Research Note | China’s AI focus continues despite US-China chip war

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    China’s AI focus continues despite US-China chip
    China’s AI focus continues despite US-China chip
    11 July 2023

    • China is pinning its hopes on AI as a key driver of growth
    • This requires an increase in computing power, including the manufacture of advanced chips
    • The US-China chip war is a short term hindrance, but China is investing heavily to maintain its momentum

    China focused on AI

    Last week’s 2023 World Artificial Intelligence Conference (WAIC) in Shanghai was attended by a record 400-plus companies showing off their latest inventions. One of the most anticipated was Baidu’s Ernie 3.5 Titan, the Chinese rival to ChatGPT.

    The conference was also abuzz with examples of AGI (artificial general intelligence) ie. robots capable of substituting for humans in a range of industries, an AI subsector that China is hoping to lead.

    Speaking at the event's opening ceremony, Xu Xiaolan, Vice Minister of Industry and Information Technology, said that China’s AI enterprises now exceed 4,300 and are worth 500 billion yuan (US$ 69.4 billion) in total.


    Whoever controls computing power, controls AI

    Xu also noted the country’s total computing power is the second largest in the world. Experts now believe that AI supremacy is highly dependent on the availability of computing power, that is, the infrastructure and technologies needed to process data.

    According to the China Academy of Information and Communications Technology (CAICT), China‘s processing power accounts for 33 percent of the global total, just behind the US’s 34 percent. In addition, China has over 2.8 million 5G stations in place, and the country’s AI research and development cycle has been shortened by 20.7 percent.

    However, a fly in the ointment is the chip war currently raging between China and the US. As AI development deepens, chips play an even more vital role as a component of computing power. For example, the share of graphics processing provided by advanced chips is up from 3 per cent in 2016 to 41 per cent in 2020.


    Chip war heats up

    Yet China’s access to advanced chips and chip-making equipment is limited by a growing array of export curbs imposed by the US and its allies. Just two weeks ago, the Dutch government announced that it would be restricting the export of select semiconductor equipment such as lithography machines. Also due to come into force this month are Japan’s export restrictions on 23 types of tools and equipment related to the production of high performance chips.

    These latest moves by the Netherlands and Japan are deemed to be in support of the US’s ongoing campaign to undermine China’s tech ambitions. Not surprisingly, they have been met with angry responses from China.

    In retaliation, China said last week that it is imposing controls on the export of two metals - gallium and germanium - vital for the manufacture of certain types of semiconductors. According to the US Geological Survey, China accounts for 98 percent of the world’s production of gallium, and 68 percent of the refinery production of germanium.


    But some damage limitation is possible

    While this suggests an acceleration of the “decoupling” between the world’s two superpowers, in fact, the relationship is a complex one. On Sunday, US Treasury Secretary Janet Yellen ended her four-day visit to China with conciliatory words. This was hot on the heels of another visit by a top US official - Secretary of State Anthony Blinken – who met with President Xi Jinping in June.

    Both sides seem keen to stabilise relations, and this may have something to do with the tight intertwining of the two economies. US-China trade continues to grow despite the trade war that started in mid-2018, with US exports to China reaching US$153.8 billion in 2022 from US$106.5 billion in 2019. Similarly, Chinese exports to the US rose from US$449.1 billion in 2019 to US$536.8 billion in 2022.

    Nevertheless, when it comes to strategically important technologies such as semiconductors, China is already working to increase its self-sufficiency across the entire supply chain. To date, Chinese semiconductor companies such as SMIC are producing high-end 7nm chips and is striving to achieve 5nm chip production by 2025. Over the same period, supported by the US Chip-4 Alliance, competitors like TSMC, Intel and Samsung Electronics are on course to launch ultra-advanced 3nm and 2nm chips.


    AI Investments pick up steam

    Meanwhile, China is investing aggressively to further enhance its computing power. For example, the Shenzhen government announced in early June that 100 billion yuan (US$13.8 billion) would be invested to establish an AI zone in the city. Over time, it is hoped that this zone will serve as a tech and AI hub for a number of nearby cities including Hong Kong, Macau and Guangzhou.

    Shanghai has also spent over 250 billion yuan (US$34.6 billion) on new AI infrastructure over the past three years, a third of which is from private capital. In April, the city announced provision of 100 million yuan (US$13.8 million) for certain qualified semiconductor and AI projects.


    Shared global prosperity

    An emerging message from both the US and China is that the economic benefits of AI are sufficient to sustain both superpowers. Janet Yellen, in her closing remarks to her Chinese hosts reiterated this point: "We believe that the world is big enough for both our countries to thrive. Both nations have an obligation to responsibly manage this relationship, to find a way to live together and share in the global prosperity."

    On the other hand, if the US-China conflict intensifies, investors can expect a deeper disruption of the global tech supply chain, and for inflationary pressures to persist. This is given China’s traditional position as “the world’s factory” based on its ability to produce raw materials and manufactured goods at scale and with lower costs.


    1China Academy of Information and Communications Technology (CAICT)

    2US Office of Technology Evaluation, 2022


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