Google's January investigation into Chinese hacking of over twenty companies and the emails of dozens of human rights activists has highlighted an increasingly potent form of espionage:

"Cyber espionage is the great equalizer. Countries no longer have to spend billions to build globe-spanning satellites to pursue high-level intelligence gathering, when they can do so via the web..."

That is from a joint report released today by the Information Warfare Monitor and Shadowserver Foundation called "Shadows in the Cloud". It details how China-based hackers stole secret documents from the Indian Defense Ministry, the Dalai Lama's offices and the U.N over the past year. Although the report acknowledges no Chinese government link to what they dub the "Shadow Network," the information harvested is unlikely to be of much benefit to individuals. It includes secret assessments of India's security in regions bordering Tibet, Bangladesh and Myanmar; missile systems; information on the domestic Maoist insurgency; and embassy assessments of Indian relations with West Africa, Russia, former Soviet republics and the Middle East.

Reuters neatly summarizes the report's conclusions into how the attackers operated:

"The cyber-spies used popular online services, including Twitter, Google's Google Groups and Yahoo mail, to access infected computers, ultimately directing them to communicate with command and control servers in China"

Although the Chinese government has denied any involvement and made clear that it views hacking as an international crime, it will be interesting to see if it investigates such hacker networks operating from its territory. There is surely enough evidence to do so. On the other hand, it is no secret that the U.S. also hosts a large number of the world' cybercriminals; a recent report from Symantec's Message Labs showed that while the bulk of the world's targetted email attacks (28 percent) originate in China, 14 percent originate in the U.S.

In fact, since the Google-China debacle exploded, grievances in the American media have seemed to focus on freedom of speech and freedom from censorship rather than on issues of espionage. The Indian press also seems somewhat unconcerned -- the report has gotten little attention there and the Chinese government has brushed it off as media hype. It just seems that all parties are resigned to the fact, at least tacitly, that this is the way things work nowadays.

The Sydney Morning Herald reports that in an effort to secure the release of four of its executives who were convicted on corruption charges in China last week, mining giant Rio Tinto has secured the services of a guy who knows a thing or two about making deals with Beijing:  

Dr Kissinger, 87, is well known in China since his secret 1971 meeting with Premier Zhou Enlai paved the path for the US president Richard Nixon's historic meeting with Mao Zedong.

The Herald understands Dr Kissinger helped secure a meeting on Rio's behalf with Wang Qishan, a Politburo member and former banker who handles many of China's international financial affairs.

As FT Alphaville notes, Kissinger's consulting firm advises corporate clients on government relations and is very active in China. 

Hat tip: China Digital Times

As the latest phase of the epic showdown between China and Google headed into its third day, it became increasingly clear that neither party is planning to back down -- and in fact, it now looks like Beijing is looking to punish the search company for its insouciance.

For its part, Google seems committed to standing on principle. James Fallows has a good interview with David Drummond, the Google vice president whose been out front on the company's move of its search portal from mainland China to Hong Kong. And he manages to clear up a mystery: What's the connection between the hack attack and Google's decision not to censor search results any more?

This attack, which was from China ... was almost singularly focused on getting into Gmail accounts specifically of human rights activists, inside China or outside. They tried to do that through Google systems that thwarted them. On top of that, there were separate attacks, many of them, on individual Gmail users who were political activists inside and outside China. There were political aspects to this hacking attacks that were quite unusual.

?That was distasteful to us. It seemed to us that this was all part of an overall system bent on suppressing expression, whether it was by controlling internet search results or trying to surveil activists. It is all part of the same repressive program, from our point of view. We felt that we were being part of that. 

That was the direct connection with the hacking incident. It wasn't in isolation. Since the Beijing Olympics, our experience in China has gotten worse. Although we have gained market share, it has become more and more difficult for us to operate there. Particularly when it comes to censorship. We have had to censor more. More and more pressure has been put on us. It has gotten appreciably worse -- and not just for us, for other internet companies too.

Rebecca MacKinnon corroborates that  account in comments originally intended as congressional testimony. Money quote:

China is pioneering a new kind of Internet-age authoritarianism. It is demonstrating how a non-democratic government can stay in power while simultaneously expanding domestic Internet and mobile phone use. 

On the business front, the New York Times reports that Google's partners are swiftly moving to distance themselves from this move (the paper also quotes a number of pro-China scholars who profess confusion at the company's stance, though another Times story shows more balance).

