China wants to make its own chips. 2 failures in 1 week show how hard that will be

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China’s push for self-reliance in semiconductors suffered two embarrassing reversals this week as one of the nation’s most high-profile chipmakers was taken over by municipal authorities in its home city of Wuhan, and a second chipmaker, affiliated with prestigious Tsinghua University in Beijing, defaulted on a corporate bond.

On Wednesday, the South China Morning Post, citing Chinese corporate registration records, reported that authorities in Wuhan’s Dongxihu district have seized control of Wuhan Hongxin Semiconductor Manufacturing Company (HSMC) following months of delays in the construction of a $20 billion semiconductor manufacturing plant that was to have been one of the most advanced in China.

Construction at the plant has been stalled since August; the facility appears not to have produced much of anything. The company’s chief executive has resigned and fled the country. The local government’s plans for the plant and sorting out the company’s debt obligations remain unclear.

News of HSMC’s travails came two days after a prominent Chinese credit rating agency declared that Tsinghua Unigroup, 51% owned by Tsinghua University-controlled Tsinghua Holdings, had defaulted on a privately-placed domestic bond worth $197 million. Unigroup owns one of China’s biggest mobile chip designers and controls Yangtze Memory Technologies Co. in Wuhan, which makes flash memories. Unigroup’s financial woes puzzled analysts because the company has enjoyed generous state-backing in years past; in 2015, Unigroup made headlines by attempting a $23 billion takeover of U.S. memory-chip maker Micron Technology.

Stumbles at HSMC and Unigroup highlight how difficult it will be for Beijing to realize its goal of achieve self-sufficiency in semiconductors by 2030.

China is the world’s largest consumer of semiconductors. It is expected to spend more than $300 billion on importing semiconductors this year—about $60 billion more than it spent last year on imports of crude oil. In 2019, China produced only 16% of the semiconductors it consumed domestically.

That dependence on foreign chipmakers has long been source of anxiety for China’s leaders. And it has become a national emergency over the past year as the Trump administration imposed a series of harsh measures designed to ban companies from both the U.S. and its trading parters from selling semiconductors or chip-making technology to China.

Beijing has lavished subsidies on home-grown chipmakers—mostly to no avail. In 2014, China announced a National Integrated Circuit Plan promising to spend $150 billion to expand local semiconductor manufacturing. Eliminating China’s dependence on foreign suppliers for key technologies like semiconductors is a central focus of China’s 14th Five-Year Plan drafted in Beijing last month.

And yet China’s leading chipmakers, by most estimates, remain five to ten years behind the most advanced fabrication facilities in Taiwan, South Korea, and the U.S. “Today, China has no leading-edge semiconductor manufacturing facility,” declare Justin Hodiak and Scott W. Harold of the RAND Corp., who note that China’s most modern foundry, at Semiconductor Manufacturing International Corporation (SMIC) in Shanghai, only began production for creating chips from the 14 nanometer technology node in late 2019—at least two generations, behind the leading edge foundries run by Taiwan Semiconductor Manufacturing Corp. (TSMC), Samsung, and Intel.

S&P Global Market Intelligence estimates Chinese semiconductor companies have raised the equivalent of nearly $38 billion so far this year through public offerings, private placements, and asset sales. The Wall Street Journal reports that more than 50,000 Chinese companies have registered their businesses as related to semiconductors this year, a record that is four times the total from five years ago.

But many of these would-be chipmakers have no experience with the industry and are piling in from unrelated sectors like real-estate, cement, and agriculture to qualify for the latest round of tax breaks and government subsidies. HSMC isn’t the first multi-billion dollar China-based chip-making venture to go belly up—there have been at least two more this year—and almost certainly won’t be the last.

It would be foolish to suggest that China’s drive to become self-sufficient in semiconductors can’t succeed, but the evidence to date suggests this isn’t an industry that plays to China’s economic strengths.

More Eastworld news below.

Clay Chandler

This edition of Eastworld was curated and produced by Naomi Xu Elegant and Grady McGregor. Reach Naomi at and Grady at

Eastworld news

Back to the farm

The Chinese government is spearheading a mass migration policy from urban centers to the countryside—the opposite direction of China’s traditional rural-to-urban migration pattern. The government is sprucing up rural infrastructure and offering financial incentives to returnees to lure city-dwelling entrepreneurs and consumers to rural areas. Rural citizens make up a large portion of China’s poor, and the migration push is part of a wider nationwide anti-poverty campaign that aims to eradicate extreme poverty by the Chinese Communist Party’s centenary in 2021. Wall Street Journal

The China challenge

The U.S. State Department released a 70-page policy document on Tuesday strategizing a U.S. response to China’s global rise. Titled “The Elements of the China Challenge,” it details the Communist Party's ideological worldview and suggests ways the U.S. and American allies might counter China’s growth. The paper was compiled by the State Department’s Office of Policy Planning, whose founder, George Kennan, was the architect of the U.S.’s Cold War-era strategy to contain the Soviet Union. It lists ten “tasks” for the U.S. that include “cooperating with China when possible and constraining Beijing when appropriate” and “educating Americans about the China challenge.” Axios

