In an effort to constrain strategic competitors, the United States has imposed restrictions on exporting high-end chips to China. However, the Chinese Communist Party (CCP) has been trying to evade US controls through various means, including smuggling chips, setting up shell companies in Southeast Asia, and building allies in the Middle East. The US has responded by tightening restrictions step by step to close loopholes.
President Joe Biden, who is about to bid farewell to the White House, has taken a series of actions against the CCP. In early December, after the Biden administration introduced the latest restrictions on high-end chips for China, The Wall Street Journal reported on December 14th that Biden plans to introduce new regulations aimed at setting export limits on artificial intelligence chips to certain countries, primarily located in Southeast Asia and the Middle East.
These chips include advanced processors known as GPUs or Graphics Processing Units used for training and running large-scale artificial intelligence models. These regulations are designed to prevent China from acquiring computing capabilities from other countries. The rule, named the “Artificial Intelligence Export Control Framework,” was submitted to the Regulatory Information Service Center on Monday, December 9th.
US officials are also considering other options. It was disclosed that the US government is considering controls on the export of so-called “weights” that form the basis of advanced artificial intelligence models and further restrictions on chip manufacturing to target the CCP.
Previously, the US Department of Commerce’s Bureau of Industry and Security (BIS) announced a series of new chip export control rules on December 2nd, including new controls on 24 types of semiconductor manufacturing equipment and three software tools used for developing or producing semiconductors; new controls on High Bandwidth Memory (HBM); adding 140 Chinese companies to the entity list, including tool manufacturers, semiconductor factories, and investment companies involved in promoting the CCP’s military modernization efforts. This is the fourth time since 2022 that the BIS has issued chip export control rules targeting the CCP.
The new chip regulations that the Biden administration is set to announce for Southeast Asian and Middle Eastern countries are a response to China using these regions as a gateway for chip smuggling.
According to The Information, this year, a Chinese electrical company in eastern China, despite US sanctions, successfully ordered 300 servers worth $120 million, each equipped with 8 Nvidia H100 chips. This transaction was facilitated by a broker in Malaysia who helped the Chinese company establish a shell company to conceal its true identity and circumvent US export controls.
This is just one example of the CCP smuggling high-end chips. According to The New York Times, in Shenzhen’s SEG Electronics Market, many sellers claim to offer customers chips that are banned by the US.
One seller mentioned that many companies come to him to order artificial intelligence microchips, buying 200 or 300 chips at a time. Another merchant stated that he recently shipped a large number of servers from Hong Kong to mainland China, each loaded with over two thousand of the most advanced chips produced by the US technology company Nvidia.
Another channel for the CCP to smuggle chips is through South Korea. In November this year, the Suwon Local Prosecutors’ Office’s Defense Industry Technology Crime Investigation Department in South Korea announced the arrest and prosecution of two executives of a US manufacturer’s Korean export company on charges of dishonesty and violating customs laws for smuggling approximately 98,500 IC chips imported from the US, valued at 14.1 billion Korean won (729 million yuan) into China without declaring them to customs. These chips are mainly used in communication base stations and may also be used for military radars and satellite communications, designated as strategic materials subject to export controls.
In order to obtain high-end chips, the CCP has been strategically laying the groundwork in the Middle East to deepen cooperation in the field of AI.
G42 is a prominent AI company in the United Arab Emirates (UAE). In January this year, Mike Gallagher, the former chairman of the House of Representatives China Task Force and a congressman, wrote to Commerce Secretary Gina Raimondo, pointing out that G42 has extensive business relations with Chinese military companies, state-owned entities, and CCP intelligence agencies.
He wrote, “According to documents reviewed by the committee, G42’s CEO Peng Xiao operates as part of a vast network composed of UAE and Chinese companies that develop dual-use technologies and provide material support for China’s civil-military fusion and human rights abuses.”
The committee’s investigation also found that G42 has relationships with entities blacklisted like Huawei and Beijing Genomics Institute (BGI). Additionally, companies and executives connected to G42 have ties to a Chinese scientist who embezzled millions of dollars in US military-funded research from the University of California, Los Angeles to create a new Chinese government laboratory in Beijing.
Furthermore, based on the Central Intelligence Agency’s investigation, there are extensive connections between G42 and the CCP. The CIA found that G42’s “stack” or its underlying technology infrastructure was built with assistance from Chinese companies, including Huawei.
US intelligence agencies also found that a subsidiary of G42 called Presight AI sold surveillance technology to police forces worldwide, including software almost identical to what the Chinese police use.
G42’s CEO, Peng Xiao, appears to be of Chinese descent, though it is unclear if he is from mainland China. He received his undergraduate and master’s education in the United States but relinquished his US citizenship to become a citizen of the UAE. He initially led the UAE company DarkMatter Group’s subsidiary Pegasus, which facilitated a transaction with Huawei, before becoming CEO of G42.
The deep involvement of the CCP in the Middle East may already be yielding results. In December this year, Axios cited sources saying that the US government has approved Microsoft to export advanced artificial intelligence chips to G42. Although G42 has announced its disassociation with Chinese companies to appease the US government, concerns remain about whether these American chips will flow into the hands of the CCP due to the close economic partnership between the UAE and China in other areas and maintaining military relations.
Another strategy the CCP employs to evade US chip bans is by utilizing US cloud computing services.
According to Foreign Policy’s report, Chinese organizations, including some linked to the military, are using cloud platforms such as Amazon Web Services and Oracle Cloud. Through these platforms, they can leverage the powerful capabilities of advanced chips like Nvidia A100 and H100 GPUs without actually owning them. Even companies on the US entity list are indirectly gaining access to high-end chips through these means.
For instance, the blacklisted Chinese AI company iFlytek, despite sanctions due to human rights issues, legally leases high-performance Nvidia chips through cloud services.
Furthermore, Shenzhen University paid 200,000 yuan (approximately $28,000) through an intermediary to access AWS cloud servers powered by Nvidia A100 and H100 chips. Similarly, the research institution “Zhijiang Lab” sought AWS cloud services to develop artificial intelligence models.
To address this loophole, the Biden administration proposed in January for cloud service providers like Amazon and Microsoft to identify and actively investigate foreign customers developing AI applications on their platforms, disclosing the names and IP addresses of foreign customers.
The US Congress has also taken action. In May this year, Congress authorized the Department of Commerce to oversee remote access to US technology. They also require cloud services to verify users of large-scale AI models and report to regulatory agencies when these models are used for potential malicious activities.
The co-author of the bill, Representative Michael McCaul, stated in a press release, “China is leveraging advances in commercial artificial intelligence to prepare for military conflict with Taiwan…We must understand that whoever sets the rules for its applications will win this great-power competition and determine the global balance of power.”