MyEListings' markets and economics editor and creates content about global macro events and their impact on US commercial real estate.
TLDR:
On October 2, the US announced new export controls on high-end semiconductors, effectively ending China’s ability to produce them in-country, and threatening other countries that might assist in their circumvention with economic devastation.
These sanctions come at a time when multiple next-gen chip fabs are under construction in the US, and are likely to set Chinese ambitions backward several generations at a time when the US was already poised to extend its lead.
Integrated circuits (aka computer chips) require very specific physical conditions in their manufacture. They must be created in extremely low-pollution, artificial, and extremely capital-intensive environments which include cutting-edge lithography machines, software, and engineering expertise.
Computer chips require exponentially-greater investments in capital and expertise from one level of manufacturing to the next. China specializes in manufacturing low-end chips you might find in your IoT devices - your refrigerator that orders milk when you’re low or your Bluetooth meat thermometer.
Mid-range chips you might find in automobiles or aircraft tend to come from Thailand, Malaysia, or Korea, and the highest-end chips are products of Japan, Taiwan, and the US. At the highest end of manufacturing, one company, Dutch semiconductor lithographer ASML, makes the only technology capable of outputting chips of the caliber, and they are geopolitically allied with the US, suggesting China will have no choice but to source high-end chips on the gray market, extract them from components and repurpose them, which comes with much waste and inefficiency.
The latest batch of sanctions targets not only China’s ability to procure the manufacturing hardware for making these chips but its ability to use the hardware should it be procured illegally by targeting components, software, and the US engineers who design most of it.
US executives of Chinese firms have an unfortunate choice: they can quit, or they can lose their citizenship. Nearly all such US execs have resigned from their posts in the last week, as a result.
Taiwan, via TSMC, controls over 80% of the world’s high-end semiconductor trade. TSMC started by allowing manufacturers to outsource manufacturing to their fabs, and has grown to be the 800 lb gorilla in the space. This is a massive lure for the Chinese, who view Taiwan as a renegade province they intend to reincorporate by ‘incentive’ or force.
This course of action is unlikely in reality, however. The reasons are many: China lacks military experience in all respects. It has zero institutional memory of warfare or how to prosecute it. It has exactly 6 amphibious vehicles that take 9 hours to cross the Taiwan strait, inviting multiple bottom visits in transit. It has never attempted, let alone completed an amphibious invasion of so much as a picnic table, and amphibious landings are perhaps the most complicated military endeavor to pull off. The US would not sit by and allow such an event to take place; its response would likely have effects that make the current sanctions package on Russian commerce look like a massage date with hot tea. And, Russian telegraphy notwithstanding, it isn’t all that wise to announce your military ambitions in advance.
Regardless of other effects, one that is extremely likely to occur is Chinese capital flight. Over $3 trillion has fled China since 2008, but this could be the tip of the iceberg in future months. Chinese capital flight is fairly sophisticated in its application, which occurs largely through trade machinations and unnecessary middlemen, often in Singapore.
When Chinese capital flees the country, it often finds its way into Canadian and US real estate. With capital flight, investment returns are often a secondary consideration, marking inbound flight capital as ‘dumb money.’ And it is used thusly. But Chinese capital is in good company these days as other parts of the world devolve into conflict, shortages, and flights to quality, which flights have increasingly fewer sound landing pads.
The US, and its largest asset classes, namely the treasury market and commercial and residential real estate, represent the biggest targets in time.