China to US: Two can play at technological war

Beijing threatens to block US access to vast stores of Chinese data – the lifeblood of many AI-driven applications

By DAVID P. GOLDMAN

NEW YORK – Beijing’s crackdown on initial public offerings by Chinese companies in the US stock market denotes a turn to hard-edged economic nationalism, signaled by President Xi Jinping’s July 6 denunciation of American “technology blockades.”

In an online address to friendly political parties around the world, Xi declared, “We must jointly oppose anyone engaging in technological blockades, technological division and decoupling of development.”

He added that no country had the right to “obstruct the development of other countries and harm their people’s lives through political manipulation.”

The Trump administration banned US investors from owning shares of 35 Chinese companies that Washington says are linked to the Chinese military. The Biden administration expanded the list to 59, which Americans must divest by August 2.

By discouraging Chinese companies from listing in the US, Beijing has said in so many words that it doesn’t need America’s capital markets to finance Chinese companies because it has plenty of capital at home.

Xi’s address “clearly establishes a position where China does not feel inferior to the US,” semiconductor industry guru Handel Jones told Asia Times. Jones is CEO of International Business Strategies, a consulting firm that advises top-level global technology companies.

In a related action, the Chinese government announced strict controls on exports of Chinese data, a critical resource for artificial intelligence applications in several industries including pharmaceuticals.

China’s data controls also may reflect Beijing’s concerns about China’s vulnerability to cyberattacks. Trump announced the tech sanctions in March 2020, after objections from the Defense Department and the US semiconductor industry stopped an earlier version of the plan in December 2019.

Despite US tariffs on Chinese goods, American imports of Chinese products rose to an all-time record in 2021, due in part to demand for medical supplies and consumer electronics. In so many words Beijing has told Washington: “You want to decouple from us? Well, we’ll decouple from you.”

The Trump administration last year imposed unprecedented sanctions on semiconductor sales to China, invoking extraterritorial privilege to ban the sale of any high-end computer chips, manufacturing equipment or design software that contains US components or intellectual property.

Harvard professor Graham Allison, the author of the widely-cited book The Thucydides Trap, compared the tech boycott to the 1941 American oil embargo that prompted Japan’s attack on Pearl Harbor.

China’s first response to the Trump tech boycott, sustained by the Biden administration, was a traditional one, namely to bribe the barbarian on one’s border and buy time.

Although some Biden advisers (and most of the US semiconductor industry) wanted to eliminate the sanctions, the prevailing hostility towards China in both US political parties made that a hard choice politically.

Beijing’s new assertiveness may stem from the government’s confidence that it can work around the American chip boycott, producing most of the country’s semiconductor requirements at home.

“If the river is too wide to cross,” a Chinese industry leader who requested anonymity told Asia Times, “go upstream, where it is narrower” – meaning that China can master “upstream” semiconductor production as well as “downstream” applications.

China signaled its new stance by suspending downloads of the ride-hailing app Didi Global only days after the startup completed a US$4.4 billion initial public offering in New York. The regulators claimed that Didi had improperly collected users’ personal information.

The Chinese government had asked Ddi to postpone its American listing, the Wall Street Journal reported, but the ride-hailing company went to market nonetheless. The company’s high-flying stock fell below the IPO price after its app was suspended.

Chinese regulators also announced investigations of two other high-flying internet companies with recent IPO’s on the US market: Full Truck Alliance and Kanzhum.

Growing regulatory pressure on Chinese technology firms caused a sharp selloff in the sector, with the popular exchange-traded fund KWEB sinking to $62 from a recent peak of $102.

Remarkably, domestically traded A-shares of Chinese tech companies have rallied, especially semiconductors. Stocks associated with China’s efforts to reduce dependency on foreign computer chips have been among the strongest performers.

Enforcing export controls on data is a key concern of the Chinese government, the Observer (guancha.cn) news site reported in a July 7 commentary entitled, “Chinese companies go overseas and enter the era of two-way compliance.”

Last August, China’s ministries of commerce and science issued a catalog of “export-prohibited and restricted technologies,” including “personalized information” gleaned from “data analysis.” All technologies now require an export license.

By this means, the Observer added, China prevented TikTok, an enormous source of user data, from being sold to “Microsoft or Wal-Mart.”

The export control law, the Observer commentary added, “highlights a new concept of national security. Different from traditional security concepts, this new concept of national security involves security in non-traditional areas, including economic security, technological security, information security, ecological security, resource security, nuclear security, and network security.”

Last month, the Standing Committee of the National People’s Congress passed a Data Security Law, authorizing “national security reviews on data processing activities that affect or may affect national security.”

China’s new protectiveness about data stems from two motivations. The first is the prospect of cyberwar. The second is economic.

The porting and storage of data in machine-readable form is the “control point” in the new world of the Fourth Industrial Revolution, as Huawei’s Chief Technology Officer said in an interview for my 2020 book, You Will Be Assimilated.

If artificial intelligence is the engine of Industry 4.0, just as steam was the engine of the original Industrial Revolution, then its fuel is data – not coal.

China has a natural advantage in data because its political system does not offer the same right to privacy as in the West. Beijing has cracked down on its tech companies when they allegedly abuse the vast amounts of data they gather from consumers, but the right of the government to use the data is not in question.

In some fields, notably health care, it is more difficult to undertake cutting-edge research without recourse to data from China, which digitizes hundreds of millions of medical records and sequences the DNA of a large portion of its population.

If the US wants to ration chip technology, China can restrict access to data. China believes that it can compensate for its reliance on American chip technology more easily than the US can recreate its vast data resources.

Another July 7 commentary at the Observer site announced that “mass production of domestic high-end chips is imminent.” The publication cited Bao Yungang, who heads the computer technology division of China’s Academy of Sciences.

“In the fourth quarter of 2019, China achieved mass production of domestic 14nm process chip,” the website reported. “By March this year, the yield rate had reached 90%-95%…. The possibility of mass production next year is very high.”

China can’t produce the 5 to 7 nanometer chips that power high-end smartphones but “14nm is currently the most widely used process technology” in most applications, including “high-end consumer electronics, high-speed computing, power amplification, broadband base stations, and so forth,” Bao told the Observer.

Importantly, “domestic 14nm chips can meet most of the needs in fields such as 5G communications and high-performance computing.” Bao noted that in 2019, chips of 7nm or less comprised only 4% of the world semiconductor market.

Starting in late 2019, China started hiring chip fabrication engineers from Taiwan, now the world’s leader in semiconductor manufacturing. By some accounts, the mainland lured away between 10% and 20% of Taiwan’s engineering force with exorbitant salaries.

Earlier this month, President Xi appointed his Harvard-educated Vice Premier Liu He to head an “all-country” effort to achieve semiconductor independence. China’s high-tech investment program has a budget of about $1 trillion.

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