At the Heart of China’s Self-Sufficiency Gamble

Over the last 40 years, after the establishment of socialism with Chinese characteristics and China’s subsequent financial revolution, business logic has surmounted strategic and political rivalry between the White House and Beijing. So long as demand expanded abroad, China would continue to supply, rapidly developing its Special Economic Zones to transform the mainland and lift its people to economic prosperity. However, this development was always driven by one goal: to one day achieve self-sufficiency and join the global stage as a pioneer, not a follower. Increasingly, the picture of dependency between the US and China is inverting and as China begins to flex its newfound economic power, retaliation from the US is fierce. The recent focus is on technology, as China aims to terminate its reliance on imports and increase its bargaining power, namely regarding semiconductors and computer chips.

 

Over the last six months, as US–China tensions continue to mount, China’s largest computer chip maker, Semiconductor Manufacturing International Corporation (SMIC) has ceased to appear in the media. Employing over 18,000 people globally, SMIC produces around 2 million electronic chips a month. The firm is China’s principal hope at producing cutting-edge computer chips at home to power everything from smartphones and 5G base stations to military systems. China’s overreliance on foreign exporters is evident, a product of its late coming to the business, with local chip companies fulfilling only 10 per cent of domestic demand, having to import more advanced models from Taiwan Semiconductor Manufacturing Company (TSMC), Intel and Samsung.

 

SMIC is now at the centre of China’s venture, as the country pours its resources into the semiconductor race to catch-up with foreign chip makers. Intensifying its recruiting efforts, China now targets top engineers from firms in more competitive countries, with 3000 Taiwanese engineers now working on the mainland. A local Chinese report put the country’s yearly spending on raw materials for semiconductor products at 160 billion USD, surpassing its spending on petroleum goods. In October 2019, the country even started a 29 billion USD fund to bolster the semiconductor industry. This all comes despite China being the largest consumer of semiconductor-based products. Committed to fighting the US over trade, China needs to emerge as a competitive producer of computer chips to first fulfil internal demand and correct the significant opportunity cost of starting-up alone.

 

In June, SMIC delisted from the New York Stock Exchange, responding to a threat from the US senate forcing Chinese companies to delist for refusing to open their books to regulators. The Chinese corporation subsequently offered on Shanghai’s STAR market (a new listing for China’s newest technology stocks set to rival US NASDAQ). To finance their expansion, SMIC started efforts to raise fresh capital but has recently struggled, as the US threatens the further blacklisting of Chinese technology companies after banning Huawei from US activities earlier this year. The firm has already raised 2.25 billion USD primarily from lenders on Chinese soil and state-backed funds but plans to seek an ambitious further 2.8 billion USD on the Shanghai Stock Exchange. This puts SMIC in a precarious position, relying on international investor confidence whilst in fierce competition with bigger, better competitors abroad and a domestic market demanding an as-of-yet undeveloped product. On Monday 7th of September, rumoured reports of US blacklisting caused the company share price to tumble, down 22.9 per cent in Hong Kong and 11.3 per cent in Shanghai, erasing 6.1 billion USD from the company’s market capitalisation. Currently, the US blacklist includes Chinese military providers, Huawei and 5G development firms and other companies suspected of involvement in human rights violations in Xinjiang province, the Uighur homeland in Western China. The blacklist not only signals serious concerns of flagrant violations in countries outside of China’s sovereignty, but also greatly hinders the ability of these companies to trade with US allies.

 

While domestic players believe that US sanctions have created more domestic demand for Chinese chips, helping scale-up smaller firms in China’s supply chain, the global technology supply chain is sure to be disrupted. At the core of this issue is China’s sourcing of the raw materials it needs to achieve its expansion in production. Xi Jinping’s belt and road initiative now stretches across Eurasia, reaching deep-water ports in Pakistan, oilfields along Russian sea-routes and mines in Mozambique. China’s access to these is remarkable, but China’s handling of these assets remains unpredictable. It would not be the first time China finances a high-debt, high-risk endeavour (such as the Sri Lankan port of Hambantota) and forces the relinquishing of key assets crucial for the development of local communities. As the decoupling of the US and China continues to unfold, and sanctions lists expand, these concerns will have to be weighed, and the supply chains of international industries carefully monitored. The self-sufficiency of China may not be far-off, but what it will look like and how the global community can best prepare itself remain important questions.

 

By Edouard Nelson

Senior Editor: Gonzalo Riera-Ripoll

 

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