2022 look ahead: Five predictions for China tech

Nina Xiang is the founder of FutureLogic, a media platform bridging the Asian and global innovation economy. She is the author of “US-China Tech War: What Chinese Tech History Reveals About Future Tech Rivalry.”

On a sunny day in November 2020, as Biden was announced the winner of the U.S. presidential election, a loud cheer pierced the quiet forest trail I was hiking near Washington, D.C.

Commotion filled the air as the news quickly spread among the hikers in and around the woods. The animals must have been perplexed, but probably not as much as U.S.-China tech policy wonks who in the following months would be wondering: How will President Biden change U.S. policy on China technology?

As 2021 draws to a close, there is no question that U.S. policies under President Biden amount to Trump 2.0. Though it was widely expected, it was nevertheless a lost opportunity for positive change from the Biden administration. But what was unexpected during the past year in China tech was how forcefully Chinese regulators would to tamed its tech titan behemoths.

If 2021 was the year when the dust settled and boots dropped for China tech in both its external and internal environment, then next year will be more about how specific policies are carried out. With the underlying tone firmly set, there hopefully will not be any big surprises though that is still possible, nor any major policy shifts.

China’s bruised tech sector will enter a phase of wound-licking when the industry and its individual companies make small tweaks and incremental improvements with the hope of rising again in what amounts to a distant future.

With that backdrop in mind, here are my five predictions for China tech in 2022.

U.S.-China bickering over tech will continue but will not run amok:

We will see the two countries continue fighting over familiar issues in similar fashions as in the past. The U.S. is likely to add more Chinese companies to its Entity List, a roster of companies that have to apply for special licenses to buy U.S. technologies and products, and potentially sever more financial ties relating to alleged Chinese military capability concerns. China could attempt to gain more leverage by tightening its grip on its own tech companies and their massive data stores.

But like a married couple who argue all the time yet manage to keep their union intact, the two tech superpowers both understand their deep interdependence. The giant machine that is China’s tech sector is a part of the U.S.-dominant global semiconductor supply chain, which in turn relies heavily on the Chinese market to finance its massive research and development. Divorce is out of the question.

China will make little progress on its self-reliance efforts:

Despite Beijing’s ambitious goals of achieving varying degrees of self-reliance by 2025 or 2030, this progress will instead take decades. It is unlikely that there will be major breakthroughs next year to alter China’s heavy reliance on foreign tech. Huawei Technologies’ recent action to license its smartphone chip designs to third parties is another indication that the company itself understands this will take years.

 

Huawei’s reportedly self-reliant semiconductor manufacturing plant that is capable of making 28-nanometer chips in Shanghai by the end of next year is facing delays.

Let’s see if Shanghai Micro Electronics Equipment, China’s hope for making its own lithography machine, can produce something that is capable of making 28-nm chips next year, after being reportedly able to reach that milestone for 2020 and 2021. With hundreds of thousands of components included in a single lithography machine, any delay affecting one part will result in delays for the whole project. A network is only as strong as its weakest link.

Beijing could further tighten tech regulation:

With the implementation of two major new laws this year – China’s data security law and the personal information protection law – there will likely be strong enforcement actions next year. Chinese regulators will also continue prosecuting tech companies that violate antimonopoly and anti-competition rules.

Beijing will also add more hardware to its toolbox, with new regulations on internet advertising and algorithm recommendation systems potentially arriving next year. China’s tech sector will endure more damage in 2022 on the regulation front, but it will also be the moment when the industry can hit targets for compliance and therefore begin to recover from Beijing’s regulatory blows.

U.S.-China tech decoupling inches deeper:

Despite the fact that U.S.-China interdependence is bone-deep – the two countries’ bilateral trade increased healthily this year and cross-holdings of financial assets remain in the trillions of dollars — there are cracks in select areas that could hasten decoupling.

China’s government and state-owned enterprises will likely procure more domestic-made computers and software. This preference for domestic products will extend to other sectors, such as medical equipment. Chinese tech companies could become more disconnected from the U.S. financial market, as both venture capital investment and IPOs will likely look inward.

Ultimately, it is time to seriously consider the negative impact of social and cultural decoupling. As China’s COVID-induced travel ban enters its third year, the lack of people-to-people interactions from the grassroots to the top leadership level could push the two sides toward deeper suspicion and preempt any opportunity for improving relations.

Damage to China tech’s innovation machine will emerge:

Beijing’s stated policies such as “common prosperity” are essentially asking entrepreneurs, venture capitalists and business owners to become politicians. This has not been tried before and its chance of success is dubious. In addition, this opens up avenues for potential corruption and conflicts of interest.

If entrepreneurs and investors only focus on sectors encouraged by the government, it will start to sap the overall vitality of China tech’s innovation machine. Innovation does not do well when chained inside a cage.

To sum up, the next year will see the beginning of a new era of China Tech 3.0. The internet boom in the 1990s and early 2000s and the ensuing mobile internet and artificial intelligence boom represented a kind of gold rush, with all the alluvial gold already picked up. Going forward, we can expect muted growth and greater operational hardship.

Author: Nina Xiang, NIKKEI Asia