Category Archives: Technology

Corruption Probes Aim To Kickstart China’s Lagging Semiconductors Sector

THE SEMICONDUCTOR INDUSTRY has been hit with a series of anti-corruption investigations over the past month.

On August 9, the Central Commission for Discipline Inspection announced that three senior executives connected to the management of the investments of the National Integrated Circuit Industry Investment Fund, the main channel through which the government has provided more than $100 billion of state support for the sector, were under investigation for corruption.

In addition, the Commission is sending a team into the Ministry of Industry and Information Technology, whose minister, Xiao Yaqing, is already facing disciplinary proceedings.

The latest investigations follow hard on those of six other senior figures. These include Ding Wenwu, president of the National Integrated Circuit Industry Investment Fund, Lu Jun, president of Huaxin Investment, an asset manager for the Fund, and four top executives of Tsinghua Unigroup, the Tsinghua University-owned chipmaker and technology business beset by debt problems. Yangtze Memory Technologies was one of the Tsinghua Unigroup companies backed by the National Integrated Circuit Industry Investment Fund.

One of the four is former Unigroup Chairman Zhao Weiguo, who is associated with several businesses backed by the National Integrated Circuit Industry Investment Fund. He will be remembered outside China for leading a $23 million takeover bid for the US chip maker Micron Technology in 2015, which Washington blocked at the last minute.

China’s semiconductor industry has expanded rapidly since 2014 under government direction. Yet, despite the massive state support, China has not caught up to the cutting edge of chip manufacturing. Semiconductors remain its largest category of goods imports.

The anti-corruption crackdown reflects top leadership’s frustration with the semiconductor sector’s lack of progress even as its strategic importance grows in the face of US export controls on semiconductor manufacturing equipment and a new multi-billion-dollar programme to develop the US semiconductor sector. A further source of frustration is that the world’s largest supplier of advanced chips is Taiwan.

Public investment in state-backed sectors commonly has large inefficiencies. In this case, these appear to have been greater than usual — returns and outcomes look very poor compared to, say, the investment in the space industry — and worsened by who at this point knows what side deals were cooked up in the shadows of that mountain of money.

The shake-up of the sector that the anti-corruption investigations will cause will likely leave it better managed than before, though not necessarily better able to deliver ‘technological breakthroughs’ to order.

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US Stacks The Chips In High-Stakes High-Tech Game With China

Extreme ultraviolet source, droplet generator and collector mirror in a NXE3400b lithography system. Photo credit: courtesty ASML.Copyright © (ASML) All Rights Reserved

REPORTS FROM THE NETHERLANDS say that Washington is pressing the Dutch government to ban exports of semiconductor fabrication equipment to China.

ASML, one of the key manufacturers in the sector, is headquartered in Veldhoven near Eindhoven in the southern Netherlands. China is the company’s third-largest market after Taiwan and South Korea, worth $2.1 billion in 2021, one-sixth of total annual sales.

Since 2019, a Dutch-US agreement on export licences for dual-use technologies has prevented the company from selling Chinese firms its most advanced lithography systems — the machines that use ultraviolet light to trace the circuitry on computer chips (a detail of which can be seen in the photograph above).

According to the reports, Washington wants to expand the scope of the restrictions as it moves to slow Beijing’s drive for technological self-sufficiency. Last year, the US National Security Commission on Artificial Intelligence recommended that the United States ask its allies to prevent all lithography tool exports to China.

The Catch-22 for Washington is that restrictions on sales of advanced Western technology to China only spur Bejing’s development of its indigenous tech industries to end run US sanctions.

Last month, Bloomberg reported that China’s chip industry was growing faster than any other, with 19 of the world’s 20 fastest-growing chip industry firms being Chinese, compared to just eight a year earlier.

Beijing is pouring billions of dollars of investment into chipmaking by funding national champions, encouraging Chinese firms to ‘buy Chinese’ and through industrial policy programmes like ‘Little Giants’, which backs high-tech start-ups. It is also lobbying as discretely as it can manage against a bill in the US Congress that would provide $52 billion to supercharge US semiconductor manufacturing.

