The Biden administration’s new technology restrictions are already causing disruptions in China as US semiconductor equipment suppliers are telling staff based in the country’s top memory chip maker to leave, according to WSJ, citing sources familiar with the matter.
State-owned Yangtze Memory Technologies Co. has seen US chip semiconductor equipment companies, including KLA Corp. and Lam Research Corp., halt business activities at the facility. This includes installing new equipment to make advanced chips and overseeing highly technical chip production.
The US suppliers have paused support of already installed equipment at YMTC in recent days and temporarily halted installation of new tools, the people said. The suppliers are also temporarily pulling out their staff based at YMTC, the people said. –WSJ
It’s hard to overemphasize how badly fucked China’s chip industry is with this latest move. Semiconductor equipment not only needs regular maintenance, but extremely specialized expertise when something goes wrong and your yields crash, wizards who can look at a wafer defect chart and determine by experience what’s gone wrong with which tool. Without support and spare parts from the western semiconductor equipment giants, expect yields to start crashing in a matter of months, if not weeks, especially if Applied Materials and Tokyo Electron join the pullout.
I just put in a call to the Applied Materials press office to ask them about this. I’ll let you know if I hear back.
As Peter Zeihan notes, these sanctions screw not only China’s semiconductor industry, but every segment of the high tech assembly chain that depends on them.
Takeaways:
Not only is China now unable to import the equipment to make semiconductors, or the tools to maintain and operate the equipment, or the software that’s necessary to operate the equipment, or any mid or high level chips at all. Now any Americans who want to assist with the Chinese semiconductor industry have to make a choice: you can have your job with China or you can have your citizenship.
I’ve read this elsewhere: “One of the provisions of President Joe Biden’s executive order is that any U.S. citizen or green card holder working in China cannot work in the Chinese semiconductor industry or risk of losing American citizenship.” The thing is, I don’t think such sanctions are constitutional, and I’m pretty sure stripping citizenship over trade regulations with a country we’re not at war with would fail the Ninth Amendment “necessary and proper” test.
Back to Ziehan:
“Within about 48 Hours of the policy being adopted last Friday, every single American citizen who was working in China in the industry either quit, or their companies relocated their entire division so they wouldn’t have to lose their staff.”
“For all practical purposes the Chinese semiconductor industry of everything over Internet of Things level of quality is now dead, and that has a lot more implications than it sounds.”
“Chinese have proven incapable over the last 25 years of advancing sufficiently [to run the technology required] to operate this industry, beyond being able to simply operate the facilities that make the low end chips, and even that had to be managed by foreigners. So there is no indigenous capacity here to pick this up and move on.”
“In terms of industrial follow-on, this doesn’t just mean that the Chinese are never going to be able to make the chips that go into cars or computers, it also means that any industry that is dependent upon the hardware dies.”
China can’t do anything remotely high tech (hypersonic missiles, AI, Great firewall, etc.) without buying chips on the gray market.
“This is a deal killer not just for the industry, but for a modern technocratic system from a technological point of view. China is done.”
What’s China going to do about it? “I would expect this kind of ‘bag of dicks’ diplomacy that has evolved in China to get this hard, and loud, which will probably only encourage the Americans to act more harshly.”
In many ways, the Biden Administration’s approach to China has been a continuation and escalation of the Trump approach: No More Mister Nice Guy, with sanctions and reshoring of American industry.
Short of actual military action, it’s hard to see how China can effectively retaliate against America over these moves. American companies are already leaving, and China has built up so much ill will in various international trade organizations that it’s difficult to see how they could lodge a complaint with one of those and prevail.
The rail bridge has two tracks going each way, and they ran a test 15-car train on the other span. I have a civil engineer/bridge inspector friend who thinks it’s probably unwise to use the rail bridge at all, as the fire has almost certainly weakened the structure through spalling. But Russia doesn’t have a lot of options.
The destroyed train hasn’t been cleared yet.
They’ve opened up the surviving lane for traffic. “It’s been said that the road span can handle 20 cars an hour and has a weight capacity of 3.5 tons.” That’s rural mail route capacity, not “support a major front in a war” capacity.
Russia is trying to repair the bridge.
They’re using passenger-only ferries to cross, but the run rate is so low they may only have one ferry in service.
Peter Zeihan says it’s potentially a turning point in the war:
“By far the most significant development of the war to date.” I would say that the failure to take Hostomel Airport in the opening phases of the war was bigger, as that meant Russia’s high risk/high reward decapitation strike had failed.
“The Kerch bridge is the only large-scale rail connection between mainland Russia and the Crimean peninsula, which is home to about two and a half million people.”
All other rail lines are under threat of Ukrainian artillery.
He reiterates that everything in Russia runs on rail, as they never built a modern road network in most of the country.
“With Kerch being the only real connection, it is the primary primary way that the Russians Supply Crimea in the southwestern front with not just troops and equipment, but with food and fuel.”
He estimates the bridge spans couldn’t be repaired without several months of work.
“Now that the Ukrainians know it can be done, you can bet they’re going to try to hit other parts of it to make sure the thing stays offline.”
“For the first time we have a path forward for the Ukrainians here to win that is not long and windy.”
Russia finally has a problem it can’t just shove bodies at. “You don’t throw a half a million people at logistics. This is something where either you have the connections or you don’t.”
Russian troops in Zaporizhzhia, Kherson and Crimea are “suddenly on their own.”
They can now only supply those regions in two ways. “One is by truck, and we know that because of all the Javelins that have been put into Ukraine, and all the RPGs, that the Russians are almost out of their entire military tactical truck fleet, and they’ve started using city buses and Scooby-Doo vans, and those just can’t take the volume of stuff that an active frontline needs.”
The second way is by ship, and if they can’t supply anti-ship missiles, then Ukrainians can Muscova “every single cargo ship that the Russians try to bring in.”
“Losing cargo ships in that volume, losing trucks and buses in that volume, is hollowing out the entirety of the Russian internal transport system. This is the sort of thing that if you bleed this fast, it takes a decade to recover from, and in a war zone that is not going to happen.”
And sanctions make everything harder.
There still seems to be some confusion over just what blew up the bridge. While truck bomb is still the most widely accepted theory, supposedly Russia scans all trucks before the enter the bridge. And Suchomimus has a video up showing something in the water just before the blast (what isn’t clear).
Finally, there are persistent reports of arrests of military personnel in Moscow. But the primary source for these reports seems to be Ukrainian, so several grains of salt are probably in order.
Ukraine continues to liberate territory from its Russian occupiers, not only in the Kharkiv/northeast front, but also on the Kherson/southwest front, where the last few days have seen a rapid collapse in Russian lines.
