Foreign direct investment in the second quarter recorded a negative figure… Chinese IT companies are hoarding semiconductors
“It doesn’t matter if it’s a black cat or a white cat, as long as it catches mice.”
This is what Deng Xiaoping (1904-1997), the chief architect of China’s reform and opening-up policy, said upon returning from a visit to the United States in 1979, meaning, “Whether it’s capitalism or communism, whatever makes the Chinese people well-off is the most important.” In accordance with Deng Xiaoping’s “black cat, white cat theory,” the Chinese Communist Party introduced a market economic system and actively promoted reform and opening-up policies starting in the 1980s.
Deng Xiaoping’s Fading Legacy
As the Chinese Communist Party suppressed the Tiananmen Square pro-democracy movement in 1989, Deng Xiaoping’s reform and openness policy began to show signs of retreat, and from January 18 to February 22, 1992, Deng Xiaoping inspected the economic cities in the southern regions, including Wuhan, Zhuhai, Shenzhen, and Shanghai, and emphasized the need to expand reform and openness. The speeches made by Deng Xiaoping during his inspection tour at that time are called the “Southern Tour Speeches.” In his Southern Tour Speeches, Deng Xiaoping emphasized that “the reform and openness policy must be promoted without the slightest hesitation for the next 100 years.” Starting in 1993, the year after the Southern Tour Speeches, China actively pursued a policy of attracting foreign direct investment (FDI). At that time, FDI amounted to 27.5 billion dollars (approximately 37 trillion won).
The Chinese Communist Party and government celebrated the 120th anniversary of Deng Xiaoping’s birth on August 22 this year with grand celebrations, but his legacy is fading away. In particular, criticism is being raised in the United States and other Western countries that Chinese President Xi Jinping, who calls himself Deng Xiaoping’s successor, is going in the opposite direction of reform and openness. In fact, the 120th anniversary celebrations presided over by President Xi were significantly scaled back compared to the 100th and 110th anniversaries. Since President Xi took power, the autonomy that Deng Xiaoping granted to the private sector, including companies, for China’s economic and technological growth, as well as the benefits to foreign companies and capital, have been largely lost, and state-led economic and social control has been strengthened.
A representative example is the sharp decline in FDI into China. According to the State Administration of Foreign Exchange, FDI last year was recorded at $33 billion (about 44.3 trillion won), a sharp 80% decrease from the previous year. This is the lowest level in 30 years since 1993. Compared to $180.2 billion (about 242 trillion won) in 2022, it is an 82% decrease, and compared to $344.1 billion (about 462.16 trillion won) in 2021, it is only one-tenth. Foreign companies’ willingness to invest in China is decreasing due to China’s slowing economic growth, economic recession, strengthening political control, and conflict with the United States. In addition, the uncertainty for foreign companies in China has increased due to the Chinese government’s Anti-Espionage Act (Espionage Act) that has been in effect since July of last year. In the semiconductor industry, there is a clear trend of American companies leaving China due to the US’s control of China. According to the Rhodium Group, an American political and economic analysis organization, companies from various countries that invested 48% of their semiconductor investments in China in 2018 reduced their investments to around 1% in 2022.
China’s FDI this year is expected to record a negative figure for the first time ever. This is because FDI into China is decreasing significantly as pessimism about the Chinese economy is boiling over. According to China’s State Administration of Foreign Exchange, FDI in the second quarter of this year recorded -14.8 billion dollars (about -19.87 trillion won). This means that foreign companies are withdrawing more money from China than they invested in it. This is the second time since the third quarter of last year that quarterly FDI has recorded a negative figure. The scale is the largest since the State Administration of Foreign Exchange began compiling related data in 1998. Bloomberg News pointed out that if this trend continues this year, FDI will record a net outflow for the first time ever.
IBM lays off 1,000 Chinese employees
The ‘China run’ phenomenon of foreign companies such as the US is also serious. American mobile phone manufacturer Apple is actively avoiding risks from China not only in sales but also in production. Although the Chinese market accounts for 17% of Apple’s total sales, it is continuously reducing its sales network. Since starting production of the first iPhone at the Foxconn factory in India seven years ago, Apple has been moving its production bases outside of China, including outsourcing production of the iPhone 16 Pro lineup for the first time this year. Bloomberg News reported that Apple’s production of the iPhone 16 Pro in India is an important milestone, and pointed out that the conflict and confrontation between the US and China will deepen in the future.
