{"id":231288,"date":"2024-03-15T14:11:05","date_gmt":"2024-03-15T14:11:05","guid":{"rendered":"https:\/\/swissfederalism.ch\/usa-cina-chip-capitali\/"},"modified":"2024-03-17T10:39:50","modified_gmt":"2024-03-17T10:39:50","slug":"u-s-china-chips-capital","status":"publish","type":"post","link":"https:\/\/swissfederalism.ch\/en\/u-s-china-chips-capital\/","title":{"rendered":"The U.S.-China tug-of-war over chips and capital"},"content":{"rendered":"<h1 class=\"entry-title\"><span class=\"font-377884\">The U.S.-China tug-of-war over chips and capital<\/span><\/h1>\n<h3><span class=\"font-377884\"><em><span class=\"font-377884\">The U.S. and China are wrangling over Western investment into chips and other advanced technologies, with the long-term consequences of U.S. controls uncertain.<\/span><\/em><\/span><\/h3>\n<h3 class=\"toc-only\" style=\"text-align: center;\"><span class=\"font-377884\" style=\"color: #ff0000;\">In a nutshell<\/span><\/h3>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li><span class=\"font-377884\">Several factors are driving foreign investment away from China<\/span><\/li>\n<li><span class=\"font-377884\">U.S. policies to stunt Chinese tech growth face implementation challenges<\/span><\/li>\n<li><span class=\"font-377884\">The Biden White House is determined to follow through<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<figure id=\"attachment_231265\" aria-describedby=\"caption-attachment-231265\" style=\"width: 840px\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/swissfederalism.ch\/wp-content\/uploads\/2024\/02\/chip-electronics-Image-by-Image-by-dujin-yun-from-Pixabay-1024x768.jpg\"><img decoding=\"async\" class=\"size-large wp-image-231265\" src=\"https:\/\/swissfederalism.ch\/wp-content\/uploads\/2024\/02\/chip-electronics-Image-by-Image-by-dujin-yun-from-Pixabay-1024x768.jpg\" alt=\"Chip electronics Image by Image by dujin yun from Pixabay\" width=\"840\" height=\"630\" srcset=\"https:\/\/swissfederalism.ch\/wp-content\/uploads\/2024\/02\/chip-electronics-Image-by-Image-by-dujin-yun-from-Pixabay-1024x768.jpg 1024w, https:\/\/swissfederalism.ch\/wp-content\/uploads\/2024\/02\/chip-electronics-Image-by-Image-by-dujin-yun-from-Pixabay-300x225.jpg 300w, https:\/\/swissfederalism.ch\/wp-content\/uploads\/2024\/02\/chip-electronics-Image-by-Image-by-dujin-yun-from-Pixabay-768x576.jpg 768w, https:\/\/swissfederalism.ch\/wp-content\/uploads\/2024\/02\/chip-electronics-Image-by-Image-by-dujin-yun-from-Pixabay-1536x1152.jpg 1536w, https:\/\/swissfederalism.ch\/wp-content\/uploads\/2024\/02\/chip-electronics-Image-by-Image-by-dujin-yun-from-Pixabay-350x263.jpg 350w, https:\/\/swissfederalism.ch\/wp-content\/uploads\/2024\/02\/chip-electronics-Image-by-Image-by-dujin-yun-from-Pixabay.jpg 1920w\" sizes=\"(max-width: 840px) 100vw, 840px\" \/><\/a><figcaption id=\"caption-attachment-231265\" class=\"wp-caption-text\">Chip electronics Image by Image by dujin yun from Pixabay<\/figcaption><\/figure>\n<p class=\"has-drop-cap\"><span class=\"font-377884\">For the first time since records began in 1998, the third quarter of 2023 saw more foreign direct investment (FDI) flowing out of China than in. The official figure was -$11.8 billion. Foreign companies withdrew profits from China for six consecutive quarters through the end of September 2023, totaling more than $160 billion in outflows. The decline in China\u2019s FDI is a symptom of the country\u2019s economic downturn. At the same time, a struggle continues between Chinese leader Xi Jinping and American President Joe Biden over harnessing the flow of Western capital.<\/span><\/p>\n<p><span class=\"font-377884\">China faces several structural economic problems that are becoming increasingly salient, including high local government debt, a sluggish and partly bankrupt real estate market, low consumer confidence and high youth unemployment. The Biden administration announced in August 2023 that it would limit U.S. capital investment in China\u2019s sensitive technology sector, extending the competition between the two powers into the arena of investment controls.