Brian Liu, Raquel Leslie
Decoupling between the United States and China accelerated in late November as both countries adopted new trade restrictions against the other. On Nov. 24, the U.S. Commerce Department announced export controls on eight Chinese quantum computing companies. A week prior, Bloomberg reported on new import controls created by a quasi-governmental Chinese industry panel known as the “Xinchuang committee,” which effectively blacklists technology companies that are more than 25 percent foreign-owned from supplying sensitive industries.
In a press release, the Commerce Department stated that it added the eight Chinese quantum computing companies to the Entity List in an effort to “prevent U.S. emerging technologies from being used for the [Chinese military’s] quantum computing efforts.” American companies are barred from exporting certain products to companies on the Entity List without applying for a special license from the Commerce Department; such licenses are rarely approved. The list was created in the late 1990s to address weapons proliferation, but it has since evolved into a general tool to protect U.S. security and economic interests.
As a policy tool, the Entity List is not without its drawbacks. Imposing export controls on Chinese companies can often produce adverse effects on American companies further downstream in the supply chain. After the Trump administration added Huawei to the Entity List in 2019, stock prices of American chipmakers Intel, Qualcomm, and Broadcom, and networking modules manufacturer NeoPhotonics, fell between five and 30 percent. Stock prices of IQE, a British semiconductor manufacturer that supplies suppliers to Huawei, fell by more than 40 percent.
The Commerce Department’s move represents a line of continuity with Trump-era China trade policies. Since taking office in March, Secretary of Commerce Gina Raimondo has added at least 66 Chinese companies to the Entity List. After her confirmation hearing, Raimondo pledged to use the Entity List to “full effect.” Still, Republicans have pushed the Biden administration to adopt even more aggressive export restrictions. In an op-ed in October, Republican Sen. Tom Cotton labeled Raimondo the “Secretary of the China Lobby.” Cotton also placed a hold on Biden’s nominee for the Commerce Department’s Bureau of Industry and Security (BIS), the organization that administers the Entity List, but later lifted the hold after the nominee promised that he would “aggressively” police tech exports to Beijing.
Chinese analysts have argued that the Xinchuang committee and China’s broader push for technological self-reliance are a direct result of the U.S. export controls. Chinese internet research firm iResearch stated in a report in July that “U.S. choke-hold policies, exemplified by the Entity List, were the direct catalyst that pushed China to build the Xinchuang sector …. [The Entity List] underlined the urgency for China to invest more in technology innovation and have the key technologies made in China.” Others have argued that Chinese President Xi Jinping’s call for greater technological self-reliance was motivated in part by seeing the effect of American export restrictions on Huawei.
China has officially rejected the allegations in the Bloomberg report, with a foreign ministry spokesperson denying that China has plans to replace foreign technology. However, the denial was undercut by reports the following week that Xi approved a new three-year plan to revamp the state technology system, with the ultimate goal of “self-sufficiency and self-empowerment in technology.” Reports also emerged on Nov. 26 that the Cyberspace Administration of China, China’s central internet regulator, asked top executives at the ride-hailing giant Didi Chuxing to propose a plan for delisting the company from the New York Stock Exchange over data security concerns. These moves indicate that tech decoupling between the U.S. and China will continue unabated, despite Xi’s and Biden’s rhetoric.
Alibaba, Tencent Fined Following Launch of China’s Expanded Anti-Monopoly Bureau
Alibaba and Tencent are the latest Chinese tech giants to be fined by Chinese market regulators in the wake of the government’s official launch of an expanded anti-monopoly bureau on Nov. 18. The rebranded government agency will be responsible for antitrust enforcement and housed within the State Administration for Market Regulation (SAMR), the country’s top competition watchdog.
China’s State Council appointed Gan Lin, an agricultural scientist, as deputy minister of the new bureau on Nov. 15. Gan was formerly deputy minister at SAMR and rose to prominence earlier this year for her role in the country’s anti-monopoly campaign. The statement announcing her appointment was the first time the government referred to SAMR’s antitrust unit as the National Anti-Monopoly Bureau. China’s anti-monopoly functions were previously conducted under the Ministry of Commerce, the National Development and Reform Commission, and the former State Administration for Industry and Commerce. Following State Council reforms in 2018, regulatory supervision was handed over to SAMR.