Ukrainian forces continued to make significant gains in Kherson Oblast while simultaneously continuing advances in Kharkiv and Luhansk oblasts on October 4. Ukrainian forces liberated several settlements on the eastern bank of the Inhulets River along the T2207 highway, forcing Russian forces to retreat to the south toward Kherson City. Ukrainian forces also continued to push south along the Dnipro River and the T0403 highway, severing two Russian ground lines of communication (GLOCs) in northern Kherson Oblast and forcing Russians south of the Kherson-Dnipropetrovsk Oblast border toward the Beryslav area. Ukrainian military officials noted that the Ukrainian interdiction campaign is crippling Russian attempts to transfer additional ammunition, reserves, mobilized men, and means of defense to frontline positions. Ukrainian forces also continued to advance east of the Oskil River in Kharkiv Oblast, and Russian sources claimed that battles are ongoing near the R66 Svatove-Kreminna highway.
Kreminna seems to be the next big target for Ukrainian forces to take in Luhansk, allowing them to cut a major supply line and directly threaten Severodonetsk and Lysychansk.
Here’s a detailed description of the collapse of the northern portion of the Kherson front.
For another idea how rapid that advance have been, here are snapshots of the Deep State war map on 10/1 and 10/4.
Since most of the bridges over both the Inhulets and Dnipro rivers have been blown up, Russian forces are at significant risk of being cutoff and unable to retreat.
And just as I was working on this, a Peter Zeihan video on the topic dropped:
Takeaways:
Kherson: “The entire Russian line has crumbled.”
“Kherson is the only major city Russia has captured in seven months.”
“This is the greatest concentration of Russian forces, and it is the best troops Russia has.”
They also have the best equipment. If the Ukrainians capture it, it would be even better than Kharkiv.
“I still believe this is Russia’s war to lose. The first year of all Russia’s wars look a lot like this. Bad training, bad coordination, poorly maintained equipment.” Modern warfare seldom gives you an entire year to sort your problems out.
“Watch Kherson closely. This could be where the war is decided.”
Russia seems to be retreating everywhere save the central front in Donetsk, where they seem to be eking out tiny, meaningless gains of a square kilometer or two a day. That’s not a recipe for success.
Faced with the continued erosion of Russia’s military position in Ukraine, Vladimir Putin has chosen to double-down on failure.
Russian President Vladimir Putin on Wednesday announced the partial mobilization of military reservists, a significant escalation of his war in Ukraine after battlefield setbacks have the Kremlin facing growing pressure to act.
In a rare national address, he also backed plans for Russia to annex occupied areas of southern and eastern Ukraine, and appeared to threaten nuclear retaliation if Kyiv continues its efforts to reclaim that land.
It came just a day after four Russian-controlled areas announced they would stage votes this week on breaking away from Ukraine and joining Russia, in a plan Kyiv and its Western allies dismissed as a desperate “sham” aimed at deterring a successful counteroffensive by Ukrainian troops.
Before this announcement it was apparent that Russia basically had no reserves, so a mobilization isn’t a surprise. Why admit failure when you can simply get more of your countrymen slaughtered for doubling-down on your own mistake?
It won’t be easy or fast to call up that many reservists, according to military experts, because Russia basically doesn’t have a reserve.
A 2019 RAND study noted that “Russia has paid little attention to developing an effective and sizable active reserve system that might be immediately required in the event of a major war.” RAND estimates that Russia has an effective reserve of only 4,000-5,000 men.
The country’s former army reserve units had been disbanded from 2008-2010 as part of the military’s modernization program, with their equipment — all of it older — going into storage or scrapped.
That doesn’t mean that Russia can’t conscript, train, organize, and arm 300,000 new soldiers, but it won’t be quick or easy.
One problem, as Foreign Affairs analyst Oliver Alexander put it, is “effectively readying and equipping these reservists. Russia already has problems equipping its professional armed forces.”
Then there’s the speed problem. Dara Massicot wrote back in August — weeks before Kyiv’s stunning counteroffensive in Kharkiv — that “Even if the Kremlin pulls all levers available, declaring a general mobilization to call up sufficient armored equipment and trained personnel, that process would still take time.”
That’s because with something like 80% of Russia’s combat power already fighting in Ukraine, plus wartime losses to their NCO and officer corps, the Russian army will need to train more trainers before anything like 300,000 men can be mobilized.
Just last month, Putin ordered an increase in the size of the Russian military of 137,000 troops. But as I reported to you then, Putin’s order only meant that “Starting next year, the Russian military will be authorized to find another 137,000 troops.” The country has long had a problem with draft dodgers, one that Putin’s “special military operation” won’t help.
He also notes the problem of obtaining new equipment. Even the first wave of Russian invasion included troops who were armed with ancient rifles. With the sanctions in place, none of that is going to get any better. Plus the fact that Russia essentially used up all their smart ordinance during the first stage of the war and that sanctions ensure they can’t easily make more.
Is there a Peter Zeihan video on the topic? Of course there is.
Some takeaways:
Reiterates why everything in the Russia army travels by rail. “The Ukrainians were able to take a couple of re-up depots in eastern Ukraine and Kharkiv a couple weeks ago and the front just collapsed.”
“We might be seeing a repeat of that in the Donbas.”
“The Russians are now discovering that they’re actually outnumbered locally, and that with all the captured equipment, the Ukrainians actually now have more artillery and more ammo.”
“This is the sort of war the the Russians know how to fight: Just throw bodies after it.”
The influx of new troops “doesn’t mean that the nature of the war is
fundamentally changed,” but now they’ll be able to rotate fresher troops in, “and continue fighting the war more or less the way that they have been now, which is to say poorly.”
Russia is already crashing demographically, and the main cohort of this war is coming from the men who should be fathering children. “This is a potentially a country killer. Before I thought that this was Russia’s last war. Now I’m certain of it.”
Says Ukraine can still win, but they need to do the Kharkiv counteroffensive twenty times over.
Says they need to continue hitting Russian logistics nodes. “The one I am most interested in, of course, is Miriapol. Because if the Ukrainians can reach Mariupol, they basically isolate Russian forces throughout southern Ukraine, and then you’re talking about a hundred thousand Russian troops that are just stranded with no hope of resupply at all.” (Assuming his later mention of taking out the Kerch Strait Bridge.)
Nor are the sham referendums likely to make any difference either.
Russian-appointed occupation officials in Luhansk, Donetsk, Kherson, and Zaporizhia oblasts announced on September 20 that they will hold a “referendum” on acceding to Russia, with a vote taking place from September 23-27. The Kremlin will use the falsified results of these sham referenda to illegally annex all Russian-occupied parts of Ukraine and is likely to declare unoccupied parts of Donetsk, Kherson, and Zaporizhia oblasts to be part of Russia as well.
The Kremlin’s annexation plans are primarily targeting a domestic audience; Putin likely hopes to improve Russian force generation capabilities by calling on the Russian people to volunteer for a war to “defend” newly claimed Russian territory. Putin and his advisors have apparently realized that current Russian forces are insufficient to conquer Ukraine and that efforts to build large forces quickly through voluntary mobilization are culminating short of the Russian military’s force requirements. Putin is therefore likely setting legal and informational conditions to improve Russian force generation without resorting to expanded conscription by changing the balance of carrots and sticks the Kremlin has been using to spur voluntary recruitment.
