US Blacklists Largest Chinese Chipmaker, 60 Other Companies

There was speculation early in the session that tensions between the US and China were set to ease following an FT report that the US Treasury department was “attempting to water down an executive order from President Donald Trump that bars Americans from investing in Chinese companies with suspected ties to the People’s Liberation Army” (which however was “met with furious opposition from the Pentagon and state department, opening up a heated dispute over one of the last big anti-Beijing policies of the Trump era”). So to set the record straight, Reuters first reported and this morning the Commerce Department confirmed that it’s blacklisting Semiconductor Manufacturing International Corp. and more than 60 other Chinese companies “to protect U.S. national security.”

The designation restricts companies from exporting U.S.-origin technology to the listed firms without a license, with a provision that effectively prohibits SMIC from acquiring technology to build chips with 10-nanometer circuits and smaller, the industry’s top class of chips.

“This action stems from China’s military-civil fusion doctrine and evidence of activities between SMIC and entities of concern in the Chinese military industrial complex,” the Commerce Department said in a statement.

“Entity List restrictions are a necessary measure to ensure that China, through its national champion SMIC, is not able to leverage U.S. technologies to enable indigenous advanced technology levels to support its destabilizing military activities,” Wilbur Ross said in a statement provided to The Wall Street Journal.

Commerce Secretary Wilbur Ross confirmed the move in a Friday morning interview with Fox Business. It was reported first by Reuters overnight. Shares in China’s top chipmaker slid 5.2% Friday in Hong Kong on the news after earlier rising on the FT report.

A senior Commerce Department official told the WSJ that the policy was designed to prevent SMIC from using U.S. technology to produce the most cutting-edge chips for advanced military applications such as drones, military aircraft and exoskeletons.

“We’re taking this action to address a national-security concern by using a very targeted action that we believe will hopefully begin to move SMIC in a better direction,” the official said, adding that the department has been communicating with SMIC to address its concerns.

Other Chinese entities affected include those “that enable human rights abuses, entities that supported the militarization and unlawful maritime claims in the South China Sea, entities that acquired U.S.-origin items in support of the People’s Liberation Army’s programs, and entities and persons that engaged in the theft of U.S. trade secrets,” according to the statement.

As Bloomberg notes, the majority of the newly banned companies are Chinese and will join the likes of Huawei Technologies Co. on a list that denies them access to U.S. technology from software to circuitry.

The move is not a surprise as Trump had been widely expected to level more sanctions against China’s national champions before Joe Biden formally took office. “If the report you mentioned is correct, it will be another example of how the U.S. is using its national power to crack down on Chinese companies,” Chinese Foreign Ministry spokesman Wang Wenbin said at a briefing in Beijing on Friday. “We urge the U.S. to stop its wrongful activities cracking down on foreign companies.”

The Shanghai-based chipmaker, which is a supplier to Qualcomm and Broadcom, lies at the heart of Beijing’s intention to build a world-class semiconductor industry and wean itself off a reliance on American technology, arguably the issue at the core of the US-China trade war. Washington in turn views China’s ascendancy and its ambitions to dominate spheres of technology as a potential geopolitical threat. A blacklisting threatens to cripple its longer-term ambitions by depriving it of crucial gear.

As Bloomberg adds, “in response to the widening U.S. crackdown, China is planning to provide broad support for so-called third-generation semiconductors in its next five-year plan to increase domestic self-sufficiency in chip manufacturing, people with knowledge of the matter have said.” SMIC, which is backed by the China Integrated Circuit Industry Investment Fund as well as Singapore’s sovereign fund GIC Pte and the Abu Dhabi Investment Authority, is expected to play a central role in that overall effort.

The company had already been laboring under similar, less severe curbs after the Commerce Department in September placed it on a separate export restrictions list, accusing SMIC of supplying the military. Those sanctions took a toll on shares of the company, whose co-CEO Liang Mong Song this week unexpectedly resigned, triggering another selloff.

It is unclear whether Biden officials will take a similarly hard-line approach to Chinese firms or unwind any of the current administration’s orders. Under President Obama, Commerce Department officials applied export restrictions more narrowly, typically penalizing companies that ran afoul of U.S. law, and sometimes removing them if corrective action was taken.

Since January 2017, the Trump administration has added more than 300 Chinese entities to its export blacklist.