<\/span><\/p>\n<p><span class=\"font-377884\">In view of geopolitical tensions and the current Chinese downturn, Moody\u2019s rating agency lowered its outlook for China\u2019s credit from stable to negative, while maintaining its A1 investment-grade rating on the country (which has not changed since 2017). Foreign companies in China have withdrawn earnings or downsized accordingly, and the Wall Street financial community has also changed its tune, no longer singing Beijing\u2019s praises.<\/span><\/p>\n<h2 id=\"h-explaining-the-fdi-flight\" class=\"wp-block-heading\"><span class=\"font-377884\">Explaining the FDI flight<\/span><\/h2>\n<p><span class=\"font-377884\">Responding to Moody\u2019s decision, China\u2019s Ministry of Finance said it was \u201cdisappointed\u201d and called the agency\u2019s concerns \u201cunfounded.\u201d It argued that the country\u2019s real estate and fiscal problems were \u201cmanageable,\u201d and that the government was working to \u201cdeepen reforms and address risks and challenges.\u201d<\/span><\/p>\n<p><span class=\"font-377884\">A closer look at the phenomenon of foreign capital withdrawal and the FDI slump in China reveals several developments.<\/span><\/p>\n<p><span class=\"font-377884\">Sean Stein, president of the American Chamber of Commerce in Shanghai, recently spoke about the pressures on American companies coming from the Chinese side. The U.S. political community often discusses strategic competition with China around the four dimensions of military, economic, technology and political values.\u00a0But, he argued, the biggest pressure on American firms is a fifth dimension: the tough competition presented by Chinese companies.<\/span><\/p>\n<p><span class=\"font-377884\">\u201cChina\u2019s small and medium-sized enterprises \u2026 with their clouds of smart employees working late nights and overtime, can affect U.S. companies\u2019 business at any time,\u201d Mr. Stein said. \u201cChinese companies are faster than U.S. companies in responding to the market, they are better at using digital strategies, they can quickly adapt and use emerging technologies, they are better at marketing and they are better at applying for license permits.\u201d Competing against Chinese electric vehicles, even the vaunted Tesla might someday face threats to its survival.<\/span><\/p>\n<p><span class=\"font-377884\">A second factor driving out foreign capital is China\u2019s revised Anti-Espionage Law, which came into effect in July 2023. The policy expanded the definition of espionage and prohibits the transfer of \u201cinformation related to national security and interests.\u201d This ambiguous provision led some foreign executives to worry that certain business activities and topics of conversation in China may become off-limits. Even Moody\u2019s advised its Chinese employees to work from home after making the rating change, and its Hong Kong analysts were warned against traveling to the mainland for fear of possible retaliation by Chinese authorities. U.S. pollster Gallup has decided to pull out of the country because of the law.<\/span><\/p>\n<p><span class=\"font-377884\">With current interest rates in China much lower than in most of the world, foreign companies are not reinvesting the profits they have made in the country, but are rather remitting them elsewhere where they can earn a higher return. Furthermore, companies are increasingly shifting investments from China to other countries to diversify against intensifying geopolitical risks.<\/span><\/p>\n<p><span class=\"font-377884\">Offering another perspective, Zhang Jun, professor of economics at the Fudan University, argues that it is no longer appropriate to focus on China\u2019s economy in terms of traditional FDI flows; what matters most is FDI in competitive high-tech areas. While at the beginning of 2023 Fitch Ratings projected that China\u2019s FDI would continue to decline amid weak foreign investor sentiment, FDI in high-tech manufacturing was thought to be more resilient.<\/span><\/p>\n<p><span class=\"font-377884\">The developments in China last year have borne out this forecast. High-tech manufacturing investment has been growing faster than total FDI and total high-tech FDI since 2021, and remained resilient in 2023 \u2013 up 25.3 percent year-on-year in the first half of the year, following 49.6 percent annual growth in 2022. Whether this situation is sustainable, however, is unclear.