Putin may believe that he can appeal to Russian ethnonationalism and the defense of purportedly “Russian peoples” and claimed Russian land to generate additional volunteer forces. He may seek to rely on enhanced rhetoric in part because the Kremlin cannot afford the service incentives, like bonuses and employment benefits, that it has already promised Russian recruits. But Putin is also adding new and harsher punishments in an effort to contain the risk of the collapse of Russian military units fighting in Ukraine and draft-dodging within Russia. The Kremlin rushed the passage of a new law through the State Duma on September 20, circumventing normal parliamentary procedures. This law codifies dramatically increased penalties for desertion, refusing conscription orders, and insubordination. It also criminalizes voluntary surrender and makes surrender a crime punishable by ten years in prison. The law notably does not order full-scale mobilization or broader conscription or make any preparations for such activities.
ISW has observed no evidence that the Kremlin is imminently intending to change its conscription practices. The Kremlin’s new law is about strengthening the Kremlin’s coercive volunteerism, or what Chechen leader Ramzan Kadyrov called “self-mobilization.”
The Kremlin is taking steps to directly increase force generation through continued voluntary self-mobilization and an expansion of its legal authority to deploy Russian conscripts already with the force to fight in Ukraine.
Putin’s illegal annexation of occupied Ukrainian territory will broaden the domestic legal definition of “Russian” territory under Russian law, enabling the Russian military to legally and openly deploy conscripts already in the Russian military to fight in eastern and southern Ukraine. Russian leadership has already deployed undertrained conscripts to Ukraine in direct violation of Russian law and faced domestic backlash. Russia’s semi-annual conscription cycle usually generates around 130,000 conscripts twice per year. The next cycle runs from October 1 to December 31. Russian law generally requires that conscripts receive at least four months of training prior to deployment overseas, and Russian President Vladimir Putin has repeatedly denied that conscripts will be deployed to Ukraine. Annexation could provide him a legal loophole allowing for the overt deployment of conscripts to fight.
Russian-appointed occupation officials in Kherson and Zaporizhia oblasts announced the formation of “volunteer” units to fight with the Russian military against Ukraine. Russian forces will likely coerce or physically force at least some Ukrainian men in occupied areas to fight in these units, as they have done in the territories of the Russian proxy Donetsk and Luhansk People’s Republics (DNR and LNR).
The Russian State Duma separately passed new incentives for foreign nationals to fight in Russia’s military to obtain Russian citizenship and will likely increase overseas recruitment accordingly. That new law, which deputies also rushed through normal procedures on September 20, allows foreign nationals to gain Russian citizenship by signing a contract and serving in the Russian military for one year. Russian law previously required three years of service to apply for citizenship.
Putin’s appeals to nationalism may generate small increases in volunteer recruitment from within Russia and parts of occupied Donetsk and Luhansk. However, forces generated from such volunteers, if they manifest, will be small and poorly trained. Most eager and able-bodied Russian men and Ukrainian collaborators have likely already volunteered in one of the earlier recruitment phases.
Local Russian administrators will continue to attempt to form volunteer units, with decreasing effect, as ISW has previously reported and mapped.
Russian forces and the Wagner Private Military Company are also directly recruiting from Russian prisons, as ISW has previously reported. These troops will be undisciplined and unlikely to meaningfully increase Russian combat power.
Putin likely hopes that increasing self-mobilization, and cracking down on unwilling Russian forces, will enable him to take the rest of Donetsk and defend Russian-occupied parts of Luhansk, Kherson, and Zaporizhia oblasts. He is mistaken. Putin has neither the time nor the resources needed to generate effective combat power. But Putin will likely wait to see if these efforts are successful before either escalating further or blaming his loss on a scapegoat. His most likely scapegoat is Defense Minister Sergei Shoigu and the Russian Ministry of Defense. Reports that Shoigu would accompany Putin while Putin gave a speech announced and then postponed on September 20 suggest that Putin intended to make Shoigu the face of the current effort.
That decree is every bit as popular as you would expect.
Takeaways:
“Today, people went to the streets from Moscow to the Far East to protest. Even though it only concerned those in reserve, everyone sees where this is going.”
“Former Security Minister of the Donetsk People’s Republic called on Russia’s military command to better supply existing units on the ground. He also added that lack of equipment is the main reason why the Ukrainians keep advancing in Kherson.”
He thinks the conscripts will work logistics jobs, free up contractors to do the fighting. I remain doubtful that the effective military contractor pool for this war is terribly deep.
Neither the mobilization nor the sham referendums change any immediate facts on the ground in Ukraine. It will take many months to take new “recruits” up to even the most basic soldiering standards. Or maybe they’ll just give them three days training and send them into battle with old rifles and old ammunition like they did before, with the same results.
Either way, it doesn’t solve any of Putin’s immediate problems…
The administration of US President Joe Biden next month is to broaden curbs on US exports to China of semiconductors used for artificial intelligence and chipmaking tools, several people familiar with the matter said.
The US Department of Commerce intends to publish new regulations based on restrictions communicated in letters earlier this year to three US companies — KLA Corp, Lam Research Corp and Applied Materials Inc, the people said, speaking on the condition of anonymity.
Every wafer fabrication plant in the world uses equipment from one of those three companies. Applied Materials and LAM Research (along with Tokyo Electron) have their fingers in almost all areas of chipmaking equipment (PVD, CVD, Etch, etc.), while KLA (formerly KLA-Tencor) dominates the wafer inspection equipment segment. Add ASML in the Netherlands, and those five absolutely dominate the semiconductor equipment market.
The letters, which the companies publicly acknowledged, forbade them from exporting chipmaking equipment to Chinese factories that produce advanced semiconductors with sub-14 nanometer processes unless the sellers obtain commerce department licenses.
This is where things get tricky. SMIC claims they can do 7nm, but everyone outside China doubts they can do it reliably, repeatably and profitably. SMIC announced they’re about to start manufacturing 14nm, and that they can probably do. Practically, they’re the only semiconductor manufacturer in China that can do sub-14nm, as just about everyone at the top of the next biggest semiconductor manufacturer, Tsinghua Unigroup, just got arrested in July.
Without a continued stream of machines, spare parts and technical know-how from those five semiconductor giants, China’s semiconductor industry is doomed. China’s domestic semiconductor equipment industry is essentially garbage, and they’re so far behind in so many areas that they can’t even steal their way to parity. The knowledge gulf is just too vast.
According to World Trade Organization statistics, China’s trade deficit in integrated circuits and electronic components (including Hong Kong’s trade deficit) has almost doubled from the equivalent of $135 billion in 2010 to $240 billion in 2020.
The growing trade deficit in integrated circuits reveals one crucial fact: Achieving technological self-reliance is still a faraway Chinese dream. To keep its exports growing, China has no other way but to keep importing advanced chips to assemble into consumer goods with high-tech intensity (e.g., smartphones, tablets, and the like).
