Ian Williams
China is entering the new year with its tech ambitions under a Covid cloud. The enormous cost of the now abandoned zero-Covid policy has badly strained government finances, and the communist party’s pledge to build a world-beating chip industry, already reeling from American sanctions, is falling victim to the familiar ills of cost, waste and corruption.
A much hyped one trillion yuan ($145 billion) investment plan is reportedly on hold. Costly subsidies have born little fruit but they have encouraged graft and provoked sanctions. As a result, government officials are looking at alternative ways of encouraging growth in the semi-conductor industry, according to Bloomberg.
The problems with the chip programme have raised broader questions about whether China’s increasingly autocratic system is capable of innovation
Xi Jinping has pledged that China will ‘resolutely win the battle in key core technologies’, and a domestic semi-conductor industry is fundamental to that ambition. Chips are crucial to the production of products ranging from smartphones to laptops, cars, aircraft and even cookers and refrigerators. The most advanced semi-conductors power artificial intelligence, which has numerous military applications. As relations between the US and China have deteriorated, so they have become a key battleground in the race for supremacy in the technologies of the future. Xi has told Chinese scientists, ‘Technological innovation has become the main battlefield of the international strategic game’.
The US has placed three dozen Chinese tech companies on a trade black list, the so-called ‘entity list’ of firms deemed a threat to national security. More recently it has restricted the export to China of high-performance chips critical for the development of supercomputers, surveillance systems and advanced weapon systems. Washington has also restricted the tools for making the chips. The latest controls are particularly potent because they include foreign-made chips that use American tools and software in the design and manufacturing process. The US dominates the production of such tools, and now any firm using them will require a licence for exporting to China.
The latest trade figures show how these restrictions are starting to bite. Chinese imports of chip-making equipment from the US fell to $349 million in November, roughly half the value of a year earlier. There were also sharp falls in imports from American allies Japan and South Korea. US staff and companies working in the chip sector have been moving out of the country. Tech companies are examining their supply chains – this week it was reported that Dell, the world’s largest computer maker, will stop using Chinese made semiconductors by 2024 and has told suppliers to reduce the use of other China-made components.
This has given Beijing’s efforts to build a domestic chip industry more urgency, though ‘decoupling’ supply chains is a two-way process, which arguably began in China in 2014 with its Made in China 2025 programme. This spelt out Beijing’s strategy to be free of western technology, including chips, by 2025 and to create local champions. It coincided with a greater emphasis on ‘Military-Civil Fusion’, an explicit strategy to make technology developed (or otherwise acquired) by Chinese companies available to the military.
One case in point is a rapidly growing company called Yangtze Memory Technologies Corp (YMTC), which is based in the city of Wuhan, and is seen by Xi as a national champion in his efforts to develop a domestic chip industry. It has benefited from generous subsidies, and US officials allege that the company works closely with the Chinese military and has violated earlier trade sanctions by supplying chips to Huawei, the Chinese telecoms company. Washington has imposed export controls on the company and US chip equipment suppliers have pulled their US staff out of its facilities. It is a rapid reversal for YMTC, which had been courting high-profile clients, including Apple, which was considering using YMTC chips in some smartphones, triggering outrage from US lawmakers.
China’s chip strategy has involved throwing billions of dollars at the industry, and it appeared to be going awry even before this week’s reports of a pause in the programme. Shortly before the five-yearly communist party congress last October gave Xi an unprecedented third term as party boss, an anti-corruption campaign targeted top officials in the chip industry, including the country’s information technology minister, amid fears that funds were being squandered or stolen.
It is hard to say precisely how much China’s zero-Covid policy cost the country, but the economic hit, directly and indirectly, has been enormous. Last year, analysts at Soochow Securities, a China-based brokerage, estimated that the annual cost of Covid testing alone was running at 1.7 trillion yuan ($257 billion), roughly 1.5 per cent of GDP. This is the context in which the government now appears to be re-examining its massive chip investment programme.
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