China (belt and) road to supremacy

Fast approach

China has been climbing it’s way to the position of a superpower for a while now. The progress it has made is short of astounding. With the loosened grip over the economy, CCP (Chinese Communist Party) paved the way for companies like Alibaba, Tencent and Huawei and set them loose (it has changed approach in 2020 with antitrust investigation against Ant Group and Tencent). While much is to be said, how technologies those companies now possess were acquired, it’s still a fact that China has now catched up. WeChat – the app made by Tencent is kind of “Swiss knife” of mobile apps and was (is?) ahead of it’s western rivals. WeChat provides usual social media features and video conferencing, games, payment system used to pay bills or order pizza. Chinese companies are also major supplier of AI surveillance, 5G and other networking products all over the world.

US government is trying to rein in the Chinese expansion, effectively booting out Chinese companies from western markets, and withholding chips supply. China found itself in a tight spot. Verticalization is the necessary next step for those like Huawei to stay relevant on international market (to sell mobiles in developing countries, they need competitive smartphones and robust software ecosystem – app store with plenty of apps and Android fork). Seems like they could pull it off. Huawei has app gallery and released Harmony OS for smartphones and IoT devices and it’s going to push hard it’s Chinese peers like Oppo , Xiaomi, Vivo and the rest to adopt it. Or maybe CCP will require them to have optional “Chinese” OS. The competitors won’t switch voluntarily, given the Google app store is ubiquitous and gives them market advantage. Huawei will obviously need developers to grow ecosystem, but actually chip supply is its biggest obstacle. (I will expand on this later)
In Europe Huawei’s smartphone shipments fell 25%, but Xiaomi’s grew 88%. (Google’s app store isn’t available on new Huawei phones). In China Apple retains 22% market share, the rest are domestic manufacturers :

Huawei shipped more smartphones worldwide than any other vendor for the first time in Q2 2020, according to Canalys.

Achilles foot

Huawei does the chip design, not manufacturing, That was made by biggest chip manufacturer from Taiwan – TSMC which uses American tech in the process.
China had to import $306 billion in semiconductors from outside the country while domestic production by Chinese chip companies reached only $19.5 billion in 2019. It’s five year plan sets new policies to expand domestic semiconductor industry, but as of now it’s really behind.
A quote from Nikkei: “Huawei is in talks with MediaTek, the world’s second-largest mobile chip developer after Qualcomm. Other possible supplier is UNISOC, China’s second-largest mobile chip designer after Huawei’s HiSilicon Technologies unit.
Huawei is also working on it’s own dedicated plant in Shanghai and it’s going to be rather long way. Run by a partner, IC R&D Center, it will start with the chips made at 45nm, technology more than a decade old (Qualcomm new 2021 SoC is made in 5nm technology). Huawei aims to produce 20nm chips by the end of 2022 – still not good enough for smartphones, but good enough for networking equipment. The project was first reported by Chinese newspaper Caixin in September 2020. CCP will provide support, as already mentioned by a chairman Guo Ping.

Dutch firm ASML makes a machine that uses so-called extreme ultraviolet (EUV) and is required to make the most advanced chips such as those manufactured by TSMC and Samsung. Reuters reported earlier this year that the U.S. pressured the Netherlands government to stop the sale of an ASML machine to Chinese SMIC. Shipment has not made it to China. Now EU is fighting back, as US is offering exemptions for American companies while European suppliers are left hanging. This is quite a hit in the pocket as this chart shows:

From FT “Where Europe sells its chips”

China is making concessions to EU, given ongoing trade/security dispute with US. Barriers to foreign investment are lowered in EVs, telecoms, real estate and shipping. Still, foreign companies would face stringent regulations. Future will tell how far they are willing to go. Seems like pandemic situation (and gov polices), is giving them the upper hand in the “EU–China Comprehensive Agreement on Investment

Five year plan: Made in China 2025

Xi Jinping signature project promotes 10 sectors of mostly tech industries:

1. Development of integrated circuits, chips, telecoms system, etc.
2. High level manufacturing equipment like robots, NC tools
3. Aerospace equipment
4. Maritime and hi-tech shipping
5. Modern rail
6. New energy vehicles
7. Power and 8. Agricultural equipment
9. Material engineering
10. Biopharma and advanced medical products.

China’s 996 Work Culture (9am to 9pm, 6 days per week) along with the growing number of STEM workers is something to behold, especially with the sheer number of Chinese citizens gaining university knowledge and PhD’s. It’s R&D spending is on par with US.
In 2018 China was declared world’s largest producer of scientific articles by Nature. Even tough they are not the most cited, the chart from Nikkei is impressive:

In near future global dominance in science and economy will be tried. The debt of US and EU is growing faster than China’s. Bottomless wallet of China is already showing its power with acquisitions across Europe. From the Bloomberg article:

Approximately 360 companies have been taken over (over 10 years), from Italian tire maker Pirelli & C. SpA to Irish aircraft leasing company Avolon Holdings Ltd., while Chinese entities also partially or wholly own at least four airports, six seaports, wind farms in at least nine countries and 13 professional soccer teams“.

