far have 
been careful, cautious, and largely constructive. We do have 
situations obviously where their policies, Middle East being 
one that Carolyn talked about, have bumped up against ours in 
part because we have different interests, and those are areas 
where we are simply going to, I think, continue to have 
different interests for the long term.
    Ms. Bartholomew. All right.
    Mr. Shea. Clean up.
    Ms. Bartholomew. Yeah, I will do clean-up. You will see, we 
have 12 of us on this Commission, and we have a wide range of 
views, and you guys know what it is like marking something up. 
When we go through our report, it ends up for the most part 
being a consensus document, which means sitting in the room, 
hammering it out paragraph by paragraph, line by line, and 
sometimes word by word. So thank you for the opportunity. I 
think you will see that there are probably some differences in 
some of our views.
    I think just from sort of a bigger picture that I think 
that China is ultimately interested in retaking what it sees as 
a historic position in the world. I do think that it is 
necessarily going to be taking on a bigger global role, partly 
because of its search for resources, which it needs in order to 
build its economy the way that it wants to. I think that that 
will potentially and frankly inevitably end up challenging U.S. 
power in a lot of ways, sometimes intentionally, but sometimes 
it is just we will be playing in the same space.
    I know people like to give the Chinese Government credit 
for their work on counter-piracy. I guess I always need to say 
that they are there protecting their own interests, and we see 
the world fundamentally differently, which is that the U.S. 
sees that it has a global responsibility and it isn't just our 
interests that we are advancing.
    And the final thing that I really would like to note is 
that I am particularly concerned about what I see as China 
exporting a model of economic growth with authoritarian 
government, and we see that is certainly of interest in Africa, 
both in North Africa and in the rest of Africa and other 
places; people who have a tendency toward authoritarian 
orientation and see opportunities for doing economic growth in 
trade deals with China, I think is going to be a real challenge 
for us.
    Mr. Forbes. Well, thank you all, and the chairman and the 
ranking member both had commitments that they had to step out 
for, but we are ably represented by Congressman Davis, and I 
would like to recognize her for any questions that she might 
have.
    Mrs. Davis. Thank you, Mr. Forbes.
    I might just follow up on your question. Just if you could 
maybe characterize in some ways the differences on the 
committee and perhaps kind of the range of where people were 
coming in and what you think that was based on because we 
really appreciate the fact that you are here and the fact that 
there certainly are some differences. There are differences, of 
course, as you know, on this committee, and if you could give 
us a little more depth about that, that would be helpful.
    Ms. Bartholomew. We probably all have different views on 
that, too.
    Mr. Reinsch. Well, let me begin on that one. I think one of 
the advantages of the Commission is that the members bring to 
it different background and expertise. I said mine is primarily 
in international economic policy and trade, although I served 
in the Clinton administration as Under Secretary of Commerce 
for Export Administration and dealt with export controls and 
technology transfer.
    Others bring different experience. Larry is known to many 
of you, his long experience in the military. That has meant in 
effect the Commission approaches the issues differently based 
largely on the differences of background.
    A number of members of the Commission over the years, and I 
have served on it from its inception, have been primarily 
concerned with the military challenge that China poses for us 
in multiple areas, and our work there has shifted over time 
from, you know, nuclear power to naval power, satellites, 
cybersecurity, whatever.
    I think a number of the other commissioners, many of them 
on the Democratic side, frankly, have focused more on China's 
economic challenge and the challenge it presents to our 
industrial base, not only our defense industrial base but our 
manufacturing base, and our overall trade relationship to 
China.
    The mandate that Congress gave us when we began was to 
study both, and we have tried very hard each year to, you know, 
balance our hearings and activities so that we focus on both. I 
think it is fair to say that all of us, and you can all 
disagree with me if you want, but I think all of us see that 
China poses a lot of challenges for us. I use the word 
advisedly. In our first year, in our first report, the biggest 
debate we had was over whether to use the word ``threat'' or 
not, and I was one of those that preferred not to use the word 
``threat,'' but I think ``challenge'' is an appropriate word. 
China presents challenges all over the map, largely because of 
its size, and as Carolyn said, there are areas where we are 
going to bump up against each other or not deliberately but 
because we are both large powers that share space. So I think 
we try to navigate our way through that and try to identify 
hopefully in advance those areas where we would recommend 
Congress take a closer look at.
    Mr. Shea. Yeah, I think we are divided into two teams, 
security and economics, and my assessment is that there is 
general close to unanimity on the security side, and there is 
less unanimity on the economic side.
    One issue that the Commission has sort of advanced is 
examining the investment by Chinese state-owned enterprises 
into the United States, which at this point is relatively 
modest. I think most of us think there should be a heightened 
level of examination and concern about this. There are a 
minority of commissioners who will say, well, it is just like 
Japanese investment in the 1980s, but I think some of us, 
including myself, say, well, these state-owned enterprises are 
organs of the Chinese Communist Party. The leaders are 
appointed by the Organization Department of the Chinese 
Communist Party, the large ones. They, China is engaged in a 
massive economic espionage campaign against the United States. 
That didn't happen in the 1980s, I don't believe, by Japan. And 
China is building up a military that is designed to restrict 
U.S. access to the western Pacific. So--and it is all part of 
the larger Chinese enterprise. So we are called the Economic 
and Security Review Commission for a reason, because the two 
areas are closely linked.
    Ms. Bartholomew. Yes, it is a good and interesting 
question, and for those of you who don't know of us, I mean, as 
I said, there are 12 of us, 3 each appointed by the House and 
Senate Democratic and Republican leadership, so we come with 
different orientations and with different levels of expertise.
    I think in the 10 years that I have served on the 
Commission, I see that a number of people have sort of a strong 
economic orientation and some sense that economic strength is 
critically important to our national security and our national 
strength, and others have had a more what I would call 
traditional military and security orientation. But I do think 
that over the 10 years that I have served on the Commission, 
that we are seeing more alignment in places, and that was in 
some ways what we were established to do.
    I would say out of fondness with my colleague Dr. Wortzel, 
the first time I saw him really interested and then concerned 
about the economic issues is when we--manufacturing, when we 
looked at the defense industrial base and what was the ability 
of our manufacturing sector to be able to create components for 
the warfighter if we needed it, as things were being outsourced 
more and more, and what was the future of our tool and die 
industry, so there are places that we have really crossed over 
in terms of looking at the issues and bringing our own 
orientations but recognizing that there are a lot of challenges 
that we can all work together on.
    Dr. Wortzel. I came on to this Commission with a very 
strong orientation toward espionage, military developments, and 
looking very hard at Chinese long-term intentions, as their 
military literature defined it, and probably for the first year 
resisted almost attending a hearing that had anything to do 
with economics. But I was educated.
    And I have to say that if I had to pick out a single area 
where you might find tension and debate, it is over the 
orientation of the United States as a free trade and open 
trading nation and the challenge that is posed by dealing with 
an authoritarian state composed almost entirely of state-owned 
industries, populated with people who have to follow the 
dictates of a long-term plan by the Communist Party and how 
you--our tensions tend to be over how you maintain a free and 
open trading system with proper national security controls for 
exports and still meet the challenge of this controlled economy 
that has so many substitutes.
    Mrs. Davis. Thank you.
    Thank you, Mr. Chairman.
    Mr. Forbes. Thank you, Ms. Davis.
    Mr. Conaway is recognized for 5 minutes.
    Mr. Conaway. Well, thank you, Mr. Chairman.
    And ladies and gentlemen of the Commission, thank you for 
your work on this issue. The--just a quick brief look at your 
report shows at first blush a particularly juggernaut of China 
across all these spectrums. Could you also talk to us or did 
your Commission look at where is China's Achilles heels to be 
able to fulfill all of these grand schemes? You know, they have 
got a particular, almost visceral fear of internal unrest. They 
have got demographic issues, a one child policy. They have got 
a tremendous imbalance in marriage age females versus males and 
an economy that has got to grow faster than ours in order to 
soak up all the new interests. Could your Commission talk to us 
a little about those aspects of can China actually deliver on 
all of their grand schemes?
    Mr. Reinsch. Yes, I think that you have provided a very 
good list, and these are issues that we have looked at over the 
years. They have an enormous number of problems. They have a 
demographic problem, as you noticed, as you noted. In past 
years, we have spent a lot of time on their environmental 
problems, which actually is one area where cooperation between 
us and them can be useful, both in terms of technology sharing 
and because of the environmental benefits. If they clean up 
their air and water, that is good for everybody, beginning with 
their people, but it is also good for our people, because their 
air blows over in this direction, and people who represent the 
West Coast are familiar with that problem.
    They know it is a problem, and they are under significant 
domestic internal pressure to deal with it. It is visible every 
day, and if you go there, you will experience that.
    My own interest has been in their enormous economic 
problems. Right now, in the wake of the financial crisis, you 
know, virtually every country has economic problems. I, 
frankly, would much rather be us than them under the current 
circumstances. Their steps to--they are moving in the right 
direction economically, but they have, I think, a long way to 
go. They are taking baby steps, and they have the central 
dilemma of, how do you liberalize economically without opening 
the door to pressures for political liberalization, which is 
the central conundrum of how they are trying to operate?
    This regime--I am sorry, this administration if, I mean, 
President Xi and Premier Li, if anything, have given early 
indications of being tougher politically even than their 
predecessors and more resistant to political change and trying 
to address demands for political reform by fighting corruption. 
