By Yoko Kubota in Beijing and Liza Lin in Singapore 

China has introduced a sweeping policy to swap the foreign technology products the government uses with indigenous ones, people familiar with the matter said, doubling down on its efforts to decouple its technology sector from the U.S. amid the trade war.

Chinese government agencies and critical infrastructure providers such as telecom operators and power grids must start allocating a certain ratio of information technology procurement contracts to domestic suppliers, the people said.

The initiative, introduced last year but not made public, comes amid trade tensions between Washington and Beijing and the U.S. blacklisting of Chinese companies such as the giant smartphone maker Huawei Technologies Co. China's attempts to ease its reliance on U.S. technology are also driven by a fear of backdoors into its operations, analysts say.

According to China's directive, 30% of those government contracts in 2019 have to be signed with indigenous suppliers. In 2020, that ratio would go up to 80%, or an additional 50 percentage points; and in 2021, up another 20 percentage points to 100%, they said -- known internally as the 3-5-2 rule.

CSC Financial, a securities firm, has estimated that some 20 million to 30 million units of computers and equipment could be swapped to domestic products between 2019 and 2022 because of the policy initiative.

China has long sought to wean itself off of American technology, including servers, operating systems, and chips made by U.S. companies such as International Business Machines Corp., Microsoft Corp. and Intel Corp. Still, this fresh initiative came in 2018, at a time when the trade friction and technology competition were escalating between the U.S. and China, and as some Chinese companies started to face restrictions from Washington to buy goods from American suppliers.

Last year, U.S. companies were barred from doing business with Chinese telecom gear maker ZTE Corp. as punishment for violating terms of an earlier deal to settle allegations that it engaged in sanctions-busting sales to Iran and North Korea.

The ban nearly brought ZTE's operations to a halt. It served as a stark reminder to China how its technology sector remains reliant on foreign companies and technology, including chips, even as it makes strides in areas such as smartphones and telecom equipment.

The ZTE restriction has since been lifted, but the U.S. has continued to blacklist other Chinese companies. They include telecom equipment and Huawei, chip maker Fujian Jinhua Integrated Circuit Co., surveillance-system producer Hangzhou Hikvision Digital Technology Co. and facial-recognition business companies SenseTime Group Ltd.

The information office of the State Council, China's cabinet, and the National Reform and Development Commission, China's planning agency, couldn't be reached for comment late at night.

The Financial Times reported earlier on the policy initiative.

The direction of the initiative comes as no surprise to many U.S. businesses. Jacob Parker, senior vice president at the U.S.-China Business Council, said that such a policy directive would be in line with the messages that the business lobby has heard from the Chinese government on its push to diversify away from U.S. technology.

Decoupling China's technology infrastructure won't be simple or cheap, said Randy Phillips, Asia Managing Partner for corporate investigations firm Mintz Group. "Even with China's resources, it will still cost a sizable sum of money," said Mr. Phillips, who is also a member of the American Chamber of Commerce's board in Beijing. "It's not as simple as swapping out the technology. There's also new training for staff, maintenance, it's a whole logistical trail that requires funding."

American technology companies in China are all feeling the pressure from China's intentions to shift away from Western technology and are seeking ways to stay relevant, he added.

Analysts say China fears data breaches such as the ones involving Microsoft in 2008 and Edward Snowden's revelations of a U.S. surveillance scheme using American technology infrastructure in 2013 only further triggers this insecurity, they said.

U.S. firms have tried various ways to participate in government tenders as China ramps up purchases of domestic goods, including forming joint ventures and tailoring it's products to Chinese authorities' requirements.

In 2015, Hewlett Packard Co. sold a majority stake in its Chinese server and storage unit H3C Technologies Co. to state-owned Tsinghua Holdings for $2.3 billion, to allow the company to bid for Chinese government contracts and boost the operation's prospects. Microsoft customized a version of its Windows 10 software solely for the Chinese government's use in 2017.

In recent months, some U.S. companies faced hurdles. In August, Cisco Systems Inc.'s CEO said that the company, which in the past has sold products to China's large carriers and state-owned enterprises, was no longer being asked to participate in bids.

Write to Yoko Kubota at yoko.kubota@wsj.com and Liza Lin at Liza.Lin@wsj.com

(END) Dow Jones Newswires

December 09, 2019 15:09 ET (20:09 GMT)

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