The new deal (RCEP) between fifteen Asian-Pacific economies made in Nov 2020 (which excludes US) is a another sign of changes coming. China has already made big strides in Africa as well. According to Morgan Stanley analysts yuan could be world’s third largest reserve currency by 2030, Russia’s yuan reserves rose from 2 percent in 2018 to over 14 percent in 2019. There is a digital version of yuan in the works, which will make transactions easier and enable better control and tracking. Fintech is a big part of China’s growth plan in the world markets. Chinese economy grew 6.5 per cent in the fourth quarter of 2020 and expanded 2.3 per cent for the full year. Analysts expect economic growth to rebound to 8.4% in 2021, before slowing to 5.5% in 2022.

Censorship and privacy laws

Western social media companies aren’t allowed on Chinese market and on the domestic market censorship and surveillance is ubiquitous. Yet China implemented series of laws protecting citizen’s privacy. Civil Code of the People’s Republic of China, effective in 2021, provides the right of privacy and personal information protection. Already in place: the Draft Data Security Law (for public comments) in July, the Draft Personal Data Protection Law implemented in October. With the Cybersecurity Law from 2016, it’s quite robust legislation. Anti-Monopoly Guidelines is another law poised to reign in China tech giants. It may also be a play to obtain leverage and bigger control.

New scientific avenues

Quantum supremacy – happens when a quantum computer can outperform conventional computers on at least one type of task. Until now, only one computer has ever achieved this feat – Google’s Sycamore device. It’s supercomputer relies on ultra-cold superconducting chips.
China has developed a photon-based quantum computer called Jiuzhang. Lu Chaoyang, professor in charge of the experiment at USTC, reported that computer achieved the breakthrough by carrying out a specific type of calculation – boson sampling. Boson sampling is a means for calculating the output of a straight-line optical circuit that has multiple inputs and outputs. More info can be found in Science magazine. It took Jiuzhang approximately 200 seconds to provide an answer. They noted that it would have taken the world’s fastest supercomputer approximately 2.5 billion years to carry out the same task.

Another field where Chinese science is going forward is nuclear fusion. The HL-2M tokamak reactor has been completed in Chengdu, and demonstrated its first discharge on Dec 4 2020.

Space program and Moon Base

China has ambitious space program, the first spacecraft with humans in mind Shuguang-1 was designed in January 1968. The first successful crewed mission was Shenzhou 5 in 2003 (3rd country in the world to do so). Chinese Lunar Exploration Program launched first lunar orbiter in 2007. In January 2019, lunar rover Chang’e 4 landed on the far side of the Moon.
The objective of the program is to establish a permanent human presence. Launched on 23 November 2020, new mission Chang’e 5 brought 2kg of lunar soil back to Earth on 16th of December. Future noteworthy lunar mission is expected in 2027. It may include a lander, rover, and a flying detector, as well as a 3D-printing experiment using in-situ resource utilization (ISRU) to test-build a structure.
There are plans for a permanent Chinese space station in 2022. It’s worth adding that Wolf Amendment, a law passed by US Congress in 2011, prohibits direct cooperation with China, even tough China government agreed to share samples and data from the moon mission with other countries.
There is ongoing mission to Mars, known as Tianwen-1 – it has an orbiter, a lander and a rover. It will reach the planet around mid-Feb 2021.
September of 2020 was first test flight of reusable spaceplane aboard a Long March 2F rocket from the Jiuquan Satellite Launch Center.
According to Wired article from 2019 there are around 100 private space companies, up from just 30 in 2018. LinkSpace was the first to test reusable rocket in August 2019.

Geopolitic tensions

China’s rise to status of global power made US and others very concerned. Building islands on South China Sea, the increased pressure on Taiwan, Hong Kong and internally Uighurs, along with world expansionist ambitions, made the neighbours like Japan, India and Australia tighten cooperation with the Americans. Some postulate that Chinese ambitions mask internal problems like demographic crisis, slowing GDP, capital flight and innovation handicap caused by the nature of authoritarian regime. It’s also true that national wealth of China is three times lower than US.

Xi Jinping’s declared China to become the world’s leading power by 2049 and its model will challenge democracy as the leading idea of the century.
Internal weaknesses could by covered with expansionism and ongoing US trade war may push China (and already is) for bolder moves in SEA region. It’s a complicated picture and whatever future will bring, China will play a big role in it.

P.S. I would recommend to take a look at Merics recomendations how EU should deal with growing China influence (it’s at the bottom of the page)


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