In this week's edition:

• The Big Picture 
• New Area of Focus for Semiconductor Race 
• Lawmakers’ Letter to TikTok CEO 
• China Approves Broadcom Acquisition of VMWare 
• Nvidia Warns of Sales Slowdown Due to U.S. Regulations 
• China Allows Export of Critical Mineral Despite Graphite Curbs 
• Foreign Ministers from Japan, South Korea, and China Meet

Underpinning the idea that the United States and China have incentives to decrease geopolitical risk and bilateral tensions are the 2024 U.S. elections and the Chinese economy. While the elections are just under 1 year away, the Chinese economy is beginning to reflect the government stimulus that has been rolled out piecemeal over the last year. Estimates for 2023 growth are now firmly around 5-5.5%, largely on the back of consumer spending, as real estate and global trade continue to suffer. The domestic market has struggled, leading many Chinese to not feel the better-than-expected growth numbers. Policymakers are hoping that private sector and foreign investment will rebound following the bilateral U.S.-China meeting just weeks ago and President Xi’s promises to maintain a more open business environment.

That said, portions of the Chinese economy continue to struggle—most notably the property sector and industries connected to it. Just this weekend, Chinese regulators opened an investigation into Zhongzhi and its investment subsidiary, Zhongrong—both of which are part of the country’s shadow-banking sector and both of which have missed payments this year. In an investor letter last week, Zhongzhi indicated that it has over $35 billion more in liabilities than assets at present. The government is also rolling out plans to help the real estate sector, including by increasing credit to developers, but it will take time to impact the economy.

The Taiwan election next year will offer increased geopolitical risk as well, as it becomes clear that the ruling Democratic Progressive Party (DPP) has a good chance of winning in January. This is in large part due to the failure of the 2 opposition parties to coalesce around a joint ticket. During a press conference, Kuomintang’s Hou Yu-ih and the Taiwan People’s Party’s Ko Wen-je had a public argument that led to both men filing separate presidential bids. The collapse of the pro-China ticket gives the DPP candidate, Vice President Lai Ching-te, a better chance for the Presidency. A Lai presidency would likely be pro-U.S., following the precedent set by current President Tsai Ing-wen and with Hsiao Bi-khim, Taiwan’s former envoy to the US, tapped as the running mate. This increases the chances that China responds antagonistically in the lead-up to, and following, the election. Incentives for cooperative behavior remain and will continue indefinitely, but irritants like the Taiwan election will pose challenges to the relationship.

The Biden Administration is looking to the advanced packaging process for semiconductors as another front in the race to decrease reliance on China and build out U.S. supply chains. Advanced packaging is a pathway to achieve high performing chips without the most advanced technology. The process involves encasing chips in protective layers that connect them to the hardware. It also allows vertical stacking of older chips responsible for specific functions which creates a package with multiple capabilities. China has increased its focus on packaging because it is not sanctioned by the U.S. According to industry experts, China values this area of the supply chain because it can help its domestic industry build faster computer systems more cheaply, despite export controls restricting the most advanced chips. China currently claims 38% of the packaging market, more than any other country.

Advanced packaging is also necessary for AI chips, which will generate the most demand for packaging in the industry in the next 18 months, according to industry analysts. Advanced packaging demand is also predicted to soar as it becomes harder and more expensive to achieve breakthroughs in semiconductor production. Designers are opting to stack chips with multiple capabilities rather than try to fit more and more miniscule parts onto one chip.

The Biden Administration will soon roll out its National Advanced Packaging Manufacturing Program, created by The CHIPS and Science Act, which will invest in high-volume packaging facilities in the U.S. Administration officials and lawmakers view semiconductor packaging as essential to increasing U.S. semiconductor production. The Commerce Department’s paper on advanced packing says the program is meant, “to enable semiconductors that are made in the United States to be packaged in the United States. This end state is necessary to sustain U.S. global competitiveness and to maintain supply chain security and resilience.” Rep. Jay Obernolte (R-CA), a vice chair on the Congressional Artificial Intelligence Caucus, said, “It wouldn’t matter if we did 100% of our chip manufacturing onshore if the packaging is still offshore.” In her testimony to the House in September, Commerce Secretary Gina Raimondo called for the U.S. to focus more resources on packaging capabilities saying, “chips can only get so small, which means all the special sauce is in the packaging.” SK Hynix announced last year that it will build a $15 billion packaging plant in the U.S. Commerce plans for the U.S. to have multiple advanced packaging plants by 2030.

Last week, 25 House Republicans sent a letter to TikTok CEO Shou Zi Chew citing concerns regarding “the rise of terrorist and antisemitic content” on the platform, and the overwhelming majority of viewers falling between the ages of 18 to 24. Specifically, they cited the hashtags such as #freepalestine and content “glorifying” Osama bin Laden. The lawmakers also showed continued concern with TikTok’s connection to the Chinese company ByteDance and its requirement to comply with China’s “National Intelligence Law of 2017” which gives Chinese Community Party (CCP) officials access to user data. They request answers to 13 questions about TikTok’s connection to ByteDance and the CCP, content moderation policies, algorithmic capabilities, and age restrictions by December 4^th.

Following approval from the EU, UK, South Korea, and Japan, China granted approval for the merger of Broadcom and VMWare. China did give conditions, however, which include interoperability between VMWare’s server software with Broadcom competitors’ hardware in its domestic market.

Last week, Nvidia warned about a sales slowdown attributed to the increased stringency of U.S. regulations on chip exports to China. The company warned that U.S. export controls affecting some of its chips, including its flagship H100 and other chips that were adapted for Chinese export, would adversely impact sales in China in the upcoming quarter.

The semiconductor manufacturer did also exceed analyst predictions in its quarterly earnings report, which was released on Tuesday evening. It reported a quarterly revenue of $18.1 billion, surpassing Wall Street estimates of $16.2 billion. The company’s net income reached $9.24 billion, almost $2 billion higher than analysts’ projections.

The company also announced a delay in releasing one of its AI chips for the Chinese market. Nvidia plans to release 3 AI chips for sale to China, following U.S. export control updates.

After a 23-month hiatus, China exported small amounts of germanium and gallium in October. The metals are crucial for high-end tech manufacturing and are used in semiconductors, telecommunications equipment, and electric vehicles. China imposed export controls on the materials in August, and new export regulations affecting graphite, another crucial component for electric vehicles, are set to take effect on December 1^st.

After almost zero exports in August and September, Chinese customs data reveals that minimal quantities were exported in October. Germanium exports amounted to 0.65 tons, compared with 8.78 tons in July, while gallium exports were 0.25 tons, down from 7.58 tons in July.

Chinese exporters must now seek government licenses and provide information on their foreign customers and their usage of germanium and gallium.

Foreign Ministers from Japan, South Korea, and China met on Sunday in Busan to discuss restarting the summit between the 3 nations which has not taken place since 2019.

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