Although China (including Hong Kong) is also the largest exporter of semiconductor chips in the world, less than 7% of chips produced in China were made by Chinese semiconductor companies in 2021.
More than 90% of chips produced in China are made by foreign firms. In other words, China’s exports of semiconductor chips are overwhelmingly dominated by foreign companies.
Its inferior level of technology is the main reason for China’s chip reliance on foreign firms. While Chinese firms are stuck with advancing toward 7nm chips, the Taiwan Semiconductor Manufacturing Co. and Samsung are progressing towards mass production of 3nm chips this year. Intel plans to take over TSMC’s leading role in semiconductor technology by 2025.
The competition among a few tech giants in the U.S., Taiwan, and South Korea is clear, and the Chinese firms are not likely to jump into the global technology competition in the semiconductor industry anytime soon.
The U.S. restrictions on exporting chipmaking equipment to China’s largest semiconductor firm, Semiconductor Manufacturing International Corp., have not only deterred China’s technological advancement, but also exposed the fundamental mismanagement problems inside China’s semiconductor industry.
Xi might not have noticed his industry’s poor performance had China been able to continue to produce chips with foreign equipment.
Some parts about the Tsinghua scandal snipped.
Several Taiwanese executives leaving China’s semiconductor industry last year is another major setback in the development of China’s semiconductor industry.
China not only spent tremendously on building chip plants and purchasing expansive equipment, but also on recruiting talent from overseas. Over the past few years, China recruited more than 3,000 skilled workers from Taiwan to work in China’s semiconductor industry.
China amassed enormous capital, talent, and foreign equipment, but the problem is with governance. Xi’s absolute authority encouraged a rush into China’s semiconductor industry. Moreover, the extraordinary integration of the public and private sectors in China has twisted industrial development toward short-term profit-making, instead of long-term accumulation of manufacturing strength and technological improvement.
Xi’s “wolf warrior” diplomacy has further overshadowed the outlook of its semiconductor industry. China’s success relies on close partnerships with various suppliers and customers in different countries across the globe. Alienating them on the geopolitical front only undermines those relationships.
The U.S. ban on exporting chipmaking machines to China was the straw that broke the Chinese semiconductor industry’s back.
On top of that, the CHIPS and Science Act just signed into law bans semiconductor companies receiving U.S. government subsidies from investing in China for the next 10 years. There are major loopholes in that prohibition, but if Congress can manage to keep the administration’s feet to the fire—including by tightening the legal restrictions—it could have a major impact on China’s tech development.
In addition, the U.S. has extended the export restriction to 14 nm chipmaking machines to the Semiconductor Manufacturing International Corp. and other foreign chipmakers in China. A specific electronics design automation software for making advanced chips is also banned from exportation to China.
Without foreign investment and inputs, China is only likely to deepen its reliance on importing advanced chips from overseas.
Peter Zeihan notes (correctly) that China’s semiconductor industry has been singularly unable to fab advanced chips on their own.
Not to mention that fraud still abounds. Chinese CPU semiconductor startup Quillion Technology closed up shop three months after raising $89 million.
$89 million is probably enough to get you to tape-out for a fabless semiconductor house designing a smaller chip (or maybe even a low-power ARM-based CPUs for embedded markets), but it’s a woefully small sum for a real cutting-edge CPU company, and laughable if they intended to be an integrated design manufacturer fabbing their own chips, where building even a trailing edge fab starts in the billions.
More on that topic:
Takeaways:
“Money seems to have a strong corruptive power over CCP officials that they can’t resist. Like China’s real estate industry, China’s semiconductor industry is also plagued with corruption, over-construction, and highly leveraged capital maneuvers.”
She goes over the history of the Chinese “Big Fund” for semiconductors I covered here, and later talks about the indictments.
“The state-run Semiconductor Investment Fund was used more as an instrument to speculate in stocks than an institution for conducting basic R&D. The government-backed fund, aka the “Big Fund,” has investments in 2,793 entities within three layers of ownership.” Very few of them have the word “semiconductor” in their names. (Like I said before, shell games all the way down.)
From 1984 to 1990, the Ministry of Electronics Industry delegated the management of the vast majority of state-owned electronics enterprises to local provincial and municipal governments. While these state-owned enterprises (SOEs) obtained more autonomy, something strange happened. These companies imported outdated integrated circuit production lines that had no commercial value. The wasteful projects cost money, but people used the opportunities to take foreign trips, receive kickbacks, and send their children abroad. And this happened on a large scale.
Pretty much classic ChiCom behavior.
China’s high-tech industry, like its financial industry, is dominated by powerful CCP families, and the Jiang Zemin family is one of them. In 1999, Jiang Zemin gave his oldest son, Jiang Mianheng, the reins of China’s “autonomous chip development.” As vice president of the Chinese Academy of Sciences (CAS) and president of the Shanghai branch for many years, the junior Jiang has long held the turf of China’s science and technology sector. He is also personally involved in the semiconductor business. His Shanghai Lianhe investment has holdings of Shanghai Zhaoxin Semiconductor Company.
Classic story:
Chen Jin, a former junior test engineer at Motorola, joined Shanghai Jiaotong University in 2001 after returning to China.
He was given the responsibility to develop the “Hanxin” chip, an important part of the state-run high-tech development program known as the “863 Program.” In just three years, Chen obtained 100 million in R&D funding and applied for 12 national patents. On Feb. 26, 2003, Chen’s team officially released the “Hanxin 1” chip. The Shanghai Municipal Government, the Ministry of Information Industry, and the Chinese Academy of Sciences all backed his work. The expert panel declared the “Hanxin 1” and its related design and application development platform as being the first of its kind in China and achieving an important milestone in the history of China’s chip development. Subsequently, Hanxin 2, 3, 4 and 5 chips were launched, all of which were claimed to have reached an advanced level globally. The Hanxin series of chips even entered the General Equipment Procurement Department of the Chinese military. However, 3 years later, on Jan. 17, 2006, “Hanxin 1” was revealed to be completely fake. Chen downloaded a Motorola chip source code through a former Motorola colleague. Then he secretly bought a batch of Motorola dsp56800 series chips, paid a peasant to scrape the original Motorola logo with sandpaper, and asked a local Shanghai print shop to print the “Hanxin” logo on it.
China correctly identified semiconductors and semiconductor equipment as key technologies for truly becoming the world’s preeminent technological manufacturing giant. Unfortunately for them (and fortunately for us), the CCP’s endemic culture of corruption and their top-down command economy are antithetical to the onrush of capitalist technological innovation that powers Moore’s Law.
Peter Zeihan says the abysmal performance of the Russian Army is going to have a whole lot of ramifications around the world, many in Russia’s own near abroad. “It means that the image of the Russians as a regional power, much less a global one, is gone, and it’s not coming back.”
Some takeaways:
“The countries that had signed on to kind of a Russian Alliance, if you will, [they’re] on their own completely, and that provides opportunities for their rivals to take matters into their own hands.”
