Research Publication – Reality Bytes – Clash of the Titans Vol. V.I

Radio Free Mobile and Alavan Independent update their view on China and Technology with the publication of Reality Bytes – Clash of the Titans Vol. V.I

RFM research subscribers will receive their copy by email. 

Despite all indications to the contrary, China has abruptly changed course by ending Covid Zero and working to get the economy back on track. There are plenty of reasons to doubt a long-term turnaround, but we look set for a big bounce over the next year or two. At the same time, the USA has managed to get The Netherlands and Japan to increase restrictions, but these may be restricted to military applications as opposed to more broadly as the USA desires. China will set its own standards wherever it can and the result will be fragmentation and lower long-term growth for all.

• Damascene moment: President Xi has abruptly changed course by repealing Covid Zero and moving to get the economy back on track. Concern about the economy was almost certainly the main catalyst though civil protest also played a part.
• China’s return: Vice-Premier Liu He has been on a charm offensive at Davos pushing economic recovery and reforms. He was met with scepticism but in the short to medium term, we think that economic stimulus in Q2 2023 will be followed by a sustained economic recovery.
• Middle-income trap. Demographic data, productivity and high debt levels may push China into the middle-income trap which could see GDP growth averaging just 3-4%. This would be very bad news for its ambition to rival the USA as an economic and technological world power.
• No unilateral control: The USA is unable to control the semiconductor equipment market at 10nm to 18nm unlike it can at the leading edge. These nodes use Deep Ultraviolet (DUV) where equipment can be sourced from The Netherlands or Japan. This is why the USA has been negotiating with these countries feverishly over the last few months.
• Netherlands and Japan: on January 28^th 2023, The Netherlands and Japan agreed to increase restrictions on China but we believe that these two countries will limit themselves to targeting technologies that can be used for military purposes as opposed to technology more broadly.
• The new restrictions will 1) affect the non-leading edge nodes (18nm – 10nm), 2) be delayed in implementation, 3) be targeted to military applications as opposed to the USA which targets everything and 4) may also target compound semiconductors.
• Lagging reality. Although there has been watering down from Japan and The Netherlands, there are other actions the USA can take. Many Chinese companies are already abandoning the advanced nodes and moving to 28nm – 45nm where there is still plenty of business.
• Build the wall 2.0. The Balkanisation of the internet looks more certain than ever. The new restrictions will only make China push harder for self-reliance, meaning that it will create its own standards wherever it can. The splitting of the global network into two pieces inevitably means less growth for all of the technology sector in the long term.