Yanwen’s blog

12/7/2024

At the YMCA swimming pool, lifeguards are always present, ensuring everyone’s safety. Among them, one stands out. Every day, he arrives with a green notebook and a water bottle. Perched on his high chair, instead of simply watching over the pool like the others, he’s always intently focused on his notebook, like busy writing something.

Curious about his activities, I often wondered if he might be a writer. Yesterday, I finally asked him. To my surprise, he revealed that he spends his time drawing. He’s a 23-year-old college graduate with a degree in graphic design, aspiring to establish himself as a graphic designer, though he hasn’t landed a job in the field yet.

I shared with him that my daughter is also an aspiring artist, still working her way toward her goals. He nodded knowingly and admitted, “It’s not easy to make a living as an artist. These days, with the internet and social media, it’s easier to sell your art than to get truly recognized.”

He went on to offer heartfelt advice:  

“Don’t worry too much about not being where you wish to be right now. Focus on keeping your passion alive and your heart healthy and happy. 

As an artist, if you pour your heart and soul into your work, you’ll recognize your own worth—even before the world does. Eventually the world will see the talents you have to offer. Lead with your heart, and your dreams will start to come alive. Stay true to your path, and don’t let the doubts of others weigh you down.”

As I left the pool, his words lingered in my mind—a powerful reminder that the journey to realizing one's dreams is often winding and uncertain. His resilience and belief in the transformative power of passion and dedication served as a testament to the importance of staying true to oneself, no matter the odds. In a world that often demands quick success, true fulfillment might not come from immediate recognition, it's from the unwavering pursuit of what lights your soul on fire.

12/6/2024

Today’s focus is on China’s measures to counter U.S. chip restrictions. They highlight an escalating technological and economic rivalry. Recent developments demonstrate that these restrictions may yield unintended consequences, echoing lessons from the U.S. sanctions on Huawei.

Lessons from Huawei’s Resilience

Huawei’s response to U.S. sanctions reveals the limitations of such measures. While the sanctions caused a temporary setback, Huawei swiftly adapted by:

1. Investing in Domestic Semiconductor Capabilities: Producing the Kirin 9000S chip for its Mate 60 series.

2. Shifting Market Focus: Targeting non-Western markets and leveraging telecommunications strength.

3. Maintaining Profitability: Achieving $7.7 billion in net profit in the first half of 2024, despite restrictions.

Ironically, these sanctions spurred Huawei's technological advancements, contradicting U.S. initial policy goals. The Huawei case underscores how restrictions have backfired by fostering self-reliance and innovation.

Strengthening China’s Semiconductor Ecosystem

According to the Center for Strategic & International Studies (CSIS), current restrictions have bolstered China's resolve to reduce dependence on foreign technology. Key actions include:

Massive Funding Initiatives: Establishing a 300 billion yuan ($41 billion) semiconductor fund.

Increased Investment in R&D: Strengthening capabilities across the semiconductor supply chain.

These efforts come as no surprise as they align with China’s broader goal of technological self-sufficiency, accelerating its pursuit of domestic innovation.

Retaliatory Measures and Their Impact

China’s restrictions on exporting rare earth minerals like gallium and germanium introduce additional complexities:

1. Semiconductors and Electronics: Essential for advanced semiconductors, LEDs, and solar panels, these materials’ scarcity will increase production costs and delay timelines for U.S. industries.

2. Defense Technologies: Rare earths are vital for radar systems and precision-guided weapons. Restricted access could disrupt the U.S. military’s supply chain.

3. Renewable Energy: The Biden administration’s clean energy goals may face setbacks as solar panel and wind turbine production costs rise.

4. Consumer Electronics: Smartphones, laptops, and other devices could become more expensive for U.S. consumers.

5. Dependency on Allies: The U.S. will need to pivot to allies for rare earths, but most nations lack the processing expertise China has developed.

