China is convinced that US ‘economic coercion’ is doomed to fail, as China imported about $440 billion worth of chips in 2021, far exceeding the number of subsidies the US will grant under their CHIPS law.
Until very recently, the United States maintained an asymmetric advantage in global technological innovations. However, over the past two decades, its leadership has been increasingly challenged by China’s “great leap forward” in developing a deep-pocketed digital infrastructure architecture. In 2014, China established the National Integrated Circuit Industry Investment Fund, known as the “Big Fund” (大基金), aimed at advancing China’s semiconductor industry. The following year, China rolled out an ambitious Made in China 2025, with the goal of achieving 70% “self-sufficiency” by 2025 in basic components and critical materials, pushing the United States out and other actors in their sleep. If these reasons were not enough to justify a cold war between the United States and China, the severe disruptions caused by the Covid-19 pandemic in sectors such as telecommunications, electronics and automotive have forced countries to build new supply chains away from China.
As the United States tightened the noose around high-tech exports, China’s semiconductor industry faced the heat. In an effort to raise more money, it was reported by 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 over 200 billion yuan ($30 billion). Considering the proportion of 3 to 4 times, it is expected to leverage the scale of social financing of nearly one trillion yuan (about 148 billion US dollars). Such huge funding with not-so-spectacular results has raised many eyebrows in the halls of Chinese power, and the Party’s anti-corruption watchdog, the CCDI, has opened investigations into corruption plaguing 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 downfall of eight industry leaders from China’s Big Fund and Tsinghua UniGroup.
Bigwigs like Ding Wenwu, chairman of Big Fund, Du Yang, Yang Zhengfan and Liu Yang, all associated with Sino IC Capital, have fallen out of favor. It can be noted that Sino IC Capital manages assets belonging to Big Fund. Wang Wenzhong, a partner of Shenzhen Hongtai Fund Investment Management Co. Ltd., and Lu Jun, the former deputy director of the China Development Bank, came under the CCDI scanner. In addition, Zhao Weiguo, the former chairman of Tsinghua UniGroup, and Diao Shijing, the former chairman of the same company, were also investigated in July. The Tsinghua UniGroup is believed to be closely related to the Big Fund. According to Pan Helin, co-director and researcher of the Digital Economy and Financial Innovation Research Center of Zhejiang University’s International Business School, “the anti-corruption campaign must continue and expose the hypocrisy , [real] face and formalism (虚伪，面子，形式主义) of the semiconductor industry. According to statistics, there are 142,900 chip-related enterprises 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 July 28 and its signing into law by President Joe Biden on August 9. Bill allocates $52.7 billion over five years to fund and encourage U.S. semiconductor manufacturing with a 25% tax credit, and authorizes nearly $170 billion in funding over five years for research and development. The bill includes provisions that generally prohibit recipients of CHIPS funding and the investment tax credit from expanding semiconductor manufacturing in China for a period of ten years. According to a statement from the U.S. State Department, the bill will “prepare our economy for the 21st century and strengthen our regional supply chain diplomacy, including through the U.S.- EU, the Indo-Pacific Economic Framework and the Partnership of the Americas for Economic Prosperity.
As expected, the bill angered China and government officials called it a “violation of the WTO principle of non-discrimination”. Others called it a “major shift in the US crackdown on China” and an “arbitrary US push for supply chains to be removed and decoupled from China”. This is understandable because “China’s dependence on global semiconductors still exceeds 90%, and the localization rate of chips in some areas is below 10%,” according to one report. In the 13th Five-Year Plan, China considered designing and developing 32/28nm, 15/14nm and accelerating R&D on 10/7nm chips, but it seems that these have not reached their goals.
Yet China remains convinced that US “economic coercion” is doomed to fail, as China imported about $440 billion worth of chips in 2021, far exceeding the number of subsidies the US USA will grant under the new law. China is confident that semiconductor investment in China is on an upward trajectory, as “China consumes up to 40% of the world’s production of semiconductor microchips.” Currently, the majority of global semiconductor companies are located in the East Asia-Pacific region. In 2020, Taiwan controlled 63% of the market share, South Korea 18% and China 6%. According to a recent industry report (2022), the self-sufficiency rate of China’s IC industry is relatively low, especially in the field of mid-to-high-end chips, and the phenomenon of import dependence is serious. Localization is expected to accelerate with production from the SMIC factory in Shenzhen since 2022, analysts said, but the chips produced would be mostly 28nm. Reports reveal that SMIC has made a breakthrough in developing a near 7nm process regardless of US sanctions.
Since the Industrial Revolution 4.0 is fueled by big data, the CHIPS and Science Act and the Chip4 Alliance of the United States, Taiwan, South Korea and Japan have forced China to crack down on its semiconductor industry. drivers, which is considered very corrupt and partially controlled by the Shanghai clique. Given the importance of the industry and US decoupling, China will continue to pump money into the sector, albeit in a more regulated and cautious way, and will strive to achieve self-sufficiency, particularly in the segment of 10nm and smaller chips which are crucial for quantum computing, AI, hypersonic, and 5G etc., technologies. Achieving the same will further accelerate China’s economic dominance and military assertion in the region and beyond.
BR Deepak is a professor at the Center for Chinese and South Asian Studies at Jawaharlal Nehru University in New Delhi.