China's leaders may think Google is emerging the loser here, and the company's stock has stagnated over the last few months as investors pondered the impact. "From an industry standpoint, however, Google's exit will leave more room for international and domestic competitors to tap into the potential of a market with the largest online population," one China Daily article today reads. "Without Google access to pornographic and subversive content, China's cyber space will continue to grow in a cleaner and more peaceful environment." Uh-huh.

Ultimately, this incident could end up hurting China far more than it does Google -- exposing the country's claims of increased openness as hollow, scaring away potential investors, and taking away a valuable source of innovation and healthy competition.

But it's not just China that could end up damaged. We're definitely seeing a tipping point here in the United States, with U.S.-China relations heading into dangerous territory. When you've got Paul Krugman calling for retaliatory tariffs on Chinese goods, something is definitely afoot.

A new report from the left-leaning Economic Policy Institute claims that China's currency policies sucked away 2.4 million U.S. jobs between 2001 and 2008. That strikes me as highly dubious, but many in Washington will seize upon the figure as pressure on the Obama administration to label China a "currency manipulator" mounts. And I think the Google fracas plays into that.

The scary thing is, we all lose if a trade war breaks out. The price of Chinese imports will go up around the world. U.S. consumers will pay more for their iPhones. And China might retaliate, making everyone poorer.

I'm sure Obama's economic team -- committed free traders like White House advisor Larry Summers and Treasury Secretary Timothy Geithner --  knows all this, and is counseling calm. But sometimes the political guys win.

Time magazine's cover current package is the third of their annual “10 Ideas” issues; this time it’s forward-oriented, focused on "10 Ideas That Will Shape the Next Ten Years." One of those is a piece on the U.S.-China relationship by yours truly: “The Indispensable Axis: Their frenemy-ship will shape the decade.”  

Every concept need some catchy jargon, right? A year ago we heard a lot in Washington about the "G-2," the notion that an expanded bilateral relationship between Washington and Beijing might steer the world. Well, there's certainly a lot less of that talk lately. Not only because heightened tensions between the two countries on myriad fronts have since taken the shine off the idea, but also because the notion of grand pooh-bahs from the U.S. and China hashing out the world order in grand summits was always a bit starry-eyed anyway. Last year, Elizabeth Economy and Adam Segal of the Council on Foreign Relations sliced and diced that notion in a very smart Foreign Affairs article, "The G-2 Mirage." (Summary: "A heightened bilateral relationship may not be possible for China and the United States, as the two countries have mismatched interests and values. Washington should embrace a more flexible and multilateral approach.")

It's telling that one of the strongest proponents of the "G-2" concept has been former National Security Advisor Zbigniew Brzezinski, whose vision of how two superpowers get along (or don't) was shaped by the Cold War. But we aren't really back to the U.S.S.R. Although Soviet-era memories and defensive reflexes are apparently never far from the thoughts of Washington and foreign-policy elites (in his New York Times column, Tom Friedman is lately fond of billing China's expanding green-tech manufacturing sector as the "New Sputnik," tapping into latent anxieties on Capitol Hill), we aren't headed for a new Cold War. The U.S. and China are far too mutually dependent and economically intertwined -- a notion that's been widely explored in recent books and already birthed its own jargon, from Niall Ferguson's "Chimerica" to Zachary Karabell's "Superfusion."

So if we aren't going to see future smoke-filled summits on par with Yalta or SALT negotiations in which the leaders of two superpowers decide the world's fate -- nor a cozy alliance resembling the United States' "special relationship" with Britain -- what will we see? With apologies to Madeleine Albright, who declared the United States as "the indispensable nation," here's how I frame the next decade of the U.S.-China indispensable axis: 

There is no precedent for this unique evolving relationship, one in which the two sides will both compete and cooperate, perhaps simultaneously, as they shape and support a global system they can benefit from.

In some ways, this axis might resemble the fluidity of the G-8, the group of industrialized countries that cooperate on economic issues where they share interests but go their separate ways on issues where they don't. Washington and Beijing will increasingly be the 800-lb. gorillas in multilateral architectures like the G-20 or Asia-Pacific Economic Cooperation while developing a shifting bilateral relationship, working together closely on some issues and hampering each other's unilateral actions on others.

The good folks at Time, bless 'em, shortened this in the headline to: "frenemy-ship."

The Heritage Foundation has pulled together a fascinating study of Chinese investment -- showing (with really nice charts and maps!) just where all of those yuan are heading overseas.

A few things to note, plus one question....

