BNP AM

The sustainable investor for a changing world

FRONT OF MIND | Article - 4 Min

Ramping up the US-China chip rivalry: Who will suffer the most?

In another turn of the screw in its ban on tech and chip exports to China, the US is proposing to block direct company investment in advanced tech areas such as artificial intelligence, 5G wireless and quantum computing. How much China suffers will depend on whether the country has enough knowledge to sustain its own development of advanced tech. There is evidence that it has.  

The latest US restriction could damage China in the short term as the country is deeply integrated into the global semiconductor value chain and depends heavily on advanced microchip imports. Over the longer term, we believe the move will delay, but probably not derail, China’s technological progress. It may have only a limited effect on China’s productivity and growth outlook.

Investment implications

From an investment perspective, public markets are not included in the proposed ban. However, pending details from Washington on its breadth, China’s car and health care sectors may feel the pinch as US investment in those areas is bigger than in other tech-related fields.

The US’ anti-China tech policy may benefit other Asian players as the West itself seeks alternative tech suppliers.

China’s own software industries should not be damaged; they may even increase their market share catering for the huge domestic market as the digitalisation of the economy accelerates.

The US ups the ante

As well as considering a ban in direct investment in China’s advanced tech industries,[1] the US government agreed with Japan and the Netherlands in February to curb exports of advanced microchip fabrication equipment to China.

This followed a proposed alliance in January with the largest microchip-producing economies, including Taiwan, Japan and South Korea, to coordinate tech export control policies.

Short-term damage to China

If not mitigated by China’s own technological advances, such restrictions could set back its semiconductor technology by decades.[2] Data show that China excels in the low-tech end of the supply chain; it is a net exporter of basic devices. However, China is running a massive trade deficit as a net importer of advanced chips, which are used in consumer products and capital equipment (Exhibit 1).[3]

World Trade Organization data[4] on the global value chain shows that China relies heavily on importing advanced semiconductors to make technology goods for both export and domestic use. By contrast, the US makes and exports technology goods using domestically produced advanced microchips.

This high foreign-tech dependency means China could be constrained by restrictions of foreign supplies. Japan and the US together provided almost 60% of China’s microchip fabrication equipment, and the Netherlands is also an important supplier.

By targeting these critical inputs, the US appears to be seeking to impede China’s semiconductor manufacturing capability from advancing beyond 2022 levels.

Long-term impact could be limited

Despite the bleak short-term outlook, some industry experts – even in the US – warn that the latest proposed restrictions might not hold back China’s microchip technology for long. Most Chinese tech systems rely on locally made, less sophisticated microchips – products that US export controls do not cover.[5]

Furthermore, if China needs cutting-edge semiconductors to further its development of AI, 5G and quantum technology, it is technically capable of producing them; it only lacks the commercial capability to scale up production.[6]

Indeed, China is rapidly catching up on research & development spending (see Exhibit 2). The country has more than eight million university graduates each year and more science, technology, engineering and math (STEM) PhDs than the US.[7] This implies that China has the wherewithal to further its own tech development, even in the face of the latest restrictions.

The impact on China’s long-term growth outlook may also be limited. US high-tech investment in China is estimated to have accounted for only 0.5% of China’s total foreign direct investment (FDI) in recent years[8].

China’s medium-term annual growth rate could be higher than the consensus average of 3% for much longer if Beijing’s latest reforms succeed in raising productivity and renewing industrialisation momentum.[9]

Will the US shoot itself in the foot?

While we believe tit-for-tat retaliation is not a plausible option given China’s heavy dependence on foreign technology,[10] US semiconductor companies are unlikely to emerge unscathed from Washington’s export ban policy. China is the largest market for many such firms: in recent years, exports to China have accounted for 27% of sales at Intel, 31% at Lam Research and 33% at Applied Materials.

Both Applied Materials and Nvidia have said they expect the new export controls to cut USD 400 million (or 6% and 7%, respectively) from their sales in Q2 2023. Lam Research has said it expects the controls to cut USD 2.5 billion (15%) from its 2023 sales.