Belarus: “Here’s a country of 10 million people that has basically hitched itself to Putin’s star. And the Poles, the Latvians, the Lithuanians, the Estonians, the Finns, and the Swedes they have been chomping at the bit for years to try to take Alexander Lukashenko of Belarus down to size and basically peel Belarus out of the Russian orbit. They will now have the opportunity, and it’s unlikely that anyone in Europe or the United States is going to try to stand in the way.”
“Unless Lukashenko sues for peace with the Balts and the Nordics, very quickly we should count on seeing him being brought up on war crimes before very long. Because after all he did provide the access that was necessary for the assault on Kiev early in the war.”
Georgia: “Here I do expect things to be a little bit more circumspect. The Georgians tried to call Russia’s bluff and invade their former secessionist Republics of North Ossetia and Abkhazia several years ago in 2004, and it was a trap and the Russians were able to destroy the Georgian Army. So the Georgians are not going to do this until a couple of other countries in the region have already pulled this off successfully.”
Moldova:
There’s a small secessionist republic there called Transnistra. It’s only 10 percent of the population of a country of like three and a half million people. There’s not much going on there, but the Russians intervened decisively right at the end of the Soviet collapse to basically make sure that Transnistra could be functionally independent under Russian sponsorship, but unlike the Georgian secessionist territories, which share a land border with Russia proper, Transnistra is on its own. The only way to supply it is through Ukraine, and that has obviously stopped. So the Moldovans and their sponsors in Romania have now a vested interest in ending this historical aberration, and I would expect to see that being wrapped up within a year or two.
Israel: Without big brother Russia providing help, Syria may be screwed.
The Russians have very publicly, unfortunately for them, relocated a lot of hardware from Syria to Ukraine, specifically air defense equipment to help them with their assaults. Which means that if you are Israel, the only thing that is standing in your way of going after the Syrian regime is someone from the Biden Administration saying “You know what? We really don’t want a nuclear event to erupt because there are Russian troops involved.” Well, the tone of the Biden Administration in the last 72 hours has kind of changed. Now it’s more of “You kids go have fun” sort of vibe, so I expect us to see some very interesting pyrotechnics between the Israelis and the Syrians in a very short period of time, followed by the Syrians suing for peace. Which means that we get to revisit the entire Syrian Civil War now without the Russians being players.
Two caveats from my viewpoint: 1. Given the history of Israeli striking Syria with impunity several times over the past decade, with possibly one Israeli plane hit during that period, I don’t think Russian anti-aircraft equipment have provided any significant deterrent to Israel doing whatever it wanted in Syria. I view it more likely that Israel views a weakened Assad continually beset by a grinding civil war against numerous enemies a preferable option to taking him out entirely. 2. Not sure where Zeihan is getting his information on a change in the Biden Administration’s messaging to Israeli, but I readily concede that he likely does have better sources than I do. It may also be that the most recent failure of the asinine Iran deal has changed the collective mind of whatever passes for a Biden brain trust.
Speaking of Iran: “Tehran has lost its primary weapons sponsor, and its primary Security Council sponsor, and that is going to force the Iranians to think differently and act differently in every theater.”
Plus possible policy changes in (or toward) Cuba and Venezuela.
For those who think I rely too much on Ukraine updates and Peter Zeihan videos, enjoy this Peter Zeihan video update on Ukraine!
Takeaways:
“Everything that the Russians were bad at before (propaganda, logistics, precision, training, maintenance, equipment), everything they were bad at before, they’re worse at now.”
Ukraine has moved from trying to stop the Russian advance with shoulder-mounted weaponry to longer-range heavy artillery, allowing them to hit ammo dumps, logistical hubs and high-value officers.
“The degree to which the Ukrainians are able to put targeting information, either from their own human network or signal intelligence that is provided by the Americans, and put it to use has been very impressive, and it has snarled the entirety of the Russian advance in both the east and the south.”
“Russia may be running out of ammunition.”
Russian doctrine calls for slow advances prepared by massive artillery barrages.
“They faced a massive industrial collapse in the 1990s that they never really covered recovered from.”
They have fought three artillery intensive wars since the Soviet collapse: two in Chechnya and then one in Syria. So now the Russians are attempting to advance over a front that’s a thousand miles long with a burn rate for their artillery in excess of 40,000 shells a day. Going through a relatively small by Soviet standards arsenal that has been acquired since the Soviet collapse, when the industrial system collapses. Well, any equipment any shells that they’re going to use that are not from that stack are things that were built before 1989, meaning that they’re in excess of 30 years old. We’ve seen reports several a year in Russia going back 30 years that, every once in a while, one of these shells [just] cooks off and the entire ammo dump goes up. It’s entirely possible that some of the explosions were seeing in places like Belograd or Western Russia are not actually being caused by the Ukrainians, but by the Russians manhandling of their own equipment. But regardless, that burn rate 40,000 a day is not something that anyone could maintain at length.
Thus Russia has been shooting at big static targets like train stations and malls. “They have the feel of being a little bit more than the Russians shooting at things to demonstrate to the world that the Russians can still shoot at things. Tanks and infantry are not following up on any of these attacks.”
“Kherson was the only major city that Ukrainians ever lost to the Russians, the only regional capital.”
“All the normal things that plague offensives are appropriate to think about here. They trigger higher casualties among the attackers than the defenders. They require more troops, They require better logistics. They’re more vulnerable to disruption. All of that stands. Also, you have to consider that this isn’t simply Ukraine’s first significant offensive in the war, but this is Ukraine’s first significant offensive ever.”
“The Ukrainians have continually surprised to the upside, and the Russians have continually surprised at the downside. So what should have been a wildly unbalanced war that should have been over four months ago all of a sudden, if not a conflict among equals, is suddenly looking like a little bit more of a fair-ish fight.”
Summary of the Kherson situation so far, including damage to the bridges, covered here and here.
No guarantee that the Ukrainians will win in Kherson, but it obviously offers them the best chance.
“If it proves that the Ukrainians are successful [Russian] forces are going to have to evacuate on foot, they are going to have to leave all of their gear behind…this would be the single biggest military transfer to Ukraine of the post-war environment, and certainly of this war…all of a sudden, the Ukrainians might actually have what they need.” Sometimes Zeihan has a tendency to overstate things, and I think he does that here. Yes, they’ll probably capture some usable heavy equipment, but the estimates I hear are some 20,000 Russian troops in Kherson, and I’m not sure how many functional military vehicles will be left in usable condition after such heavy fighting. They might well pick up significant quantities of towed artillery.
He talks about the importance of taking Nova Kakhkovka, and controlling the irrigation gates for the canals that feed occupied Crimea.
If Ukraine retakes Kherson, they might theoretically be able to take out the Kerch Strait Bridge. (Note that this is only true if they actually have the ATACMS missiles for their HIMARS that the Biden Administration says we haven’t given them yet, as I calculate a distance of roughly 179 miles from Nova Kakhkovka to the bridge.) “Crimea goes from being an incredibly strategically valuable platform that the Russians can use to launch into Ukraine proper, into the most significant military vulnerability that post-war Russia has ever had.” Eh, I think I have to go with the Atomic Bomb between 1945 and August of 1949.