Unfortunately, in my view, corruption is kind of an integral 
part of the way the regime operates. They can't effectively 
deal with corruption without undermining the party's control, 
and that is their central dilemma. And they have to face the 
problem of trying to deal with that in that context. They have 
to deal with the fact that anything they do to liberalize the 
economy is inevitably going to create political pressures that 
are going to complicate their life. That, to me, is the biggest 
problem they have got.
    Mr. Shea. I think, Congressman, you and Chairman Reinsch 
have put together a nice list of the problems that China faces.
    The one additional vulnerability or two additional 
vulnerabilities I would see are the debt. We don't know how 
much debt is in the system. They had a huge stimulus program. 
They rely on local governments to finance infrastructure 
projects, so there is a huge amount of debt floating around in 
the system, and it is very opaque. We just don't have a good 
handle on how much outstanding debt there is.
    There is also, they don't have a strong culture of 
breakthrough innovation. They are very good at incremental 
innovation. We had a hearing last year on this subject, and 
they are very good at going on the manufacturing floor and 
trying stuff out in the marketplace, bringing it back, fixing 
it, but very much incremental. They don't necessarily have a 
culture yet of people challenging conventional wisdom, 
breakthrough thinking.
    Dr. Wortzel. I would like to address some of the things 
that we have had in previous annual reports that I think meet 
your question. Among them, the inability to master the 
metallurgy for jet turbine fan engines and marine engines, 
naval engines. They just can't do it.
    The attempts with difficulties in addressing air and water 
pollution that we have looked at in China, you know, there are 
real ways we could help them there.
    Dennis mentioned the problems in innovation, and then, 
finally, the weaknesses in their military and developing a 
cadre of personnel that are able to maintain a networked, I 
think I can use the acronym in this committee, C4ISR [command, 
control, communications, computers, intelligence, surveillance 
and reconnaissance] system that they know they need.
    Mr. Forbes. The gentleman's time has expired.
    And the ranking member has been a strong leader in this 
area, and he has returned, so the chair would recognize him for 
any questions he may have.
    Mr. Smith. Thank you, Mr. Chairman.
    I think you mentioned in your opening remarks a lot of the 
different areas where China has, you know, conflicts over the 
islands and, you know, differences with, you know, border 
disputes. What do you think are the most likely to cause 
problems in those areas? What is the greatest challenge, the 
country they are most likely to come into conflict with, and 
how might we go about trying to resolve some of those border 
disputes? What role should we play? What role should others 
play? Because that seems to be the area that, you know, is most 
causing China to be more belligerent as they, you know, advance 
territorial claims, you know, basically because they want the 
mineral rights, and they think they are the biggest kid on the 
block so they can go ahead and force their way in. What is the 
best way to defuse that?
    Mr. Shea. I think the best way is to have a strong U.S. 
military presence there. If Japan weren't operating under a 
security umbrella with the United States, I wonder what would 
be happening now. So I think the best way to preserve peace in 
the area is to have a strong, strong naval, U.S. naval 
presence.
    One thing that is very concerning is the possibility of 
something happening, an incident happening at sea that is 
unintentional. You probably, the committee has probably heard 
about the incident earlier this year, the two incidents 
involving the PLA Navy locking target, radar targeting on a 
Japanese vessel, naval vessel, and a Japanese helicopter. The 
Japanese showed tremendous restraint in not reacting to that. 
It seems as if--my impression is that that was more of a 
tactical decision made by the local PLA, the commander of the 
PLA Navy vessel, as opposed to some sort of great strategic 
decision. I think the PLA Navy is getting a little more 
sophisticated and aware of norms, maritime norms, but something 
like that could really--is really a problem.
    I have asked some Japanese interlocutors, do you have a 
phone where you call, can someone in the Japanese military call 
someone in the Chinese military directly and say, we have this 
situation at sea? We don't want this thing to blow out of 
control, and there is no mechanism for that type of 
consultation or communication. So I believe transparency, 
communication, strong U.S. military presence.
    Ms. Bartholomew. Yeah, I would join in that. I think 
internally one of the biggest flash points they have is 
Xinjiang and how that is handled and what ultimately happens, 
but as I look at China and the region, I am concerned about I 
guess what I would call incremental expansionism, which is that 
their moves in the South and East China Seas to sort of, they 
have these historic claims, but it is sort of they keep moving 
forward a little bit and not ever coming back quite as far as 
they had done before.
    And it is affecting the Philippines, as you mentioned, Mr. 
Smith, you know, the terrible tragedy that happened in the 
Philippines and what kind of role, but it is affecting Vietnam 
and Indonesia and Japan, and I think I certainly agree with my 
colleague that having a U.S., a strong U.S. presence in the 
region I think to rebalance both militarily and economically 
and diplomatically, it is going to be really important to try 
to defuse some of these things.
    Mr. Smith. One other question along these lines if I could, 
and China, the neighbors around China, one of the concerns is 
that as we, you know, go through some of the budget struggles 
that we have had and speculation about sequestration and all 
that, you know, the neighbors, they are going to recalculate 
basically that, you know, well, China is the only person, but 
it just seems to me that it is unlikely because the 
relationship with China is difficult, but how do you see that 
playing out? What are Vietnam, Philippines, how are they going 
to deal with the fact that we may not have as big a presence as 
we would like? I mean, I think we are going to have a presence, 
but how do you see that rebalancing?
    And I am sorry, Dr. Wortzel, you were going to dive in 
there, so I will let you.
    Dr. Wortzel. That is all right. I will start with that, 
sir. It seems to me that part of it depends on whether the 
surrounding nations are traditional U.S. alliance partners, so 
that extended deterrence and the confidence in U.S. extended 
deterrence is extremely important in the region. I think that 
Secretary Clinton and Panetta and Gates' remarks on the 
importance of resolving maritime disputes peacefully and that 
U.S. does have an interest there are extremely important, and 
the explanation and the situation with the Senkakus in Japan is 
very different than the situation with the Philippines and 
Scarborough Shoal, but your question on what is the most 
explosive, potentially explosive problem, in my view, is not 
the land borders, that could, you could have scuffles; the most 
potentially explosive or volatile problem is the positions that 
China takes on the range of activities that can be conducted in 
the South China Sea, East China Sea, and its own exclusive 
economic zone because that is where you get things like the EP-
3 incident. That is where you get the painting of Japanese 
ships with fire control radar. That is where you get the 
Invincible and Bowditch incidents, and those things can really 
spiral out of control.
    Mr. Reinsch. If I could add, I think that in terms of how 
others are going to respond, in the short run, Chinese 
behavior, which I would characterize as aggressive in the 
region, if anything, is driving them closer to us, and you have 
seen that.
    Mr. Smith. That would have been my logical conclusion as 
well, yeah.
    Mr. Reinsch. I think that eventually the Chinese are going 
to figure that out and will probably respond with more 
sophisticated tactics, but in the short run, it has helped us. 
There is at the same time and always has been in the region 
this lingering fear that the Americans are going to leave, and 
it is one of these things that no matter how many times every 
administration of the last six or seven has said we are not 
leaving, there is always still this undercurrent of fear that 
we might. I think it is incumbent on every administration, 
regardless of party, to continue to reassert our interests in 
the region and continue to take concrete steps to demonstrate 
our interest in the region.
    Frankly, from my point of view, the most useful thing the 
United States can do in the short run is to conclude the TPP 
[Trans-Pacific Partnership] negotiations, and Congress can 
approve the TPP.
    Mr. Smith. Right.
    Mr. Reinsch. A little lobbying here, and we can demonstrate 
to the region that we have an ongoing long-term trade and 
investment, which is important, and as well as military 
commitment to the region.
    Beyond that, I think you are going to see different 
countries reacting in different ways. The Vietnamese, who 
historically have had an adversarial relationship with China, 
haven't changed, and I think are focusing first on a search for 
more friends anywhere they can find them, including us, and 
will be looking at their own military buildup. The Philippines, 
for obvious reasons, which is having a terrible crisis they 
have to deal with in the extreme short run, I think is going to 
be doing the same thing.
    The countries farther south I think are--it is a little bit 
more complicated. Indonesia is facing an election and probably 
a change of administration. It is hard to predict what is going 
to happen there. But the picture will be different in each 
case.
    Mr. Smith. Okay. I think that pretty thoroughly answers my 
question. I will yield back, give some others a chance. Thank 
you, Mr. Chairman.
    Mr. Forbes. Thank you, Mr. Smith. The Chair now recognizes 
the chairman of the Readiness Subcommittee, Mr. Wittman, for 5 
minutes.
    Mr. Wittman. Thank you, Mr. Chairman. Chairman, members of 
the Commission, thank you so much for joining us today. I want 
to begin with Dr. Wortzel, and ask you a question about the 
readiness posture both of China and of the United States. As 
you know, President Xi has said that he is emphasizing the 
readiness of Chinese military forces. I want to know, in that 
perspective, how does China view the current situation in the 
United States with sequestration, the current military 
readiness challenges that we have? And where does that put 
China from the standpoint of their strategic thinking about the 
United States, not just in the Asia-Pacific, but how they are 
interacting across the globe?
    Dr. Wortzel. Well, they see us, their military thinkers and 
writers and political leaders, see us in a slow decline, and 
struggling to meet the obligations that we have cut out for 
ourselves. And they look at, you know, some things that might 
be effective operational tactics like air-sea battle and think 
that we may not be quite capable of doing those things with the 
proper number of forces.
    At the same time, I think they recognize that we really do 
have probably the best, most used, and most practiced military 
at operations in the world, and they don't have that. They have 
a lot of great operational doctrine, in part, modeled on ours. 
