China is confident that the US’ ‘economic coercion’ is doomed to fail, for China imported about $440 billion worth of chips in 2021, far exceeding the number of subsidies the US is going to provide under its CHIPS Act

Until very recently, the United States maintained asymmetric advantage in global technological innovations. However, since the last two decades, its leadership has been increasingly challenged by China’s “great leap forward” in developing a digital infrastructure architecture with deep pockets. In 2014, China set up the National Integrated Circuit Industry Investment Fund, known as the “Big Fund”, aimed at leapfrogging China’s semiconductor industry. The next year, China rolled out an ambitious Made in China 2025, with an objective of achieving 70% “self-sufficiency” by 2025 in core components and critical materials, jolting the US and other players from their slumber. If these were not good enough reasons for a US-China cold war, heavy disruption by the Covid-19 pandemic across industries such as telecommunication, electronics and automobile forced countries to build new supply chains away from China.

As the US tightened its noose around hi-tech exports, the Chinese semiconductor industry faced the heat. In a push to raise more money, it has been reported by the Chinese media, in the first phase of its funds, Big Fund raised 138.7 billion yuan ($20.5 billion), and for the second phase between 2019 and 2021, raised more than 200 billion yuan ($30 billion). Given the proportion of 3-4 times, it is expected to leverage the scale of social financing of nearly one trillion yuan (around $148 billion). Such a huge funding with not so spectacular results raised many eyebrows in China’s power corridors, and the anti-corruption watchdog of the Party, the CCDI, started investigations into the corruption running amok in the industry. In November 2021, Gao Songtao, the former vice president of Huaxin Investment Management Co. Ltd., also known as Sino IC Capital, was investigated. The arrest of Xiao Yaqing, China’s minister of industry and information technology, in July 2022, was followed by the fall of eight industry leaders across China’s Big Fund and Tsinghua UniGroup.

Bigwigs like Ding Wenwu, president of Big Fund, Du Yang, Yang Zhengfan, and Liu Yang, all associated with Sino IC Capital, have fallen from grace. It may be noted that Sino IC Capital manages assets belonging to Big Fund. Some others who have come under the scanner of the CCDI are Wang Wenzhong, a partner of Shenzhen Hongtai Fund Investment Management Co. Ltd., and Lu Jun, the former deputy director of China Development Bank. Besides, Zhao Weiguo, the former chairman of Tsinghua UniGroup, and Diao Shijing, the former president of the same company, were also investigated in July. The Tsinghua UniGroup is believed to be closely related to the Big Fund. In the words of Pan Helin, co-director and researcher of the Digital Economy and Financial Innovation Research Centre of Zhejiang University International Business School, “Anti-corruption campaign must go on, and unmask the hypocrisy, [real] face, and formalism of the semiconductor industry.” According to statistics, there are 142,900 chip-related companies in China. In the first half of 2022 alone, China added 30,800 chip-related companies.

These investigations in China coincided with the CHIPS and Science Act passed by the US Congress on 28 July and its enactment into a law by President Joe Biden on 9 August. The bill allocates $52.7 billion over five years to fund and incentivize semiconductor manufacturing in the United States with 25% tax credit, and authorises nearly $170 billion in funding over five years for research and development. The bill includes provisions that generally prohibit beneficiaries of the CHIPS funding and investment tax credit from expanding semiconductor manufacturing in China for a period of ten years. According to a statement from the US Department of State, the bill will “prepare our economy for the 21st century and strengthen our regional supply chain diplomacy, including through the U.S.-EU Trade and Technology Council, the Indo-Pacific Economic Framework, and the Americas Partnership for Economic Prosperity.”

As expected, the bill drew China’s ire and government officials labelled it as “violation of the WTO’s non-discrimination principle.” Some others called it a “major shift in the US crackdown on China” and US’ “ arbitrary push for supply chains to be removed and decoupled from China”. This is understandable as “China’s dependence on global semiconductors still exceeds 90%, and the localization rate of chips in some fields is less than 10%” according to a report. In the 13th Five Year Plan, China has envisaged to design and develop 32/28nm, 15/14nm, and accelerate the R&D on 10/7nm chips, however, it appears that these fell short of their objectives.

Yet China remains confident that the US’ “economic coercion” is doomed to fail, for China imported about $440 billion worth of chips in 2021, far exceeding the number of subsidies the US is going to provide under the new Act. China is confident that the semiconductor investment in China is on an upward trajectory as “China consumes up to 40 percent of global output of semiconductor microchips”. Presently, the majority of the world’s semiconductor companies are located in the East Asia-Pacific region. In 2020, Taiwan controlled 63% of the market share, with South Korea at 18% and China at 6%. According to a recent industry report (2022), the self-sufficiency rate of China’s integrated circuit industry is relatively low, especially in the field of mid-to-high-end chips, and the phenomenon of dependence on imports is serious. According to analysts, the localization is bound to accelerate with SMIC’s Shenzhen factory production since 2022, but the chips produced would be mostly of 28nm.The reports reveal that the SMIC has achieved breakthrough in developing a quasi 7nm process irrespective of US sanctions.

Since the 4.0 industrial revolution is being fuelled by big data, the CHIPS and Science Act and the Chip4 Alliance of the US, Taiwan, South Korea and Japan have forced China to crack down on its semiconductor industry, which is believed to be highly corrupt and partially controlled by the Shanghai clique. Given the importance of the industry and the US decoupling, China will continue to pump money into the sector albeit in a more regulated and cautious way and strive for self-sufficiency, especially in 10nm and lower chips segment that are crucial for quantum computing, AI, hypersonic, and 5G etc., technologies. The realisation of the same will further accelerate China’s economic dominance and military assertiveness in the region and beyond.