CHINA
THE GIANT JUGGERNAUT
PART 13
2023 JANUARY ISSUE
Written by : Andrew Sia
In these three years, we have read a lot about the situation of China and its situation in the world platform has been more dire than before. Today its challenge is the supply of the semiconductor which is required in almost everything that it is trying to build, as simple as the electrical appliances to the intercontinental missiles, semiconductors are applicable.
China realized that to become less dependent on the West but to rely more on its technology to become a state-led and self-sufficient techno-superpower is very vital. Self-reliance on its demand for semiconductor is the only way to go.
In the past year, Xi Jinping has been seeking for reelected to be China’s paramount leader. He succeed in his attempt although his team is the least to be desired.
We have noticed that China has been on the rollercoaster as he has spent a lot of effort to China’s leader by breaking all the rules set by his predecessors; his zero-Covid policy has earned very bad reputation globally; he knocked over the fintech with the value of $2 trillion; property crash that damage the financial structure; toppled Hong Kong and damaged its reputation as one of the global financial hubs; and created political tension with the neighboring countries.
As the world’s most populous country and also as the world’s second largest economy, Xi Jinping should know that China’s social stability is depending on its economy growth.
Writeup Before the 20th National Congress of the Chinese Communist Party
President Xi Jinping has been trying to seek for the reelection for more than a year already. But if we are judging for what he has been performing, especially in the last three years, we found that the situation in China for the going forward is in a very dim situation. We have seen his policy as – Monopolizing of power for someone who was already in power for ten years; activating Covid lockdowns with a handful of cases; cutoff $2 trillion in value of the fintech stocks; property market crash; wiping out of Hong Kong—the world’s third largest financial center; creating political instability around its nation, and I can go on and on but we are heading to Xi Jinping’s another reign with incredible effect that will influence the western liberal democracy disregard if we like it or not. That is what the 20th National Congress of the Chinese Communist Party has brought to the world.
It was already announced that China’s economy would expect to grow slower than the rest Asian countries for the first time since 1990. With Xi’s remaining in power will weaken China in the years to come.
Understanding China, the Giant Juggernaut
China has acquired global economic and diplomatic influence, and enabling covert operations that extend well beyond traditional intelligence gathering. And because of this, it is threatening the Western security system. Both the U.S. and the British domestic intelligence chiefs—the F.B.I. director, Christopher Wray, and the MI5 director general, Ken McCallum—called for concerns over China’s effort in stealing technology and economic intelligence to use to influence foreign politics in Beijing’s favor.
The culture of the Chinese Communist Party has always had a clandestine nature. This has been more obvious since Xi Jinping took the power ten years ago. This is going to expand now after his position has been extended for another five years. China can also be best described as an intelligence state.
The acquiring and protecting secrets as an all-nation undertaking, whether it is from its citizens and even schoolchildren are taught to recognize any kind of threats.
The last state that can be comparable with is Russia, its former Soviet Union was working in the same magnitude until it was imploded. At that time China was barely visible in the world stage 30 years ago, but today China is so powerful and its intelligence agencies are so powerful and resourceful they are becoming an exploiter and make use of those vulnerabilities of those nations who are depending on China’s economy and power. Their intelligence operatives are presence in almost all the international cities and served as its national hub for collecting high-tech intelligence.
China’s Intelligence Act was enacted in 2017, required all its citizens to assist intelligence agencies. Not only that, they have involved successful cases to recruit foreign citizens, school professors, scientists and even politicians who would be given substantial funding to work for their interest.
With a well extended Chinese diaspora communities all over the world, and its well-oiled propaganda machine, strong economy and advancements in all technical fronts, the people may fall and become its preys.
It is no longer the way that conforms to normal concepts of espionage. It is built very dangerously and all this is falling into Xi Jinping’s plot to develop his own strategy to catch up with the Western technology in order to keep China’s economy growth to assure its social stability. He has already made his ambition so clear that he wants to be the world’s paramount leader.
It is not too late to know about Xi’s ambition. Western policymakers have woken up and have alerted their intelligence services to ensure their strategies going ahead will protect the ideals of freedom, openness and lawfulness from the greatest threat from the Chinese Communist Party.
China Wants to be Self-Dependent Techno Superpower
China wants to become a state-led and self-sufficient techno-superpower. This is China’s reaction while the U.S. want to decouple their economy from China, on the other hand Beijing wants to become less dependent on the West, and especially on its technology.