They have exercised it several times in what we would call 
unified commands, supported across the Armed Forces in an 
integrated way, but they have never really used it. And they 
are not practiced at using it. And I think that is going to 
take them quite some time.
    Mr. Wittman. Very good. I want to pose a question to the 
entire panel. Looking at the recent natural disaster there in 
the Philippines, looking at the U.S. response, which I think we 
are all very proud of, and we understand what we can do in that 
region of the world, and then looking at the Chinese response, 
what does that do for our relationships in the region, not just 
with the Philippines, but how other nations look at us? And 
what does it say about the Chinese limited response? And what 
does it say about Chinese capacity? Is it an issue of a lack of 
will to do this? Is it an issue of a lack of capacity? Where 
does that stand? And again, how is that viewed within that 
particular region?
    Ms. Bartholomew. Yeah. Well, I think, as you said, Mr. 
Wittman, that we can all be really proud of the way that our 
Armed Forces respond, both in the Philippines, I would say 
going back to the tsunami in Indonesia, and also the Tohoku 
earthquake in Japan. I think that that buys us an enormous 
amount of good will. It is not the reason that we do it, but it 
is one of the benefits that we do it. And I found it 
particularly interesting, as Mr. Smith mentioned, that China's 
first response on the Philippines was really pathetic. I mean, 
it is the only way to describe it. And I think that there was 
enough international concern and outcry that they have stepped 
up some. But, you know, people remember who is there and 
helping them. It is like constituent service in some ways, 
people remember who has helped them.
    So, you know, I know that one of the sort of shared 
military exercises is disaster response that is happening. I 
don't think that it is simply going to be the mechanics and the 
logistics of disaster response. I think that the Chinese are 
going to need to change their entire orientation in terms of 
what is their responsibility in the region when it comes to 
crises. But I am, like you, very proud of our armed services 
and the way that they always respond to these things.
    Mr. Reinsch. If I could add to that, I was struck on the 
financial relief side that a single American company, Philip 
Morris International, has contributed more to the Philippines 
than the Chinese, all of China has, which I think says 
something. One of the things, when I used to teach this issue 
years ago, one of the texts I used talked about the key element 
of hegemonic leadership globally is the willingness essentially 
to take one for the team, to take on, to bear costs in the 
interests of maintaining the system and helping everybody else. 
It is what the United States did after World War II, for 
example, to rebuild the system. And the costs were not that 
great at the time, but the rewards--not the direct rewards, but 
the rewards for the people of Europe were enormous.
    The Chinese continue to demonstrate over and over and over 
again that they haven't learned that lesson. Their responses 
tend to be tactical. They are mad at the Philippines for 
reasons that we all know. So their response is to demonstrate 
their irritation. Unless they grow beyond that, their capacity 
for leadership, either regionally or globally, is going to be 
limited.
    Mr. Wittman. Okay. Thank you, Mr. Chairman. I yield back.
    Mr. Forbes. Ms. Bordallo, the ranking member of the 
Readiness Subcommittee, is now recognized for 5 minutes.
    Ms. Bordallo. Thank you very much, Mr. Chairman. And I 
thank all of our witnesses for being here today to give us 
further information. My first question is in regards to how 
China views our selective hardening and dispersal plans. As 
your report has discussed over the past year, China has 
enhanced its anti-access/area denial [A2/AD] capabilities with 
certain stand-off weapons systems. So part of countering that 
A2/AD threat is selective hardening and dispersal of Air Force 
facilities in the Pacific Command area of responsibility. How 
important would you say are these actions to countering the A2/
AD threat? And what message does this send China? How does this 
change their calculations?
    Dr. Wortzel. I think that we absolutely need to harden and 
disperse. And it is critical to the survival of our military 
assets. But I think what it will do is force the Chinese to 
improve their ability to mass weapons on a target, to use 
intelligence, surveillance, and reconnaissance to identify 
hardened targets, and to improve their ability for precision 
strikes on those targets. So hardening is one part of what we 
need to do. It seems to me that the second part are ballistic 
missile and cruise missile defenses. That the real answer, in 
my opinion, to massed warheads, whether they are coming from 
ballistic missiles or cruise missiles, is you really have to 
move forward on directed energy, whether it is ship-based or 
land-based or air-based laser and things like that. So we 
really don't have adequate--in my opinion, adequate responses 
to what they can mass in terms of cruise missile and artillery 
fires.
    Ms. Bordallo. Thank you. I have another question. It is 
also for any of the witnesses. There has been a lot of 
discussion about the outcomes from the third plenum session of 
the 18th Congress in Beijing. There has been a lot of focus on 
the development of the national security council-like entity, 
although we wait for the details of how this organization is 
going to be structured, as well as the announcement that China 
was easing its one child policy and closing their detention 
centers.
    Now, I know it is only a few days since the session 
concluded, but I am wondering what all these actions in total 
paint. Tell us. Can you comment on their actions? Is it serious 
concern among the political elites about growing internal 
instability in China? And is there a way of trying to more 
effectively coordinate government, but also defuse political 
hot button items?
    Mr. Reinsch. Let me begin, if I may, Ms. Bordallo.
    Ms. Bordallo. Yes.
    Mr. Reinsch. First, just to note, these events all happened 
after our report, so obviously, they are not covered in the 
report. We did produce a detailed memorandum on the plenum 
document and the document that appeared last Friday as well. We 
have circulated it to members of the committee, I believe. If 
we haven't, we are going to. And it is also on our Web site. So 
I would encourage you to have your staff to take a look at that 
for greater detail. The initial document was disappointing, 
partly because it was at 40,000 feet, and managed to say 
several different things in different directions 
simultaneously.
    I think that we would probably say--and we haven't had a 
chance to discuss it collectively--but I think that our view 
would be that the document they provided on Friday has a number 
of promising elements to it. The biggest question always, as I 
mentioned in my opening statement, is whether they will 
actually be able to implement these things. You know, the old 
slogan that mountains are high and the emperor is far away is 
as true now as it was 5,000 years ago. These things often don't 
happen at the local level.
    And in terms of, you know, public unrest, as you mentioned, 
some things that will be very popular, like expanding land use 
rights for farmers, for example, to prevent arbitrary seizures, 
and dealing with the hukou system, the urban and residential 
permit system in some modest ways, whether those are 
implemented or not really is going to be up to local 
authorities, and not the national authority. And we simply have 
to wait and see what happens.
    The sign from the document is entirely a positive one. In 
some larger areas, I think their steps forward are modest. Even 
assuming they are implemented, they will be modest. I think the 
debate amongst economists is going to be whether they are 
heading for a hard landing or a soft landing. That the course 
they have embarked upon is untenable for the long term 
economically. But whether they are going to be able to sort of 
skate through it or suffer a more serious setback is I think an 
issue that economists are going to be debating. I think I will 
stop there.
    Mr. Shea. Ms. Bordallo, you asked about the creation of a 
national security committee. One thing of interest in that is 
it also covers domestic security. And you asked the question 
are they concerned about internal instability? And the clear 
answer is yes. Now, we also have a memo on this, which we can 
share, share with you as well, prepared by our very crack 
staff. But some have speculated that the positioning of 
internal security as a responsibility of this national security 
committee is an effort to reduce the power of something called 
the politics and law leading small group--they do everything by 
small groups in the Politburo--which has overseen the police, 
judicial system, and civilian intelligence operations within 
China.
    And there is an individual, Zhou Yongkang, who used to run 
that, a former member of the standing committee of the 
Politburo, whose colleagues are being investigated in 
PetroChina and other areas.
    Ms. Bordallo. Well, thank you very much. My time is up. And 
the chairman is nodding at me. I would like to hear more.
    Mr. Forbes. Thank you. And as you guys know, you work very 
closely with Congressman Bordallo, so I am sure that you can 
give her that additional information. Dr. Heck is recognized 
for 5 minutes.
    Dr. Heck. Thank you, Mr. Chairman. Thank you all for being 
here. Recognizing that we are in the Armed Services Committee, 
I am going to take advantage, I want to take advantage of 
having you before me and go on a topic that is not related to 
the military. And that has do with the importance of gaming to 
Macau. As you may guess, I represent southern Nevada.
    Mr. Reinsch. That is not unexpected.
    Dr. Heck. So with 87.5 percent of total government revenue 
coming from gaming from Macau, allowing them to accumulate the 
third largest budget surplus as a percentage of GDP [gross 
domestic product], and surpassing Las Vegas as the world's 
largest gambling market, I wonder what you think the greatest 
implications are for Macau on the U.S. gaming industry.
    Mr. Reinsch. This is an issue that we have studied for the 
first time in the Commission's history. We had not addressed 
Macau for the previous 12 cycles. So this was new for us. And 
as you know from the statistics you cited, it is impossible to 
study Macau without studying gaming, since it is such a 
significant part of what goes on there. We had testimony from 
your regulators, from Federal Treasury authorities and 
regulatory authorities, and also from experts. We also ended up 
meeting with representatives of two of the American casinos 
that operate in Macau at great length. And they provided us 
with a lot of information about the procedures that they follow 
in the Macau casinos to insulate themselves, in an attempt to 
insulate themselves from some of the problems that our report 
identifies. I think the report speaks for itself on this. We 
felt that the way that Macau is regulated, the way it is 
structured, and the way it works, it interacts with Chinese law 
in both the prohibitions on gambling in the rest of China, 
except for lotteries, but at the same time, the prohibition on 
collecting gambling debts in the rest of China, promotes a 
culture that contributes to organized crime and money 
laundering because of capital controls on moving money from the 
mainland to, well, anywhere, but in this case, Macau.