The long-term opportunity for China lies in developing a globally competitive chip industry that would dethrone its US rival and perhaps fatally damage US technological leadership. Former Google chief executive Eric Schmidt and Harvard scholar Graham Allison wrote in the Wall Street Journal last month that:

If Beijing develops durable advantages across the semiconductor supply chain, it would generate breakthroughs in foundational technologies that the US cannot match.

Schmidt and Allison proposed that Washington use carrots (tax incentives and subsidies) and sticks (leaning on their governments) to encourage chipmakers TSMC and Samsung to partner with US chip designers and fabricators to manufacture advanced chips in the United States. That would do nothing but escalate Beijing’s reaction to what it already calls ‘technological terrorism’.

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Shanghai Police Data Hack Reveals As Much As It Hides

THE REPORTED BREACH of the Shanghai police database is — at the very least — an embarrassment to China’s cybersecurity services but could have more serious ramifications.

According to Bloomberg, unidentified cybercriminals stole 23 terabytes of data, including personal and criminal case information of more than 1 billion citizens. An anonymous poster on the Dark Web using the handle ‘ChinaDan’ claimed to have stolen the data trove from the Shanghai National Police database and offered it for sale for 10 bitcoin ($197,00 at current depressed crypto prices).

Authorities have thus far disclosed no information on how the most extensive known hack of Chinese data happened or who might have executed it. We may never know, even if the official investigation reveals a vulnerability at the Shanghai police’s cloud services provider, almost certainly a Chinese big-tech firm. Alibaba, Tencent and Huawei are China’s leading cloud services providers.

Early speculation by outside cybersecurity experts is that there was a bug or misdeployment of the distributed search and analytics engine widely used by cloud services. Tighter regulation or rectification of cloud-service providers would hint at where authorities believe the cause of the hack to have been. So, too would be demotions, or worse, of police personnel or other members of the security apparatus.

One reason that the hack is so embarrassing for the Chinese government. Another is that it is now implementing a strict data privacy and protection regime under the umbrella Data Security Law and Personal Information Protection Law enacted last year and the earlier Cybersecurity Law. The trio imposes stringent data privacy obligations on all businesses regarding personal and non-personal data while giving state agencies extensive leeway over collecting and processing such data.

Internationally, the leaking of data files on Xinjiang haves had reputational and sanctions consequences for China. The scale of this breach will again expose Beijing to scrutiny over the extent of state surveillance.

Should reports escape the censors (the hashtag #dataleak has been blocked on Weibo), some Chinese may ask themselves not just why authorities hold so much personal data but why police in a city of 28 million have data on more than 1 billion people. However, police are a national force under the Ministry of Public Security, and the hacker(s) may have accessed the ministry’s records via the Shanghai police database. Yet that, in turn, reminds how interconnected China’s internal security systems are.

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The Unhealthy Use Of China’s Health Codes App

THE PUNISHMENT OF five local officials in Henan province for using a COVID-19 quarantine enforcement app to prevent protesters from travelling shows the capacity for digital repression and Beijing’s desire that local officials’ use of it does not get out of hand.

The punishments of two officials for ordering the tampering with the codes and three for carrying it out followed an investigation by the local discipline and supervision commission in Henan’s provincial capital, Zhengzhou.

Earlier this month, hundreds of people who had lost savings in a Ponzi scam in Henan found their health codes on the smartphone apps used to enforce COVID-19 quarantines suddenly turned red, despite testing negative for COVID-19.

A red code prevents access to public transport, hotels and other facilities. This prevented the citizens from travelling back to Henan to access their frozen bank accounts and petition authorities for redress.

The scam had already been widely shared on social media, and the apps turning red outraged social media users already weary from lockdowns. Posts about family members of depositors being placed in mandatory quarantine after their relative’s health code turned red further fuelled the anger at health codes being turned into what was called certificates of good citizenship.