In order to become dependent, China will need to promote domestic innovation, localize strategic aspects of the supply chain, boost the deployment of renewable energies and reduce the reliance on fossil fuels, revitalize its local seed industry, and find counter-balance in currencies against the monopoly of the U.S. dollar. This “tall” order will take China many years to accomplish.
Top of the list for China to foster technology is the semiconductors and it has already poured unprecedented resources into this strategic industry. In total, over $150 billion has been pledged by local governments. In 2020 alone, it imported a whopping $378 billions of semiconductors. Part of it was spent to stockpile the supply as it was worried for any form of sanctions.
In this summer, SMIC, one of China’s leading chipmakers, announced the making of a 7-nanometer chip. This is only one or two generations behind the industry lead by TSMC in Taiwan and Samsung in South Korea. But the analysts said that the goal of full semiconductor self-reliance is delusional as the industry is so complex and without interconnected with other countries is infeasible.
Currently the energy self-sufficient rate is about 80% and that leaves the 20% of supply mostly in the form of imported oil and gas. China is particular concerned about the shipping routes through the strategic point such as the Strait of Malacca where the U.S. naval has a strong presence.
It has increased its focus on renewable energies such as solar and wind. Analysts said that China is on track to achieve a national plan to source about 33% of its power from renewables by 2025. It will still need to build up more resources to replace the fossil fuels.
China’s food security has plummeted over the past three decades as its population has grown and the agriculture has shifted from grains to more lucrative crops. Currently only 33% of the country’s total demand for the three food oils—soya bean oils, peanut oils and rapeseed oil—can be satisfied by domestic production. It was 100% in the early 1990s.
China needs to protect the arable land, manage more efficient water usage and plan for major water-saving projects.
But the key is still the invention of genetically modified seeds in China. At the moment, China is only using GM seeds for cotton. Meanwhile, China has acquired Syngenta, the Swiss agricultural-tech group whose business is focused on seeds and development.
China’s trade is currently using the U.S. dollar for two-third of its invoicing. It is highly dependable on Swift. Its internationalize of the renminbi has not been successful yet. Its promotion of “digital renminbi” has been slow.
In this respect, China’s self-reliance on its currency will be a long way to go.
Having said all these, China is like the “Cat on a Hot Tin Roof”, especially when its paramount leader, Xi Jinping pledged his 100% support behind Putin before Russia’s invasion in Ukraine. Soon after, Russia started the bombing of Ukraine and it was sanctioned, and the use of Swift had been forfeited.
At the moment, more Chinese companies have been caught with the U.S. sanctions. It is being warned if it tried to take over Taiwan, it would face the serious consequence. With the record of the violation of humanitarian in its suppression of the Uyghurs in Xinjiang and the high profile in repression of the student movement in Hong Kong, China under Xi Jinping is extremely unpopular in the Western world.
U.S. has stressed strongly for exporting any technology to China and the export of the semiconductors are already in the ban-list.
But for a country who has opened its door for the foreign companies to invest in China, to stop entirely from doing business is very difficult.
U.S. is Curbing Supply of Sensitive Components to China
China is one of the world’s largest technology markets. The U.S. administration is cutting of China from certain advanced chips made by American and foreign companies using the U.S. technology. For those companies who are doing business with China, they showed concerns that the restriction could prevent its customers from producing chips, and ASML, the Dutch company has expressed their criticisms about this measure. The U.S. government had spent months to persuade the Netherlands government to prevent ASML from selling older lithography machines to Chinese semiconductor companies, but they have been refused.
The advanced companies have complained that the moves did not come soon enough. Although the U.S. intelligence reports warned that American technology were used by China to develop advanced weapons and especially for the surveillance networks to police its own people. Risks have been highlighter in artificial intelligence, quantum computing and semiconductors. Although restrictions have been imposed against Semiconductor Manufacturing International Corporation (SMIC) during Trump administration, they have been downplayed by the industry and sales continued for a significant period of time. This led to July this year that SMIC had cleared a major technological hurdle, producing a semiconductor in 7-nanometers that can rival with some of the complex chips made in Taiwan by TSMC.
