China is “the most threatening actor
in cyberspace” as its intelligence agencies and hackers use
increasingly sophisticated techniques to gain access to U.S.
military computers and defense contractors, according to the
draft of an annual report mandated by Congress.

Chinese hackers are moving into “increasingly advanced
types of operations or operations against specialized targets,”
such as sensors and apertures on deployed U.S. military
platforms, according to the report.

“China’s persistence, combined with notable advancements
in exploitation activities over the past year, poses growing
challenges to information systems and their users,” the U.S.-
China Economic and Security Review Commission
said in the draft
obtained by Bloomberg News. “Chinese penetrations of defense
systems threaten the U.S. military’s readiness and ability to
operate.”

A U.S. intelligence official, speaking on the condition of
anonymity to discuss classified matters, described as relentless
China’s efforts to blind or disrupt U.S. intelligence and
communications satellites, weapons targeting systems, and
navigation computers.

The commission’s draft report bolsters warnings by U.S.
officials that cyberattacks pose growing risks to the military
and to critical industries such as electric utilities,
pipelines, and telecommunications. Defense Secretary Leon
Panetta
cited Chinese and Russian capabilities in an Oct. 11
speech, saying cyber threats could become as devastating as the
Sept. 11, 2001, terrorist attacks.

‘Zero-Day’ Attacks

Most cyber activity in China during the past year “relied
on basic and straightforward techniques,” such as “zero-day”
attacks that exploit a software vulnerability for which victims
have no immediate fix or patch and the use of stolen digital
certificates to make malware appear legitimate, according to the
draft.

“Irrespective of the sophistication, the volume of
exploitation attempts yielded enough successful breaches to make
China the most threatening actor in cyberspace,” according to
the draft.

Geng Shuang, a spokesman for the Chinese embassy in
Washington, didn’t return an e-mail seeking comment on the draft
report.

Most Chinese intrusions against U.S. government and
military systems appear intended to collect intelligence or
technology rather than launch attacks, the commission said.
Penetrations of U.S. military systems, though, “could switch to
become disruptive or destructive,” and that’s a danger because
they “still reportedly require weeks to investigate.”

Illegal Subsidies

Created by Congress in 2000, the bipartisan commission has
reported on China’s economic and military rise, usually in
critical assessments accompanied by recommendations for counter-
actions such as trade sanctions. Its annual overview and a
yearly Pentagon report are the two primary publicly available
official assessments of China’s military developments.

The draft on cybersecurity, part of an annual report
scheduled for release on Nov. 14, calls for Congress to
“develop a sanctions regime to penalize specific companies
found to engage in, or otherwise benefit from, industrial
espionage” and to define it as an “illegal subsidy subject to
countervailing duties.”

The draft concludes that China’s network of civilian and
military cyber specialists includes units of the People’s
Liberation Army
.

Retired Marine General James Cartwright, a former vice
chairman of the U.S. Joint Chiefs of Staff, told the commission
in March that, “While it is very difficult in cyber to have a
‘smoking gun,’ so to speak, the clear paths back into servers
and other mechanical devices inside of the Chinese sovereign
domain remain a constant problem for us.”

Cyber Militia

While the Chinese military’s ability to manage
sophisticated computer systems is limited, according to the
report, its leaders “recognize this weakness and intend to
develop a pool of soldiers” who can manage cyber technology as
well as advanced weapons systems.

China employs a “cyber warfare militia,” PLA civilian
units “usually comprised of workers with high-tech day jobs”
that focus on military communications, electronic warfare and
computer network operations, the draft said.

The militia members are among the nation’s 538 million
Internet users with access to 677 million devices that can be
used to enter the Internet, according to the International Data
Corp.

Holiday Dropoff

This scale of Internet access “greatly influences the
global volume of malicious activity,” the draft says.

According to statistics supplied to the commission by San
Francisco-based service provider CloudFlare Inc., attacks
account for about 15 percent of global Internet traffic on any
given day.

That “plummeted to about 6.5 percent” around Oct. 1,
2011, China’s National Day, “when many workers take leave,”
according to the draft report.

China’s military capabilities, including cyberwarfare,
haven’t been an issue in the U.S. presidential election even as
Republican candidate Mitt Romney has criticized China on trade
and currency issues.

Romney wrote in his book, “No Apology,” that China’s
investments in “cyberwarfare, anti-satellite warfare and anti-
ship weaponry, for example, are calculated to neutralize our
military’s many strategic advantages.”

‘Strategic Competitors’

The commission in March released a report by Northrop
Grumman Corp. (NOC)
that concluded China’s cyber capabilities are
advanced enough to disrupt U.S. military operations during a
conflict over Taiwan. The draft report cites the Northrop
Grumman study in outlining its broader conclusions about China’s
advances.

The National Intelligence Council, using data culled from
13 U.S. agencies, concluded in November 2011 that “China and
Russia view themselves as strategic competitors of the United
States
and are the most aggressive collectors of U.S. economic
information and technology.”

The China commission’s annual report last year disclosed
that computer hackers, possibly from the Chinese military,
interfered with two U.S. government satellites four times in
2007 and 2008 through a ground station in Norway.

To contact the reporter on this story:
Tony Capaccio in Washington at
[email protected]

To contact the editor responsible for this story:
John Walcott at
[email protected]

Customers use computers at an Internet cafe in Shanghai, China. Photographer: Qilai Shen/Bloomberg

Oct. 9 (Bloomberg) — Bill Plummer, spokesman for Huawei Technologies Co., talks about the company's response to a U.S. House committee report that said the phone-equipment maker may enable Chinese spying, and the impact of the government's investigation on the company's business.
Plummer speaks with Nicole Lapin on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)