How China ‘Throttled’ Its Private Sector | US-China Chip War | Overcapacity Concerns

In 2018 at the height of VC investment, 5,132 startups were founded in China; by 2023 that figure had collapsed to 1,220 and is on track to be even lower this year, according to data provider IT Dud cited by the Financial Times.

“in 2018 at the height of VC investment 5132 startups were founded in China according to data provider it dud by 2023 that figure had coll collapsed to 1,22 and is on track to be even lower this year”

Treasury secretary Janet Yellen expressed warnings during her April visit about overcapacity concerns, which Beijing has publicly rejected as a western rhetorical trick to suppress its growth, even though Beijing previously recognized overcapacity as an issue itself, most recently at the 2023 economic work conference.

“the US group will seek to build on the warnings expressed by treasury secretary Janette yelen during her April visit over over capacity concerns concerns which Beijing has publicly rejected as a western rhetorical trick to suppress its growth even though previously it has recognized it itself as an issue in the economy with the 2023 economic work conference being the most recent example”

The US, EU, Turkey, India, Mexico, Chile, and Brazil have all taken trade actions against Chinese exports in specific sectors—EVs, steel, and solar—and while each country has its own concerns, the underlying reason is undeniable: China's overcapacity undermines workers, industries, and economic resilience and security.

“the EU and turkey have also recently imposed tariffs on Chinese EV Imports Mexico chile and Brazil have taken trade actions on Chinese steel and India uses tariffs and other trade tools to defend its solar manufacturers from Chinese dumping and while each country has its own concerns and needs the underlying reason is undeniable as the G7 leaders and financial ministers have stated China's overcapacity undermines our workers Industries and economic resilience and security”

Many startup companies in China sold equity to investors on the basis that investors would buy back shares if the company did not list on the stock market or get acquired by a certain date, but a wave of failures has led venture capital firms to try to claw back assets from their insolvent portfolio companies through the courts, and new startups now face even more onerous terms.

“many startup companies sold Equity to investors on the basis that they would buy back those shares if they did not list on the stock market or get acquired by a certain date but a wave of failures has led Venture Capital firms to try to claw back assets from their insolvent investe companies through the courts new startups face even more honorous terms”

In 2020 the White House slapped trade restrictions on SMIC after the publication of a report detailing its links to a major Chinese defense conglomerate and military-affiliated universities; SMIC denied connections to the military; the Biden Administration later tightened the restrictions, but the rules have allowed for workarounds—companies have continued selling less advanced equipment to SMIC's new factories by obtaining special licenses and routing sales through non-US subsidiaries and employees.

“in 2020 the White House slapped trade restrictions on smic after the publication of a report detailing its links to a major Chinese defense conglomerate and Military Affiliated universities smic denied connections to the military the Biden Administration later tightened the restrictions but the rules have allowed for workarounds company have continued selling less Advanced Equipment to smic's new factories by obtaining special licenses and routing sales through non-us subsidiaries and employees”

The US and its allies are grappling with how to limit the impact of any Chinese retaliation as they seek to counter China through export controls, with negotiations centering on aligning the three countries' (US, Japan, Netherlands) export control rules so Japanese and Dutch companies will not be subject to the foreign direct product rule.

“Beijing has made threats to Tokyo and Japanese companies Japan and the US have discussed how to limit the impact of any Chinese retaliation something Washington and its allies are grappling with as they seek to counter China the US export controls are designed to close loopholes and existing rules and add restrictions that reflect the fast progress of Huawei and other Chinese groups in ship production over the past two years negotiations have centered on allying the three countries export control rules so Japanese and Dutch companies will not be subject to the foreign direct product rule”

China's dominance of rare earth materials and key supply chains has been part of Beijing's yearslong self-sufficiency drive and national security goals.

“China's dominance of rare earth materials and Key Supply chains has been part of Bing's yearslong self-sufficiency drive and National Security goals”

According to Beijing's ideology statement, China's development faces risks and challenges such as disrupted innovation chains, obstructed industrial chains, and contracted capital chains.

“adding quote with the complex and severe International situation the competition among countries to occupy the commanding Heights of science and technology is unprecedentedly intense our country country's development faces risks and challenges such as disrupted Innovation chains obstructed industrial chains and contracted Capital chains”

The US Treasury Department under secretary for international Affairs J Shambo will hold discussions with Chinese counterparts on Thursday and Friday this week as part of the fifth gathering of an economic working group formed by both governments to enhance communication during heightened competition between the world's two largest economies.

“us-based The Wall Street Journal writes today that American officials led by J Shambo the treasury Department's under secretary for international Affairs will hold discussions with their Chinese counterpart on Thursday tomorrow and Friday of this week the planned meetings are the fifth Gathering of an economic working group formed by both governments last year to enhance communication at a time of heightened competition between the world's two largest economies”

Leadership of the semiconductor industry is lobbying in Washington this week against the next round of updated export controls on sensitive American semiconductor technology that China seeks to gain.

“the US House of Representatives China select committee learned that leadership of the semiconductor industry are in Washington this week to Lobby against the next round of updated export controls the house body even tweeted quote we understand that several major semiconductor equipment CEOs will be in DC this week to Lobby the Biden Administration they hope to weaken export controls President Biden placed on sensitive American semiconductor technology that China hopes to gain”

The United States will act on overcapacity concerns and will not act alone, with the best outcome being for China to acknowledge the growing concerns among its major trading partners and work with the US to address them.