Like Apple, American big tech companies are closing or downsizing their businesses in China and are also reducing their workforce. IBM, a leading American semiconductor company, decided to move its R&D center in China to India and lay off about 1,000 employees. IBM, which entered the Chinese market in 1984 and has been increasing its business scale every year, decided to drastically reduce its business last year when its sales in China decreased by nearly 20%. This is because the company judged that it had no chance of winning due to the prolonged economic downturn in China and fierce competition with local companies. Microsoft (MS), Tesla, and Intel have also withdrawn from China or reassigned employees. In May, MS decided to transfer about 800 of its Chinese employees to work sites in the US, Australia, and Canada. Tesla decided to reduce its workforce across all sectors in China, including sales and service, engineering, and production. American automaker GM is also considering restructuring its R&D division in China. In particular, American big tech companies have decided that it is difficult to do business in China as the government strengthens its policy of containing China in advanced industries such as semiconductors. According to the U.S. Department of Commerce, U.S. direct investment in China last year was $5.1 billion (about 6.84 trillion won), down 40% from the previous year.
The Chinese government has taken measures to restrict the disclosure of key data related to foreign investment in the stock market as the possibility of a net outflow of foreign capital from the stock market for the first time this year has increased. As of August 19, China’s securities authorities have switched the daily trading trend data of overseas investment funds through mainland stock exchanges such as Shanghai and Shenzhen to non-disclosure. The data will be released quarterly for the time being. As a result, key indicators of the market worth 8.3 trillion dollars (about 11,100 trillion won) will be unknown.
This measure seems to be a desperate measure by the Chinese government to reduce the sharp volatility in the stock market caused by the continuous outflow of foreign capital due to the economic recession. According to the Hong Kong Stock Exchange, foreign capital inflow into the Chinese stock market this year is negative. Foreign investors have turned to net outflow as they have pulled out US$12 billion (about 16 trillion won) from Chinese mainland stocks since the beginning of June. Western economic experts predict that the Chinese stock market will record the largest net outflow of foreign capital in a year as the Chinese economy worsens.
The youth unemployment rate in China in July was 17.1%. It is the highest since the government changed the method of calculating youth unemployment rates for those aged 16 to 24 in December last year. The industrial production growth rate in July also slowed for the third month in a row. Global investment bank JP Morgan predicted that the Chinese stock market would have difficulty recovering until 2026, focusing on China’s real estate risks and the high youth unemployment rate.
Samsung Electronics and SK Hynix’s sales in China double
Chinese Big Tech and other information technology (IT) companies are hoarding memory semiconductors such as DRAMs in preparation for the U.S. government’s stronger sanctions on advanced semiconductors and technology. Accordingly, Samsung Electronics and SK Hynix’s semiconductor sales in the first half of this year have more than doubled compared to the previous year. According to the semi-annual reports recently released by Samsung Electronics and SK Hynix, sales in China for the two companies combined amounted to 40.9513 trillion won, nearly doubling compared to the first half of last year (21.6901 trillion won). The Hong Kong-based South China Morning Post (SCMP) pointed out that “Chinese semiconductor companies are under pressure to stockpile semiconductor products before the announcement of new U.S. regulations.”
Chinese big tech companies such as Huawei and Baidu are purchasing large quantities of high-bandwidth memory (HBM) for artificial intelligence (AI) development before the US sanctions are further strengthened. Market research firm TrendForce analyzed that “Chinese companies are significantly increasing their stockpiles of AI chips and memory due to fears of additional export restrictions.” Samsung Electronics and SK Hynix’s sales to China are expected to continue to rise in the second half of the year. The US is not imposing any particular sanctions on the export of memory semiconductors, which are Samsung Electronics and SK Hynix’s main products, to China.
Taiwan’s TSMC, the world’s largest semiconductor foundry, also saw its sales to the public double thanks to Chinese companies’ hoarding. According to TSMC’s financial report, its sales in China in the second quarter (April to June) amounted to NT$107.8 billion (approximately KRW 4.5 trillion), up 102% from the first quarter (January to March) and up 86.8% from the same period last year. Taiwan’s Economic Daily analyzed that “Chinese companies ordered a large number of semiconductors from TSMC to stockpile ahead of the U.S. government’s strong expansion of regulations.” It seems that the Chinese economy will have a difficult time getting out of the recession swamp for a considerable period of time due to a decrease in FDI and the U.S. government’s strengthened sanctions.
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〈This article Weekly Donga 〉Published in issue 1456
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2024-09-15 20:09:31