• Sub-Saharan Africa is the biggest single region for investment for the Chinese. (Plus, $36.4 billion is a lot of investment in a region whose total GDP is $744 billion.)
• China spends the most money in Africa in the Democratic Republic of Congo. The resource-rich country is one of the very few on Earth whose economy has actually shrunk in the past 20 years (due to a brutal civil war). 
• For every dollar of U.S. investment, China spends 51 cents in Iran.  
• China invests nearly twice as much in west Asia as in east Asia -- a testament to its need for resources, more so than products.
• China spends more in Australia than any other single country.
• Why is China spending so much in Greece? Shipping?

Chinese entrepreneur Huang Guangyu's rise from street vendor to chairman of Gome, the leading consumer electronics retail chain in China, had all the hallmarks of the classic rags-to-riches tale of modern China -- until it all came tumbling down.

Last November Huang, who has been valued as the richest man in China, was taken into police custody.  This week Huang was formerly indicted on charges including bribery and insider trading. His trial -- and the public response to it -- will be something to watch. How does one become a billionaire in China? Is there a "clean" way to the top?

Stories about Chinese officials threatening to dump the dollar, no matter how implausible, are always great Internet fodder. Today's entry: This Reuters report about a couple senior PLA officers who are pushing the idea that China should retaliate against U.S. arms sales to Taiwan by selling some of the nearly $800 billion Treasury bonds Beijing has on its books.

Only at the bottom do you learn this helpful context:

But any attempt to use that stake against Washington would probably maul the value of China's own dollar-denominated assets.

We also rarely get a sense in such wire reports of just what sort of influence such officials have. Are they on the fringe? Respected insiders? Hard-liners with a growing following? That kind of information would be helpful for those of us who aren't intimately familiar with internal Chinese politics.

UPDATE: More from Ashby Monk, who quotes a correspondent in Britain thusly:

[A]t a conference ... I asked what the White House would do if it received a call from Beijing saying that “unless the USA did XX or desisted from YY by a given deadline, China proposed to sell all its dollar assets without concern as to price”.

We came to a conclusion then that it was in fact something of a hollow threat. To start with, the US authorities (via the Federal Reserve) can buy any dollar bonds the Chinese wish to sell: it will explode the Fed’s balance sheet, but it can be done. It is more problematic if the Chinese sell dollars on the FX market, as the US authorities cannot simply buy them all, as they do not have enough foreign currency and could not mobilise their gold fast enough. So the dollar’s exchange rate would spike sharply down, before (probably) spiking back up again to near the level it started at – offset a bit because one would assume that having just utilised their dollars in this way, China would not immediately buy them back and so the main forced buyer of dollars would be removed from the market.

China wasted no time in heating up the 46th Munich Security Conference. In the opening address Friday, Chinese Foreign Minister Yang Jiechi strongly asserted Chinese policy, and took more than a few swipes at the United States.

Yang is the first Chinese official to speak at the annual conference, and he seemed to have turned the normally stoic affair into something much more direct and confrontational. His remarks are yet another indication of the growing differences between China and the United States.

Addressing a recent U.S. arms sale to Taiwan which he called a violation "of the international code of conduct, Yang said:

The Chinese government and people feel indignant about this... We have one fifth of mankind. At least we deserve a chance to express our views on how things should be run in the world.

Yang further intimated China would block new UN sanctions directed against Iran, claimed that Chinese media was more reliable and "solid" than Western news organizations and that he didn't know how "this Google thing popped up."

Via FP contributor Ashby Monk, here's an interesting story from Bloomberg News that hasn't gotten much attention. It seems that Russia tried to use its vast financial holdings and conspire with China to create "economic disruptions" in the United States in 2008. An astonishing scoop, if true.

The source of the tale is Hank Paulson, the former U.S. Treasury secretary whose memoir, On the Brink, is coming out soon. 

Says Bloomberg:

The Russians made a “top-level approach” to the Chinese “that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies,” Paulson said, referring to the acronym for government sponsored entities.

China rejected the idea, according to Paulson, and the Russians are denying the story. Monk, an expert on sovereign wealth funds, comments:

If true, it would appear that Russia was plotting economic warfare against the US during the summer of 2008; I don’t really know what else to call it. Their intention was to use their sovereign wealth to purposely weaken and damage the US economy. The fact that all this apparently occurred around the same time that Russia was engaged in a traditional war with Georgia, a US ally, lends some credibility to the idea.

This New York Times article about the surprising release of records from the late Mao era raises the question: Just how crazy was the Cultural Revolution, anyway?