“the United States will act and we will not act alone the best outcome though would be for China to acknowledge the growing concerns among its major trading partners and work with us to address them”

The allocation of capital—whether direct grants, credit, or PE/VC investment—does not necessarily follow the objectives announced in Beijing's policies. Decades of misdirected investment have made it hard for financial actors to channel resources to more productive sectors and firms, creating tension between central government wishes and financial sector needs: Beijing wants allocation to small companies and emerging technologies, but financial actors need to play it safe by funding large established players and delaying losses in overcapacity sectors.

“the allocation of capital be it direct grants credit or pevc investment does not necessarily follow the objectives announced in Beijing policies Decades of misdirected investment made it hard for financial actors to now channel their resources to more productive sectors and firms creating tension between central government wishes and the needs of the financial sector Beijing wants them to allocate more Capital to small companies and emerging Technologies but they need to play it safe by funding large established players and delaying losses and sectors affected by high overcapacity”

State-driven mechanisms which underpin Chinese overcapacity are central to what Beijing considers its superior system and to pursuing key national security objectives, and therefore it is unlikely to reverse course even under international pressure.

“the state-driven mechanisms which underpin Chinese overcapacity is Central to what Beijing considers its Superior system and to pursuing key National Security objectives and therefore it is unlikely to reverse course even under International pressure”

When Chinese production is growing faster than its own demand or that of the global economy, the rest of the world cannot absorb China's increase in manufacturing production without being forced to adjust, and these conditions would not appear in a normal market economy but are instead a fundamental distortion driven by government policy.

“when Chinese production is growing faster than its own demand or that of the global economy the rest of the world cannot absorb China's increase in manufacturing production without being forced to adjust these conditions would not appear in a normal market economy what we are seeing is a fundamental Distortion driven by government policy”

J Shambo, in a July speech on Chinese overcapacity, argued that Chinese policy makers' preference to push manufacturing further as China's growth driver means taking on an increasingly outsized share of global production, with other countries' manufacturing sectors needing to shrink to compensate, and that China's size means its imbalances pose an even greater risk to the global economy because a large economy with a dominant market position can shift global prices and leave the rest of the world to deal with consequences.

“Chinese policy makers clear preference today is to push manufacturing even further as China's growth driver which means taking on an increasingly outsized share of Global Production with other countries manufacturing sectors needing to shrink to compensate China's size means that its imbalances pose an even greater risk to the global economy a smaller economy exports at the world price but a large one especially with a dominant Market position can shift Global prices and leave the rest of the world to deal with the consequences”

Narratives about Chinese overcapacity are heavily focused on China's trade disputes with the West and on EVs, solar, and batteries, but overcapacity is affecting the whole global economy and is much broader than just the green industrial sector, according to Yohan, a former South Korean trade minister now at the Peterson Institute.

“a lot of narratives about Chinese overcapacity are heavily focused on China's trade disputes with the west and on EVS solar and batteries but this is something that is affecting the whole global economy and which is much broader than just the green industrial sector”

If the West tries to impose the same sort of sanctions on China that were imposed on Russia following the Ukraine invasion, the West would essentially be cutting its own throats because of China's dominance of critical supply chains.

“if the West tries to impose the same sort of sanctions that we did against Russia we would be essentially cutting our own throats”

Two executives at RMB-denominated funds whose LPs were primarily local governments stated that it is no longer enough that the company is on the hook for repurchasing shares—founders must now take personal liability for the debt.

“two Executives at remb denominated funds whose LPS were primarily local governments say that it is no longer enough that the company is on the hook for repurchasing shares Founders must take personal Li ility for the debt”

Three separate venture capital executives estimated that state-run funds now account for about 80% of capital in the Chinese VC market, with one Chinese expert on innovation saying 'the state is taking over the industry in an age of anti-corruption' and that this is contradictory to the VC spirit of engaging in high risk and high potential ventures.

“three separate Venture Capital Executives estimated that state-run funds now accounted for about 80% of capital in the market the state is taking over the industry in an age of anti-corruption says one Chinese expert on Innovation who declined to be named it is contradictory to the VC Spirit of engaging in high risk and high potential Ventures”

Rand advisor Jimmy Grik expressed concern that US controls have too many leaks to be effective at curbing China's advanced chip ambitions, saying 'defense has gotten higher but we've decided to leave open the front side and back gate.'

“Rand advisor jimy grik also expressed concern that us controls have far too many leaks to be effective at curbing China's Advanced chip Ambitions explaining quote defense has gotten higher but we've decided to leave open the front side and back gate”

While it was not easy to generate an agreement on export control harmonization, the US had to be careful not to take actions that would cause the Japanese and Dutch to abandon the trilateral mechanism created during the Trump Administration that has helped harmonize export controls, according to someone familiar with negotiations.

“one person familiar with the negotiations said that while it was not easy to generate an agreement the US had to be careful not to take actions that would cause the Japanese and Dutch to abandon the trilateral mechanism created during the Trump Administration that has helped harmonize export controls”

Toyota and Tokyo have known about the vulnerability to Chinese gallium and graphite supplies for well over a decade and have done nothing to mitigate it.

“we recently covered the news that Tokyo is concerned about a possible PRC retaliation against gallium and graphite supplies critical to the supply chains of Toyota some commentators have expressed frustration at this pointing out that Toyota and Tokyo have known about this vulnerability for well over a decade and have done nothing to mitigate it”

Given multiple loopholes in US export controls on semiconductors, it is no mystery that SMIC has progressed in its advanced chip capabilities.

“given these loopholes some have said it is no mystery that smic has progressed”