“If Ukraine is going to win this war, this is how it’s going to start.”
You may remember Peter Zeihan’s analysis of world agricultural output in the wake of of deglobalization and the Russo-Ukrainian War, and his forecast of famine late this year.
That was just before the Ukraine export deal was signed. Now he’s looked at the facts and run the numbers, and says it isn’t going to help much.
Takeaways:
“Right now the Ukrainians have about 18 million metric tons stored up in their silos at or adjacent to their ports. That’s a lot that needs to move. That is in excess of half of a normal harvest for the country.”
“On August 1st we got our first ship, the Razoni, to dock to load up and to leave for Lebanon. It’s carrying 26,000 metric tons. So we need 700 more ships of this size if we’re going to get that grain out.”
“The Ukrainian harvest starts in less than 45 days. So you’re talking about needing to get a dozen or so vessels in there every single day. So far we’ve had one. I don’t have a lot of hope for this.” (Note: Since then we’ve had four more.)
“Right now the Ukrainians have nowhere to put it. Their silos are full from last year’s harvest. They weren’t able to export because the war started back in February.
“Even if the farmers were able to work their fields and not be molested by Russian troops (and remember we’ve already had mass evacuations from eastern and southern Ukraine) the problem remains that they can’t get fuel into the country. So you’re talking about needing to harvest industrial levels of wheat without industrial equipment.”
“The likely end result here is that this is the last year that Ukraine participates in international grain markets. They simply don’t have the capacity to get stuff up at a scale. In fact the only place that they might be able to ship stuff is by rail and at most with significant upgrades that have not yet been done. They can probably only ship about one-fifth of their normal produce out that way the rail lines are just not designed for that kind of bulk cargo.”
Bottlenecks have arisen due to the different rail gauge used in Ukraine, dating back to the Soviet era. That means shipments are being transferred to new wagons at the border.
Ukrainian Infrastructure Minister Oleksandr Kubrakov has targeted the upgrading of rail infrastructure in western Ukraine as a priority the EU should focus on. “Rail transport can partially undertake all the transportation of agricultural products, particularly grain,” he said. “However, transporting goods is difficult due to western Ukraine’s low border-crossing capacity, which is not designed for transshipping such volumes.”
“Some 768,300 metric tons of Ukrainian grain was exported by rail between May 1 and May 16.”
Back to Zeihan: “And a lot of them have to transit little territory called Transnistra [in Moldavia], which is under Russian control.”
The sobering conclusion:
You remove the world’s fourth largest wheat exporter from the market and you’re going to look at cascading problems. Not just with food prices and malnutrition, but civil conflict and breakdown, most notably in the Middle East. The last time we had a doubling of global wheat prices, we saw the Arab spring back in 2011. What we’re dealing with is an order of magnitude more complicated and deeper rooted. And to think that we’re only going to have doubling of prices is ridiculously optimistic.
Well, it’s a good thing the Middle East isn’t know for having populations full of unstable hotheads looking for an excuse to kill each other at the drop of a hat…
Peter Zeihan (him again) spoke at Iowa’s Swine Day on the topic of Agriculture at the End of the World:
At lot of this is Zeihan’s polished Greatest Hits presentation (Deglobalization, the need to stop Russia in Ukriane to prevent a future conflict with NATO that would go nuclear, China’s demographic crash, the cult of personality/isolation of Xi Jinping, China’s absurd never-ending Flu Manchu lockdowns, etc.), but here are some highlights of specific agriculture topics:
Russia isn’t just destroying population centers in Ukraine, it’s deliberately targeting Ukraine’s agricultural infrastructure, including grain silos.
Odessa is not a normal city. It is at the mouth of the Nipur river, which is kind of their equivalent of the Mississippi, and it is also their manufacturing center. It’s a cultural hub. It’s a financial center. It is New York and Houston and St. Louis and Chicago and New Orleans all in one. And if the Russians succeed in capturing it, that is the end of Ukraine as a modern economic entity. Right now Odessa is under blockade. They can’t export anything. This has been the source of 95 of their exports to this point.
China’s pork industry got hit hard by swine flu three years ago, and they’re probably getting hit by it now.
They’re trying to regrow the swine industry with subsidies, but that’s just resulted in “Two million people who have no idea what they’re doing” buying the wrong kinds of feed.”
“If they don’t have pork, all they’ve got left is rice. Rice is the most phosphate input intensive crop.”
“The Chinese have traditionally been the world’s largest producer and exporter of phosphate, ’cause it’s a food security issue. Well they’ve stopped all exports until further notice. So we’ve lost potash because of the Ukraine War. We’ve lost phosphate because of Chinese mismanagement.”
Skipping over the oil stuff, but Texas is sitting pretty because it’s easier and quicker to bring shale oil production online.
Did I already mention that Zeihan says Russia is probably going to lose Siberian well use because if they can’t ship it off, it freezes in the permafrost?
“We’re not looking at a recession, we’re looking at an energy-induced depression that’s already affecting multiple continents. But not here…The baseline here are pretty good.”
The effect of reduced fertilizer supply to the rest of the world? “This is famine. We will have it again in the fourth quarter of this year…a half a billion to a billion people will suffer malnutrition.”
If you stop growing wheat on marginal land due to fertilizer shortage, you start growing it on your better land, and your export output collapses.
“The volume of internationally traded agricultural commodities is in the early stages of collapse.”
The Brazilian Serato is heavily dependent on external inputs from abroad. We, on the other hand, get the overwhelming majority of our fertilizer inputs nationally and from Canada.
“There is no Brazilian agricultural sector without Russian involvement. And Russian involvement is going away. It’s the world’s largest source of soy exports. And without global soy exports, there is not a global pork industry. Except here. And if we’re being nice, Canada too.”
Argentina will probably do fine as well.
“Your mid case scenario should be inflation of nine to 15% for at least the next five years.”
“You are looking at the fastest expansion in farm incomes, per person, and per acre that we have ever seen in this country’s history, and it will last for at least the remainder of this decade.”
I think Zeihan has a tendency to overstate the case sometimes, but he’s more right than wrong…
Remember the bank runs in China story after all those bank accounts in Hunan were frozen? I’ve been looking for signs of wider contagion amidst the Chinese banking sector, and mostly haven’t seen it. But I have seen a lot of other cracks appear in China’s overall economic system, so here’s a roundup.
One reaction to the frozen accounts: “Chinese Bank Run Turns Violent After Angry Crowd Storms Bank of China Branch Over Frozen Deposits.”
A large crowd of angry Chinese bank depositors faced off with police Sunday in the city of Zhengzhou, and many were injured as they were taken away, amid the freezing of their deposits by some rural-based banks.
The banks froze millions of dollars worth of deposits in April, telling customers they were upgrading their internal systems. The banks have not issued any communication on the matter since, depositors said.
