By now, you’ve probably heard the news: The U.S. Department of Justice filed indictments Monday charging five Chinese military officers with hacking into computer systems at five U.S. companies — and hacking the International Steelworkers union to boot.

While hacking by China into U.S. government and commercial computers has long been suspected — and even publicly accused — yesterday’s announcement was the first time the U.S. government had filed official criminal charges against foreign government employees in relation to a hacking incident.

In a 56-page indictment (PDF), the DOJ charged five Chinese military officers — Wang Dong, Sun Kailiang, Wen Xinyu, Huang Zhenyu, and Gu Chunhui — all serving with “Unit 61398” of the Chinese People’s Liberation Army, with hacking U.S. companies to steal commercial secrets with the aim of benefiting “their competitors in China, including state-owned enterprises (SOEs).” Among the companies named as victims of the attacks: Westinghouse, SolarWorld, Alcoa (NYSE: AA), Allegheny Technologies (NYSE: ATI), and U.S. Steel (NYSE: X).

Those are the basic facts of the matter, as stated in the DOJ’s indictment. Now here are the facts that matter to you as an investor.

This is a bigger deal than you think
Announcing the indictment, FBI Director James B. Comey named five individual Chinese officers as perpetrators of the hacks in question and named only five companies as victims of Chinese hacking. But according to the The Wall Street Journal, the DOJ limited this week’s indictment to covering only companies that “allowed themselves to be named” as victims of Chinese hacking. Notably, the DOJ indictment did not mention the hacks, widely believed to have originated in China, that targeted Lockheed Martin (NYSE: LMT) in 2009.

Indeed, according to Internet security company FireEye (NASDAQ: FEYE), there have been “thousands” of Chinese officers involved in similar hacks in recent years. Director Comey noted, too, that “there are many more victims,” in addition to the five firms, and one labor union named in his indictment, “and there is much more to be done.” Expect more indictments to follow.

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It’s also a smaller deal than you think
All that being said, and not to diminish the scale of the scandal, the DOJ’s China indictments this week are unlikely to result in any arrests. Experts largely agree that, because China has no extradition treaty with the U.S., the Chinese are unlikely to ever turn over their military officers to U.S. authorities for prosecution. Given that China Foreign Ministry spokesman Qin Gang has angrily denounced the DOJ’s charges as “fabricated facts” and denied that “the Chinese military and their relevant personnel have … engaged or participated in cybertheft of trade secrets” such cooperation seems even less likely.

Furthermore, when you consider that the U.S. National Security Agency has lately been embroiled in a spying scandal of its own — including spying on Chinese commercial ventures — it’s hard to see how the DOJ can expect the Chinese to adopt anything other than a “pot calls kettle black” attitude to this week’s indictment.

But it will have implications
Accordingly, the risk of diplomatic blowback from the DOJ’s indictment seems very high. Tracking down the source country of a hack attack is no easy matter — and attributing a specific attack to a specific individual hacker is even harder. According to the Journal, it took the DOJ more than six months to develop enough information to make it confident enough in its allegations to file this week’s indictment — but China will have no such problems with responding in kind.

Thanks to Edward Snowden’s helpful data dump in Hong Kong last year regarding U.S. spying activities, literally billions of bytes of data on the NSA, its sources, methods, and key actors are now at the Chinese authorities’ disposal. Should they desire to retaliate against the U.S. by raising this issue publicly and escalating the dispute to the point of issuing official criminal indictments, the Chinese doubtless have the data to do so. Already, the Chinese have reportedly suspended cooperation with the U.S. on a U.S.-China working group on cybersecurity. Don’t be surprised if the next news to break is about Chinese authorities indicting members of the U.S. government security apparatus.

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It will help some companies
And what can investors expect to result from the DOJ’s indictments of five Chinese military officers? Most obviously, the publicity given to the issue of Chinese spying on U.S. citizens, companies, and employees will raise the profile of the Internet security “issue.” It’s almost certain, therefore, to increase interest in computer and network security products from the nation’s leading IT security companies — firms like FireEye (which wasted no time getting itself quoted in stories on the hacking scandal this week).

And harm (or is that help?) others
Farther from the IT sphere, ramifications are likely to be felt in the industry now most closely associated with Chinese hacking: the metals industry. Although Chinese hacking of U.S. companies is doubtless widespread, this week’s indictments focus on Alcoa, Allegheny Technologies, and U.S. Steel, all big actors in the metals sphere — and all of which have been struggling to compete lately in a market dominated by declining sales. All three of these companies reported declining sales in their most recent quarterly earnings releases.

Industry experts expect these allegations to breathe new life into efforts by U.S. Steel and others to get new import tariffs imposed on Chinese steelmakers. If the Chinese military truly is in cahoots with Chinese steelmakers, this would surely amount to the kind of unfair competition that import tariffs were designed to punish. Indeed, responding to news of the indictment, U.S. legislators representing steel industry districts in Pennsylvania, Rep. Mike Doyle and Sen. Bob Casey, are already agitating for President Obama to impose swift punishment on Chinese companies for their “anticompetitive trade practices.”

Perverse as it may seem, this news of China spying on our metals makers couldn’t have come at a better time for its victims.

 

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