View from Washington: Xi pushes back and forward on US chip clampdown

At the end of the 20th National Congress of the Communist Party of China, President Xi Jinping made his first – though not entirely explicit – comments on the technology restrictions imposed by the Biden Administration around semiconductors, AI and supercomputing earlier this month.

They came just hours before The Financial Times reported today (24 October) that leading Chinese memory company YMTC has asked core staff that are US citizens and US Green Card holders to leave as it seeks to comply with Washington’s latest export controls.

“Just as China cannot develop in isolation from the world, the world needs China for its development,” Xi told Sunday’s (23 October) concluding press conference, having just unveiled a new politburo packed with his supporters.

He added that China would “open its door wider to the rest of the world”, but all other signs from the meeting were that current zero-Covid restrictions (with their deleterious impacts on the local economy and global trade) will remain in place for a good while yet.

Xi himself is unlikely to publicly launch any response aimed at disrupting either global supply chains or the businesses of China’s foreign investors. But he is now overflowing with loyal subsidiaries who will be willing to do so, if they get the nod. His comment was still a deliberate reminder of some of the economic weapons China has already amassed should the course now be set for a full-blown digital Cold War.

But more importantly Xi had already signalled that his government will increase the billions it is already investing towards his goal of technological independence. This was widely expected.

His opening address to the Congress was peppered with references to the importance of innovation, as analysts from two leading China tech analysts, Rhodium Group and Trivium, noted.

Rhodium’s Jordan Schneider cited this from Xi: 
“To meet China’s strategic needs, we will concentrate resources on original and pioneering scientific and technological research to achieve breakthroughs in core technologies in key fields.”

Trivium’s Tom Nunlist settled on this as another “quote from Xi’s 20th Party Congress address you should hold on to going forward”: 
“We must adhere to science and technology as the number-one productive force, talent as the number-one resource, [and] innovation as the number-one driving force.”

The Chinese leadership’s deep-seated fears about the technological gap between it and the West, and particularly the US, date back to Mao Zedong. But Xi has found himself in a position where the link between digital innovation and national security is a priority for any leader and at the point where he believes he can build on the knowledge local engineers have amassed. That is thanks to the earlier ‘opening up’ policies of first Deng Xiaoping, and then Jiang Zemin and Hu Jintao.

During those administrations, China embarked on a three-stage process that might crudely be described as “Acquire, Replicate, Innovate”: getting know-how from future rivals, creating cheaper equivalents to their products, then creating its own novel ones. All this, while the Chinese economy remained more open to foreign investment and partnership.

China is not the only country to have followed this path. Much the same could previously be said of Japan and South Korea.

During Xi’s premiership, China has advanced to where he believes it can enter a fourth stage: “Dominate”. To that end, in areas such as computer vision (and significantly surveillance), drones and telecoms hardware, the country can today lay claim to three world-class players in, respectively, Hikvision, DJI and Huawei. The strategy has evolved. It now has added “Xi Jinping Thought”, but it has roots across more than three decades.

Xi’s aggressiveness in setting domination – or at least leadership – as a goal for AI, supercomputing and semiconductors leverage targets already enshrined within government strategies such as Made in China 2025 and the National AI Plan. Since these launched, the evidence that the country is getting nearer to it (though probably not as quickly as Xi would like) has grown and clearly lies behind the new US restrictions.

By seeking to cut all Chinese companies out of the most advanced chip manufacturing, the US is applying the biggest tool it has available to slow and even cap its rival in innovation. There are Chinese engineering teams designing chips for bleeding-edge processes but if they cannot make them or get a foundry to do it for them, what is that worth?

This raises an interesting question: Just how comprehensive are China’s digital capabilities? And there is a second one: To what degree are its skills and resources sufficient to meet Beijing’s core objectives for now? Analysing those questions can help decide whether we should see Xi’s latest comments as simple rhetoric, expensive pipe dream, or potentially realisable.

In terms of capabilities, Covid-19 has made that harder to do. Even before the pandemic, Chinese academics and businesspeople had faced increasingly formal and informal restrictions on how much they could mix or communicate with foreign counterparts. The continued imposition of zero-Covid while much of the rest of the world has relaxed travel restrictions means they have also largely disappeared from the traditional ‘networking’ circuit. Two years can be an age in digital innovation.

