Xi urges open supply chains after curbing key exports to correct West

Chinese leader Xi Jinping called on nations to spurn decoupling and the cutting of supply chains, evidently in a carrot and stick approach, as a day earlier his government had imposed limits on exports of two key metals used to make chips to counter Western restrictions on Beijing.

The world's No. 2 economy wants to work with nations to "reject the moves of setting up barriers, decoupling and severing supply chains," Xi said in a virtual speech to Shanghai Cooperation Organization leaders.

"We should make the pie of win-win cooperation bigger, and ensure that more development gains will be shared more fairly by people across the world," he said, according to a text of the comments released late Tuesday by the official Xinhua News Agency.

The remarks contrast with a decision by Xi's government on Monday to subject gallium and germanium, along with their chemical compounds, to export controls. China's Ministry of Commerce said the move was meant to protect national security.

However, a source at a major western chip maker, who spoke on condition of anonymity, said China's gallium move seems more like a "message that they can hit back rather than intending a real punch".

Describing the controls as a "well-thought-out heavy punch" and "just a start," Chinese trade policy adviser Wei Jianguo said, "if restrictions targeting China's high-technology sector continue then countermeasures will escalate." 

Wei was the vice commerce minister during 2003-2008 and now serves as the vice chairman of China Center for International Economic Exchanges, a state-backed think tank.

He told state-run China Daily that he expected the controls to exert heavy pain on some countries. China's move coming just before US Treasury Secretary Janet Yellen visits Beijing and on the eve of US Independence Day has been clearly timed to send a message to the Biden administration, which has been targeting China's chip sector and pushing allies such as Japan and the Netherlands to follow suit.

However, while they could inflict heavy pains on Westerners in the short-to-medium term, China's potential export controls may also accelerate efforts by countries to reduce dependence on the world's second-biggest economy.

Democratic Republic of Congo state miner Gecamines has already said its new plant opening in September could help fill the gap in germanium production created by China's ban.

The US has taken increasingly aggressive measures to rein in China's technology ambitions, largely to limit military advances, and has worked to convince allies in Europe and Asia to do the same.

The US is now preparing to curtail Chinese companies' access to cloud-computing services including those provided by Amazon.com Inc and Microsoft Corp, the Wall Street Journal reported, citing people familiar with the situation.

Washington is considering requiring cloud providers to seek government permission before serving Chinese firms that employ such platforms to train AI models, the Journal reported. 

Beijing has previously complained about nations decoupling or de-risking from China. Last week, Premier Li Qiang warned that governments which attempt to politicise their economies will only fragment the world.

"The invisible barriers put up by some people in recent years are becoming widespread and pushing the world into fragmentation and even confrontation," he said.

In a sign of the broad push China is making to counter any de-risking push, Minister of Commerce Wang Wentao told former Japanese Foreign Minister Yohei Kono in Beijing on Tuesday that the two nations should work to ensure supply chains remain stable.

China containment to be costly

As such, efforts to contain China's technological rise through export controls, even if successful to some extent, remain a costly strategy for the West and its East Asian allies. 

Analysts have described Monday's export restriction as China's second – and bigger – countermeasure in the long-running US-China tech fight, coming after it banned some key domestic industries from purchasing from US memory chipmaker Micron in May.

China's move has raised concerns that restrictions on rare earth exports could follow, with analysts pointing to a curb on shipments imposed 12 years ago in a dispute with Japan.

China is the world's biggest producer of rare earths, a group of metals used in EVs and military equipment.

Others have warned in the past that if China really wanted to hit global automakers where it hurts it could, for example, control exports of graphite.

China produces 61% of global natural graphite and 98% of the final processed material to make EV battery anodes, according to Benchmark Mineral Intelligence.

The Global Times state media tabloid, in a separate editorial said the control was a "practical way" of telling the United States and its allies that their efforts to stop China procuring more advanced technology was a "miscalculation".

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.