    There is an extended record on this subject dating back to 
congressional investigations 20 years ago before the Senate 
Permanent Subcommittee on Investigations that looked at various 
aspects of this issue that has suggested that money laundering 
and organized crime are significant problems. There was, on the 
international front, the issue, the case a few years ago of 
Banco Delta Asia, which had ties to North Korea, and there were 
questions then about flow of funds into and out of North Korea 
that would enable them to do some of the things that our 
government has been objecting to for a long time.
    We concluded that this was an issue that needed more work. 
And the essence of our investigation--I am sorry, the essence 
of our recommendations to the Congress is that this is 
something that needs to be looked into in more detail by the 
authorities that have basically more expertise and more assets 
than we do.
    Dr. Heck. Were you able to come to any conclusions or ideas 
of what this would mean? What Macau's success would potentially 
mean to the U.S. gaming industry?
    Mr. Reinsch. I wouldn't say that--we did not come to a 
conclusion with respect to the--specifically with respect to 
the activities of the American casinos there. We didn't 
encounter any evidence that suggested that they were complicit 
in illegal activities. We concluded, and they, I think, would 
acknowledge, that it is a very difficult situation doing 
business there because of everything I just described. I think 
that beyond that, I think we were not in a position to go 
farther. But Carolyn may want to say something more about it.
    Ms. Bartholomew. Yeah. It was--I think we come into this 
with a lot of different viewpoints on this Commission. And I 
think, Dr. Heck, that, you know, when you look at the 
percentage of revenues that the three U.S. companies who are 
involved in gaming in Macau are getting from Macau, it does 
raise some questions. We did not deal with those questions 
specifically. But you know, what, 60 percent or 70 percent of 
the revenues of some of these companies is now coming from 
Macau gaming. I came away from the hearing that we had and the 
additional information concerned about the ability of 
regulators to get access to the kind of information that they 
need to ensure that the U.S. gaming companies that are working 
in Macau are not being adversely affected by the organized 
crime that we know permeates the industry generally. But I 
think Nevada needs to be thinking about this and looking at 
this effort.
    Dr. Heck. Thank you. Thank you very much, Mr. Chair. I 
yield back.
    Mr. Wilson [presiding]. Thank you very much, Dr. Heck. We 
proceed now to Congressman Austin Scott of Georgia.
    Mr. Scott. Thank you, Mr. Chairman. Ma'am, gentlemen, thank 
you for being here today. And I was glad to hear you speak of 
our friend Taiwan, and making sure that they know that we are 
going to continue to be their friend. I had the opportunity to 
visit there a year or so ago with some of my staff and discuss 
different issues with regard to trade relations for agriculture 
as well as military-related issues. My question gets back to 
kind of that whole region with regard to China. They have a lot 
of borders with other countries, countries that we have been 
involved in, countries that we are involved in because of 
terrorism. Those terrorists don't seem to want any type of 
trade with any outside country. So my question gets back to, if 
we look at Afghanistan, and Al Qaeda, the other terrorist 
groups that operate in that region, China essentially stayed 
out of those conflicts that we were engaged in. But now, as 
they try to expand trade into those other countries, are they 
starting to become more aware of--that might not be the right 
term. What approach are they taking to terrorism? And are they 
starting to see increases in threats from Al Qaeda and others 
to them?
    Mr. Reinsch. We have looked at this in the past. We didn't 
spend a lot of time on it this year, Mr. Scott. Let me defer to 
Carolyn in a minute. I think what I would say is that they are 
acutely aware of it, because they have a problem in Xinjiang in 
western China, a problem primarily with the Uighurs, which are 
of the Muslim culture. So the Chinese are very sensitive to it. 
And again, as always with China, for reasons of self-interest, 
not a larger interest. And their concern about terrorism 
elsewhere is spillover primarily, and people either moving into 
China, moving into Xinjiang and causing the same troubles that 
they are causing somewhere else, or providing some aid and 
comfort flowing back and forth across borders. That has let 
them in some limited circumstances to be cooperative and share 
some of our concerns with fighting these efforts in other parts 
of the world, again, because they see a direct relationship to 
them.
    They have also begun to, at least in one notable case, move 
into Afghanistan with a significant investment, economic 
investment, a mine that they are building. I don't have a lot 
of current information on how that is going, and whether it has 
been subject to terrorist attack, or whether it has become a 
volatile political issue. Somebody else might want to comment 
on that. So, you know, they are sensitive, but they are 
sensitive, again, for very specific internal reasons.
    Mr. Shea. I will just make two observations. China is the 
largest foreign investor in Iraq's oil fields today. I don't 
know if the committee knows that.
    Mr. Scott. Say that again.
    Mr. Shea. China is the largest foreign investor in Iraq's 
oil fields. This is outlined on page 301. We have some 
information about that. Secondly, China, this is an issue we 
looked at a couple of years ago, owns--Chinese entities, state-
owned enterprise owns the largest copper mine in Afghanistan. 
And it is called the Aynak mine. I have not kept up to date as 
to whether it is up and running or--I think it is the single 
largest investment in natural resources in Afghanistan's 
history.
    Mr. Scott. And if I may, before he answers, and that is one 
of the issues that I have a hard time with as a member of the 
Armed Services Committee, just before you answer please, ma'am, 
because we are sending our men and women over there to provide 
security when it is China that is receiving the economic 
benefits and the industrial relations in that country. Quite 
honestly, they should be paying the cost, not the United States 
taxpayer and the U.S. soldier. Ma'am.
    Ms. Bartholomew. Mr. Scott, I think that is a very 
important point that you made, which is that our young men and 
women died in Afghanistan and in Iraq.
    Mr. Scott. Still are.
    Ms. Bartholomew. And the Chinese are getting economic 
benefit out of both of those. So I think that is an important 
issue, an issue of concern. I just wanted to go back and 
revisit on the issue of terrorism, I think it is important to 
recognize that in China, where the people of China are so 
repressed, the Chinese Government has a tendency to indicate--
to characterize any uprising or any attempt to try to challenge 
them, they sometimes call it terrorism. And so it becomes 
complicated in terms of understanding and looking at it.
    And then also, and I don't know, Larry, whether this was 
actually ever really documented, but particularly in the 1990s, 
there was some sense that the Chinese might have been providing 
missile technology and some nuclear technology and things to 
Pakistan in this kind of a, we will help you, but you make sure 
that you keep your problems outside of Xinjiang Province. This 
kind of, I doubt it was ever actually stated that way, but some 
sense of some of their dealings in parts of the world where 
some of these problems are kind of a, almost a quid pro quo. I 
don't know that there was actually any ever documentation of 
that, but I think that there was some concern among analysts.
    Mr. Scott. I am out of time, so if you speak, be very 
brief.
    Dr. Wortzel. Their concern is pan-Turkic and Uighur 
separatism. And they will permit literally anything to go on 
inside a country, regardless of who else it threatens, and 
assist any country with weapons, as long as they think they are 
getting a quid pro quo in controlling what they see as pan-
Turkic and Uighur separatism.
    Mr. Scott. Thank you for those answers. Thank you for the 
work you are doing and for being here.
    Mr. Wilson. Thank you, Mr. Scott. We now proceed to 
Congresswoman Tammy Duckworth of Illinois.
    Ms. Duckworth. Thank you, Mr. Chairman. My question, I am 
not sure which of you would be the right person to answer, has 
to do with China's cybersecurity, their cyber attacks and how--
I would like a greater discussion on the Chinese Government's 
role in cyber theft and espionage using Chinese companies or on 
behalf of Chinese companies.
    Ms. Bartholomew. I was just going to say we are lucky we 
have one of the country's experts on that issue sitting right 
here at the table, Dr. Wortzel.
    Dr. Wortzel. I think the three things that have really 
helped document that this, for the most part, is a centrally 
directed effort, are the two reports by the Northrop Grumman 
Corporation for our Commission, and the Mandiant report that 
went as far as to identify an organization of the Third 
Department of the People's Liberation Army that does this.
    So it is an extensive effort. It involves the electronic 
warfare and countermeasures department of People's Liberation 
Army that cracks into computer systems, takes control of them, 
documents important nodes, and then they turn it over to the 
Third Department, the equivalent of our National Security 
Agency, which extracts information and can replace information, 
so that a large part of it is government directed.
    Ms. Duckworth. And is that information then turned over to 
their corporate entities? Cybertheft?
    Dr. Wortzel. Absolutely. It goes right to corporate 
entities. It is used to short-step research and development, it 
is used to supplement research and development, particularly in 
areas that they are unable to do themselves. And it supports 
directly their own comprehensive strategic industries that they 
want to develop.
    Ms. Duckworth. What about the opposite flow of information? 
That is, I have Huawei in my district. One of their North 
American locations is actually in my district. I have real 
concerns, especially with them and ZTE and the reports that 
have been generated about how they are actually turning over 
information from their work with U.S. entities as 
telecommunications corporate networks back to the Chinese 
Government. Do you still that that is still existing, that the 
information is actually flowing from their corporate entities 
back to----
    Dr. Wortzel. When the Director of National Intelligence 
sees that as a problem, the commander of the U.S. Cyber Command 
sees that as a huge problem, our Commission sees that as a 
problem, and despite all the denials, that the genesis of some 
of these companies out of the People's Liberation Army says to 
me that there is very close cooperation.
