Commentary on Political Economy

Saturday, 26 September 2020



US sanctions China’s biggest chipmaker

The US Department of Commerce says exports to SMIC pose an ‘unacceptable risk’ of being diverted to ‘military end use’
The US Department of Commerce says exports to SMIC pose an ‘unacceptable risk’ of being diverted to ‘military end use’ © Bloomberg

The US government has sanctioned China’s biggest chipmaker, dealing further damage to the country’s semiconductor industry after cutting Huawei off from its chip suppliers.

On Friday, the US Department of Commerce told companies that exports to Shanghai Manufacturing International Corporation (SMIC) posed an “unacceptable risk” of being diverted to “military end use”, according to a copy of the letter seen by the Financial Times.

The move threatens to cut off China’s biggest chipmaker from crucial US software and chipmaking equipment. Companies now require licences to export such products to SMIC.

On Saturday, SMIC said that it was continuing to engage with the US Department of Commerce. The company reiterated that it “has no relationship with the Chinese military, and does not manufacture for any military end-users or end-uses.”

SMIC, a “national champion” that is crucial to the government’s hopes of achieving chip self-sufficiency, became the country’s biggest initial public offering for a decade when it raised $7.6bn in Shanghai earlier this year.

SMIC has already been hit by the US’s tightening of sanctions on Huawei. This meant that SMIC could no longer serve its largest customer. The chipmaker had warned of the risk of a worsening of US sanctions in its IPO prospectus.

The sanctions will also affect Qualcomm, the US chip designer which uses SMIC to fabricate some of its chips. Analysts believe that Qualcomm is SMIC’s second-largest customer after Huawei.

On Saturday, SMIC said the company was not yet aware of the new sanctions, and was looking into the situation.

Beijing’s Ministry of Foreign Affairs has previously declared its opposition to US sanctions on Chinese companies. Last weekend, China’s Ministry of Commerce announced broad powers to curb the operations of foreign companies deemed “unreliable”.

Lawyers are concerned that Beijing’s “unreliable entities list” could be used to punish foreign companies that carry out sanctions against Chinese companies, putting such companies in a bind between US and Chinese law.

The Department of Commerce did not immediately respond to a request for comment.

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