<\/span><\/p>\n<p><span class=\"font-377884\"><strong><a href=\"https:\/\/swissfederalism.ch\/en\/scenarios-new-normal-geopolitics\/\">Scenarios for a \u2018new normal\u2019 in geopolitics<\/a><\/strong><\/span><\/p>\n<h2 id=\"h-chinese-response\" class=\"wp-block-heading\"><span class=\"font-377884\">Chinese response<\/span><\/h2>\n<p><span class=\"font-377884\">In some ways, this argument reflects President Xi\u2019s economic goals: China is trying to retain foreign capital generally, but FDI in high-tech is more relevant. After Beijing recognized the scale of the FDI problem last year, Mr. Xi and his government made a heavy-handed statement to foreign business leaders, promising to improve mechanisms for protecting the rights and interests of foreign investors. This turned out to be just lip service.<\/span><\/p>\n<p><span class=\"font-377884\">Mr. Xi has rather focused on FDI in high-tech areas. His notion of \u201chigh-quality development\u201d means relying on the country\u2019s own innovation but also on foreign technology and capital, so that China can take the lead in the fourth industrial revolution (which includes artificial intelligence, life sciences, industrial materials and renewable energy). The key to this revolution is advanced microchips.<\/span><\/p>\n<p><span class=\"font-377884\">The Chinese leader\u2019s trip to the U.S. in October was not so much about easing relations with Washington as about competing for U.S. capital, especially capital related to chip production. Beijing understands that the U.S. is not a monolith, but a system sensitive to many different interest groups. China hopes to use the conflict within the American business community, especially among chip companies, to mitigate the Biden administration\u2019s ban. In arranging President Xi\u2019s schedule during his stay in San Francisco, Chinese officials initially requested that a planned dinner with business executives be held before the Biden-Xi meeting, a clear indication of their real priorities. Of course, the White House rejected this request.<\/span><\/p>\n<p><span class=\"font-377884\">President Xi\u2019s advisors had prepared three versions of his speech for the dinner with business leaders; after the meeting with President Biden \u00a0unfolded, Mr. Xi picked the friendliest version of his remarks. In a 30-minute address to top executives, he declared that China wants to be a \u201cpartner and friend\u201d of the United States. But even then, the effect appeared to be limited.<\/span><\/p>\n<h2 id=\"h-biden-s-challenges\" class=\"wp-block-heading\"><span class=\"font-377884\">Biden\u2019s challenges<\/span><\/h2>\n<p><span class=\"font-377884\">The world\u2019s top five chip manufacturing equipment vendors received more than 40 percent of their revenue from Chinese customers in the third quarter of 2023. California-based Lam Research drew nearly half of its revenue from China. According to Nikkei Asia, the Chinese market contributed 62 percent, 27 percent, 22 percent and 18 percent of last year\u2019s revenue for Qualcomm, Intel, Tesla and Apple, respectively.<\/span><\/p>\n<p><span class=\"font-377884\">This data shows clearly why U.S. chip companies are trying so hard to retain the Chinese market. Nvidia chief executive Jensen Huang said in Singapore on December 6 that the firm is cooperating with U.S. government regulators to remain in compliance while providing alternate, less powerful AI chips to Chinese customers, which are set to be marketed this year. Even if the claims of cooperation are exaggerated, the company\u2019s ambition to win Chinese business is genuine. Nvidia accounts for over 90 percent of China\u2019s AI chip market, according to Reuters, and before the export controls relied on China for about a fifth of its revenue. But the company\u2019s attempt to abide by U.S. restrictions while offering lower-level chips to meet Chinese demand will likely not satisfy the ambition of China\u2019s AI industry.