Transcript: The surprise winner of the US-China chip wars

This is an audio transcript of the FT News Briefing podcast episode: ‘The surprise winner of the US-China chip wars’

Sonja Hutson
Good morning from the Financial Times. Today is Wednesday, March 13th and this is your FT News Briefing.

Ukraine is getting a boost in military aid, and Malaysia might just be an unexpected winner of the US-China chip war. Plus, China wants its economy to grow a lot this year, but it’s also pumping the brakes on local spending.

Joe Leahy
The danger is, you know, when you’re putting one foot on the brake and one on the accelerator, you might get it wrong.

Sonja Hutson
I’m Sonja Hutson, and here’s the news you need to start your day.

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Ukraine’s been having problems getting funding for its war with Russia lately, but it got a bit of a break yesterday. Both the EU and the US announced some additional aid. EU countries are set to approve €5bn in military aid, and the US managed to scrape together $300mn in ammunition and artillery. Congress is struggling to approve a much larger aid package, so the US Department of Defense cobbled together the money using recent savings from army contracts. Ukraine’s at a critical point in its war with Russia. Most western policymakers are worried that without regular top-ups in funding and military equipment, Kyiv’s forces won’t be able to hold the line against Russian troops.

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Beijing has set an ambitious target to grow the Chinese economy by 5 per cent this year. But at the same time, it has also ordered deep cuts to local infrastructure spending. That could make it a lot harder for the country to reach that growth goal. Joe Leahy is the FT’s Beijing bureau chief, and he joins me now to discuss. Hey, Joe.

Joe Leahy
Hi, Sonja.

Sonja Hutson
Joe, can you give us some more details on what exactly these cuts entail?

Joe Leahy
So Beijing has ordered 12 highly indebted parts of the country to try to reduce spending. We’re looking at sort of inland, less developed parts of the country, areas such as the inland province of Guizhou, which is one of China’s least developed provinces. Last year, they earmarked about two-thirds of their local GDP for fixed asset investment, and they’ve ended up building nearly half of the world’s highest 100 bridges. This is sort of the extreme case, but all of them have been investing far too much, probably. And Beijing wants them to start to wind this back because really, they’re not generating enough revenue to service all of the debt that they’ve been using for this investment.

Sonja Hutson
OK. So Beijing is trying to help these areas get their debt under control. What are some of the drawbacks to that plan?

Joe Leahy
So this could deliver a real hit to consumption, jobs and government spending in these provinces right at a moment when they are actually in a sort of a down cycle in their economies, and they actually need to be spending more on consumption. The risk would be, you know, they slow these provinces down too much, and then people stop consuming in these provinces and then they become a real deadweight on growth this year. The other problem is, as they sort of cut down on investment, they do still have these large government workforces and these people need to be paid. So there’s also all those kinds of concerns around the suppliers to these contracts that are getting suspended. What’s going to happen to them? You know, so there’s all of these knock-on effects that could possibly happen after this goes through.

Sonja Hutson
Yeah. I’m glad you brought up the knock-on effects. I’m wondering, what does this economic pain locally mean for China nationally?

Joe Leahy
I should say, I mean, these areas that we’re talking about, they account for about 18 per cent of China’s overall GDP. So we’re not talking about, you know, all of China by any means here. But in a year when China is trying to hit a fairly ambitious growth target of 5 per cent, and you’re actually putting the brakes on investment in areas that account for one-fifth of the country’s GDP, this could be quite challenging. I mean, this could make it quite sort of delicate, you know, when you’re trying to actually hit this target.

Sonja Hutson
Is there anything the government can do to avoid that and keep the country on track to meet the growth target?

Joe Leahy
China’s going to have to really try to find ways of stimulating other parts of the economy while it’s reducing the investment burden of these areas. And also it needs to pump money into these areas so that they can find other sources of revenue. They still have to pay their public servants. They still have to, you know, keep the public finances afloat. So the central government is really gonna have to essentially subsidise these areas as they go through this adjustment process. And most people believe it won’t be a sort of a one-year process. It’s gonna take a long time for these areas to unwind some of this huge debt that they’ve accumulated, building bridges and highways all over the place.

