US tech curbs are making China pull its talent back home, push for self-reliance

Chinese President Xi Jinping | Photographer: Ding Haitao/Xinhua | Getty Images via Bloomberg

The technology war between China and the United States (US) was reflected during the 20^th Party Congress. Days before the Communist Party of China’s (CPC) quinquennial conclave, which charts the nation’s policy trajectory, America made it tougher for China to access semiconductors and the equipment that helps in its manufacture, but more importantly, it barred American nationals from working for a Chinese entity involved in its manufacture or proffering technical knowhow.

Tech-tonic tussle

The American Department of Defense is augmenting the investment blacklist for its citizens to include more Chinese companies, which are suspected to have ties to the People’s Liberation Army (PLA). This means US citizens will not be permitted to purchase or sell publicly traded securities in companies such as DJI Technology and Zhejiang Dahua Technology which manufacture drones and surveillance kits respectively and CRRC Corporation Ltd. which makes railway transit equipment. It also includes  BGI Genomics Co Ltd which manages a large gene databank. Around 50 Chinese companies including telecommunications major, Huawei, along with companies such as  Semiconductor Manufacturing International Corporation (SMIC) had been added to the blacklist in June 2021. Through this, the US seeks to counter China’s military-civilian fusion strategy, which seeks to aid PLA’s modernisation by ensuring access to sophisticated technology with private firms playing the conduit. Thus, the Biden administration has intensified its onslaught on two elements that powered China’s rise: technology and capital.

A perusal of the areas where the investment ban kicks in shows that it is not randomly selected sectors, but those which were singled out by Chinese President Xi Jinping as sunshine sectors and included in his ‘China Manufacturing 2025’ plan. Under this project, China had aimed at building dominance in the production of key segments such as  next generation information technology, high-end numerical control machinery and robotics, aerospace and aviation equipment, maritime engineering equipment and high-tech maritime vessel manufacturing, sophisticated rail equipment, energy-saving vehicles, electrical equipment, agricultural machinery and equipment, new materials, and biopharmaceuticals and high-performance medical devices by 2025. Former US President Donald Trump’s reference to Xi’s pet project during his speech on 16 November that announced his bid for the White House in 2024 probably means that the use of US regulatory tools in securitisation will shape the future course of American financial and investment policy towards China.

The CPC’s main aims in the next five years are to achieve high-quality economic development through greater self-reliance and building competencies in science and technology. While Xi has sought to transform China into a hi-tech economy, and move away from the ‘mass-manufacturing’ model to ‘smart manufacturing’, America’s efforts at striking at China’s economic foundations have called into question the latter’s efforts to sustain its modernisation initiative. The report noted that there were external attempts to blackmail, contain, blockade, and exert pressure on China, which seemed to convey that China was under siege. In response, while China seems to be walling itself from the world, it is important to see what it is creating beyond the ‘Great Tech Wall’.

Talent hunt

Xi report to the Party zeroes in on education, science and technology, and human capital as the strategic pillars for building a modern socialist nation. In the backdrop of the Sino-American technology rivalry, Xi is homing in on refining its human capital and creating an ecosystem of science and technology. No initiative can flourish without political support. Some of the appointments in China’s ruling elite after the 20^th Party Congress reflect its priorities in building a foundation for science and technology. A case in point is the inclusion of General Li Shangfu, a technocrat in the aerospace arena who headed the Xichang Satellite Launch Center into the Central Military Commission—a body that oversees the nation’s armed forces. Incidentally, the Countering America’s Adversaries Through Sanctions Act (CAATSA) sanctions have been invoked against him since 2018.

Nurturing ecosystem

Xi’s report underscored the need to create a high-quality talent pool, for which efforts are now underway to build a commensurate ecosystem. The Shenzhen Development and Reform Commission recently announced plans to provide subsidies for production, research and development of sophisticated chips, which have been affected by the US trade curbs. Under the 14^th Five-Year Plan, China is set to build around 220 high-technology zones across the country by 2025, with the aim of making breakthroughs in important technologies and producing goods that are competitive in the global market. Hong Kong has announced the Top Talent Pass Scheme under which two-year visas can be granted to those having an annual income of HK $2.5 million (US$318,500), or have graduated from one of the world’s top 100 universities and with at least three years of working experience.

The CPC’s efforts at creating a ‘red-capital ecosystem’ have gathered steam in recent years.

Yi Huiman, chairman of the China Securities Regulatory Commission (CSRC), called for capital markets to “guide funds” towards companies in “science and technology innovation”. In 2019, the Shanghai Science and Technology Board commenced operations with an aim of  facilitation finance into companies in high-tech and strategic emerging sectors and the number of listings has increased from 25 to more than 300. In November 2021, the Beijing Stock Market commenced trading with an objective of funneling funds into innovation-driven companies. In November 2022, CSRC vice-chairperson Fang Xinghai reiterated the point that private equity firms and venture capital investment must finance  technological innovation by financing companies associated with semiconductors, new energy, computing, and pharmaceuticals.

Xi gave a clarion call for the “sons and daughters” of China to focus their energies on ‘national rejuvenation’, which is the CPC’s project of restoring the nation’s historic greatness. Xi conceptualises the Chinese race as one, regardless of individual nationality and hopes that his nationalist pitch strikes a chord for those who are keen to contribute to a “rising China”. In the midst of the Sino-American tech competition, the decision of biologist Nieng Yan who announced her decision to quit Princeton University and move to China to work for a research and development centre set up by the Shenzhen local government has caused a stir on Chinese social media. Her return is being perceived as an act of patriotism amidst the US-China tech war.

There are times when there may be an opportunity even in adversity. While the US semiconductor-control curbs seek to starve China of talent in this critical field, the CPC may be tempted to lure back Chinese-Americans with US citizenship who are in important  technical positions in Chinese chip companies. In this endeavour, it may be emulating the Taiwan’s government’s experiment in which it tapped Morris Chang (who later founded Taiwan Semiconductor Manufacturing Company) who had been passed over for a promotion to the top job at Texas Instruments in the 1980s to helm its push to build the semiconductor sector.

Will Xi’s patriotism pitch work in bringing the prodigals back? First, the intense ideological conflict between China and the West and domestic factors such as curbs on free expression and tough zero-COVID policies may stall Chinese nationals educated overseas from coming to China and work in advanced technological areas. Second, the downturn in China’s economy may significantly circumscribe the allocation of resources for training and hiring talent from abroad. Lastly, as the outlook of China and the US on critical economic ingredients such as technology, capital, and human capital diverge, the former will be pushed towards attaining self-reliance in critical technologies to cut down external vulnerabilities.

Kalpit A Mankikar is a Fellow with Strategic Studies programme, and is based out of ORF’s Delhi centre. Views are personal.This article originally appeared on ORF website.