As Beijing Charts a Course to “Self-Reliance,” Challenges Abound

As the CCP lays out the vision for its latest five-year plan, reports suggest that developing national “self-reliance” is a critical piece of Beijing’s long-term goals. This emphasis is not new: related themes such as “dual circulation” and “technological modernization” have been frequently stressed by officials across numerous industries, with efforts being spearheaded in areas from semiconductor development to China’s emerging central bank digital currency. However, numerous analysts have noted that the road to self-sufficiency for China may be bumpier than it looks.

The semiconductor industry is one key sector aiming to increase capacity. Despite the huge sums Beijing has invested into developing a homegrown semiconductor champion, challenges have been considerable. The urgency to develop a viable domestic champion is not just for economic reasons, but for strategic ones as well. Chinese semiconductor manufacturers have recently been hobbled by their reliance on foreign technology, especially after the U.S. imposed sanctions on the country’s biggest chipmaker in late September. As The New York Times’ Chris Buckley and Steven Lee Myers report, analysts expect an important component of the new five-year plan will involve redoubling efforts at developing the semiconductor sector:

[…] Mastering the design and production of silicon chips and other parts can be expensive and risk-filled, and industry experts have questioned how far and how quickly China could successfully decouple itself from global suppliers.

“I think a lot of what China is trying to do is to throw a lot of resources — financial resources, human resources — at clearly identified problems,” said Andrew Batson, the China research director for Gavekal Dragonomics, an independent research firm. “A lot of the priorities involve scaling up of existing technologies domestically.” [Source]

With establishing a viable chipmaker something of a national priority, money has flowed into the pockets of new entrants and has led to several high-profile collapses. For SupChina, Luz Ding wrote last week about the “debt-ridden disappointment” of one semiconductor startup, HSMC, which attracted billions in investment but is now reportedly struggling financially:

Founded in 2017, HSMC received high expectations mainly thanks to its big-name CEO, Chiang Shang-yi (蔣尚義 Jiǎng Shàngyì), who formerly oversaw research and development as the joint COO of the world’s biggest semiconductor manufacturer, TSMC (Taiwan Semiconductor Manufacturing Company). HSMC earned additional prominence in the field when it purchased an advanced lithography machine from the Netherlands’ ASML and announced it aims to produce 7nm chips, a goal that even SMIC has yet to achieve. HSMC attracted 128 billion yuan ($19 billion) of investment and subsidies. However, recent government and news reports suggest that the company is facing financial fallout and risks bankruptcy.

Construction of HSMC’s headquarters and factory in Wuhan has come to a full stop as the company failed to pay off its contractors, according to multiple Chinese media reports (in Chinese). HSMC appears to be still operating, with hundreds of employees continuing to work in the temporary office buildings, but there is no indication of any ongoing production activities in the factory, an HSMC equipment supplier told SupChina.

HSMC is currently facing a significant cash shortage and is at risk of being shut down anytime, according to the mid-year economic report issued (in Chinese) this July by the local government of Wuhan’s East-West Lake District, where the semiconductor startup is located. [Source]

Last month at the South China Morning Post, Amanda Lee reported that the National Development and Reform Commission would step in to curb “chaos” in the semiconductor industry:

Meng Wei, a spokeswoman with the National Development and Reform Commission (NDRC), said that some companies “with insufficient knowledge of integrated circuit development” have “blindly entered into projects”.

“The risks of low-level construction have appeared repeatedly, and there has even been stalled construction of individual projects and vacant factories, resulting in a waste of resources,” Meng said on Tuesday at a regular press briefing of the economic planning agency.

She added that the NDRC “also noticed that the enthusiasm for domestic investment in the integrated circuit industry is constantly rising”.

In response, she said the commission will work with other state departments to more closely supervise semiconductor projects. [Source]

Another crucial step towards China’s goal of self-reliance is stimulating domestic demand to reduce demand for exports from abroad. A related principle recently promoted by Xi Jinping during his Shenzhen tour is the idea of “dual circulation,” which envisions a “new balance away from global integration (the first circulation) and toward increased domestic reliance (the second circulation).” At the Paulson Institute’s MarcoPolo think tank, Houze Song noted that the challenge for Beijing now is encouraging greater demand for domestic consumption:

Moreover, dual circulation is simply an acknowledgement of reality. For years, many have called for rebalancing the Chinese economy. At a macro level, that rebalancing has actually happened since the global financial crisis. China’s trade surplus has already dropped from more than 8% of GDP to around 1% of GDP, while the share of domestic demand has risen accordingly by 7% of GDP over the same period.

But the form that rebalancing has taken is not optimal nor sustainable because it has been driven by domestic investment. Liu He, China’s top economic policy advisor and Vice Premier, has long argued for a more sustainable rebalancing based on domestic consumption and income growth. In fact, many elements of the “dual circulation” strategy are identical to Liu’s rebalancing proposal he published after the financial crisis but were never implemented. With Liu now in charge of reforms, there is a higher likelihood that more concrete actions will be taken. [Source]

Encouraging China’s consumers to spend more in today’s climate is no small task. While Beijing has done its best to exude confidence as China rebounds from the impact of COVID-19, recently released economic figures show that the general public is less willing to spend compared to last year. For The Wire China, Victor Shih wrote that those figures along, with a lack of concrete details from Beijing on how the new five-year plan will stimulate domestic consumption, show that achieving domestic reliance will be harder than it sounds:

Ning Jizhe, one of the co-authors of the [14th Five-Year] plan and the vice chairman of China’s powerful National Development and Reform Commission, likewise emphasized that a major objective of the plan was to “elevate people’s income and use multiple channels to increase the income of urban and rural residents.”

[…] Despite the stated objective, there’s been no sign of this reorientation during the current downturn. Total government spending on social security and healthcare rose from 5.2 percent of nominal GDP in 2019 to 5.5 percent this year. Meanwhile, all of the other major economies have increased health and welfare spending by trillions of dollars, pushing up deficits by more than 5 percent of GDP. As of September, the deficit in China had only nudged up from 4 percent of nominal GDP during the third quarter of 2019 to 4.8 percent this September, a 0.8 percent increase. Retail sales, a reflection of the income security of ordinary Chinese, still fell by more than 7 percent this September compared to a year ago, and declined by close to 9 percent, if inflation is taken into account.

Despite aspirations to boost consumer demand in China, which also would benefit the world, China has done very little to facilitate that goal even at a time when it made great sense to do so. It is doubtful that the 14th Five-Year Plan will elevate the trajectory of Chinese demand to a level higher than its existing path. This means China will continue to run large trade surpluses and the world will not reap much more marginal benefits from its growing economy. [Source]

Finally, there are the unknown unknowns. CNN Business’ Laura He reported that China will also likely have to contend with unforeseen challenges to its domestic supply chains:

“There is no guarantee that efforts to boost self-sufficiency in specific sectors will succeed,” wrote Julian Evans-Pritchard, senior China economist for Capital Economics, in a research note late last week.

Evans-Pritchard pointed out that unforeseen events can derail China’s plans, such as when an outbreak of African Swine Fever decimated the country’s pork industry last year. The disease wiped out a third of China’s pig population, causing a shortage that forced China to import massive amounts of meat. [Source]


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