    Ms. Duckworth. I know the DOD [Department of Defense] is 
still putting into place rules concerning country of origin for 
some of the components that are being used, not just in U.S. 
munitions purchases, but also for telecommunications and the 
like. Is there anything else that we here on this side on the 
dais should be thinking about that would help further protect 
our national security in terms of, you know, I am thinking 
about procurements. Because this is not just us dealing with 
the Chinese Government, this is actually with their corporate 
entities that are providing services and goods to U.S. 
companies.
    Dr. Wortzel. Well, first of all, given the structure of 
power in China and the penetration of the Chinese Communist 
Party into literally all industries, I don't think you can 
separate any industry in China from the government. I think the 
Department of Defense is beginning to recognize that there are 
problems, particularly in information technology supply chains. 
And they are really fighting internally over the Federal 
Acquisition Regulations on what they can do to provide 
security. The State Department had the same problem. So I think 
the National Defense Authorization Act of 2011 in what was it, 
section 806?
    Ms. Duckworth. 806.
    Dr. Wortzel. 806. They are just beginning to act on that. 
So I don't think you can let them off the hook on that.
    Ms. Duckworth. Are there other departments? I am sorry, Mr. 
Shea.
    Mr. Shea. I was just going to recommend a book to you----
    Ms. Duckworth. Okay.
    Mr. Shea [continuing]. By James Mulvenon, and Anna Puglisi, 
and William Hannas called Chinese Industrial Espionage: 
Technology Acquisition and Military Modernization. And it is a 
comprehensive examination. It is footnote 15 in one of our 
chapters. But it is a comprehensive examination of how the 
Chinese use technology theft and transfer it, they have 
mechanisms and organizations and structures to transfer that 
information to their commercial enterprises.
    Mr. Reinsch. And you ask what you guys could do about it. 
We have a recommendation simply that you encourage the Pentagon 
to move faster on the 806 issue. What is happening is 
directionally correct, but it is very slow.
    Ms. Duckworth. Thank you. I am out of time. Thank you, Mr. 
Chairman.
    Mr. Wilson. Thank you, Congresswoman Duckworth. And we now 
proceed to Congressman Rich Nugent of Florida.
    Mr. Nugent. I thank you, Mr. Chairman. And I do appreciate 
the candor of this panel. While I heard, you know, the 
terminology challenges versus threat, but when you look at the 
spectrum of what is going on with China, particularly as it 
relates to our allies in the China Sea area, what we have done 
in Afghanistan and Iraq and how the Chinese have moved in 
behind us, even though it was our sons' and daughters' blood 
and our treasure that went there to pacify or correct issues 
going on, I wonder, I mean--and then you hear about the cyber 
threat that we face from China. And it is not just--I mean.
    And I think you have articulated very well that the 
government and its industries are one and the same. But it goes 
even further than that in regards to the cyber threat as it 
relates to our national security, particularly as it relates to 
our military. And I would really like to hear about the 
relationship between China's cyber attack capability and their 
military advancements over the years, particularly as it seems 
to be that what they are developing specifically counters some 
of our abilities. And I think it has become more of a threat 
than it is necessarily a challenge. And I appreciate the 
wordsmansmith of it. But if any of you would like to talk to 
that issue.
    Dr. Wortzel. Well, first of all, I think you have to look 
at the way they think about us. When they analyze their 
security environment and the general trends, which is what they 
call it, they see us as the main threat. That is their writing. 
And Russia and India and Japan are secondary threats. So they 
have got to deal with the main threat. And they see us as 
heavily dependent on space and cyber over really extended 
distances of lines of communication.
    Now, for us, we tend to put these things into little cones. 
You know, we have got a Cyber Command and a Space Command. 
Hopefully, they are working together at STRATCOM [U.S. 
Strategic Command]. But the Chinese have adopted an approach 
that was very close to what the Soviets used in radio 
electronic combat.
    So across all the military services, and across all the 
domains of war they have integrated the use of counterspace, 
their own space systems, cyber penetration, and precision 
fires. They practice it several times a year. And they are 
still struggling with making it more effective. But it is a 
comprehensive approach that is designed to attack what they see 
as our greatest weaknesses and our dependence on all of these 
command and control and surveillance systems.
    Mr. Nugent. And it would seem that Mr. Scott hit on an 
issue that is near and dear to my heart, having had sons both 
in Iraq and Afghanistan. It seems that, you know, we could 
force an effort--and the Chinese, you have to give them credit, 
they are pretty sharp actors to come in behind us, and then on 
an economic viewpoint, and I think it has been well discussed 
by this committee, is that they do things, obviously, that are 
in the best interests of China and could care less about 
anything else. So how do we counteract that? I mean, how do we 
counteract the ability, when we go in, let's say, just in 
Afghanistan while we are still there, what do we do?
    Dr. Wortzel. I think, first of all, they were there before 
us. They didn't care about the Taliban.
    Mr. Nugent. Right. And I think they can operate, obviously.
    Dr. Wortzel. They are happy to operate in these 
environments. And they won't take a necessary security 
interest--I mean, the one thing you could do that would get 
them involved is stop protecting their areas. They start losing 
people, they start losing equipment, they have people captured, 
and what they are developing already as a force insertion 
capacity for hostage rescue, they will have to put into effect. 
And then they will have their own little problem.
    Ms. Bartholomew. I would just add that I think that our 
diplomacy needs to be perhaps more, I will use the word 
``vigorous'' in ensuring that American companies have access to 
some of these opportunities too.
    Mr. Nugent. Well, I am out of time. And I want to thank 
this panel and the committee for holding this briefing. It is 
very important to all of us to hear what you have to say. Thank 
you very much. I yield back.
    Mr. Wilson. Thank you, Sheriff Nugent. And we now proceed 
to Congressman Joaquin Castro of Texas.
    Mr. Castro. Thank you, Chairman. And thank each of you for 
coming and joining us this morning, and for your testimony. 
Sometimes when you are this low in seniority, a lot of the 
great questions have already been asked. Plus, I was late to 
the hearing. So if you have already been asked this question, I 
apologize. But I am reading through the executive summary on 
this report, and on page 10, it describes the U.S.--I am sorry, 
on page 4 first, it describes the U.S.-China trade deficit over 
the years. And as you can tell, it went up markedly in the 13 
years, or actually the 12 years between 2000 and 2012, from 
about, it looks like about $90 billion to over $300 billion. 
And during that time our economy has been up and down, we have 
had a Republican and a Democratic President, and actually a 
Democrat and then a Republican and then a Democrat. So how do 
you all account for that incredible growth?
    Mr. Reinsch. Well, I think in the first instance, the 
single event--well, there were two events, I suppose you could 
say, that triggered it. First was the decision by the Chinese 
some years earlier to embark on their own program domestically 
of economic liberalization and growth. This was the 1978 
decision by Deng Xiaoping and others to essentially change 
policy and to abandon a lot of the Maoist policies, and to put 
China on a different course.
    It took a long time for that to evolve and develop and turn 
them into an economic unit that was capable of exporting to the 
extent they are now. But that is where that began. The other 
seminal event, if you will, was when they joined the WTO [World 
Trade Organization] in 2001. That created a network of, first 
of all, lower tariffs of our exports going there, but also, you 
know, their exports coming here were reduced.
    Mr. Castro. And I would point out what is a little bit 
confounding is that on page 10 it shows, for example, that our 
agricultural exports have actually increased at the same time. 
So it seems as though we have been sending more stuff over 
there, and yet that trade deficit just keeps getting bigger.
    Mr. Reinsch. Yes. And actually, they are, I think--we 
export more to them now I think than anybody else, except maybe 
Canada. But their imports to the United States have been 
growing faster than our exports to China. So the deficit 
continues to get worse. There are two bright spots. The main 
one, our agriculture, although if you look at the rest of our 
report, we have--we think we could be doing a lot better in 
agriculture. They focus their purchases largely on soybeans, 
commodity animal feeds, and not in some other areas. They 
continue to create market access barriers for our meat, for 
example, beef, pork, and poultry. There are significant issues 
there. We also do fairly well in services, but also encounter 
significant obstacles at their end to the use of U.S. services.
    Ms. Bartholomew. Mr. Castro, this is one of the issues on 
which I think some of the members of this Commission might not 
necessarily agree on sort of causes and effects. From my 
perspective, the Chinese Government certainly did not open 
their markets the way that those who in the U.S. Government 
promoted China's accession to the WTO was supposed to happen. 
And so when you look at the numbers, and if you go back to 1989 
we had a minuscule trade deficit with China, and it grew over 
the course of the 1990s, but it took off exponentially after 
China's accession to the WTO. And so there was this promise 
that was made that this was supposed to be opening up new 
opportunities for American goods and services, and it just 
hasn't turned out that way. And it is a huge problem for our 
economy.
    Mr. Reinsch. And as she said, we don't all agree with that 
analysis.
    Mr. Castro. Sure. And then I would ask you this as a 
general question because it is one that I have been thinking 
about. China's economy is still markedly smaller than ours, 
right? You have a lot of folks there that live in poverty. You 
don't have the same middle class that we have. But in your best 
estimation, in about 45 seconds, what--if they stay on the same 
course, how long would it take China to catch up with the 
United States?
    Mr. Shea. I will just say that they can't stay on the same 
course. This investment-led, export-led economy, I think, is 
ultimately unsustainable. And the challenge for China is to 
move their economy more towards a consumer-oriented one.
