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China at the End of the Cycle

China at the End of the Cycle

The fall of foreign direct investment (FDI) in China to a three-decade low marks an important turning point in the economic development scheme of the world’s second-largest economy. On top of this, business confidence in China was at its worst until the meeting between Biden and Xi last October, when bridges were built for the recovery of some agility in talks between the two sides. By then, the latest US sanctions on the export of chip-making machinery came into effect, generating a change in the pattern that anticipated the end of a cycle for China.

The fall in FDI has not been slight, but rather drastic, dropping 80% from the previous year, reaching just $33 billion, far short of the historic peak of $344 billion in 2021. Extraordinary was also the first quarterly FDI deficit in the third quarter of 2023, the first time that outflows exceeded inflows. And yet China displaced Japan as the world’s largest car exporter in 2023, mainly through its contribution to electric car manufacturing.

In this new globalisation, the capabilities acquired in the development of renewables, sustainable mobility, and advanced chip manufacturing will generate competitive advantages by providing that dose of strategic autonomy that the great powers so crave. Balancing the geopolitical scales will be complex in a power game in which China is currently leading the push towards energy transition and the supply of many of the raw materials needed in this process. Elements that are also essential for the semiconductor industry, with restrictions that Beijing has already begun to apply to counteract those imposed by Washington.

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At the end of this cycle, FDI is moving away from China, mainly chip-related, falling to 1% in 2022 from 48% in 2018, according to Rhodium Group. In the same period, the United States captured some of this investment spirit to bring chip manufacturing back home, from 0% to 37%, while other countries such as India, Singapore and Malaysia have benefited from the offshoring of production to China in what is known as nearshoring.

The end of the cycle is nearing completion, adding speed to a race for time in which China has accelerated its decades-long process of reducing dependence on foreign technology, with the biggest challenge now being to achieve advanced chip production in-house. The incorporation of 7nm chips in Huawei’s smartphones late last year, developed in conjunction with Semiconductor Manufacturing International Corp (SMIC), China’s largest chipmaker, marked a turning point in the Asian giant’s capabilities. The Chinese investment could lead to mass production of 7nm chips by 2024, while the $10.6 billion invested to build up a stockpile of lithography machines before the restrictions took effect would be geared towards addressing the development of 5nm chips.

If successful, mass production of 5nm chips would put China back in the race for artificial intelligence, and its application to military technology, positioning Huawei as the only competitor to US-based Nvidia, whose earnings report was euphoric as it exceeded market expectations, mainly due to its sales to China. As the big winners of the AI push, Nvidia has already started adapting its chips to comply with the restrictions, but if the move to 5nm is successful, China would be closer to technological self-sufficiency.

With this end-of-cycle completed, the sanctions would have proved to be truly transformative, generating changes in China’s technology self-sufficiency agenda that would have prompted it to develop capabilities to produce chips that would be just one generation away from the most advanced. Everything has a cost, and in this case, it is quite high.

China faces more than a few challenges to compete in the AI chip revolution. Acquiring 5nm and 7nm mass capacities at a faster pace would be costing the Asian giant around twice as much as TSMC, the Taiwanese technology market leader. In addition, achieving mass production also requires improving a manufacturing process that currently only produces less than a third of commercially viable chips.

At the end of this cycle, the United States has granted GlobalFoundries $1.5 billion in the largest allocation under the CHIPS Act, the world’s third largest chipmaker, while in Europe the most valuable European technology company, the Dutch ASML, the world leader in advanced chip lithography machines, faces a geopolitical context with new competitors. An end of cycle also for Europe without consolidating advances in strategic autonomy. 


Imatge il·lustrativa


por Michele Testoni

Imatge il·lustrativa


por Juan Vázquez Rojo