Sonja Hutson
Joe Leahy is the FT’s Beijing bureau chief. Thanks so much, Joe.

Joe Leahy
Thanks Sonja.

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Sonja Hutson
US inflation unexpectedly ticked up last month to 3.2 per cent. That’s up just slightly from 3.1 per cent in January. Service-related prices, like car insurance and healthcare costs, were largely to blame for that bump. The increase puts a lot of pressure on the Federal Reserve over when to cut interest rates. The US central bank meets next week, and it’s widely expected to keep rates at a 23-year high.

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There’s an unlikely winner from all the tensions between Beijing and Washington these days. It’s Malaysia. The country has been raking in investments in the semiconductor industry, as more companies worldwide are looking to avoid US sanctions on Chinese technology. Here to talk to me about what Malaysia has going for it and what could go wrong is the FT’s Mercedes Ruehl. Hey, Mercedes.

Mercedes Ruehl
Hello, Sonja.

Sonja Hutson
OK, so explain to me the rise of Malaysia as this kind of hotspot for chip manufacturing investment.

Mercedes Ruehl
So companies around the world, they’re looking for a back-up to China’s factory floors to protect themselves from geopolitical disruptions. And the main one, of course, is the broadening US curbs on Chinese technology, which is especially for chipmaking. And one of the lesser-known beneficiaries of this is Malaysia. And that’s because Malaysia has a more than 50-year history in the back end of the semiconductor manufacturing supply chain. So that’s the packaging, assembling and testing of chips.

Sonja Hutson
Yeah. And just how much investment are we talking about here coming into Malaysia recently?

Mercedes Ruehl
So huge, huge investment. One of the staggering figures is that the state of Penang state itself, which is in the northern part of Malaysia, received some RM60bn in foreign direct investment in 2023, which is more than the total it received from 2013 to 2020. So there’s been a real boom recently, particularly from not just American companies, but also Chinese companies. They estimate there are now about 55 mainland companies in Penang operating manufacturing. And that’s mainly in semiconductors.

Sonja Hutson
Wow. OK. So it seems like investment really is booming in Malaysia. What factors could slow that down?

Mercedes Ruehl
Some of them are pretty straightforward. Malaysia has a severe talent shortage. So for instance in electrical and engineering, Malaysia reckons they need about 50,000 graduates per year. They’re producing about 5,000. There’s also been a failure to create a domestic semiconductor champion that can draw in other companies in the way that Taiwan has TSMC or South Korea has Samsung. But probably the bigger, more interesting complication, I guess precisely what is causing this boom for Penang and Malaysia is also a source of uncertainty. There’s this fear that as the US continues to clamp down further on Chinese technology, that it may end up restricting products and equipment built in countries like Malaysia by the flood of new Chinese companies. So Washington has already put pressure on Malaysia for tilting towards Beijing under Prime Minister Anwar Ibrahim.

Sonja Hutson
Got it. So the fear is that the US could expand its restrictions on Chinese technology, and those would hit companies that are now operating and investing in Malaysia. So I’m wondering, to what extent could Malaysia lose ground here in this really crucial global tech sector?

Mercedes Ruehl
When I speak to politicians and when I speak to the industry, I got the sense that while there’s a question mark over how the US might expand their definitions or sanctions, generally given the huge presence of US companies in Malaysia, if you just think you’ve got Intel, you’ve got Micron, you’ve got all of these big names that really rely on Malaysia, doing something like this would probably prove counterproductive. And that’s certainly the hope. I think what they’re more worried about is that a lot of other countries in the region have the same idea. So Vietnam and India, for instance, are building their own semiconductor industries and often with much better state incentives and many more engineers. So Malaysia, while this is a concern, is much more focused on growing its industry. And so that will include welcoming more Chinese companies.

Sonja Hutson
That was Mercedes Ruehl. She’s the FT’s Singapore and south-east Asia correspondent.

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You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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