    Mr. Reinsch. If they do everything right, which is what 
Dennis just said, I agree with him, how long will it take until 
they reached the level of per capita income--and I say per 
capita, because that is the important distinguishing feature 
here--where we are now, I would say probably 20, 25 years. But 
then we will have gone beyond that by that time.
    Mr. Castro. Sure. Thank you all.
    Ms. Bartholomew. Just note that a growing problem they have 
with inequity. So per capita income is important, but who is 
getting the benefit out of the growth is going to be really 
important, too.
    Mr. Castro. Thank you all very much.
    Mr. Wilson. Thank you, Congressman Castro. And following 
the roster, I now recognize myself. And I want to thank each of 
you for your extraordinary work on the Commission report. It is 
of particular interest to me. I grew up with a great 
appreciation of the Chinese people. My dad served in the Flying 
Tigers during World War II. And so all my life, I heard how 
industrious and how hardworking the people of China are. And 
then I appreciate, I have been to Taipei to see the remarkable 
recognition of the Flying Tigers, and appreciation by the 
Chinese people of the service of the American military.
    I had the opportunity to serve on a delegation with 
Congressman Curt Weldon to Beijing. We were at the presidential 
compound with President Jiang Zemin, where as I was introduced, 
he yawned when I was introduced as a Member of Congress, but he 
stopped the meeting when it was announced Joe is a son of a 
Flying Tiger. And so then he announced the American military is 
revered in China, which was then front page of China Daily the 
next day.
    And then I have seen as recently as last month I was at the 
Chinese embassy for the recognition of the new museum which is 
being built at the site of the Flying Tigers operations cave in 
China. Again, recognition of affection and appreciation. So I 
am really hopeful long term indeed that we can have a positive 
relationship.
    With that in mind, too, I have also had the opportunity, 
with Congressman Jeff Miller of Florida, to visit Pyongyang. We 
saw the enigma of this country, the bizarre circumstance. What 
is the relationship, each of you, to North Korea at this time 
of the People's Republic?
    Dr. Wortzel. Well, to start, they do have a peace and 
friendship treaty that, at least People's Liberation Army 
officers have said still contains a secret protocol to provide 
for security support. So it is very close. And as frustrated as 
they may be with some of the behaviors there, they are still 
doing what they can to prop up North Korea with fuel and food. 
Although the government says it won't sell weapons, they tend 
to treat their government-owned industries, state-owned 
enterprises that may be engaged in weapons trade as separate 
entities that they can't control. So I think it is a frustrated 
relationship. It is certainly not one where they can control 
what North Korea does. But they won't let it collapse.
    Mr. Shea. I would say, as Larry, Dr. Wortzel mentioned, 
their key objective is stability. They won't let the regime 
collapse. Why do they want stability? They want it because they 
don't want a refugee problem around the border. They don't want 
thousands of North Koreans coming into the country through the 
border. They don't want a U.S. ally, potential U.S. ally on 
their border. That could be the case if the current regime 
fell. And I think there is some business interests that--
resource development in North Korea, particularly at the 
provincial level in the provinces near North Korea, they have 
significant business interests in North Korea that affect--
those interests may affect Chinese policymaking.
    Mr. Wilson. And as we go to another country, it just struck 
me that the relationship China has developed with South Korea 
has been so mutually beneficial. I can't even think of trying 
to compare how South Korean investments, the jobs created, the 
economic opportunity, and then the bottomless pit that they are 
in in North Korea. I also had the opportunity last year, with 
Congresswoman Bordallo, to visit Vietnam. It is extraordinary 
to see the relationship of the people of Vietnam to the people 
of the United States. And a great concern about China. So what 
is the relationship between China and Vietnam?
    Mr. Reinsch. We were there in 2009, I guess, and I was 
struck that 2 weeks before we got there, they had, after 30 
years of negotiation, settled the land border with China. They 
had fought a war with the Chinese in 1979 over that question. 
It took them 30 years to settle the border. There is a long, 
multi-thousand-year adversarial relationship between the two 
parties, and a great deal of suspicion in Hanoi about Chinese 
intentions. And I don't see that changing any time soon.
    Ms. Bartholomew. Yeah. We haven't talked at all today about 
some of the challenges certainly that Vietnam is facing because 
of China. Things like water. The Mekong River serves as a rice 
basket. And as the Chinese dams upriver, it is having an impact 
on all of the countries downstream. So there is that. There is 
the issues in the maritime arena that the Vietnamese are 
dealing with. We had, as my chairman said, you know, we had a 
very interesting visit when we were there. I think that the 
Vietnamese were particularly pleased to see people from the 
United States coming over and talking to them about these 
issues. And I remember asking one of the generals there, you 
know, I understand that you want diplomacy to solve these 
problems. But what are you going to happen if diplomacy fails? 
And he looked and he smiled very politely and he said to me, 
well, as you well know, we know how to fight and win. I took 
that away as something.
    I mean, I think we would all hope that there aren't any 
conflicts that take place on this. But that is going to really 
require the Chinese Government, too, to make some concessions 
and be concerned about what its neighbors downstream are 
thinking.
    Mr. Wilson. Well, thank you all. And again, who would ever 
imagine a positive relationship between the people of Vietnam 
and the United States. Really, I saw a deep friendship in my 
role to work with MIA-POW [Missing in Action-Prisoner of War] 
issues. We now proceed to Congressman Mark Veasey of Texas.
    Mr. Veasey. Thank you, Mr. Chairman. I wanted to ask you 
about just the Chinese culture overall as it relates to 
cyberspace and some of the things in the past that they are 
known for, like imitation and what have you. Has the culture in 
China changed enough to where they know that a lot of the more 
serious cyberspace issues are very serious? The reason why I 
ask that question is that I recall a story that I read many, 
many years ago about an American executive from Detroit that 
happened to be in China, and they saw a car that looked just 
like, I believe it was a Jeep Cherokee. And he said, hey, 
that--at first the guy was like, hey, that looks like our car. 
He was excited. Then when he got closer, he noticed that the 
emblem was slightly different. And the guy explained to him who 
was on the tour with him that, no, that he should see that as--
you know, imitation is the highest form of flattery, that he 
should be impressed by that.
    I mean, do the Chinese seriously understand that a lot of 
the hacking and the cyberspace issues that have been going on, 
that is really like serious business?
    Ms. Bartholomew. You know, there are some people who 
believe that Chinese intellectual property protection will 
happen as the Chinese become more inventive and have things to 
protect, though there is this whole thing that is going on 
about patent filing. I think you have to look at the economics 
of this. And I just wanted to go back to something that Ms. 
Duckworth asked. The IP [intellectual property] Commission 
report assesses that the damage to the U.S. economy annually 
from intellectual property theft is $300 billion a year. Now, 
that is from all places. But they also assess that about 50 to 
80 percent of that is coming from China. That is a loss to us 
of $150 to $200 billion a year. And it has been the way that--
one of the ways that the Chinese Government has built their 
economy.
    I wish I could say that things are getting better. But they 
have been able to bypass all sorts of R&D [research and 
development] costs. So why would they stop doing this when they 
get this economic benefit, which is a huge cost to our own 
companies? We might have some differences here.
    Mr. Reinsch. Well, no, I would put myself in the category 
of this is a situation that is get getting better, but it is 
getting better very, very slowly and unacceptably slowly. One 
large American company at one point reported that--they were in 
the software business--the rate of piracy of their product had 
fallen from 94 percent to 88 percent. Now, I don't construe 
that as a victory. On the other hand, it is directionally 
correct. I think the more interesting piece of data, and I 
think that it is not--I think it is more than what some people 
believe, I think it is really axiomatic that countries get 
interested in protecting IP when they have some of their own to 
protect, because then they have constituencies within their own 
country demanding that their own government take steps.
    One of the interesting things that has happened there is 
that there has been a kind of an explosion of intellectual 
property litigation in China. I think 95 percent of the cases 
are between Chinese parties suing each other, or one suing 
another for exactly the thing you are talking about. But it is 
all about Chinese IP, it is not--you know, it is not Ford 
suing--I mean, there is some of those, too. But to me, this is 
a good sign, because it has forced the Chinese Government, one, 
to improve their court system and to develop. It is still not 
an independent rule of law system, but at least they are 
developing now an infrastructure that is able to take these 
cases and decide them in decent periods of time. And they are 
developing an infrastructure, and they are developing--they are 
responding to a demand that is domestic for better practices 
here. It is going to take a long time.
    Two years ago we did a road trip from Nanjing to Shanghai 
and stopped along the way at Suzhou and Changzhou and met with 
American companies there, and asked every single one of them do 
you have an IP problem? And everyone but one said yes. The one 
that said no said, well, of course we don't. You know, we are 
number four in the marketplace. They are all stealing from 
number one, which was a German company. What intrigued me about 
that, though, was a couple of them said we have solved our 
problems simply by getting our lawyers to send cease and desist 
letters to the offending Chinese party. I thought that was 
extraordinary. That was only a couple of cases. But, you know, 
baby steps is something I said earlier. This is moving in the 
right direction. It is going to take 20 years, you know, before 
it reaches an acceptable level.
    Ms. Bartholomew. I want to add one thing, though, which is 
that, again, my chairman is talking about big companies that 
might be able to take this 85 percent hit on intellectual 
property. But our innovative, small and medium enterprises in 
this country whose IP is being stolen can't survive that kind 
of theft. They can't afford the lawyers who can do this. They 
can't survive it. So it is huge opportunity costs for our 
economy that this kind of theft continues. And the slowness 
might work for some companies, but I am afraid that we are 
going to have a lot of companies that will go belly up because 
they can't deal with the slowness in terms of the protections.
