USA vs. China – The screw pt. II

USA cuts off capital to three sectors.

• The USA will place limits on US investment in 3 Chinese technology sectors in a move that is not really targeted at the Chinese military but further acts to limit China’s rise as a technology power that could lead to it challenging the USA in the geopolitical arena.
• The US White House has issued an executive order that bans investment into Chinese AI, advanced silicon chips and quantum computing companies which will come into force at some point during 2024.
• The official reason for these additional measures is to limit access to US capital and technology by China’s military but this looks to me like a fairly weak excuse for a much wider attack on China’s emergence as a world power.
• Alavan Independent has long held the view that the rivalry between the USA and China has migrated from a strategic rivalry into an ideological struggle that is currently being fought in the technology sector.
• Here, the USA has a very large advantage as it has unilateral control over leading-edge semiconductor manufacturing (7nm and below) and significant control over advanced manufacturing (20nm – 10nm).
• It has already used this weapon to great effect to limit China’s ability to manufacture advanced semiconductors in domestic fabs and now it is turning to other strategies to fulfil the policy outlined on October 7^th 2022.
• Historically, the policy has been to keep China 2 generations behind the leading edge but this has been changed to stop China’s development in its tracks as well as to target other sectors where China may be able to challenge the US for technology leadership (see here).
• This is why Alavan Independent and RFM have long concluded that further actions are likely that target AI and quantum computing as outlined in this order as well as The Metaverse, 6G, and autonomous driving to name a few.
• This explains the rush by Chinese Internet companies such as Alibaba, ByteDance, Tencent and Baidu to procure as many silicon chips from Nvidia as they can before the restrictions are tightened further.
• These are for the A800 chip that Nvidia released specifically for China that complies with the internal speed limit that was defined in the orders that were released by the commerce department on 7^th October 2022.
• There is a strong possibility that this regulation will be tightened at any moment meaning that the A800 will no longer be available for sale in the Chinese market.
• Despite the efficacy of past orders, I think that this order will have very little impact.
• This is because the policies of the Chinese government in combination with its crackdown on the technology sector have already had the effect of scaring almost all foreign capital away from China.
• The big listed Internet companies (arguably the least risky) are trading huge discounts to their Western peer group and there is absolutely no interest from investors to pick up these bargains.
• In the private space, the risks are much greater as the companies are smaller, earlier stage with almost no liquidity and almost everyone I speak to has given up on investing in Chinese companies for the time being.
• Hence, it looks as if China has been far more effective in discouraging foreign investment in its technology sector than the USA could ever hope to achieve.
• However, this is a further sign that more restrictions are coming, and I would not be surprised to see more technology sectors come under export regulations over time.
• 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.
• Further 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.