Gan told state-run Shanghai Securities News that SAMR’s focus is to prevent the “disorderly expansion of capital” in China, “strengthen regulations on the digital economy, technological innovation and information security, and to safeguard the general well-being of the public.” The change in the agency’s name and the seniority of its leadership may signal an elevation in the antitrust bureau’s status as Beijing continues its push to keep Big Tech in check. China’s antitrust regulators have taken on a powerful role after Beijing made its intentions to break up monopolies clear at the end of 2020.
The once-low-profile SAMR made headlines this year when it began to aggressively root out and penalize anticompetitive behavior in China’s online “platform” economy at President Xi’s direction. In April, SAMR fined Alibaba a record $2.8 billion for abusing its market dominance, followed by a $543 million penalty on Meituan in October for violating anti-monopoly regulations. SAMR also issued fines on Tencent and others in April for failing to report proposed mergers to authorities. In October, China moved to increase antitrust penalties in its Anti-Monopoly Law for the first time since it came into force in 2008. A draft amendment of the law was submitted to the Standing Committee of the National People’s Congress for a first reading on Oct. 19, with the final version expected to be enacted sometime in 2022.
Following the announcement of the National Anti-Monopoly Bureau, SAMR doled out the latest round of fines in the government’s ongoing crackdown on monopolies on Nov. 20, penalizing Alibaba and Tencent once more for failing to report corporate acquisitions. Other companies sanctioned by SAMR include online retailers JD.com Inc., Suning Ltd. and Baidu Inc. The corporations failed to report 43 acquisitions that occurred up to nine years ago under rules on “operating concentration.” Each violation carries a penalty of 500,000 yuan ($78,000).
The earliest deal under scrutiny was a 2012 acquisition involving Baidu and information technology firm Nanjing Wangdian, and the most recent was the 2021 agreement between Baidu and Chinese automaker Zhejiang Geely Holdings to create a new-energy vehicle company. Other deals cited by SAMR include Alibaba’s 2014 acquisition of Chinese digital mapping and navigation firm AutoNavi and its 2018 purchase of a 44 percent stake in Ele.me—the country’s second-largest on-demand delivery company after Meituan. According to the regulator, however, the deals did not have the effect of eliminating or restricting competition.
China has made antitrust enforcement a priority in its recently published five-year plan for the development of rule of law in the country, suggesting that Beijing’s regulatory scrutiny over the anticompetitive behavior of Chinese tech giants could be the new normal. The newfound vulnerability of Chinese Big Tech to regulatory attacks has thus far facilitated their cooperation with the government on a wide variety of policy objectives and may prove instrumental in advancing Beijing’s broader goal of technological self-sufficiency.
Other News
Chinese News Groups Warned of Penalties for “Information Security” Violations
Xie Dengke, head of content at the Cyberspace Administration of China, stated on Nov. 16 that news organizations could be pulled from China’s new “white list” of approved internet news providers if they violate “information security.” Xie warned that internet regulators would suspend the qualifications of any news outlets that experience information security “accidents,” though he did not explain what would qualify as an accident. After the suspension period, the news source’s qualifications will be reviewed for formal revocation or restoration to the approved list. Xie added that any sites that carried content from sanctioned sources during the suspension and review period would face punishment.
Xie’s comments followed the administration’s release in October of a white list of government-approved news outlets whose content can be carried by other media. The list contained 1,358 outlets—roughly four times the number of outlets in its last iteration in 2016—and included mobile apps, Weibo, and WeChat social media accounts run by official media sources for the first time. However, it notably excluded some of the more liberal mainland Chinese news organizations including financial news outlet Caixin. According to the Cyberspace Administration of China, organizations were deleted because they “no longer fit the conditions, have poor performance or lack influence.”