    Mr. Veasey. Mr. Chairman, could I ask one more question?
    Mr. Bridenstine [presiding]. Without objection.
    Mr. Veasey. There was a recent acquisition of a large 
American pork producer by a Chinese company. And of course 
whenever a Chinese company acquires something, obviously, they 
are in business with the Chinese Government in some sort or 
fashion. What sort of concerns, you know, looking long term at 
deals like this, and obviously in order to keep the economy 
going strong worldwide, you know, we need to be able to do 
business with the Chinese and other countries that may not 
necessarily share all of our same business, I guess, morays as 
it relates to, you know, cybersecurity and what have you. But, 
you know, when you talk about an American pork producer and you 
are talking about a company that is going to have to be 
interacting with the USDA [United States Department of 
Agriculture] and other Federal agencies, you know, what sort of 
security concerns, you know, might that sort of a deal, you 
know, have for the American public?
    Ms. Bartholomew. I think that this is another issue where 
we are going to have some differences on here. But I would just 
note, Congressman, that our colleague, Congressman Slane, who 
is sitting in the audience, testified on the Senate side 
expressing concerns about what this acquisition might be. Of 
course, it has since gone through. But we will ask our staff to 
get you a copy of his testimony. We have food security 
concerns, food safety concerns. And I have been interested to 
see that since that acquisition has happened, that particular 
company is doing a lot of advertising on TV, that I don't 
recall seeing, all about their good products. But we have a 
number--some of us have a number of concerns about it.
    Mr. Reinsch. I would just say this is probably an issue 
that has divided the Commission more than most issues. There 
were different views on that specific transaction, which I 
think Carolyn has addressed, and I won't say anything more 
about that. And Dan has addressed it in his own testimony, 
which we can get you. I think there is also a debate amongst 
commissioners on the larger issue of how to deal with this 
issue.
    It happens to be the same debate that Congress has had on 
several previous occasions. And that is what are the authority 
to prohibit an acquisition? Should we base solely on national 
security, or whether it should also be based on what might be 
called economic security, or cost-benefit, or whatever the 
Canadians, for example, use what they refer to as a net 
economic benefit test in going to a similar process to ours.
    Congress has considered that question twice in 1987 and 
then again in 2007 and, on both occasions, decided not to go 
down that road, and so we have a statute that is a national 
security statute only and permits the President to block a 
transaction based on national security.
    In this particular case, CFIUS [Committee on Foreign 
Investment in the United States], the group that oversees this, 
which is an interagency committee, concluded that there was not 
a national security issue with respect to pork. People don't--
not everybody agrees with that, but that was the conclusion 
they came to. It wouldn't surprise me if at some future point 
Congress takes this issue up again and debates it again.
    I would just say the politics of it are complicated because 
at one level these acquisitions do raise all the issues that 
you mentioned. Another issue with these acquisitions 
particularly, or a green field investment particularly, creates 
jobs and brings new economic activity, so you often find that 
whereas, you know, military officials and national security 
officials in Washington have one view, you know, the Governor 
of Alabama or the Governor of Texas may have a very different 
view about the economic advantage that an acquisition might 
bring.
    Mr. Shea. Just to add to that, there is another issue that, 
frankly, we are divided on the Commission is the issue that is 
raised by the Smithfield purchases. It is the issue of 
reciprocity. It is unlikely that an American company could turn 
around and buy a pork-producing company in China.
    Mr. Veasey. That is correct.
    Mr. Shea. And there are multiple markets, multiple sectors 
in the Chinese economy that are essentially off limit for 
foreign investment, including U.S. investment, so the 
Smithfield purchase also raises the issue of reciprocity.
    Mr. Veasey. Thank you.
    Thank you, Mr. Chairman.
    Mr. Bridenstine. The gentleman's time has expired.
    The Chair now recognizes the gentleman from Arizona, Mr. 
Franks.
    Mr. Franks. Thank you, Mr. Chairman.
    First, thank all of you for being here, and I wanted to 
kind of direct this question, if I could, Mr. Reinsch, to you.
    Obviously, a lot of us concerned about China building such 
a robust naval offensive capability at a time when we are 
facing a readiness crisis in our own country and to respond, 
and of course, they are, I think, probably looking at our 
rapidly downgrading force capabilities across the spectrum of 
our military. Can you talk a little bit about the JL-2 as well 
as the first anti-ship ballistic missile, the Dong-Feng or the 
DF-21, and how the Commission assesses our missile defense 
apparatus as postured to respond to these missiles in the 
defense of our homeland and our allies abroad?
    Mr. Reinsch. I really can't, Mr. Franks, but Mr. Shea can 
and Mr. Wortzel can.
    Mr. Franks. All right. Well, we will talk to----
    Mr. Reinsch. I would prefer to have them speak for us.
    Mr. Franks. Okay.
    Dr. Wortzel. It has been a painful program for them, Mr. 
Franks. They have spent decades blowing out the bottom of test 
submarines trying to perfect a submarine-launched ballistic 
missile that they couldn't get to pop out of the water, and 
although they have worked at it for a very long time, it looks 
like finally they may be nearing operational capability in one 
ballistic missile submarine, and if that becomes operational, 
then I would expect two or three more. That will allow them to 
target the United States with some 16 more ICBMs 
[intercontinental ballistic missiles], but it also complicates 
our problem of locating a submarine.
    Now, we think they will operate it in bastion as the 
Soviets did and the Russians do, and that is perhaps not as 
great a problem because if it operates in bastion, it is still 
launching over an area that we are protecting with ballistic 
missile defenses; but they don't have to operate it in bastion. 
If they move it into the deep South Pacific, which they 
explored with hydrographic ships and undersea mapping ships in 
the late 1970s and 1980s, it complicates our ability to find 
it, and it literally flanks any ballistic missile defenses and 
radar systems that we have. So if you are worried about a 
couple of launches out of northeast China or North Korea across 
kind of a polar route to the United States, we are probably in 
good shape. If they have three of them out there, you are in 
real trouble.
    Mr. Franks. I understand, and I assume blowing out the 
bottom of the submarines they classify as a negative result 
most of the time.
    Dr. Wortzel. Only reselling.
    Mr. Franks. Quickly, I am going to try to get two other 
quick questions in if I can. Can you just elaborate in general 
on what progress China has made in developing and testing EMP 
[electromagnetic pulse] weapons or enhanced nuclear weapons for 
purposes of EMP?
    Dr. Wortzel. They have worked on it. They have also worked 
on tactical neutron enhanced radiation warheads. We know that 
they have worked on electrical generating EMP as well.
    Mr. Franks. EMI [electromagnetic interference].
    Dr. Wortzel. Right. I think they are aware of what the 
footprint of an EMP blast inside their own second island chain 
would probably do to cripple themselves, so it is something 
they have looked at, and they are capable of doing it.
    Mr. Franks. Well, I hope we keep an eye on that.
    Last question. The Burmese Government and military has, you 
know, obviously a very ingrained relationship with China, and 
we also know that democratic civil society within Burma is sort 
of upset about that with how much support that China has given 
to the Burmese Government's oppressive military. What do you 
think the future of the Chinese-Burmese bilateral relationship 
is? How do you think that the Chinese will deal with their 
setback in influence in Burma, and how do they adjust to that, 
and what is our role?
    Ms. Bartholomew. Well, that is a big question, and it is 
actually not a topic that we have looked at in the past couple 
years and certainly since the change has happened. I think 
some--I guess I would say about Burma that the question about a 
distinction between what the people of Burma are thinking and 
what the Government of Burma is thinking and doing remains to 
be--it is unfolding, shall we say it that way? And I think 
another interesting dynamic I am just going to throw into the 
mix on Burma is the India-Burma relationship, and how does 
India-Burma-China end up working out? I don't really have any 
observations to make yet, but it is something that perhaps we 
should look at over the course of the year.
    Mr. Franks. I hope you will because I can tell you the 
Burmese people and the Burmese military have a widely disparate 
view.
    Ms. Bartholomew. Yes.
    Mr. Franks. Thank you.
    Ms. Bartholomew. Thank you.
    Mr. Bridenstine. The gentleman's time has expired.
    You know, if you are a freshman and you sit in these 
committee hearings long enough, sometimes they give you the 
gavel, and so I have the gavel, and I have a question I would 
like to follow up on.
    Mr. Joaquin Castro asked a very insightful question, and he 
and I are on opposite sides of the aisle. Our political 
philosophies are very different, but he does have some very 
good insights. And he asked about the trade deficit. And from 
my perspective, when you see a trade deficit the size that we 
have, usually what would happen, as long as we have, you know, 
floating currencies, their currency should strengthen as we are 
demanding more and more of their goods. That means their 
currency would strengthen relative to ours, and that would 
enable our exports to increase while their exports decreased. 
And what we have seen is that while their exports have 
increased and increased and increased, we haven't seen their 
currency strengthen the way we would expect relative to ours. I 
was wondering if the panel could share with me their thoughts 
on why that has occurred.
    Mr. Reinsch. This has also been a subject of some debate in 
the Commission. We addressed this in our report. We have 
addressed it in our report I think the last 5 years, and I 
apologize, Mr. Chairman, my statement actually had a sentence 
or two on it which I skipped in the interest of time, but if 
you go back to the full statement, it references the Chinese 
currency manipulation.
