Chinese technology – advancing through headwinds

Technology is an important source of disagreements between China and the US, as the world’s two largest economies differ on how to approach issues that include the handling of data and the trade of key technological goods, such as semiconductors.

How these tensions are playing out was the subject of a panel discussion at HSBC’s Global Investment Summit, which examined the effectiveness of US attempts to restrict China’s technological progress. These include export controls and sanctions that target Chinese companies working with the military.

One of the most recent moves made by the US was an executive order by President Joe Biden to protect the personal data of American citizens from foreign countries. This sweeping order restricts data flows from the US to China for the first time and is “the most important tool” so far to restrict Chinese data companies operating in the US, said Samm Sacks, Senior Fellow of Yale Law School’s Paul Tsai China Program and New America.

“The US government has never before blocked commercial data transfers. So we have to watch this closely,” she said.

The Biden administration has adopted a so-called “small yard, high fence” approach in its economic restrictions against China, highlighting how strict restrictions are placed on a small number of technologies to safeguard US national security. However, there is a growing concern that the US might use national security as a reason to curtail China’s technological advances more broadly to protect its competitiveness, said Ms. Sacks.

The panel discussed the evolution of US measures against Chinese technology. Under President Donald Trump the actions only affected a small number of specific companies. The Biden administration, by contrast, has introduced sweeping restrictions on chip exports that affect all the companies in a particular industry.

“We've seen pressure that has been effective on US allies and partners,” said Christopher Johnson, President and Chief Executive Officer of China Strategies Group. “So it looks a lot broader than the sort of scalpel approach that they say that they are pursuing.”

While it is unclear whether US export controls originated from economic competitiveness or national security risks, these uncertainties have filtered through to financial markets as well, said Frederic Neumann, Chief Asia Economist and Co-Head Global Research Asia of HSBC.

“We don't know what the boundaries are, what exactly is in scope and what's not in scope. And it sounds like the US administration is struggling with that definition too. And the Chinese, probably, as well,” he said.

US efforts to restrain China’s technological progress only have a limited effect on China’s real economy, as only a limited number of companies are directly affected by US sanctions.

“Once they get on that sanction list, they got additional help from the government – cheaper financing, better protection,” said Dr. Wang, Chief Economist, Hang Seng Bank China. “And in a way, it helped a lot of them to become effective monopolies in their industries.”

In response to US sanctions, China has doubled down on technological research. The aim is to expand its own supply chains so that it can become self-reliant in key areas of technological research – such as semiconductors and artificial intelligence. This is a top-level priority for the government, which is directing huge amounts of resources to promote progress in technology.

Dr. Wang highlighted two key factors that will determine whether China will succeed in its technological ambitions.

The first is talent. There is a significant mismatch between the kind of professionals created in Chinese universities and the skills that the market needs. At the same time, many international professionals have reservations about moving to China for work.

Another factor is China’s economic relationships with other countries. European partners are especially important as the EU is a major export market for green technology, such as solar panels, wind turbines and electric vehicles.

But there is a tension here. China’s strength in these areas is the result of strong government support. On the one hand, policy support has helped make Chinese products attractive to European consumers; but on the other, government support has raised concerns among EU policymakers, who are looking to introduce tariffs on electric vehicles in order to protect domestic producers.

“China’s success actually depends on the kindness of Europe. If that market shuts its door – which I think is highly unlikely, but the probability is not zero – then what are we going to do with all this capacity?” said Dr. Wang. “You can't let them go bankrupt. And the state model has to continue.”

The fundamental change is in the nature of global trade. When China joined the World Trade Organisation in 2001, free trade was the ideal and there was a large appetite among developed economies for Chinese imports. Although this was the case for much of the last 20 years, the situation is changing towards a less favourable trade environment for China.

In conclusion, China has accelerated its technological progress in recent years in the face of unfavourable US trade policies. The country is a major source of innovation in areas like machine learning and the commercial applications of biometrics. However, its potential to grow further amid intensified global trade tensions remains to be seen.