As per the report by The Sunday Standard the IAF – Indian Air Force have issues warring with reference to any Chinese smartphone including Xiaomi. They say it is a threat and one should avoid it.
Xiaomi was in the news before for the same security threat. IAF has claimed that Xiaomi devices were sending private data from the smartphone to server in China. The CERT-in Indian team also mentioned that the smartphone indeed was sending data to servers in China.
Xiaomi, I believe have taken this seriously, they did mention about how serious they are when it comes to user privacy and now the latest post by Hugo Barra on Google+ will answer most of your questions as to as to why the smartphones are sending data to servers in China specially with reference to Mi Account, Cloud Messaging and Mi Cloud services.
Now these services do need a sever which incidentally is in China and when you use these services no doubt your data will be stores on these servers. The problem with China is that the Chinese government can legally access the data from these servers if and when required – does not matter if its a Chinese company or foreign company.
Update – 23/10/2014
Xiaomi (via email) have clarified that they use various internet services – the Cloud messaging and Mi- Cloud are using it. Xiaomi have mentioned that the data is secure and not stored beyond the time required. Moreover these cloud services are optional – users can disable them if needed.
With reference to F-Secure issue (it is a week old) that was also highlight by IAF, Xiaomi had addressed it and the same has been acknowledged by F-Secure. For more details check this link http://www.f-secure.com/weblog/archives/00002734.html
And finally Xiaomi will be moving their servers out of China. They have already started migrating services to Amazon AWS data centers in USA and Singapore, it will be completed by end of 2014. The company is also planning to setup servers in India in 2015.
There is also news about Xiaomi interested in the Android One project, they want to manufacture Android One smartphones.