    The RMB [renminbi] does not float freely, and so its rate 
is effectively set by the Chinese Government. I think most 
economists out there have concluded that over a long period of 
time, the Chinese have set the rate at levels that allow them 
to achieve the results that you have described as far as trade 
is concerned. Over the last 5 or 6 years, they have allowed the 
RMB to appreciate; it has appreciated significantly. I think 
there has always been a debate amongst economies over the 
extent to which it has been undervalued. Five years ago, the 
argument was between people who said zero and people who said 
upwards of 40 percent. I think now the argument is more 
between--there is always some people who say zero--but the 
argument is more between 10 and 20 percent, so there clearly 
has been progress made. And I think it is shown in the extent 
to which our exports have increased. At the same time, their 
exports to us have increased faster, so this does not show up 
in the bilateral trade data.
    This is an issue that the last two administrations, meaning 
the Bush administration and the Obama administration, have 
pressed the Chinese on very, very hard, never with as much 
success as we would like. They continue to press. As you well 
know, it is an issue that Members of Congress have raised on 
both sides of the aisle frequently via letter and occasionally 
via amendment and bill. I have no doubt it is not going to go 
away.
    Ms. Bartholomew. Yeah, I will just add, and this is 
interesting since the chairman and I come from the same party, 
but we have some disagreements on this issue, among other 
economic issues that, you know, I think that to call what this 
administration and the previous administration and the 
administration before that have accomplished as progress is 
really just not acceptable.
    And, you know, I think that it would be, this is my views, 
it would be an important step for the U.S. Treasury to actually 
acknowledge that the Chinese Government is manipulating its 
currency rather than giving it the pass that it has 
consistently done, including most recently in September.
    Mr. Bridenstine. To follow up on that, when you talk about 
the manipulation of the Chinese yuan, what capacity would they 
have to manipulate the U.S. dollar based on how many Treasury 
securities they own of ours and how many dollars they own of 
ours? Do they have a capacity there at all?
    Mr. Reinsch. Well, it is--yes, I mean, if they dump them, 
but they would be the biggest loser if they did that.
    Mr. Bridenstine. So if they were to dump U.S. dollars, then 
they would lose exports, or they wouldn't have the strength of 
the dollar for their own export economy.
    Mr. Reinsch. The value of their holding, their dollar-
denominated holdings would go down dramatically.
    Mr. Shea. We had a hearing, sir, a couple of years ago I 
believe, where we brought in some experts who shared their 
views as to whether, you know, China was America's banker and 
they had us over a barrel, and I think the most, the 
overwhelming majority of the experts said no, as Bill 
explained, that, you know, it is sort of--China would hurt 
itself if it took a drastic action dumping its dollar-based 
reserves. My understanding is China owns about 10 percent, I 
may be wrong, but about 10 percent of U.S. Treasurys. The staff 
will correct me if I am wrong.
    Dr. Wortzel. Some years ago, we actually had a hearing and 
went up to the financial industry in New York and asked some of 
these questions, and I can't remember the percentages, but my 
colleagues have given you the arguments on why it really 
doesn't pay to dump your U.S. securities, but the other 
assessment by the financial industry is if it did, it might 
cause an increase of a couple of percent in interest rates in 
the U.S., but the whole market is so big, the whole securities 
market is so big that it is really not a fatal problem.
    And I guess the other thought I would leave you with is 
that you have many people that say you can't go to war against 
your banker. Well, we are their banker. They are not our 
banker. And if you go to war, all your assets are immediately 
seized.
    Mr. Bridenstine. So when we experienced--I don't know if 
you would call it dumping, but they had a massive sale of U.S. 
Treasury securities I think back in 2007 or 2008, can you guys 
share what--how that reflected on our currency and on our 
markets?
    Dr. Wortzel. I don't think you could then because we had 
our own financial crisis at about the same time and the banking 
crisis, so I think it would be--I think what they did was a 
reaction to that, and it would be very difficult to separate 
their action from the bigger domestic banking crisis, and that 
is from a guy that don't know much about it.
    Ms. Bartholomew. Right, exactly. He is doing an excellent 
job talking about economics in this hearing. But another point 
I just want to make is they have us over a barrel if we think 
that they have us over a barrel, and again, I have been 
concerned over the years that there might be people within the 
U.S. Government who are afraid to take certain actions on 
perhaps other issues in the U.S.-China relationship because 
they are concerned about the impact of, you know, dot, dot, 
dot, and so it becomes a negotiation tactic rather than 
necessarily the reality. And I always find myself even saying 
in a context like this what--if they dumped it, where are they 
going to put their money? I don't think they are going to be 
buying euros. I mean, it is----
    Mr. Bridenstine. I have one final follow-up on this, and 
that is when you think about the risk of China selling U.S. 
Treasury bonds or making an effort to potentially weaken the 
U.S. dollar, when you think about this risk, the follow-up is 
usually, they would never do that because it would hurt their 
own export market, and their export market is the backbone of 
their economy. But what we have seen in the last probably 7 or 
8 years, and I would like to hear if you guys agree with this, 
they have really diversified their exports across the world 
such that they don't rely so much on us for their export 
economy anymore. Can you follow up on that?
    Mr. Shea. Well, I think their biggest market is the 
European Union, and I think we come in second place, so we are 
still a very substantial market for Chinese exports.
    Ms. Bartholomew. The power of the American consumer still, 
I mean, I think that 2008, the financial crisis of 2008 really 
demonstrated both to the United States and to China how 
intertwined our economies are and that it has always been 
ironic to me that as the Chinese have built their economy on 
exports, they have been having an adverse impact on the very 
sector of our economies where the workers would be consuming 
Chinese goods, but it doesn't seem that that has had as much of 
a difference.
    But they are, indeed, diversifying their exports all over 
the world. In Africa, for example, you know, they are 
displacing African markets and African workers, and there is 
some growing concern in countries in Africa about what is 
happening to their own indigenous businesses as cheap Chinese 
goods are flying into--going into Africa.
    Mr. Bridenstine. One final line of questioning, and this is 
regarding--I am a Navy pilot. I flew combat in Iraq and 
Afghanistan, spent a lot of time in the Persian Gulf. Given the 
position that we are in with the sequester right now, our 
presence in the Gulf and around the world is lacking, and that 
is unfortunate. My concern is that if we are not securing 
shipping lanes in the Persian Gulf or in other market sectors 
around the world, there is a void, and of course, the Middle 
Eastern countries that export oil and rely on that for their 
economies, they are going to find a replacement for our 
security. And in order to hedge their bets, they will export 
oil to whoever wants to provide that security. Is there a risk 
that because we are not there and we have left a void, that 
China might fill that void, and might that explain why China is 
now investing so heavily in the Middle East and why the Middle 
Eastern countries are now exporting oil so heavily to China?
    Ms. Bartholomew. Well, first, I think that lots of 
countries around the world are hedging in their own ways. 
Certainly for the Middle Eastern countries, especially also as 
the United States talks about energy independence, they need to 
be thinking, they are thinking about where are there going to 
be reliable purchasers of oil who are also not going to be 
pressuring them on things like democratic reforms and human 
rights, so it is that issue that I mentioned earlier about 
economic growth with authoritarian government that goes hand in 
hand, but there are complications and there are risks for China 
involved in this, so Saudi Arabia has far greater oil 
production than Iran, and yet China has a really close 
relationship with Iran, and how it manages that balance of 
maintaining relationships or expanding relationships with 
countries that have their own challenges, their own problems, 
their own battles I will use the word, is going to be a really 
interesting dynamic. I mean, it is a Middle Eastern quagmire so 
that as the countries themselves are interested in engaging 
more with China and selling more to China, the Chinese 
Government very well might get pulled more into some of the 
difficult dynamics that we are trying to deal with in the 
Middle East.
    Mr. Reinsch. This is a new--if I could just add, getting 
pulled into this has been a new and kind of unsettling 
experience for them. They have encountered occasional 
difficulties in Africa. I think what really set them back was 
the need to conduct a massive evacuation from Libya during the 
revolution. They suddenly had 35,000 people that they needed to 
get out of the country, and they weren't--we are prepared for 
that kind of situation. We know what to do, we have a Navy. We 
have capabilities of dealing with it. They weren't. They 
ultimately did it, but I think it was a wake-up call for them 
that if you are going to be involved in this region in any 
capacity, you need to have a whole level of commitment and 
activity beyond anything that they have experienced and beyond 
anything that is comfortable for them. This is going to be a 
difficult transition for them to do the kinds of things you are 
talking about.
    Dr. Wortzel. The scenario you suggest that the United 
States couldn't or wouldn't creates a lot of other 
competitions, that suddenly Japan has to rethink, which has a 
very capable navy, has to rethink how far it lets it go out to 
protect sea lines of communication. They would probably be a 
natural--India is developing a navy that, you know, it hopes 
can do those kind of things. Japan and India and Vietnam and 
India look to each other for that sort of stuff. So--and there 
is no love between the Indians, the Japanese, and the Chinese, 
so it does create the potential for competitions, but none of 
those nations, except possibly Japan if it chose politically to 
do so, is capable of undertaking those missions at this time or 
for a good 5 to 10 years.
    Mr. Bridenstine. Any other thoughts before we adjourn?
    Is there anybody else that would like to ask a question? 
No?
    All right.
    Well, I would like to thank the witnesses so much for your 
testimony, and this hearing is adjourned.
    [Whereupon, at 12:14 p.m., the committee was adjourned.]
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                            A P P E N D I X

                           November 20, 2013

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