According to Chinese media the frozen deposits across the various local banks could be worth up to $1.5 billion and authorities are investigating the three banks.
On Sunday, about 1,000 people gathered outside the Zhengzhou branch of China’s central bank on Sunday to demand action; they held up banners and chanted slogans on the wide steps of the entrance to a branch of China’s central bank in the city of Zhengzhou in Henan province, about 620 kilometers (380 miles) southwest of Beijing.
China’s communist government reacted to the protests with their usual tact and understanding:
But it looks like some of them will finally get some money back:
(Plus more on the property slump.)
The official line on the Hunan account freeze: “Henan police said in a statement on July 10 that further investigations showed that, since 2011, a criminal group led by a suspect named Lu Yi had gradually taken control of several rural banks, through companies including the Henan New Wealth Group, to illegally transfer out funds. The police said they had arrested more suspects and seized more assets involved in the case.” I have no doubt the aforementioned were probably guilty, but I bet a whole lot more bank officials, regulators, and CCP officials (to the extent that those are separate groups and not mostly-overlapping Venn circles) were in on the scheme, plus a whole bunch more in dozens of other schemes that siphoned off depositor money into various pockets and a host of entirely different schemes. As I’ve said before, it’s smoke and mirrors all the way down.
Another thing driving unrest: “Rotten tail buildings,” that is residential buildings on which all construction is stopped, but for which those with mortgages for individual units are still expected to pay for:
A rapidly increasing number of “disgruntled Chinese homebuyers” are refusing to pay mortgages for unfinished construction projects, exacerbating the country’s real estate woes and stoking fears that the crisis will spread to the wider financial system as countless mortgages default.
According to researcher China Real Estate Information, homebuyers have stopped mortgage payments on at least 100 projects in more than 50 cities as of Wednesday, up from 58 projects on Tuesday and only 28 on Monday, according to Jefferies Financial Group Inc. analysts including Shujin Chen.
And that was over a week ago.
According to Citi analysts, average selling prices of properties in nearby projects in 2022 were on average 15% lower than purchase costs in the past three years. Meanwhile, it’s only getting worse as China’s home prices fell for a ninth month in May, with June figures set for release Friday.
The crisis engulfing Chinese developers is reaching a new phase, with a debt selloff expanding to firms once deemed safe from the cash crunch, including investment-grade names such as Country Garden Holdings, the largest builder by sales.
The payment refusals, which come at a time when China’s economy is set to post what may be a negative GDP print due to the latest economic shutdown over Xi’s catastrophic zero covid policies, underscore how the storm engulfing China’s property sector is now affecting hundreds of thousands of average citizens, posing a threat to social stability ahead of a Communist Party Congress later this year. Chinese banks already grappling with challenges from liquidity stress among developers now also have to brace for homebuyer defaults.
As a result of the unprecedented push for a debt jubilee, shares of China’s banks extended their recent decline Thursday, with the CSI 300 Banks Index falling as much as 3.3% before closing down 2.2%. A Bloomberg Intelligence index of Chinese developer stocks slid as much as 2.7%, even though Chinese lenders were quick to try and dispel fears that the movement could crash the economy: according to Bank of Communications, its outstanding balance of overdue mortgage loans linked to housing projects with risks of delayed delivery is 99.8 million yuan, accounting for 0.0067% of its domestic housing mortgage balance. The bank added that its housing mortgage loan quality is stable and risks are controllable, the Shanghai-based lender says in an exchange filing. At the same time, Postal Savings Bank of China says its overdue mortgage loans linked to halted housing projects is 127m yuan, and risks are controllable. Of course, it’s not like Chinese banks would ever lie, now is it?
The Great Debt Jubilee is picking up speed: China’s homebuyer mortgage boycott, which prompted Beijing to scramble to avoid a potentially devastating crash in what is the world’s biggest asset is spreading, and according to Bloomberg, some suppliers to Chinese real estate developers are now also refusing to repay bank loans because of unpaid bills owed to them, a sign that the loan boycott that started with homebuyers is starting to spread.
In a jarring case study of what happens when a ponzi scheme goes into reverse, hundreds of contractors to the property industry complained that they can no longer afford to pay their own bills because developers including China Evergrande Group still owe them money, Caixin reported, citing a statement it received from a supplier Tuesday.
Similar to homebuyers who have taken a stand and refuse to pay for properties that remain uncompleted, one group of small businesses and suppliers circulated a letter online saying they will stop repaying debts after Evergrande’s cash crisis left them out of pocket.
“We decided to stop paying all loans and arrears, and advise our peers to decline any requests to be paid on credit or commercial bill,” the group said in the letter dated July 15, which was sent to the developer’s Hubei office. “Evergrande should be held responsible for any consequence that follows because of the chain reaction of the supply-chain crisis.”
As Bloomberg oh so perceptively puts it, “the payments protest is the latest sign of how a movement by homebuyers to boycott mortgages on unfinished homes in China is spreading to affect other sectors in the economy.”
Yes it is, and it’s also why Beijing should be freaking out (if it isn’t), because what is taking place in China is far worse than what took place in March 2020 when the global credit machinery ground to a halt, only back then it’s because there was no other option, now it’s a voluntary development and not even fears of reprisals from China’s ruthless, authoritarian, Lebron-beloved dictatorship is stopping millions of people from calling for a systemic boycott, one which can topple China’s entire $60 trillion financial system in moments.
Probably an overstatement, just because it takes a whole lot to overcome the inertia of the average Chinese citizen just wanting to keep their head down and not be the nail that sticks up.
Embattled Chinese real estate giant Evergrande is expected to deliver a preliminary restructuring plan this week, following the exit of two bosses.
The firm says its chief executive and finance head have resigned, after an internal probe found that they misused around $2bn (£1.7bn) in loans.
Chinese businessmen misusing funds? Try to contain your shock.
Evergrande has more than $300bn in liabilities and defaulted on its debts late last year.
The crisis has spooked traders who fear contagion in China’s property sector.
On Friday, Evergrande said it found that chief executive Xia Haijun and chief financial officer Pan Darong were involved in diverting 13.4bn yuan ($2bn; £1.7bn) in loans secured by its property services unit to the wider group.
The firm said in a filing to the Hong Kong Stock Exchange that Mr Xia and Mr Pan had resigned because of their “involvement in the arrangement of the pledges”.
Getting caught trying to cook the books even after it’s hit the fan. Classic Chinese management.
The U.S. Securities and Exchange Commission has started the process, compelled by a 2020 law, and investors have started to pay attention. So has China, which moved to potentially clear a big hurdle that stymied U.S. regulators for years.