A Lose-Lose Game

The current tit-for-tat dynamic risks broader consequences for global supply chains. As the U.S. and China deepen their divide, both nations incur significant economic fallout, while global industries and consumers bear the brunt of the collateral damage.

This lose-lose scenario calls for cool-headed diplomatic engagement and innovative trade solutions to mitigate further harm. However, reversing the trajectory demands a rare measure of wisdom and foresight—qualities that seem alarmingly scarce in today’s geopolitical climate, unfortunately.

12/5/2024  

The recent U.S. restrictions on China’s semiconductor industry evoke the Chinese proverb “杀敌一千自损八百” (shā dí yī qiān, zì sǔn bā bǎi), meaning "to kill 1,000 enemies at the cost of 800 of your own." This aptly describes a lose-lose strategy, where harm inflicted on an opponent comes with significant self-sacrifice.

The U.S., in its bid to curb China's tech advancement, seems willing to endure bigger losses of its own, particularly in the semiconductor sector. This move carries broad implications:

Impact on the U.S.

Corporate Losses: U.S. companies like KLA, Lam Research, and Applied Materials face shrinking market access in China, resulting in lost revenue and reduced global competitiveness in the long run.  

Supply Chain Disruption: The restrictions could destabilize the global semiconductor ecosystem, leading to higher costs, delays, and inefficiencies.  

Unintended Consequences: Such measures will accelerate China's push toward self-sufficiency in semiconductor development.

Trigger China anti-restrictions measures like we already see today.

Finally, the restrictions is setting a precedent that makes other nations wary of becoming overly reliant on U.S. technologies or partnerships or exposing themselves to the potential risks of having supply chain disruptions or geopolitical entanglements. It is prompting other countries to diversify suppliers, invest in domestic technologies, or value alliances outside U.S. influence. Ultimately, this is creating an environment where, whenever possible, alternative frameworks become more attractive in global trade and technology ecosystems.

Despite the challenges, China is strategically neutralizing this lose-lose scenario through a mix of domestic resilience, innovation, and global collaboration.

Internal Circulation: Policies like “dual circulation” aim to boost domestic consumption and innovation, reducing dependency on exports and foreign technology.

Self-Reliance: Investments in core technologies such as semiconductors, AI, and clean energy are accelerating, enabling China to wean itself off foreign suppliers.

Global Partnerships: Strengthening ties with Global South, Asia, Africa, and Latin America through initiatives like the Belt and Road expands China’s influence and diversifies its economic ties.  

Regional Collaboration: Closer economic and political ties with ASEAN, BRICS, and similar groups provide multilateral buffers against U.S.-led policies.  

Seeking Common Ground: While preparing for prolonged competition, China is exploring dialogue with the U.S. on shared interests like climate change, green energy and global health to mitigate excessive confrontation.  

Long-Term Vision: China is most likely to experience slower economic growth under U.S. restrictions on technology and trade, but in the long run, it is crucial for China to prioritize peace and stability while balancing domestic resilience with pragmatic diplomacy, realizing that peace and stability provides hope for neutralizing these challenges.

By focusing on peace, stability and sustainable policies and maintaining healthy diplomacy, China has opportunities to mitigate adverse effects and continue its development trajectory, even amidst external pressures.

In late November, I came across an intriguing Bloomberg article titled "China Companies Cut Foreign-Currency Debt Just in Time for Trump." The article highlights a strategic shift in Chinese companies' financial approaches as China prepares for domestic and international economic challenges with the uncertainty surrounding Donald Trump’s second presidency.  

Here are the key takeaways from the article:  

Reduction in Foreign-Currency Debt

Chinese companies have significantly cut their foreign-currency debt, bringing it down to $570 billion—the lowest in 12 years. Similarly, foreign-currency bonds issued by non-government entities have declined to $654 billion, marking a low not seen since 2017.

Reasons Behind this Reduction

1. The People's Bank of China (PBOC) has implemented rate cuts, making borrowing in yuan more attractive than foreign currencies.

2. The Federal Reserve’s tightening cycle has increased the cost of foreign-currency loans, which effectively discourages such borrowing.