Between the cracks

Much of the illegal fentanyl that circulates in the U.S. and contributes to the ongoing opioid public health crisis comes from China. The Chinese government banned the manufacturing and sale of fentanyl last year, but that hasn’t stopped an online network of fentanyl vendors and traffickers from springing up in China. More than 100 vendors across the country skirt the rules by marketing domestically-produced analogs of fentanyl or some of the chemicals used to make it that haven’t been outlawed yet. The vendors ship the chemicals in small packages—sometimes disguised with detergent labels—to U.S. and European customers and Mexican drug cartels. National Public Radio

Jack Ma vs. the Party

Jack Ma founded Alibaba in an apartment in Hangzhou in 1999. The billionaire entrepreneur has since built China’s largest e-commerce company and the dominant fintech giant Ant Group while straddling the line between a national champion and an upstart thorn in the government’s side. In early November, that fragile balance collapsed with Beijing’s shock decision to halt Ant Group’s $37 billion IPO two days before it was scheduled to debut. The combination of Ant’s encroachment on China’s traditional banking system and Jack Ma’s outspokenness doomed Ant’s November IPO, which Chinese President Xi Jinping himself reportedly called off. Nikkei Asian Review

Hong Kong's financial core

Around one in five Hong Kong residents applied for shares in Ant Group’s blockbuster IPO before its last-minute halt in early November. The surprise suspension, and an increasingly tense political atmosphere in Hong Kong, haven’t discouraged its eager investors or the city's stock exchange. Ant’s IPO would have been the world’s biggest, but Hong Kong’s exchange is still recording enough listings to surpass its $40 billion total last year. Hong Kong’s sizzling stock market is a jarring contrast to the region’s political developments, which include arrests of prominent pro-democracy activists, the sidelining of moderate voices like former politician Martin Lee, and the expulsion of pro-democracy lawmakers from the city’s legislature. Bloomberg

A list of grievances

The relationship between Australia and China is in free fall. This week, the Chinese embassy in Sydney issued a list of 14 grievances (leaked to Australian press) that China had with Australia, including complaints about alleged anti-China bias in Australian media, "siding with the U.S." in criticizing China over COVID-19, and banning Huawei from building its 5G network. The Australian government said the complaints are "unreasonable" and "misrepresent" its position. Meanwhile, the trade spat between the two countries means that Australia may lose its largest export market, pushing exporters in Australia to search for new buyers. SupChina

Coronavirus by country


In July, Japan launched a ‘Go To Travel’ scheme, which incentivized citizens to travel around the country during a relative lull in new COVID-19 cases to boost the country’s tourism industry. Now, critics blame the program for helping seed the country’s third wave of the virus, which is on track to be worse than outbreaks the country suffered in the spring and fall. On Wednesday, Japan recorded 2,191 new cases of COVID-19, roughly 400 cases more than the previous one-day high set last Saturday. Japan’s government has since put cities like Tokyo, Okinawa, and Osaka on "maximum alert" but has yet to enforce any lockdown measures or warn citizens against traveling as a three-day holiday weekend looms. Nikkei Asian Review

Markets and movers

Baidu -- On Monday, the Chinese search engine said it would buy social media platform JOYY Inc’s live-streaming video business for $3.6 billion. After the deal was announced, activist short-seller Muddy Waters released a report accusing JOYY of falsifying user data and inflating its revenues. JOYY denied the accusations to Bloomberg. Deal Street Asia

Huawei -- The Chinese telecoms giant announced this week that it is selling its smartphone brand Honor for a reported $15.2 billion to an investment consortium, which includes the government of Shenzhen, in a bid to shield the offshoot company from sanctions imposed by the U.S. government. Fortune

TSMC -- City officials in Phoenix, Arizona approved $200 million in financial incentives for Taiwan’s flagship chipmaker, the Taiwan Semiconductor Manufacturing Company, to build a planned $12 billion plant in the city.  Bloomberg

Korean Air Lines -- South Korea's flagship carrier Korean Air Lines will spend $1.6 billion to become the top shareholder in debt-ridden Asiana Airlines, another South Korean carrier. The consolidation will make Korean Air the world's tenth-largest airline. Reuters 

Final figure

$26 trillion

On Sunday, 15 countries in the Asia Pacific, representing $26 trillion in combined GDP, signed a trade deal, called the Regional Comprehensive Economic Partnership (RCEP), that created the world’s largest trade bloc. Analysts say the pact is a geopolitical victory for China and will help the country strengthen ties across the region after the U.S. withdrew from organizations like the World Trade Organization under President Donald Trump. In total, analysts expect the deal to contribute $200 billion in total to the global economy by 2030. Fortune

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