Some market participants estimate that the damage from the proposed export controls on US semiconductor R&D and capital investment would exceed Washington’s subsidies for that industry by at least a factor of five.[11]

References

[1] “Key Lawmaker: Biden Mulling Broad Prohibitions on U.S. Investments in Chinese Tech”, Gavin Bade, Politico, 27 January 2023 (here)  

[2] “Choking Off China’s Access to the Future of AI”, Gregory C. Allen, Center for Strategic & International Studies, 7 November 2022 (here)  

[3] The advanced tech goods trade deficit disappeared during Covid-19 as China was the only functioning exporting economy when the rest of the world was shut down. The deficit is expected to return and widen when the world economy normalises.  

[4] “Sino-US Rivalry Over Chips”, Jing Liu & Junyu Tan, HSBC Global Research, Economics China, 3 February 2023  

[5] “Securing the Microelectronics Supply China”, Jared Mondschein, Jonathan W. Welburn & Daniel Gonzales, RAND Corporation, February 2022 (here)  

[6] “US Godfather Makes a Chip Offer You Can’t Understand”, David P. Goldman, Asia Times, 5 November 2022 (here)  

[7] “Chi on China: China’s Structural Growth (II) – Thinking Outside the Growth Box”, 14 February 2023 (here)  

[8] “FAQs on Proposed US Investment Ban on China”, Morgan Stanley Research, China Macro & Strategy, Asia Pacific, pp. 7, 6 February 2023  

[9] See reference in footnote 7  

[10] “Assessing the New Semiconductor Export Controls”, Matthew Reynolds, Centre for Strategic & International Studies, 3 November 2022 (here)  

[11] “China Chip Ban a US Exercise in Extreme Self-harm”, David P. Goldman, Asia Times, 13 October 2022 (here)

Disclaimer 

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Related insights

Graph of the week – Volatility in bonds creates opportunities
14:24 MIN
Talking heads – US high-yield bonds, where do we go from here?
Daniel Morris
2 Authors - FRONT OF MIND
03-06-2023 · 8 Min
BNPPAM

In the U.S., this material is for Institutional use only – not for public distribution. This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.

These documents and video clips may also include information obtained from affiliated investment management companies within BNP Paribas Asset Management, the brand name of the BNP Paribas group’s asset management services. The documents and video clips are produced for informational purposes only and do not constitute: 1. an offer to buy nor a solicitation to sell, nor shall they form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Any opinions included in these documents and video clips constitute the judgment of the author/ presenter at the time specified and may be subject to change without notice.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BNP PARIBAS ASSET MANAGEMENT USA, Inc. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.

FOR INSTITUTIONAL AND FINANCIAL PROFESSIONAL INVESTOR USE ONLY. THIS MATERIAL IS NOT TO BE REPRODUCED OR DISTRIBUTED TO PERSONS OTHER THAN THE RECIPIENT.

BNP PARIBAS ASSET MANAGEMENT USA, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. BNP PARIBAS ASSET MANAGEMENT USA, Inc. is a registered trademark of BNP Paribas or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. © 2022 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

BNP PARIBAS ASSET MANAGEMENT is the global brand name of the BNP Paribas group’s asset management services. © 2022 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

BNP Paribas Asset Management seeks to integrate environmental, social and governance (“ESG”) factors into all of our portfolios as a means to mitigate certain short, medium and long-term financial risks, identify better long-term investments, and encourage more responsible corporate behavior. We will never subordinate our client’s interests to unrelated objectives. Certain issuers and industries are excluded from our actively managed portfolios based upon our view of their ESG performance and risk profile. As a result, we may pass up certain opportunities when these excluded issuers or industries are in favor. Due to significant gaps in disclosure regimes around the world, we may need to rely upon voluntary disclosures by issuers, which are often not audited. We therefore may not have consistent access to complete, accurate or comparable information about the ESG performance of our holdings. Please consult the applicable offering document for more information about the specific ESG strategy employed by each investment strategy since a given strategy may not have specific ESG guidelines, and investments are not limited to securities that are ESG compatible.

To access insights from our teams worldwide visit:
BNP AM
Explore VIEWPOINT today