China Responds to Washington’s Sanctions with a Huge Boost in Investment and Technology

Faced with a hostile international environment, Chinese leaders have taken a sound approach to ensuring economic growth. They have decided to increase investments in major infrastructure and industrial projects to activate private capital, create jobs and boost consumption. According to Global Times, fixed-asset investments rose by 5.1% in 2022, and infrastructure investment by 9.4%.

One major project involves building up semiconductor production and research activities in integrated circuits. To help finance it, the government will allocate the enormous sum of one-trillion-yuan ($143 billion) over five years, mainly as subsidies and tax credits. First mooted last October, the project reflects China’s assessment of its own needs, but also comes in response to the draconian sanctions announced by the Biden administration on Oct. 7, 2022, and then expanded in December.

The first package of sanctions prohibits the sale to China of not only advanced semiconductors made in the United States, but also integrated circuits/chips manufactured in other countries with the aid of U.S. inputs (both products and software) — which would affect most producers throughout the world. In addition, the prohibitions apply to manufacturers of the equipment used to make chips. For example, the Dutch company AMSL makes the extreme-ultraviolet lithography machines needed to print advanced computer chips (cost per machine up to $200 million). China had contracted to buy a machine from AMSL, but Washington stepped in to block it.

The Biden Administration justifies the unprecedented harshness of the measures by claiming it is needed to “protect U.S. national security”. But they have apparently not understood how China’s dirigist economy actually works (even though it is based on the same model that transformed America at the time into an industrial powerhouse, and rebuilt post-war European economies). Beijing has now moved to become world leader in the integrated circuit industry, just as it has done in steel production and high-speed rail transport, and is on the verge of doing in space exploration.

The two main parts of the $143 billion package of assistance to manufacturers are: exemption from corporate income tax for up to 10 years, for certain companies, so the funds can be used to to modernize their production process; and subsidies to firms that purchase domestic semiconductor equipment.

In 2015, China supplied 10% of the chips consumed domestically. In 2022, according to various estimates, the percentage rose to between 26% and over 30%. The current goal is to reach a level of 70% by 2025. At this point, the Chinese cannot yet produce chips as thin as those manufactured by Taiwan’s TSM, the world’s biggest microchip maker, but they are working on developing the technology required.

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