MNI: China Must Invest, Innovate To Thwart U.S. Tech Crackdown

President Xi Jinping’s call for greater technology self-reliance will require policy and financial support to accelerate the domestic innovation needed to blunt the impact of new restrictions on U.S tech exports that threaten to derail China’s ambitions to move into advanced manufacturing, advisors and analysts said.

The new U.S. export rules, which further restrict China's access to advanced computing chips, complicate China’s plans to develop new engines of growth in artificial intelligence, biotechnology, new energy, advanced materials and high-end equipment. (See MNI POLICY: Fiscal, Credit Support To Drive China Growth Plans)

China is still in the “third camp” in these areas and is at least 30 years behind the U.S. in the “first camp”, said Jiao Xinwang, president of China Manufacturing Think Tank. The blockade of China from global tech supply chains will force it to innovate independently instead of chasing after developed technology, he said.

China needs more comprehensive industrial policies to drive the modernisation of its industrial base, which includes increased self-sufficiency in semiconductor chips, said Jiao. He proposed improved transparency of industry investment funds to avoid corruption, and mandates to invest in a wider variety of projects across the technology industry rather than just subsidising a fraction of key projects.

Shenzhen city, the tech hub of China, has become a flagbearer for tech development, releasing draft measures to promote the development of the semiconductor and integrated circuit industry. This includes a maximum CNY10 million of incentives per year for research and development of a variety of high-end chips.

NEW RULES “WILL HURT”

“The new rules will hurt China’s high-end manufacturing greater than ever as they precisely target the core sectors that China is catching up with the U.S., including supercomputers, AI, electric vehicles and smartphones,” said Jiao, noting that the capabilities of chips determine the advanced level of modern manufacturing.

China’s chip industry is over two generations behind the U.S. and closing the gap between older 28 nanometre chips, 14nm chips and newer 7nm chips would require another 10 years of development in normal circumstances, said Jiao.

China needs to improve across the chip industry, including design, production, assembly and test, and equipment production. Hisilicon, a subsidy of tech giant Huawei, can design 7nm chips but lacks manufacturing ability, said ANBOUND analyst He Jun.

The country’s top chipmaker, Semiconductor Manufacturing International Corporation, has initiated mass production of 14nm chips, said He. China’s equipment production lags well behind, though it has some advantages in the labor-intensive assembly and testing part of the process, He added.

NO WAY TO RETALIATE

The U.S. monopoly in high-grade chips means there is no way for China to counteract “unless China overthrows a large part of trade with the U.S., which it obviously would not do,” said Shi Yinhong, a U.S. expert at Renmin University and an advisor to the State Council.

The U.S. may offer some exemptions that will mitigate some of the immediate shocks, but China will have to rely on itself in the longer run, said Shi. It was reported last week that chip giants Taiwan Semiconductor Manufacturing Co and Samsung Electronics have won one-year U.S. licenses to keep exporting chips to China.