US President Joe Biden’s executive order on August 9 to ban American investments in China’s emerging technology sector could mean the death knell to the Communist Party-ruled nation’s ambitions of becoming a science and technology superpower, as the Asian giant suffers from significant weaknesses in its arsenal.

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In action indicative of the growing strains between the world’s two most significant powers, Biden decided to block and regulate high-tech US-based investments going toward China, covering sectors such as advanced computer chips, microelectronics, quantum information technologies, and artificial intelligence.

The order aims to prevent American capital and expertise from helping China develop technologies that could support its military modernization and undermine US national security. Reuters reported that the measure targets private equity, venture capital, joint ventures, and greenfield investments.

“The order seeks to blunt China’s ability to use US investments in its technology companies to upgrade its military while also preserving broader levels of trade that are vital for both nations’ economies,” NPR said in its report on the Biden administration’s decision.

The action stems from the US fears that China is using American investments in critical technology sectors to develop world-class armed forces, which could pose a serious threat and challenge to the American dream of continuing to be the world’s lone superpower.

In a recent exhaustive report on China’s leap in critical defense technologies, the US-based Institute for Defense and Government Advancement (IDGA) said Beijing’s efforts are very much still a work in progress but are already yielding tangible results and cited the example of the People’s Liberation Army – Air Force (PLA-AF) accumulating over 200 J-20 fifth-generation fighter jets in its service and operationalizing hypersonic weapons.

The IDGA report claimed that this was China’s bid to achieve qualitative parity across a broad range of critical military technologies and capabilities.

In its initial reaction to the Biden administration’s action, China said on August 10 that it is “gravely concerned” about the order and reserves the right to take measures. The order affects the regular operation and decision-making of enterprises and undermines the international economic and trade order, a statement from the Chinese Commerce Ministry read.

China’s Economic Woes

Separately, Foreign Direct Investment into China fell 89% from a year earlier in the second quarter of this year to $4.9 billion, according to data released by the Chinese State Administration of Foreign Exchange. China is facing a severe deflation crisis triggered by lower consumer demand and a contraction in the Chinese economy.

Factory activity in China had constricted for the fourth straight month in July, even as its Consumer Price Index (CPI) witnessed a 0.02% rise since a year ago, and Producer Price Index (PPI) fell by 4.6% in May, the eighth consecutive fall and steepest since 2016.

Since early 2012, investors have gone skittish over China, and international institutional investors have sold a net $148 billion of China’s bonds. Unemployment in China is at 5.2% as of June.

The IDGA report noted that though the development of advanced military capabilities, and the broader Chinese economy, is dependent on a robust science and technology base, and while China has made substantial strides in developing its domestic capabilities in this area, significant weaknesses remain.

“This is particularly concerning the semiconductor industry and constitutes a vulnerability the US is actively targeting. The development of China’s technology base, especially advanced and emerging technologies such as artificial intelligence (AI), quantum computing and related areas, advanced materials and manufacturing, and hypersonic systems, extends beyond the defense sector and has implications for the Chinese economy as a whole, the China-US relationship, and China’s wider role and engagement in the international system,” the report, written by Dr James Bosbotinis, said.

Xi Jinping’s Emphasis On Technology

Although technology is a long-standing priority of China, President Xi Jinping ‘has added additional emphasis to these concepts and has made investment and resourcing science and technology, as well as R&D, a core pillar of China’s development and innovation strategies.

In this context, the IDGA report borrowed from the US Department of Defense’s annual report to Congress on Military and Security Developments Involving the People’s Republic of China 2022, or ‘China Military Power,’ to note that ‘China seeks to be an innovation superpower that is largely non-reliant on foreign technology and that serves as a global center for high-tech industries.’

With Made in China 2025, “Beijing sharpened its emphasis on technological independence” and seeks “to leapfrog foreign technological competitors and create a superior innovation ecosystem.” Made in China 2025, launched in 2015, sets ambitious targets for integrating automation, intelligent sensors, and Internet of Things (IoT) devices into the Chinese industry.

In addition, China mainly focuses on a range of emerging dual-use technologies that promise to be both disruptive and a foundation for future economies, including AI, autonomous systems, quantum technologies, and advanced materials and manufacturing.

The Congressional report also states, “Beijing clearly understands its science and technology deficiencies, particularly China’s vulnerability and reliance on western companies for enabling technologies such as semiconductors, new materials, and in some cases basic research.”

The IDGA report noted that China also clearly understands the role and importance of emerging technologies for the development of military capabilities in the future, both from a domestic perspective and in terms of potential adversarial exploitation.

It warned that China is making significant progress toward becoming a ‘science and technology superpower.’ However, its ability to move up the value chain and build a genuinely innovative S&T base is far from guaranteed.

China’s Foreign Dependence On Chips

The International Institute of Strategic Studies, in its annual The Military Balance 2023, assesses, based on analysis of the work report issued at the 20th National Congress of the Communist Party of China held in October 2022, that “informatization remains a work in progress and that the PLA has been directed to focus more on strategic capabilities and deterrence, including in the use of emerging and disruptive technologies and ‘new-domain forces.”

It said, “Despite significant political attention and massive expenditures, Chinese policies have had limited success in raising domestic capabilities in the semiconductor industry,” with Chinese policymakers comparing China’s dependence on foreign chips to its reliance on oil.

In this regard, “the US excels in the design and development of the most advanced semiconductor chips and has a research lead in the technology areas of high-performance computing and advanced integrated circuit design and fabrication” and has sought to target Chinese vulnerabilities in particular through control of exports relating to the fabrication of advanced chips and semiconductor manufacturing equipment.

The IDGA report concluded that because semiconductors are an essential enabler for all sophisticated electronic systems, these export controls will potentially have long-term effects on developing industrial sectors in China alongside the country’s military capabilities.

The main goal behind the new US approach is almost certain to be the containment of China’s technological progress on a broad front.

• NC Bipindra is a 30-year veteran in journalism specializing in strategic affairs, geopolitics, aerospace, defense, and diplomacy. He has written extensively for the Times of India, New Indian Express, Press Trust of India, and Bloomberg News. He can be reached at ncbipindra (at) gmail.com
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