USA vs. China – The screw pt. IV.

USA restrictions are biting.

• China is making the best of a difficult situation but there is no getting around the fact that the USA is currently winning the technology war, meaning that China needs to stop hammering its homegrown companies if it wants to compete effectively.
• This week is the annual National People’s Congress which serves as a platform for the Chinese state to lay out its policies for the next 12 months.
• GDP growth has been set at 5% which is already well below the historic average and some commentators are already thinking that this is ambitious.
• This is because much of the Chinese people’s wealth is tied up in the moribund real estate sector which somehow needs to be restructured before it has any hope of growing once again.
• Furthermore, an ageing population and an imbalance between the male and female population due to the one-child policy, means that the demographic outlook is gloomy.
• Finally, China also appears to be heading straight into the “middle-income trap” as predicted by Alavan Independent where GDP per capita stalls at $12,000 and stubbornly refuses to budge.
• China has also declined to aggressively stimulate its economy for fear of inflation and the already very high debt levels meaning that the outlook is stagnation at best.
• This is not the backdrop against which to develop a thriving technology sector and the state also continues to act against its own best interest in my opinion.
• China’s technology titans arguably got too big for their boots but the hammer blow that the Chinese state has handed out to them has meant that they are terrified of putting a foot wrong which also has the effect that no one wants to own their shares.
• This in turn means that they have little inclination to invest in new technologies but instead have turned all their efforts inward to make themselves as efficient as possible given their new operating environment.
• There are also signs that the US restrictions are working as local governments appear to be handing out vouchers worth $140,000 to $280,000 each to start-ups to help them deal with large rises in data centre costs.
• These costs are rising because the silicon to train generative AI is now scarce and the owners of this silicon are increasingly keeping the capacity for themselves and their largest customers locking everyone else out.
• The silicon is scarce due to the increased restrictions on Nvidia and AMD chip exports to China which in turn means that the cost to access compute capacity on these chips has risen substantially.
• The only silver lining here is that there will come a time when the costs rise so much that it will cost the same to train on older silicon, but this is a clear demonstration of how the USA is using silicon as a weapon in its campaign to limit China’s rise as a technological and economic power.
• AI is an area where China is quite capable of challenging the USA for technological supremacy but without access to advanced silicon, China is going to get into difficulty.
• This is because it will take longer and cost much more to train algorithms than it will for anyone else undermining the economics of offering services.
• While China can control what happens at home, it has much less influence overseas and if its AI services are more expensive to make, it will greatly diminish their competitiveness.
• This will make overseas buyers less inclined to use Chinese AI and become part of the Chinese digital ecosystem which is precisely what the USA wants.
• Hence, 2024 looks like it is going to be a difficult year for China with economic problems and evidence of the USA restrictions having precisely the desired effect.
• This combined with China’s priority of control over free enterprise means that the Chinese technology sector will remain hobbled both in terms of its ability to develop technology as well as attract investment.
• This will serve to accelerate the decoupling which is now well underway as well as divide the technology sector into two distinct and incompatible pieces.
• Restrictions will only make China push harder for self-reliance, meaning that it will create its own standards wherever it can.
• The Balkanisation of the global network inevitably means less growth for all of the technology sector in the long term.