The public relations damage at a time when Beijing was doubling down on its zero Covid policy soon had state media condemning the alleged abuses by local officials. China Daily described tampering with health codes as ‘ one of the worst forms of abuse of power’.

China’s new digital privacy regime limits the independent misuse of digital technology by China’s vast bureaucracy. However, while central leadership will not impose any limits on its ability to use technology for political ends, it is demonstrating that it will discipline lower-level officials if they do so for their own ends, even if that is a misguided attempt to maintain local public order.

However, the more significant concern remains that the health code system provides higher-level authorities with a repressive tool to track and quarantine arbitrarily any opponent or critic.

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Canada Finally Bans Huawei From Its 5G Networks

CANADA’S DECISION TO ban Huawei and ZTE from providing equipment for the country’s 5G network suggests that flesh is, at last, being put on the bones of the comprehensive new approach to China that Prime Minister Justin Trudeau has been promising since last year.

Nor can it be a coincidence, this Bystander suspects, that the announcement comes in the wake of the United States preparing sanctions against Hikvision and ahead of US President Joe Biden’s trip to US allies in Asia, where he will unveil the United States’ long-awaited Indo Pacific Economic Framework.

Canada’s decision brings Ottowa in line with the other members of the ‘Five Eyes’ intelligence-sharing community (the United States, United Kingdom, Australia and New Zealand). 

The decision to ban Huawei and ZTE had been expected once China freed two Canadian citizens last September who had been ensnared in the diplomatic row caused by Ottawa acceding to a request from Washington to detain Huawei’s CFO, Meng Wanzhou, on suspicion of sanctions evasion.

Concerns among Canadia’s telecom operators about the extent of re-equipping that the bans will make necessary may have caused the subsequent delay. They will now have two years to remove any 5G equipment from the two Chinese companies already installed and five years to replace any used for current 4G service. However, there will be no government money to do so.

Beijing’s response has been boilerplate, accusing Ottowa of political manipulation and colluding with Washington. The Chinese embassy in Ottowa said in a statement:

China will comprehensively and seriously evaluate this incident and take all necessary measures to safeguard the legitimate rights and interests of Chinese companies.

That suggests some foot-stamping but likely little if any material retaliation.

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Policy Shift Will Favour China’s Tech Platform And Real Estate Firms

THERE IS LITTLE doubt that China’s economic managers are ruffled. The combination of economic headwinds from the war in Ukraine to Covid’s resurgence with its large-scale lockdowns and the uncertainty over the global economy caused by inflation, supply chain chaos and tightening monetary policy are as disruptive as they were unanticipated.

The readout from Friday’s Politburo meeting was a clear recognition that the leadership understands the straitened state of the economy. Thus it is switching the balance of policy priorities from regulation and structural change back to growth.

Evidence of that can be seen in the Politburo’s signalling of an end of the campaign to ‘rectify’ the platform tech companies that started in late 2020, and its declaration that there needs to be liquidity support for beleaguered property development firms.

The English-language version of the readout put less emphasis on continuing regulation of the tech sector than the Chinese version, which, similarly, was clearer that controls on real estate speculation would continue. 

If that was an attempt to send different messages to domestic and international audiences, it strikes this Bystander as cack-handed.

Many international investors have recently turned bearish about China and moved capital out, believing the economy is in worse shape than even the official figures suggest, exacerbated by adherence to the zero-Covid policy.

However, they will judge the concrete support for the ‘healthy’ development of the platform tech and real estate sectors on its merits rather than its promise. That support will come sooner rather than later.

The government wants both sectors to thrive, especially now, but in a way that serves central policy objectives more directly than before. 

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China Starts To Bring The Metaverse Into Line

THE METAVERSE IS increasing concerning authorities as a new playground of fraudsters and scam artists.