<\/span><\/p>\n<p><span class=\"font-377884\">Intel CEO Pat Kissinger is also increasing pressure on the Biden administration, claiming that the government risks jeopardizing one of the administration\u2019s key policies of bringing chip production \u201cback to the U.S.\u201d Without orders from Chinese customers, he warned, Intel will have less reason to advance planned factories in Ohio and other domestic projects.<\/span><\/p>\n<p><span class=\"font-377884\">Last July, the U.S. Semiconductor Industry Association released a statement calling on the White House to not impose more semiconductor export restrictions on China\u00a0\u2013 arguing that it could weaken the competitiveness of the American semiconductor industry, disrupt the supply chain and jeopardize the government\u2019s massive new investment in domestic chip manufacturing.<\/span><\/p>\n<p><span class=\"font-377884\">Companies in other countries have also been eager to break or work around the controls. Japan\u2019s Nikon is considering tapping into mainland China\u2019s chip lithography market to expand its current global market share of 7 percent, which ranks third.<\/span><\/p>\n<p><span class=\"font-377884\">Nevertheless, the Biden administration seems to be determined to ban China\u2019s advanced chip exports and investments, even if enforcement will not be easy.<\/span><\/p>\n<h2 id=\"h-high-quality-development\" class=\"wp-block-heading\"><span class=\"font-377884\">\u201cHigh-quality development\u201d<\/span><\/h2>\n<p><span class=\"font-377884\">The U.S.-China Economic and Security Review Commission (USCC), authorized by the U.S. Congress, acknowledged in a recent report that American controls on Chinese exports of advanced chip equipment have not fully worked. There are still loopholes around the policy.<\/span><\/p>\n<p><span class=\"font-377884\">The ban has certainly caused a lot of trouble for China. But the White House seems to be quite busy trying to close these loopholes to make the policy effective. In this tug-of-war for U.S. chip capital, Commerce Secretary Gina Raimondo has repeatedly warned American companies (especially Nvidia and Intel) not to sell AI-enabled chips to China in the name of national security. But the question of whose arm will ultimately be twisted\u00a0\u2013 that of chip capital or the U.S. government \u2013 is so far unanswered.<\/span><\/p>\n<p><span class=\"font-377884\">In the face of China\u2019s myriad economic problems, President Xi is banking on what he calls \u201chigh-quality development\u201d rather than political and institutional reform. During his recent visit to Shanghai, Mr. Xi rehashed his so-called \u201creform and opening up\u201d platform, but he has never really acted on that promise. For Mr. Xi, \u201creform\u201d has become history.<\/span><\/p>\n<h3 style=\"text-align: center;\"><span class=\"font-377884\"><em>China hopes to use the conflict within the American business community, especially among chip companies, to mitigate the Biden administration\u2019s ban.<\/em><\/span><\/h3>\n<p><span class=\"font-377884\">The prominent Chinese sociologist Sun Liping has warned that if the Chinese Communist Party (CCP) does not carry out deep political reforms within some five years \u2013 including on issues such as separating the party from the government, establishing the authority of the courts and freedom of speech, publication and press \u2013 the consequences will be unimaginable. Noted economist Wu Jinglian recently made a similar statement.<\/span><\/p>\n<p><span class=\"font-377884\">There is no sign that Xi Jinping will listen to such voices. Instead, he is determined to realize his own concept of high-quality development \u2013 which requires a push for Western capital, especially American capital in the chip industry. This is a last shot at his \u201cChinese dream.\u201d It remains to be seen whether this approach will repeat the mistakes of his Made in China 2025 campaign. The CCP is not only competing with the U.S. for capital, but also racing against time.<\/span><\/p>\n<h2><span class=\"font-377884\">Scenarios<\/span><\/h2>\n<p><span class=\"font-377884\">There are two possible outcomes to this tug-of-war.