We do however know that Chinese companies and institutions are already the largest block among users of the RISC-V processor architecture, an open-source technology assumed to be beyond the reach of the US government as a result. They have developed a range of designs based on it, from basic microprocessors to datacentre chips, that are in or close to production. China is also believed to have two exascale supercomputers, OceanLight and Tianhe-3.

Then, to deliver chips for more advanced domestic designs, China’s largest foundry, SMIC, has been in production at the 14nm node since 2019, the first node targeted by the new US rules. Those restrictions will, however, mean SMIC faces challenges if its fab equipment breaks down (they also prevent “US persons” repairing it) or if the company wants to expand capacity there or at still smaller nodes.

Nevertheless, Beijing has been pushing recipients of its technology funding to target the SMIC process if possible for more advanced designs that map to its goals. This brings us to the issue of core objectives.

There is a long-standing joke among China watchers that the continuing reason for the primacy and existence of the Communist Party of China is to ensure the continuing primacy and existence of the Communist Party of China. Everything else comes afterwards.

When it comes to current technological competition with the west, one concept looms large in this context – what Beijing calls the “intelligentisation” of warfare. This covers strategy, logistics, both conventional and cyber weaponry, and plenty beyond.

The big unknown here is the extent to which what China already has maps to these – from the government’s point of view – main requirements. As examples, is it ‘good enough’ to give the country geopolitical control of its region, support an assault on Taiwan or any other disputed territory (digitally and/or physically), and enable control of the Chinese population (which at 1.4 billion remains Beijing’s biggest security concern)? And can the related technologies continue to evolve despite Washington’s moves at an acceptable rate?

The honest answer to that is that, again, we simply do not know for sure – and the Chinese certainly aren’t about to start enlightening us.

We do know, though, that through the intelligentisation concept and Xi’s ever-increasing promotion of so-called “civil-military” fusion (including a recent reining-in of many of its leading technology giants), innovation is emphasised more at the applied level than the blue skies one. Does it do the job?

The report in the FT of senior foreign staff being asked to leave YMTC because “US persons” are covered by the new rules followed unconfirmed reports of a similar exodus having already begun among foreign chip technology suppliers. Biden’s measures are quickly having an impact.

Sixth Tone, one of the Chinese media more willing to probe the censorship boundaries, has also reported on what technology leaders are calling “a capital winter”. This has seen investors withdraw from the sector and valuations fall amid Covid-related and other concerns about the economy. Sources now suggest this has also been exacerbated by the chip crackdown.

Yet, to counterbalance things another time, as Tufts University Professor Chris Miller points out in Chip War, his excellent and extremely timely new history of geopolitical competition in semiconductors, Covid-19 did provide some evidence of how hell-bent China is on maintaining the status it now has as a technological powerhouse. Specifically, even though Shanghai saw one of the toughest pandemic lockdowns earlier this year, its chip foundries were kept running (we’ll have an interview with Professor Miller here soon).

There can be no doubt that the new restrictions will hurt China in the short term, and very probably the medium term as well. To bring its chip manufacturing up to today’s leading edge unaided could, based on its current progress, take the country a decade, with lithography the biggest obstacle (the leading player is ASML of the Netherlands, with much of its key IP covered by the rules). By then, as Miller also notes, the state-of-the-art will have moved on again.

But with Xi having signalled a willingness to double down on securing technological independence, there is another potentially critical factor. By shutting China out of US innovation, that very act could accelerate Beijing’s domestic efforts even though Washington’s moves are seen in many quarters as long overdue.

If China’s first efforts in developing AI and supercomputing were the result of a ‘Sputnik moment’ (often attributed to the defeat of the world Go champion by an AI), has Biden just potentially and inadvertently launched a second, more earthbound ‘Apollo project’ in the Middle Kingdom?

Notwithstanding potential action against foreign investors, that does now appear to be what Xi wants. Indeed, you could say that it’s what he’s wanted all along.