This crazy, according to the eminent historian Jonathan Spence, as told in his landmark biography of Mao Zedong:

An announcement from the "Beijing Number 26 Middle School Red Guards," dated August 1966, gave the kind of program that was to be followed by countless others. Every street was to have a quotation form Chairman Mao prominently displayed, and loudspeakers at every intersection and in all parks were to broadcast his thought. Every household as well as a trains and buses, bicycles and pedicabs, had to have a picture of Mao on its walls. Ticket takers on trains and buses should all declaim Mao's thought. Every bookstore had to stock Mao's quotations, and every hand in China had to hold one. No one could wear bluejeans, tight pants, "weird women's outfits," or have "slick hairdos or wear rocket shoes." No perfumes or beauty creams could be used. No one could keep pet fish, cats, or dogs, or raise fighting crickets. No shop could sell classical books. All those identified by the masses as landlords, hooligans, rightists, and capitalists had to wear a plaque identifying themselves as such every time they went out. The minimum amount of persons living in a room could be three -- all other space had to be given to the state housing bureaus. Children should criticize their elders, and students their teachers. No one under thirty-five might smoke or drink. Hospital service would be simplified, and "complicated treatment must be abolished"; doctors had to write their prescriptions legibly, and not use English words. All schools and colleges were to combine study with productive labor and farmwork. As a proof of its own transformation, the "Number 26 Middle School" would change its name, effective immediately, to "The Maoism School."

And you thought your middle-school experience was rough.     

In China, a few dozen mournful souls have begun a candlelight vigil outside Google's Beijing offices.(I'd love to know more about who they are). But for the most part, the debate in China over the higher meaning of Google has been more muted than in the United States, where Google's threatened withdrawl from China has been widely interpretted as a harbinger of worsening US-China relations.

Within China, the Chinese-language state-run media carried relatively cursory coverage of Google's threat to pull out of China, with scant mention of the alleged cyber security breaches. Here's the (translated) barebones text of the Chinese-language Xinhua wire story:

Google announced on January 12^th that it might shutdown Google.cn and withdraw from Chinese market completely.

Google's chief legal officer David Drummond declared the announcement on Google's official blog in the afternoon of the 12^th.Chinese reporter later verified the announcement with Google and Google'scommunication department confirmed Mr. Drummond's posting.

Google indicated that they will discuss with Chineseofficials about those legal issues in the next few weeks.

Google also cancelled its scheduled negotiation with China'sWritten Works Copyright Society on the 12^th afternoon withouttelling why.

(That last line, perhaps, is meant to make Google sound like an especially irresponsible player?)

Meanwhile for the benefit of foreign reporters, China's Foreign Ministry did convene a press conference to state that China's laws are China's laws:

After a day of silence, the Foreign Ministry said that China welcomed foreign Internet companies but that those offering online services must do so “in accordance with the law.” Speaking at a scheduled news conference, Jiang Yu, a ministry spokeswoman, did not address Google’s complaints about censorship and cyberattacks and simply stated that “China’s Internet is open.”

Twitter is, of course, officially banned in China, but the most tech-savvy Chinese "netizens" have found a way around the Great Firewall to use the micro-blogging service nonetheless. This group is, as Rebecca MacKinnon duly observed, a highly select sampling of Chinese public opinion: "The Chinese Twittersphere -- comprised exclusively of people who aretech savvy enough to know how to get around censorship or they wouldn'tbe there --  is generally cheering the news [that Google won't continue to follow existing censorship rules]."

While noting the selectivity of this group, it's been interesting to follow tweet reactions around the hashtag #Googlecn. China Digital Times has translated some of them here: 

@qhgy RT @Lyooooo: If Google leaves I won’t use Baidu or let my children or grandchildren use it (If I have them) #GoogleCN

@zz4040 Google is a real man #GoogleCN

@Fenng Ten years online has turned me from an optimist into a pessimist #GoogleCN

@mranti Withdrawal of Google means: 1 Scaling the wall is now an essential tool 2 Techies, you should immigrate. Really #GoogleCN

That last tweet is from  Zhao Jing, a prominent political writer and blogger in Beijing who writes in English-language media as Michael Anti. He spoke at length with The New York Times' Andrew Jacobs, explaining why he thought that Google’s pulling out would “set a bad example for thebusiness climate in China and make a joke of the government claims of afree Internet.”