<\/span><\/p>\n<h3 id=\"h-less-likely-circumvention\" class=\"wp-block-heading\"><span class=\"font-377884\">Less likely: Circumvention<\/span><\/h3>\n<p><span class=\"font-377884\">Under one scenario, U.S. chip capital insists on evading Washington\u2019s restrictions, providing strong conditions for Chinese high-tech development while maintaining their own corporate profits. At the same time, with China\u2019s own research and development (R&amp;D) capabilities, China might be able to take five or 10 years to surpass the U.S. in areas like artificial intelligence, and indeed play a pivotal role in the Fourth Industrial Revolution. It would also use this success to alleviate its own economic problems. Bearing in mind the warnings of Professor Sun Liping on China\u2019s institutional and political challenges, this scenario today does not look especially likely, due to the U.S. government\u2019s determination to limit chips and high-tech investments.<\/span><\/p>\n<h3 id=\"h-more-likely-slowing-economy\" class=\"wp-block-heading\"><span class=\"font-377884\">More likely: Slowing economy<\/span><\/h3>\n<p><span class=\"font-377884\">Alternatively, the U.S. government is largely able to keep chip capital from circumventing the China controls, creating other markets in India, Southeast Asia and elsewhere. Meanwhile, China\u2019s own R&amp;D capabilities seem to reach their limits, precisely because of an incapacity in producing high-value chips \u00ad\u2013 such that President Xi\u2019s \u201chigh-quality development\u201d plan will largely not be realized. This might force Beijing to make some concessions on political reforms. In the long run, China risks falling into the \u201cmiddle-income trap.\u201d<\/span><\/p>\n<p><span class=\"font-377884\"><strong>Author: Dr. Junhua Zhang &#8211; senior associate at the European Institute for Asian Studies and visiting professor at the Graduate School for Asian Studies at the Free University of Berlin.<\/strong><\/span><\/p>\n<p><span class=\"font-377884\">Source:<\/span><\/p>\n<blockquote class=\"wp-embedded-content\" data-secret=\"CWikkfbyct\"><p><a href=\"https:\/\/www.gisreportsonline.com\/r\/china-chips\/\">The U.S.-China tug-of-war over chips and capital<\/a><\/p><\/blockquote>\n<p><iframe class=\"wp-embedded-content\" sandbox=\"allow-scripts\" security=\"restricted\" style=\"position: absolute; clip: rect(1px, 1px, 1px, 1px);\" title=\"&#8220;The U.S.-China tug-of-war over chips and capital&#8221; &#8212; GIS Reports\" src=\"https:\/\/www.gisreportsonline.com\/r\/china-chips\/embed\/#?secret=rtoWm2Zh6L#?secret=CWikkfbyct\" data-secret=\"CWikkfbyct\" width=\"600\" height=\"338\" frameborder=\"0\" marginwidth=\"0\" marginheight=\"0\" scrolling=\"no\"><\/iframe><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The U.S. and China are wrangling over Western investment into chips and other advanced technologies, with the long-term consequences of U.S. controls uncertain<\/p>\n","protected":false},"author":14,"featured_media":231266,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2275,256,988,260,210,1999,1030],"tags":[663,795,263,1248,654],"class_list":["post-231288","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-america-en","category-economy","category-geopolitics","category-highlights","category-magazine","category-technology","category-usa-en","tag-china","tag-economy","tag-future","tag-technology","tag-usa-en"],"_links":{"self":[{"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/posts\/231288","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/users\/14"}],"replies":[{"embeddable":true,"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/comments?post=231288"}],"version-history":[{"count":2,"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/posts\/231288\/revisions"}],"predecessor-version":[{"id":231289,"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/posts\/231288\/revisions\/231289"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/media\/231266"}],"wp:attachment":[{"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/media?parent=231288"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/categories?post=231288"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swissfederalism.ch\/en\/wp-json\/wp\/v2\/tags?post=231288"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}