Chinese spy threat spooks US tech sector

Today’s top stories

• The Israeli military said senior officers had approved “operational plans for an offensive in Lebanon”, as fears grow that Israel and Hizbollah could slide into a full-blown conflict.

• The European Central Bank said Eurozone countries faced “significant fiscal burdens” from ageing populations, extra defence spending and climate change, making it more urgent that they cut their high debt levels.

• UK inflation returned to the Bank of England’s 2 per cent target in May in some welcome news for Prime Minister Rishi Sunak. Higher than expected services inflation however led investors to dial back bets on interest rate cuts. The BoE announces its rates decision tomorrow.

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Good evening.

As the Financial Times reveals today, US tech businesses are stepping up security vetting of staff and potential recruits over concerns about Chinese espionage, the latest twist in the saga of simmering tensions between the two countries.

The moves, from giants such as Google to high-profile start-ups like OpenAI, come amid fears that foreign governments are attempting to use compromised workers to access intellectual property and company data.

Washington has been locked in a battle with Beijing over cutting-edge technologies, particularly in artificial intelligence and advanced chips, and has imposed export controls to make it harder for China to access the latest developments.

Although industrial espionage is nothing new, cases involving Chinese spies appear to have grown in recent years, including alleged stealing of secrets from Google and other IP thefts from the likes of Tesla, Micron and Motorola, the US says.

Europe is also being targeted, resulting in a spate of highly public arrests of Chinese spies in April with tales of “honeypots” and influence operations.

European policymakers, encouraged by the US, have started to see China not just as a source of economic opportunity, but also as a security threat, especially over its support for Russia’s war in Ukraine. G7 leaders last week threatened China with more sanctions after accusing it of “enabling” the conflict while the Ukrainian president accused China of sabotaging the recent peace summit in Switzerland by pressuring countries not to attend. A new FT investigation meanwhile shows Russia has been scouring China for second-hand western machinery to boost its war effort.

US-China tensions are also running high over Taiwan, with Beijing accusing Washington of trying to goad it into war.

The G7 is also upping the ante over China’s economic policies, with the EU slapping new tariffs on Chinese electric vehicle companies and the US imposing new levies on clean-energy products and other imports from China. Beijing has retaliated with measures such as an anti-dumping probe into chemical imports.

As today’s Lex column (for Premium subscribers) explains, Europe’s carmakers are hedged enough to survive tit-for-tat battles with China, but other key export industries — such as pharmaceuticals, aircraft, cosmetics and brandy — could be vulnerable.

Battle is also still ongoing over TikTok after US President Joe Biden signed a law demanding the video app divest from its Chinese parent by next January or face a ban, citing fears that the Chinese Communist party could use data on its 170mn US users for espionage or spreading propaganda.

As HR McMaster, a former US security adviser, tells the FT in today’s story, the business sector has now become the frontline in espionage.

“The vast majority of research and development that has national security implications used to be government programmes, and now it is happening in the private sector, so these companies became really potentially lucrative targets from a Chinese perspective.”

Need to know: UK and Europe economy

Although inflation is dropping, retail industry data seen by the FT suggests consumer demand across Europe is still in the doldrums with discount strategies failing to shift more goods. UK retailers also face the additional burden of a surge in shoplifting.

Labour shadow chancellor Rachel Reeves signalled that private equity bosses who put their own capital at risk in a deal will have earnings taxed as a capital gain rather than as income.

The FT editorial board said neither Tories nor Labour were being upfront about what was needed to fix Britain’s broken public services.

Brussels is to reprimand France for breaching EU budget rules but is already bracing for a potentially far more serious clash with Paris should the far right or left take power. French businesses meanwhile appeared to have been scared off by the left alliance’s policies and are warming to the far-right RN. Here’s our explainer on what a far-right or leftwing government might mean for France’s economy.

Russian President Vladimir Putin thanked North Korea’s President Kim Jong Un for his “consistent support” and pledged to work with him to strengthen both regimes’ resistance to western sanctions.

Need to know: Global economy

A top Federal Reserve official said slowing US retail sales bolstered the case for interest rate cuts this year. Veteran investor Mohamed El-Erian said the longer the wait for cuts, the greater the risks to growth and financial stability.

Businesses in India are trying to assess the implications of a weakened Narendra Modi after the prime minister lost its majority in the recent general election. South Asia bureau chief John Reed says coalition politics might make it harder to pursue reforms in areas including education and agriculture. Opposition leader Rahul Gandhi told the FT that Modi’s government would “struggle” to survive.

Rich countries are following emerging economies by piling into gold, even as prices hit new records. Stockpiles of copper, the world’s most important industrial metal, are building up in China, highlighting the country’s sluggish economy and the upheaval facing the sector due to a global oversupply of smelters.

Getting industrial policy right is a tricky business in a new era of suspicion, protectionism and interventionism, says chief economics commentator Martin Wolf. Wolf picks the best economic reads in our summer books round-up.

Need to know: Business

US chipmaker Nvidia leapt past Apple and Microsoft to become the world’s most valuable company as investor enthusiasm over AI hit new heights. Other “AI winner” stocks however face pressure to back up their growth stories.

Our Tech Tonic podcast series on Chinese tech concludes with a look at the country’s move into “new strategic frontiers” such as space, polar and deep-sea exploration.

Sales of electric vehicles in the US are slowing as customers balk at high prices. Read our new deep dive on the great US EV reset. The sector’s latest casualty is Fisker, which has filed for bankruptcy.

How can the UK become more attractive for new businesses to find the funding they need? The new FT film discusses what can be done to improve the City’s competitiveness as an international capital market.

The World of Work

Amazon workers at a warehouse in Coventry are set to vote in a ballot that could force the company to negotiate with a union over its UK pay and conditions for the first time.

Working from home has become something of an ideological battleground, writes commentator Anjana Ahuja. All the more important then to take heed of evidence from well-designed trials to test assumptions, expose poor policies and promote effective ones.

Can an “AI interviewer” hire better than a human? Listen to the new Working It podcast.

Some good news

UK engineers have worked out how to design a robot capable of leaping 200 metres — higher than any other jumping robot designed to date. The finding could revolutionise applications ranging from planetary exploration to disaster rescue to surveillance of hazardous or inaccessible spaces.