Google might be getting out of China, but international investors are going all in on Chinese search giant Baidu, the company that likely stands to gain the most for Google's departure. Here's a report from UBS via the FT's Alphaville blog:

Baidu would benefit most from Google’s departure. The Chinese search engine market is a duopoly with Baidu and Google together accounting for 90% of revenue and 95% traffic market share (Baidu itself has 62% and 74% respectively). Baidu would emerge as the dominant player with even more bargaining power with its customers. And even if Google can successfully solve this problem and continue its presence in China, in our view Baidu will still benefit incrementally from advertisers’ concerns over spending on Google.cn.

We upgrade Baidu to Buy from Neutral and PT from US$380 to US$523. This incorporates a 50% probability weighting to our new base case valuation of $453 (assuming Google continues to operate in China) and 50% weighting to our bullcase valuation of $593 (assuming Google closes its Chinese operations).

Investors don't feel it's likely that another foreign search engine, such as Microsoft's Bing, will step in to fill the void since local affilates are going to be wary about collaborating with another foreign company.

As a weird coda to this story, Yahoo, whose executives were lambasted as moral "pygmies" on the floor of congress two years ago for their role in the arrest of a Chinese dissident, for once look like they've outsmarted their arch-rival. TechCrunch writes;

In retrospect Yahoo has played China far better than Google. It pulled out of the country years ago, knowing it wouldn’t win and owns nearly 40% of the [Chinese internet portal] Alibaba, a company that very definitely knows how to grow in China. Entrepreneur and angel investor in China Bill Bishop —who hasn’t always agreed with my China coverage in the past—pointed this out, adding “Not often Yahoo looks smarter than Google.”

Last month Google's operations in China noticed that a sophisticated hacking operation had illegally attempted to access the records of dozens of targetted Gmail users -- specifically those of prominent human rights activists, based in China, Europe, and the United States. This information, which obviously aroused great concern within the company, wasn't made public until yesterday, when Google announced a significant change in how it would operate in China.

In a press release posted on its web site Tuesday, Google explained that it would cease to comply with China's internet censorship provisions, which had prevented users of China.cn (Google's China web portal, launched in 2006) from accessing "sensitive" sites:

These attacks and the surveillance they have uncovered--combined with the attempts over the past year to further limit free speech on the web--have led us to conclude that we should review the feasibility of our business operations in China. We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.

On Wednesday late morning Beijing time, Internet users in Beijing and Shanghai reported being able to access -- for the first time -- formerly forbidden images and web links, including photos of 1989 Tiananman Sqaure demonstrations and links to freetibet.org, through Google.cn searches. This led to speculation that Google had already removed filters.

Google's apparent defiant stand -- that it will operate freely within China, or not at all -- quickly launched a heated debate. Many applauded the company' principles; others wondered how much Google really has to lose if it does exit China, given that business there has not met expectations.

Writers on technology web sites, such as Slashdot.org and Techcrunch.com, were quick to point out the company's bottom-line concerns. As Techcrunch technology reporter Sarah Lucy wrote:

I’ll give Google this much: They’re taking a bad situation and making something good out of it, both from a human and business point of view. I’m not saying human rights didn’t play into the decision, but this was as much about business....

Google’s business was not doing well in China. Does anyone really think Google would be doing this if it had top market share in the country? For one thing, I’d guess that would open them up to shareholder lawsuits. Google is a for-profit, publicly-held company at the end of the day. When I met with Google’s former head of China Kai-fu Lee in Beijing last October, he noted that one reason he left Google was that it was clear the company was never going to substantially increase its market share or beat Baidu. Google has clearly decided doing business in China isn’t worth it, and are turning what would be a negative into a marketing positive for its business in the rest of the world.

Meanwhile, Wired reporter Kim Zetter traces some of the steps Google has taken between when it discovered the cyber attacks and now, both to protect its own employees in China and to warn the international human rights activists targeted.

[A] source who is knowledgeable about the investigation [said] that Google’s decision to disclose the attack on Tuesday was also partly due to a decision made by the other targeted companies to keep the attack under wraps.

“They made a specific decision not to go public,” the source said. “You can either go out [with the information] or not, and for whatever reason, they’ve decided not to [disclose].”

He said Google felt it was important to alert the people who are potentially affected by the attack — the activist community.

Among many looming questions, one key one is: How will Microsoft, Yahoo, and other web portals react? Is Google setting a new precedent?

China and South Korea were hit by their heaviest snowstorm in six decades on Sunday. Here are few images of a buried Beijing.

A snow-replica of the "Bird's Nest" Olympic stadium in front of the real thing.

A paramilitary guard in Tiananmen square.

A tourist in Jingshan Park.