The metaverse — immersive 3D virtual environments accessed through virtual and augmented reality and seen as the next disruptive iteration of the internet — is attracting hype and investment in equal measure, fertile ground for swindlers and other criminals. 

On February 18, the China Banking and Insurance Regulatory Commission and more than a dozen government agencies warned of phoney metaverse projects and that scams were multiplying amid the frenzy that the metaverse is generating. 

The commission gave four common examples:

  • pitching fake metaverse projects to investors and then disappearing with the funds invested;
  • bogus play-to-earn games that coax players to invest heavily in the game’s tokens in the hope of outsized returns later;
  • fake cryptocurrencies presented as ‘the next big thing’ that investors need to rush to buy before it is too late ‘to get in on the ground floor’; and
  • hyping plots of land on the metaverse falsely to inflate their value. In December, state media had carried warnings about the risks in virtual property sales.

The rush to the metaverse in China has been frenetic. Last year, more than 1,000 Chinese firms, including Alibaba, Baidu, Huawei and Tencent, reportedly applied for around 10,000 metaverse-related trademarks. 

China has banned cryptocurrency trading and mining, but it has allowed the development of metaverse and non-fungible tokens (NFTs) and allowed leeway to metaverse projects with some crypto involvement. 

Now, as with other tech sectors, that space is being narrowed. Starting with cracking down on fraudsters, authorities will likely next make it clear to metaverse companies that they will not be allowed unfettered growth. 

There will be no ‘disorderly’ allocation of capital in the metaverse any more than in the real world. 

It is to be expected that authorities will police the metaverse, aware of its potential social risks and fearing a threat to national security. The China Institutes of Contemporary International Relations, a think tank associated with the Ministry of State Security, issued a report last November warning that the metaverse might bring national security risks. 

It recommended that the government play a coordinating and supervisory role in developing the metaverse, including as a vehicle for delivering public services and a way to monitor and shape public opinion.

Like other tech companies, metaverse companies are on notice that they need to be aligned with other policy goals.

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China’s New Tech Order

AFTER NEARLY TWO years of crackdowns on various tech industry sectors, a series of policy plans have emerged that collectively outline a path of re-organisation and gradual but not disruptive development into the middle of this decade.

They bring some cohesion to the loosely connected regulatory measures taken since late 2020. The steady implementation of a clear regulatory and policy framework will replace what has looked like abrupt and random regulatory interventions.

This will be a cornerstone of the recently issued five-year plans for national informatisation and the digital economy,

China’s goal is to streamline private tech businesses from fintech firms to app platforms and enmesh them with state-owned enterprises and investment vehicles to ensure greater policy control. There is a particular focus on data and aligning the tech sector with the ‘common prosperity’ and ‘dual circulation’ development agendas.

It will be a balancing act. Beijing needs to avoid squashing innovation as it pushes to develop an indigenous tech sector that can improve economic self-reliance and be internationally competitive.

Policymakers want to use digital technologies to enhance service capacity and quality across the economy and serve underserved populations, for example, by expanding social services to rural consumers or extending credit to small and medium-sized enterprises. Yet, they also want to ensure state control of the data generated by private businesses and that those businesses do not use oligopolistic power to exploit the troves of data they collect from consumers and citizens.

The plans align with the intent to redress ‘the disorderly expansion of capital’. As with the admonition to the real estate industry that housing is for living in, not speculation, the tech sector is being schooled that it has to fulfil the needs of the real economy.

In particular, that means contributing to national innovation to help transform legacy industries in manufacturing and agriculture and playing a more significant role in generating access to and delivery of government and public services.

That message is being strongly sent to fintech firms, in particular. The idea is that fintech should be incorporated into the existing banking system, not disrupt it.

Financial instability remains a worry. Authorities are increasingly concerned that fintech products for consumers risk adding a layer of unsustainable household debt on top of existing corporate debt. Concerns about threats to the financial system were one of the reasons that authorities banned cryptocurrencies last year.