But SMIC will need to decide how much time and money it is willing to sink into this production for find the method for a more efficient one. The chip maker would need to get itself ready to prioritize its political cause of making the country self-efficient or make the business successful for making money. For the starter as SMIC, the 7nm chips is one generation behind the most advanced 5nm that is already in mass production. And 7nm is just the minimum requirement for the high-performance computer chips and the super-fast processing of large amount in data in everything from servers and smartphones.
For the immediate remedy, U.S. officials announced that they would issue licenses on a case-by-case basis to allow companies to supply China with components. But companies like Intel, TSMC, Samsung and SK Hynix have received temporary exemptions to the rules.
On the other hand, China called this act from the U.S. as a significant step aiming at sabotaging their development and can bring broader implications such as limiting advances in artificial intelligence that can help the autonomous driving, algorithms and gene sequencing.
Observation After the 20th Chinese Communist Committee’s Meeting
The world was caught in awe when Xi Jinping’ picked his politburo standing committee which took place on October 23 at the 20th Chinese Communist Committee meeting. There is the absence of a single moderate figure and at the minimum of keeping two senior officials known for pro-market policies. On the following Monday, investors pulled a record $2.5 billion out of China’s stock market and the most solvent Chinese technology stocks listed on Wall Street also fell by an unprecedented 14.4%. This was the instant market reaction to Xi’s reluctant to budge for his pandemic policy and his obsession of national security.
The fall compounded with slowdowns in real estate and tech, the two sectors which China depended on its rapid economic growth.
This is the immediate market reaction to Xi for his choice of loyalists over their capabilities. They are more like puppets than capable technocrats. Followed by his appointment of hardliners to the party’s military committee, that sent the uncomfortable signal to China’s military policy.
With Xi’s decision, he successfully silenced any voices that are in adverse to his ideology in the future. Basically he has denounced Deng Xiaoping’s policy, assuring a more balanced personnel appointment and easier to be accepted by the world in general speaking. This time he bended more toward the extremism of Mao and he would continue to use the powerful grip over the country with his policy. He risked all the options for the going forward.
The world would not forget the scene they saw when Hu Jintao was forced out from the committee’s meeting.
The immediate reaction of the Hong Kong stock market was reacted by continuous dropping to the level before the handover of took place in 1997.
Further Observation of Xi’s Policy for His Third Term
It is obvious that he has cleared the politburo with a clean sweep and putting his men in the top party positions. In this way he is able to pursue his preferred policies even if those policies are unlikely to be politically-friendly or even investor-friendly.
This outcome has created more American sanctions and increased scrutiny of supply chains and investment. Not only the world has come to realize the need to reallocate their supply from China, but also to steer away from depending too much from the China market.
China’s Demand for Energy
China’s energy use began to slow down at the end of March 2022. It also marked the two-month Covid-zero lockdown that paralyzed Shanghai, known as one of the most important economic hub of China. Roads were closed, limited truck traffic near Shanghai, caused shortage of components for the factories in their production. This caused factory closure and reduced the use of electricity.
Export business have plummeted as households in the western countries are paying less interest in Chinese-made gadgets and furnishing of their houses. Instead, they spend money on traveling, restaurant meals and other services instead.
The real estate bust caused the apartment construction to stop and affected the steel and cement sectors for their energy consumption.
All of these have caused the weak demand of oil and gas imports from China since August. It has eased the pressure on energy import by almost two million barrels of oil per day, and one-sixth less gas than a year earlier. This have eased the oil prices and the natural gas prices since their peak earlier on.
China has taken the advantage from the embargo on Russia from Europe and increased its purchase from Russia with fuel at discounted prices.
Technological Application in China
The western countries have warned that the telecommunications gear from Huawei Technology could be used by Beijing to conduct digital espionage or other malicious cyber activities.
China is using digital currency and satellites to control its people. It is extending its surveillance and censorship and export its authoritarian system around the world. It is calling it their national security system and its Chinese Communist Party has been deliberating and patiently set out its plan to gain strategic advantage by shaping the world’s technology ecosystems. It openly admitted that technology can be used for control, influence and define value all for the broadening the definition of what they stressed as national security.
China is developing a centralized virtual currency which could also allow China to evade international censorship like the one imposed on Russia during the Ukraine war. Its Beidou satellite system was intended as an alternative to the established Global Positional System network which is owned by the U.S. Beijing is telling its citizens and businesses to use Beidou instead.