3. A downturn in China's property sector and reduced appetite for global expansion have also played a role in diminishing demand for offshore debt.

Implications  

This reduction in foreign-currency liabilities helps shield Chinese firms from the risks of exchange rate fluctuations and foreign interest rate volatility. It also enhances their resilience in the face of potential shocks tied to Trump’s second presidency, which may bring heightened geopolitical and economic uncertainties.

Moreover, by minimizing reliance on foreign debt, Chinese firms are better positioned to navigate tensions in global economic relations, particularly with the United States. However, this trend could reduce Chinese companies’ demand for international financing, potentially dampening activity in global credit markets, especially in Asia.

More importantly, the shift away from foreign-currency debt aligns with China's broader goal of financial autonomy and independence.  

By prioritizing domestic funding sources, China reduces its reliance on international capital markets, creating a buffer against potential disruptions, such as sanctions or another round of trade conflicts associated with Trump's first administration.

Globally, a decline in foreign-currency borrowing could shrink opportunities for global investors looking to access the high-yield Chinese debt market. More significant is its potential for greater Yuan adoption. As Chinese companies reduce their foreign-currency debt, this could signal a broader push for more yuan-denominated transactions in trade and finance.

Ultimately, foreign-currency debt reduction can make it less effective for foreign governments to use it against China, particularly the U.S., could exert over Chinese firms. This is part of China's total preparation for a more challenging geopolitical environment ahead, such as tariffs, sanctions, or stricter laws specifically targeting Chinese companies.

As Chinese firms pivot toward greater financial independence, this strategic shift reflects not just preparation for potential challenges from Trump second administration but also a broader commitment to long-term economic stability and independence. The move underscores China's focus on balancing domestic growth with a cautious approach to global financial exposure, setting the stage for a more resilient economic future.

A few months ago, I came across an article about Shanghai Micro Electronics Equipment Co., Ltd. (SMEE), one of China’s leading lithography machine manufacturers. SMEE has taken a significant step forward by applying for a patent with the National Intellectual Property Administration for a groundbreaking invention: extreme ultraviolet (EUV) radiation generators and lithography equipment.

This development has the potential to revolutionize the semiconductor industry. EUV technology is crucial for manufacturing advanced chips smaller than 7 nanometers—a domain currently dominated by Dutch firm ASML, which enjoys a global dominance in this field. In 2022, EUV machine exports accounted for 42% of ASML's $24.2 billion revenue. 

Presently, ASML, along with Japanese companies Nikon and Canon, controls approximately 99% of China’s lithography machine market. However, U.S. sanctions and export controls have significantly curtailed ASML’s ability to sell advanced equipment to mainland Chinese customers. According to ASML’s 2023 annual report, it could fulfill only 50% of its orders from China that year. Meanwhile, Washington continues to pressure its allies to enforce stricter export controls on semiconductor technologies bound for China.  

Despite these hurdles, China’s semiconductor industry has been making remarkable progress. A recent analysis by Japanese engineering firm TechanaLye estimates that China lags behind the industry leader, Taiwan Semiconductor Manufacturing Co. (TSMC), by only three years. However, this estimate appears overly conservative. The report also notes that while U.S. sanctions have caused some delays, they have ultimately acted as a catalyst, driving domestic innovation and production.  

Paradoxically, the sanctions intended to slow China’s technological advancement have had the opposite effect, accelerating research and development efforts. History has repeatedly shown that external restrictions often spur innovation—a trend vividly illustrated in the semiconductor industry today.  

China’s vast pool of talent and resources positions it as a formidable contender. The successful production of EUV equipment would mark a turning point, challenging ASML’s dominance and reshaping the global semiconductor landscape.  

Of course, the critical question now is how swiftly China can implement these advancements and what implications they will have in the technology sector.

As China accelerates its advancements in EUV technology, the global semiconductor industry stands on the brink of transformative change. Whether this marks the dawn of a new era remains to be seen.