Yanwen’s blog

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.

We are leaving Paris today, a city celebrated worldwide for its rich history, culture, art, and iconic landmarks such as the Eiffel Tower, the Arc de Triomphe, and the Louvre—the world’s largest art museum.

There is so much to say about Paris and France. As I strolled through the streets of Paris, I often noticed three powerful words carved into the facades of buildings: Liberté, Égalité, Fraternité. These words, born out of the French Revolution, resonate deeply with the nation’s revolutionary legacy.

While visiting the Louvre Museum, I stood before Eugène Delacroix’s masterpiece, Liberty Leading the People. My thoughts turned to the French Revolution, though this particular painting does not depict the Revolution of 1789. Instead, it portrays the July Revolution of 1830, another pivotal uprising in France’s turbulent quest for freedom. 

Between 1789 and 1830, the French people endured repeated upheavals and revolutions, overthrowing five emperors and establishing three republics. These struggles ultimately secured the liberty we now consider a fundamental human right. Delacroix’s painting captures the raw passion, violence, and sacrifice of revolution. At the bottom of the canvas, the twisted bodies of fallen royal soldiers symbolize the brutal cost of progress.

One striking detail is the corpse on the left, depicted in stark humiliation—stripped of dignity, even down to the absence of pants. Delacroix’s emphasis on such scenes underscores the cruelty of revolution, presenting both its transformative power and the profound suffering and sacrifice it entails.

The French Revolution’s most defining moment came with the beheading of King Louis XVI on January 21, 1793. Convicted of treason by the National Convention, his execution marked the end of absolute monarchy in France and sent shockwaves throughout Europe. Later that year, Queen Marie Antoinette met the same fate on October 16, 1793, after being convicted of high treason. Their deaths not only symbolized the collapse of the old regime but also inspired movements for republicanism while instilling fear of revolutionary upheaval across the continent.

As I reflect on Delacroix’s work and the words Liberté, Égalité, Fraternité etched into the heart of Paris, I am reminded that these ideals, while universal and aspirational, came at a huge human cost. Walking through the streets of this city, where history seems alive in every corner, I see how Paris stands as both a testament to the triumphs of liberty and a reminder of the sacrifices required to achieve it.

Today, as we leave Paris, its revolutionary spirit and enduring legacy of freedom resonate more deeply than ever—a city where the past continues to shape the present and inspire the future.

Yesterday, we visited the Louvre Museum, the world’s largest and most visited museum, celebrated for its unparalleled collection of art and antiquities, including masterpieces like the Mona Lisa and Liberty Leading the People.

This time, I focused on a remarkable artifact from ancient Mesopotamia: the Winged Androcephalous Bull, also known as the Lamassu. A defining symbol of Mesopotamian art and culture, the Lamassu captivated my attention with its intricate design and profound historical significance.

Originating from the Assyrian civilization of the first millennium BCE, these monumental sculptures served as protective deities, positioned at the entrances of palaces and temples. Their purpose was to ward off evil and safeguard the spaces they adorned.

The Lamassu's form combines the wisdom of a human, the strength of a bull, and the wings of an eagle, symbolizing the ability to transcend earthly limitations. This harmonious fusion of traits reflects the Assyrians’ deep spiritual and artistic sensibilities.

The Lamassu displayed at the Louvre was unearthed in the ruins of Khorsabad, the capital of King Sargon II (r. 721–705 BCE), in what is now modern-day Iraq. Globally, around 20–30 major Lamassu sculptures survive, most of which are preserved in museums.

However, the 2003 U.S. invasion of Iraq brought devastating consequences for the country’s cultural heritage. Widespread looting and lawlessness during this period led to the destruction of many Lamassu statues, along with countless other artifacts. This tragic loss underscores the fragility of cultural heritage in times of war and social upheaval.

The Lamassu preserved in museums today remind us of the artistic and architectural achievements of ancient Mesopotamia and also of the importance of protecting cultural heritage, particularly in the face of modern conflicts.

Human history is filled with wars and conflicts, where the survival of cultural artifacts becomes perilous. Yet, museums play a vital role in safeguarding these treasures, acting as custodians of civilization's collective memory.

Here’s a big irony of the Lamassu, which, carved from the hardest stone and originally intended to ward off evils, stands defenseless in the face of modern war and violence. Despite its intended purpose, it couldn't protect itself from the ravages of social unrest and wars.

Finally, the preserved Lamassu serves as a testament to the artistic and architectural achievements of ancient Mesopotamia. Its presence in museums today underscores the importance of protecting cultural heritage, especially amidst contemporary conflicts. It is a poignant reminder of the fragility of our shared history and the enduring need to preserve it.