1. Why does the U.S. want access to audits?
The 2002 Sarbanes-Oxley Act, enacted in the wake of the Enron Corp. accounting scandal, required that all public companies have their audits inspected by the U.S. Public Company Accounting Oversight Board. According to the SEC, more than 50 jurisdictions work with the board to allow the required inspections, while two historically have not: China and Hong Kong. The long-simmering issue morphed into a political one as tensions between Washington and Beijing ratcheted up during the administration of President Donald Trump. The Chinese chain Luckin Coffee Inc., which was listed on Nasdaq, was found to have intentionally fabricated a chunk of its 2019 revenue. The following year, in a rare bipartisan move, Congress moved to force action.
2. Where does it stand?
As required by the law, known as the Holding Foreign Companies Accountable Act or HFCAA, the SEC in March started publishing its “provisional list” of companies identified as running afoul of the requirements. While the move had long been telegraphed, the first batch of names fueled a sharp decline in U.S. shares of companies based in China and Hong Kong as it dashed hopes for some kind of compromise. In all, the PCAOB has said it’s blocked from reviewing the audits of more than 200 of those businesses. The companies say Chinese national security law prohibits them from turning over audit papers to U.S. regulators. SEC Chair Gary Gensler said in late March that the Chinese authorities faced “a hard set of choices.” Days later, China announced it would modify a 2009 rule that restricted the sharing of financial data by offshore-listed firms, potentially clearing one obstacle.
3. What is China changing?
The China Securities Regulatory Commission said the requirement that on-site inspections should be mainly conducted by Chinese regulatory agencies or rely on their inspection results would be removed. It said it would provide assistance for cooperation with foreign regulators. The CSRC said it’s rare in practice that companies need to provide documents containing confidential and sensitive information. However, if required during the auditing process, they must obtain approvals in accordance with related laws and regulations.
4. What’s the broader issue?
Critics say Chinese companies enjoy the trading privileges of a market economy — including access to U.S. stock exchanges — while receiving government support and operating in an opaque system. In addition to inspecting audits, the HFCAA requires foreign companies to disclose if they’re controlled by a government. The SEC is also demanding that investors receive more information about the structure and risks associated with shell companies — known as variable interest entities, or VIEs — that Chinese companies use to list shares in New York. Since July 2021, the SEC has refused to greenlight new listings. Gensler has said more than 250 companies already trading will face similar requirements.
5. How soon could Chinese companies be delisted?
Nothing is going to happen this year or even in 2023, which explains why markets initially took the possibility in their stride. Under the HFCAA, a company would be delisted only after three consecutive years of non-compliance with audit inspections. It could return by certifying that it had retained a registered public accounting firm approved by the SEC.
6. How many companies will be affected?
There’s not much discretion. If a company from China or Hong Kong trades in the U.S. and files an annual report, it will soon find itself on the SEC’s list simply because those have been identified as non-compliant jurisdictions. In the March interview, Gensler pointed out that the law focuses on non-compliant countries, rather than specific companies.
For that and other reasons, Beijing is looking to impose more controls to prevent capital flight.
What would a “China is screwed” roundup be like without a Peter Zeihan video?
“Demographically they’re in collapse…China’s not even going to survive this decade. They don’t even have the numbers to try…China doesn’t have the naval capacity to secure markets and resources….Xi Jinping has enacted a cult of personality that is tighter than anything that has existed through Chinese history. It’s gotten so tight that no one wants to bring him information about anything…This is how countries die.” Plus: China doesn’t know how to store grain.
The widely acclaimed globalization of the post-Cold War era is now running in reverse. A protracted slowdown in global trade has been reinforced by persistent pandemic-related supply-chain disruptions, ongoing pressures of the US-China trade war, and efforts to align cross-border economic ties with geostrategic alliances (“friend-shoring”). These developments tighten the noose on China, arguably the country that has been the greatest beneficiary of modern globalization.
Of the many metrics of globalization, including financial, information, and labor flows, the cross-border exchange of goods and services is most closely tied to economic growth. Largely for that reason, the slowdown in global trade, which commenced in the aftermath of the 2008-09 global financial crisis and intensified in the COVID-19 era, points to a sea change in globalization. While global exports went from 19% of world GDP in 1990 to a peak of 31% in 2008, in the thirteen years that followed (2009-21), global exports have averaged just 28.7% of world GDP. Had world exports expanded on a 6.4% trajectory – halfway between the blistering 9.4% pace of 1990-2008 and the subdued post-2008 rate of 3.3% – the export share of global GDP would have soared to 46% by 2021, far above the actual share of 29%.
China’s gains from the globalization of trade have been extraordinary. In the decade prior to China’s 2001 accession to the World Trade Organization, Chinese exports averaged just 2% of total world exports. By 2008, that share had risen nearly fourfold, to 7.5%. China had timed its WTO membership bid perfectly, just when the global trade cycle was on a major upswing. While the financial crisis took a brief toll on Chinese export momentum, the interruption was short-lived. By 2021, Chinese exports had surged to 12.7% of world exports, well above the pre-2008 peak.
China is unlikely to maintain this performance. Overall growth of global trade is slowing, and China’s slice of the trade pie is under mounting pressure.
The ongoing trade war with the United States is especially problematic. During the first phase of China’s export-led growth surge in the aftermath of WTO accession, the US was consistently China’s largest source of external demand. Largely due to former US President Donald Trump’s tariffs, that is no longer the case. By 2020, US imports of Chinese goods and services had fallen 19% below the peak levels of 2018. Despite rebounding sharply on the heels of the US economy’s post-pandemic snapback, in 2021, US imports from China remained 5% below the 2018 peak. Partial tariff rollbacks for selected consumer products, which President Joe Biden’s administration is apparently considering as an anti-inflation gambit, are unlikely to jump-start bilateral trade.
At the same time, enduring pandemic-related supply-chain disruptions are likely to take a sharp toll on China and the rest of the world.Over the six months ending in April, a “global supply chain pressures index” constructed by researchers at the Federal Reserve Bank of New York averaged 3.6, well above the 2.3 reading in the first 21 months following the February 2020 onset of pandemic-related lockdowns, and sharply higher than the “zero” reading associated with the absence of supply-chain disruptions.
This is a big deal for a world connected by supply chains. Global value chains accounted for more than 70% of the cumulative growth in overall global trade from 1993 to 2013, and China has enjoyed an outsize share of this GVC-enabled expansion. As supply-chain disruptions persist, exacerbated by China’s zero-COVID policies, pressures on Chinese and global economic activity are likely to remain intense.
Mounting geostrategic tensions are the wild card in deglobalization, especially their implications for China. “Friend-shoring” in effect turns Ricardo’s efficiency calculus of cross-border trade into an assessment of the security benefits that come from strategic alliances with like-minded countries. China’s new unlimited partnership with Russia looms especially relevant in this regard. With China edging closer to crossing the line by providing support to Russian military efforts in Ukraine, the US has recently moved to impose sanctions on five more Chinese companies through its so-called Entity List.
You’ve heard about the ghost cities. Did you hear about the failed ghost developments that were built as weird, cheap imitations of western structures?
Is Xi Jinping in danger from a coup?
No doubt I’ve missed many other examples of cracks in China’s economic edifice. Feel free to share them in the comments below.
