China wants to become a bigger, smarter Germany, one with industrial capacity, leveraging artificial intelligence, next-generation communications and robotics.

"BEIJING — President Biden’s early-October decision to impose sweeping export controls aimed at blocking China’s access to advanced semiconductors was eerily timed — a few days before the Chinese Communist Party’s 20th national congress.

The Chinese response to American truculence, flying in the face of the party, is defiance. The Communist Party congress, which concluded last weekend, exuded a sense of national urgency, prioritized security over the economy and focused on looming threats: a tectonic shift in geopolitics, a technology war and an enduring pandemic.

During his speech to the party congress, Xi Jinping, who was granted his third term as the top leader of the country, mentioned “technology” 40 times, promised to “win the battle in key core technologies” and emphasized innovation and technological self-sufficiency.

China has been working over the years to catch up with the United States in advanced technologies, and Beijing established an ambitious Made in China 2025 program in 2015 to refocus its industries to compete in automation, microchips and self-driving cars.

Competition and conflict with the United States have led to the rise of techno-nationalism in China. President Donald Trump’s sanctions on Chinese tech corporations such as Huawei fueled the first wave of techno-nationalism in the country. President Biden’s export controls and addition of other Chinese companies to a list of sanctioned entities has renewed Chinese determination to close the gap in its technological prowess with America.

And for the first time, the Communist Party congress has added a category to its top priorities: “ke jiao xing guo,” which means a great power underpinned by technology, science and education. Science and technology are now at the core of China’s development, and self-reliance has become a national imperative.

A day after Mr. Biden’s export controls, the local government of Shenzhen, China’s prominent technology hub, hammered out an ambitious plan to accelerate breakthroughs of its semiconductors industry, supported by a gamut of detailed financial incentives, preferential tax policies, research and development subsidies and talent programs for enterprises in the entire ecosystem.

The heavy blow dealt to many semiconductors companies — chip designers, the huge factories in which chips are made and foundries — could extend to other industries that rely on advanced chips, including autonomous vehicles and artificial intelligence.

Thirty percent of the revenue of American semiconductor companies comes from sales to China, which imported more than $400 billion worth of chips in 2021. China will have to rely on domestic chip producers now, which are expected to meet about 70 percent of its market demand by 2025.

To meet this challenge, China is turning to its strongest form of techno-nationalism, the juguo tizhi, or “whole of the nation” approach, whereby all national resources are mobilized to achieve a strategic objective. It was used in the past to reap Olympic gold medals but is now also designated for core technologies like quantum information and biotech.

China is placing large bets without expecting immediate returns. A torrent of resources has already flowed into leading-edge sectors: China invested as much as $11 billion in quantum computing between 2009 and 2011, compared with $3 billion by the United States. The government-led Big Fund in semiconductors has channeled almost a trillion renminbi (around $137 billion at current exchange rates) of private and public funding into the industry.

Even the central bank has introduced special low-interest loans on the order of 200 billion renminbi (almost $30 billion) for high-tech firms. Hundreds of national labs, which carry out the most advanced research, are being rolled out to boost basic research. More are sure to come amid a technology war.

Would China’s state-led approach that worked really well for its industrialization prove equally effective for its innovation? The state can roll out infrastructure and coordinate supply chains, but can it pick out winners in technology?

So far, the state-led approach on technological innovation has been successful but also incredibly costly. China is now neck and neck on quantum with America and leading in some areas. Semiconductor Manufacturing International Corporation, the foundry and largest chip maker in China, started shipping seven-nanometer chips despite American sanctions; Yangtze Memory Technologies Corporation, the state-owned memory chip producer, was on track to supply parts to be used in Apple iPhones before the embargo. Both benefited from billions of dollars of state funding and support.

The latest plan announced last month is to give the juguo system a new twist — a measured, smarter approach that leverages the power of the private sector and market mechanisms. While the state will continue to play the key role of mobilizing large amounts of funding for long, complex and uncertain investments, it will be left to the market and enterprises to determine what technologies are made, how to make them and where the resources flow.

Provincial governments, such as in Shenzhen, make sure that no barriers are too great for promising entrepreneurs: pushing regulators for a fast track to I.P.O., state financing and even jobs for their spouses. But setting limits to their involvement — such as caps on the equity stake they can take or the extent of financial subsidy — is aimed at reducing waste, corruption and overlaps.

Behind the mastery of critical technologies are markets, money and talent. Chinese markets are ready for a big innovation drive: Consumers are more sophisticated and demand higher quality. Only companies with better technologies can win.

Economic maturation means that low-hanging fruit has been plucked and financial resources will flow to more uncertain areas with higher returns. It is no coincidence that last year domestic revenues in China’s semiconductor industry surpassed $157 billion, with 19 of the 20 fastest-growing semiconductor companies globally being Chinese.

But talent and basic research remain China’s weak points. The China Semiconductor Industry Association estimated that there will be a gap of 300,000 experts in the industry by 2025. Last year, the industry that saw the largest surge in wages was semiconductors. Basic research, the bedrock of cutting-edge technologies, is notably lagging. And China is rapidly increasing the state budget for science.

And while the juguo system leverages public and private power unlike anything else in the world, it is usually more effective when costs are not a concern. It might be paramount for space programs and perhaps helpful for building large-scale and complex equipment — even at multiples of the normal cost.

That might save China from being totally incapacitated when severed from international technologies, but it is not so helpful in making advanced chips for end-consumer products where cost competitiveness and volume are vital. In these areas, China may be 10 years or more behind the United States. Techno-nationalism may speed up the rate of convergence, but it is unlikely to close the distance with a fast-moving train. Core technologies take time to develop — years of cumulative learning and knowledge.

China has a motto of “taking over on the bend,” which means surpassing in areas where others have no latent advantage. Germans excel in manufacturing traditional cars, but China has made a significant push in the development for electric vehicles, renewable energy and new materials. It is simultaneously betting on new directions for semiconductors. Advanced packaging techniques make chips with low-end processing nodes perform like high-end ones. Chip materials like silicon may be swapped for new-generation ones.

The Communist Party’s five-year plan revolves around strengthening manufacturing and quality. An American-style financialization and service-oriented economy is not what the Chinese leadership thinks can ensure national strength and security.

 

China wants to become a bigger, smarter Germany, one with industrial capacity, leveraging artificial intelligence, next-generation communications and robotics.

 

China is now putting its juguo system to the test. It is not only a race for technological supremacy but also the ultimate competition between two radically different systems.

Keyu Jin is a Chinese economist, an associate professor of economics at the London School of Economics and the author of “The New China Playbook: Beyond Socialism and Capitalism.”"

 

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