China retreats on going toe-to-toe with US on critical tech

The US is proving increasingly aggressive in going after China’s technological ambitions.

Xi’s administration grew frustrated that tens of billions of dollars funnelled into the industry over the past decade haven’t produced breakthroughs that allow China to compete with the US on a more equal footing. In fact, SMIC and Yangtze, arguably the two most advanced Chinese semiconductor players, were crippled by US sanctions.

Senior Beijing officials ordered a flurry of anti-graft probes into top industry figures last summer, blaming corruption for wasted and inefficient investment. The Big Fund is likely to lose its stature as a result, the people said.

All that happened as semiconductors increasingly became a key battleground in the rivalry between China and the US. Xi has repeatedly talked about the need for a sense of urgency to resolve China’s so-called choke points: areas where the country still relies heavily on the US and other foreign powers, including critical technologies such as chips.

He has implored top officials to achieve self-sufficiency in key technologies as the US moves to isolate China. When he secured a precedent-breaking third term in October, Xi vowed to “move faster” in implementing strategic projects to increase innovation, saying “efforts will be made to improve the new system for mobilising resources nationwide to make key technological breakthroughs, and boost China’s strength in strategic science and technology.”

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In response, Chinese officials recently discussed whether to offer additional incentives for domestic semiconductor companies, the people said. But many reckoned it would be difficult to pool a substantial amount after Beijing had spent heavily to combat COVID over past years, according to the people.

Instead, officials are now asking local semiconductor material suppliers to cut prices to provide support to their domestic customers, the people said. Weak tax revenue, declining land sales and the cost of stemming COVID has squeezed Beijing’s finances, pushing the fiscal deficit to a record last year.

Meanwhile, the US is proving increasingly aggressive in going after China’s technological ambitions.

Last year, it accelerated a campaign to contain Beijing’s chip endeavours, wielding various tools including export controls to deter China’s progress in emerging technologies. That was part of efforts to maintain what US National Security Advisor Jake Sullivan called “as large of a lead as possible.”

Its key allies including the Netherlands and Japan have also agreed in principle to tighten controls over the export of advanced chip making machinery to China, Bloomberg News has reported, in what may be another potentially debilitating blow to Beijing’s grand chip plans.

With assistance from Debby Wu, Gao Yuan, Mayumi Negishi, Daniel Ten Kate, John Liu and Nasreen Seria.

Bloomberg L.P.