The Chinese Dream, envisioning the Number One Economy of the World, May Collapse because of Semiconductors

China’s ambitions, to surpass the United States and become the number economy of the world, may collapse because of regulation of semiconductors in the U.S., reported the Hong Kong South China Morning Post (SCMP) on February 8.

“Semiconductor chips are often compared to the beating heart driving technology innovation. But with the United States restricting exports of critical semiconductor components and technology to China, questions are mounting over how long the world’s second largest economy can maintain a pulse,” noted the newspaper.

“Core technologies are China’s Achilles’ heel, despite having the world’s strongest industrial manufacturing capability, and they are easy prey for Washington in its strategy of tech containment,” it added. “Without mastery of the fiendishly complex chips that power everything from cars to smartphones, President Xi Jinping’s hopes of transforming China into the pre-eminent global digital power, while surpassing the US to become the No 1 economy in the world, could fall apart.”

Jun Zhang, Associate Professor of the University of Toronto, told SCMP that semiconductors are the basis of the modern day economy, and explained that there is an approximate estimate that semiconductors worth one yuan can support electricity capacity of 10 yuan, and create an economic product the size of 100 yuan. He said that China faces unprecedented pressure from the U.S., and China’s international competitiveness lies partly in how far U.S. regulation goes.

“US technology containment has led some international organisations to delay - if not drop entirely - forecasts that China will become the world’s No 1 economy,” reported the SCMP.

In a report in November of last year, Goldman Sachs predicted that in 2023, technology regulations by the U.S. could hit the Chinese economy 0.23% points. Further, it predicted that in the mid term, China’s GDP could drop 1.7% points, while growth could be undermined 0.4% points per year in the course of the next four years.

It also presented the outlook that the short term impact would mostly be reflected in semiconductors and computers while in the long term if U.S. control of exports were to continue, China would be impacted even more.

“China’s digital economy accounts for 39.8 per cent of gross domestic product, but for it to power future growth, the country needs high-end semiconductor chips,” reported SCMP. It added that under the surface, pain is already being felt in various industries from automated vehicles to high-speed computing and even AI, and that the economic impact is predicted to be even bigger.

Dan Wang, an analyst at Gavekal Dragonomics, a consulting company, wrote in a report last month that virtually all Chinese hardware companies most respond to the repercussions of the export restrictions announced by the U.S. He noted that such restrictions obstructed the development of China’s semiconductors.

Recently, the Netherlands and Japan agreed to partake in restricting Chinese supply of advanced semiconductor equipment, and this has heightened pressure on China’s semiconductor industry. Previously, Leslie Woo, a semiconductor industry consultant, told SCMP, that “The United States secured a deal with the Netherlands and Japan to restrict China’s access to certain advanced chip-making equipment, dimming Beijing’s hopes of circumventing previous sanctions by importing non-US technologies…Without foreign technology, it could take at least 20 years for China to regain lost ground.”

Moreover, this year, the EU is expected to pass the Semiconductor Act before the end of this year, which is further intensifying the global semiconductor war. The main point of the EU Semiconductor Act is to expand public/private investment with the goal of increasing its market share of global semiconductor production from the current 9% to 20% by 2030.

China has established the goal of increasing the independence rate for semiconductors from 30% of 2019 to 70% in 2025, and has continued to expand investment and support. Last year China’s R&D expenditure was CNY 4.9 tln, which was 10.4% more than the previous year, and a historical high. This accounted for about 2.55% of its GDP.

According to Xinhua News, the government news agency, amidst the ongoing pressure from the U.S., at the end of last month, the Politburo of the Chinese Communist Party discussed plans to improve technological independence at a closed door meeting. However, a senior engineer of a foreign invested semiconductor factory said to SCMP that despite the various incentives and extensive expenditure of the Chinese government, China will not be able to attract high quality human resources of global standards, which are essential for the semiconductor industry. Some government funds shall be wasted on low value-added processes and uncompleted projects. He noted that there are many investors that want to receive support from the government’s campaign.

[Provided by Yonhap News]