Caixin has earned a reputation as one of China’s most dogged investigative journalism outlets, regularly reporting on corruption, pollution and public anger at the government’s perceived shortcomings. In 2016, it took the unprecedented step of reporting on how the Cyberspace Administration of China deleted one of its own articles. Its ouster from the white list means that its articles will no longer appear on internet platforms like Sina.com that are popular ways for the Chinese public to consume news.
The Chinese government has tightened its grip on the media sector since President Xi
took office and instituted a regulatory crackdown on a range of industries. On Oct. 8, China’s National Development and Reform Commission proposed new rules barring private capital from news gathering and distribution, a move that appears designed to weaken its influence vis-a-vis state media. Chinese authorities also reportedly requested in March that Alibaba divest some of its media assets, including the South China Morning Post, over growing concerns about the company’s sway over public opinion in China.
U.S. House Poised to Enact Law to Better Compete With Chinese Technology
The House of Representatives is poised to pass the U.S. Innovation and Competition Act (USICA), Senate Majority Leader Chuck Schumer’s $250 billion plan to enable U.S. technology companies to better compete with China. The bill allocates tens of billions of dollars to bolster domestic semiconductor manufacturing and mandates sanctions against entities involved in Chinese cyberattacks against the U.S. The bill also authorizes the Committee on Foreign Investment in the United States to review foreign gifts and contracts with U.S. universities that would “provide [China] with potential access to critical technologies.”
USICA passed the Senate in June with bipartisan majorities but stalled in the House for months over disagreements about specific provisions of the bill. In an effort to break the logjam, Schumer pushed to attach USICA to the National Defense Authorization Act, the annual must-pass defense appropriations law. After Senate Republicans raised objections to the attachment, House Speaker Nancy Pelosi and Schumer announced a deal to delink the bills and to resolve the chambers’ differences through a conference committee.
The impending passage of the bill portends escalating economic competition between the U.S. and China, despite Xi and Biden’s recent summit where the two leaders pledged closer cooperation. Beijing has issued stark warnings that USICA’s passage would be met with reprisals, likely by blocking select exports essential to key U.S. industries. In the past several weeks, China’s embassy in Washington has lobbied U.S. business groups to speak out against the bill, arguing that it reflects a “zero-sum mindset” and harms the interests of both American and Chinese companies. Their warnings are unlikely to succeed, however; if the bill passes the House, President Biden is expected to sign it into law.
Top Executives at China’s Top Chipmaker Resign En Masse, Exposing China’s Semiconductor Struggles
Top executives at Semiconductor Manufacturing International Corporation (SMIC), China’s largest chipmaker, resigned en masse on Nov. 11, further frustrating China’s attempts to resolve its domestic semiconductor shortage. In a stock exchange filing, SMIC announced that its vice chairman, co-CEO, and two other board members had resigned effective immediately. The announcement comes two months after the company’s former chairman announced his resignation, citing personal health reasons.
The personnel change is likely to adversely affect China’s ability to meet its “Made in China 2025” target of producing at least 70 percent of “core materials” domestically by 2025. Overall domestic production of semiconductors in China remains at 16 percent, despite government efforts to boost production. Semiconductor chips enable a wide range of commercial and military technologies, from televisions to electronic weapons systems.
Since the Commerce Department added SMIC to its Entity List in late 2020, the chipmaker has struggled to grow sales and remain competitive in research and development. SMIC’s chips remain roughly two or three generations behind those produced by Taiwan Semiconductor Manufacturing Company, the world leader in semiconductor manufacturing. In addition to blocking American companies from doing business with SMIC, the Biden administration has pressured the Dutch government to restrict exports of critical ultraviolet lithography machines to China, limiting SMIC’s ability to manufacture advanced chips.
Despite Washington’s best efforts, some American companies and investors are still continuing to make investments in China’s semiconductor industry. Intel’s venture capital arm has reportedly backed Primarius Technologies, a Chinese startup. A recent Wall Street Journal analysis showed that U.S. investors and chip manufacturers participated in 58 Chinese semiconductor investment deals from 2017 to 2020, more than double the number from the previous four years.
Commentary
In Foreign Policy, Jianli Yang and Lianchao Han argue that the opening of China’s internet should be a core component of the Biden administration’s new approach to its trade relationship with China.
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