For tech companies as a whole, Beijing is making it clear that it rejects the digital economy model of large, winner-takes-all platforms as seen in the West and embraces new business models that enmesh state and private actors.

The era of unregulated growth is over. Tech firms will now be expected, for which read required, to contribute to the Party’s other policy objectives — tackling financial risk, supporting social objectives and development goals, improving market regulation and data security — and their shareholders, patriotically, to bear the costs.

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The Chips Are Down

BY VALUE, CHINA imports more semiconductors than oil. For the past two years, chips have been the country’s most valuable import.

That, in itself, tells this Bystander how much of a foundational challenge China still faces in becoming a technological rival to the United States until it is the leading provider of chips, the bricks of the digital economy, and especially the most advanced designs.

The national drive for self-sufficiency in the design and fabrication of semiconductors is long-standing. Domestic production is being ramped up rapidly, and the pace has accelerated since the US imposed sanctions to deny it access to US chipmaking technology.

Domestic output rose by one-third last year over 2020’s level, to reach 359.4 billion units, according to data newly released by the National Bureau of Statistics, having grown by 16% in 2020 over 2019.

However, last year’s production was still less than imports, which reached 432.5 billion units.

More significantly, China still does not yet produce the most advanced chips. The indigenous chip industry is still only nibbling at the edges of the leadership of foreign chipmakers like TSMC, Samsung, and Intel in cutting-edge chips. It is also an industry in which economies of scale favour the market leaders.

That adds to the risk of China’s strategy to leap-frog to compound semiconductors or ‘third-generation’ chips. Chipmaking is an industry ill-suited to decoupling.

Investment of some $26 billion in production facilities in 2021 — and the mobilisation of state planning resources on the scale of the development of the atom bomb in Mao’s time — is moving China’s chip makers up the technological ladder and reducing the country’s vulnerability to sanctions and external shocks.

The Covid-19 disruption to supply chains was a further wake-up call in that regard if any was needed. However, supply chains in the sector are complex and transnational, making self-sufficiency in chips beyond China (and indeed any country) for the foreseeable future.

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Reining In All Round

Screenshot of China Cinda Asset Management web site captures on January 16, 2022

IT TAKES SOME deft reading between the lines to understand the unexpected decision by China Cinda Asset Management, a bad-debt manager controlled by the finance ministry, to drop its backing for the restructuring of Ant’s consumer finance business.

The only public reason that China Cinda has given for backing out late last week from its announced 6 billion yuan ($940 million) participation in a 22-billion-yuan funding round for the reformulated version of Ant’s consumer finance business is “further prudent commercial consideration and negotiation.”

As part of the ‘rectification‘ of Jack Ma’s Ant Group that commenced with regulators pulled the rug from under the group’s planned blockbuster $37 billion initial public offering in November 2020, Ant’s two consumer finance businesses, Huabei and Jiebei, were to be consolidated as Chongqing Ant Consumer Finance, in which Ant’s stake would be capped at 50% and regulatory oversight extended.

Authorities are pruning back the growth of China’s tech platforms for various policy reasons, from reining in financial risk to concerns about misuse of consumer data, overweening market power and a feeling that the platforms and their billionaire owners are just getting too big for their boots.

Yet authorities also have concerns about the four bad-debt managers straying from their core mission, especially now their cash flows are being squeezed and debt ratios rising. After all, there is still a potential real-estate sector meltdown to worry about. There is no appetite to repeat the bailout of China Huarong Asset Management, the largest of the four state-backed bad-debt managers established in the late 1990s to clean up the ugly parts of the large state-owned banks’ loan books.

The China Banking and Insurance Regulatory Commission (CBIRC) recently instructed the bad-debt managers to return to their core businesses of managing bad loans and distressed assets.

China Cinda already owns 15% of Chongqing Ant through its wholly-owned subsidiary Nanyang Commercial Bank. Expanding that to become the second-largest shareholder in China’s largest consumer finance company does not fit CBRIC’s mandate.

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