Peru’s elite in panic at prospect of hard-left victory in presidential election

Free Peru candidate Pedro Castillo has inspired the poor but his campaign has led to capital flight

Michael Stott in Lima

He has been firing up audiences with a simple message: ‘No more poor people in a rich country’ © Bloomberg

Ravaged by one of the world’s worst coronavirus outbreaks, wracked by political turmoil, scarred by corruption scandals and blighted by worsening poverty, Peru will choose its fourth president in under a year on June 6.

Described by many observers as a choice between the lesser of two evils, the second-round run-off election pits Pedro Castillo, a rural primary school teacher turned hard-left populist, against Keiko Fujimori, the widely disliked scion of an authoritarian president who ruled in the 1990s.

Panic has seized the Peruvian elite at the prospect of a win by Castillo, whose political party Free Peru is led by a Marxist advocating widespread nationalisation, higher taxes, a new “people’s constitution” and import substitution policies in the world’s number two copper producer.

“Would you like to live in Cuba or Venezuela?” ask electronic billboards along a main highway in Lima, in a reference to Castillo. 

The sol fell to a historic low of 3.85 to the dollar last Wednesday as wealthier Peruvians rushed to dump the national currency and move their savings abroad.

“I have not seen capital flight this bad here in two decades,” one leading business figure told the Financial Times.

The roots of Peru’s deep crisis go back years. 

Hailed as a success story by investors, not enough of its economic growth trickled down to the poor. 

Successive corruption scandals destroyed faith in the political and business classes and created chronic instability, which led to Peru having three presidents in just over a week last year. 

When coronavirus hit, the health service collapsed amid a shortage of beds and medical oxygen.

An FT analysis of excess death data shows that Peru has been by far the world’s worst-affected country, suffering more than double its normal death rate during the pandemic.

A strict lockdown last year plunged the economy into a deep recession but failed to curb the spread of the virus, fuelling indignation. 

Almost a third of Peruvians now live in poverty, according to official figures, an increase of 10 percentage points since the start of the pandemic.

Now, Peru’s downtrodden millions see in Castillo a ray of hope. 

Sporting a trademark white Stetson hat and waving a large inflatable yellow pencil symbolising education, “El Profe” has been firing up audiences across left-behind areas of Peru with a simple but powerful message: “No more poor people in a rich country.”

At a recent campaign event in Villa El Salvador, one of the teeming suburbs of modest cinder block homes that sprang up around Lima in recent decades, Castillo strode the stage denouncing the country’s rulers.

“The traditional political class are filling their pockets with the wealth of this beautiful land,” he bellowed. 

“Peru is an enormously rich country and its people are eating sand . . . We will give this country back to the people”.

Local residents cheered him on, waving flags and chanting in chorus, “Urgente, urgente, Pedro presidente”.

“It’s time to change everything around here,” said María Fernanda García, as she hawked snacks nearby. 

“We’ve had enough”.

The task of trying to stop Castillo has fallen to Fujimori, a conservative who was the runner-up in a chaotic first-round election with 18 candidates, none of whom proved popular. 

Castillo won with 18.9 per cent and Fujimori’s tally of 13.4 per cent was smaller than the number of blank and spoiled ballots.

Polling data showed that Fujimori had among the highest rejection rates of the first-round candidates. 

She was forced to abandon campaigning in the historic city of Cusco last week after being pelted with plastic bottles and rubbish by a hostile crowd.

Already tarnished by corruption allegations, her unpopularity is amplified by a record as a confrontational leader in a previous parliament and from past conflicts with her family.

Nonetheless, “the panic of the business class is such that they are endorsing Keiko without any conditions whatsoever”, a former government minister told the FT. 

“They are trying to justify the unjustifiable to get her elected.”

The latest opinion polls show a tight contest, with a wide early Castillo lead narrowing significantly but they failed to forecast Peru’s first round accurately and few people are making bets on the outcome.

Local journalists complain of heavy pressure from media owners to demonise Castillo and play up the idea that he represents a Marxist menace, something the candidate’s supporters say is untrue.

“Castillo’s is not the Cuban or Venezuelan model,” said Pedro Francke, a university economics professor who is advising him. 

“He is much more in the image of [former Bolivian president] Evo Morales.”

Assessment of what a Castillo government might be like is complicated by the candidate’s aversion to interviews and uncertainty over the role of Vladimir Cerrón, the Marxist leader of Castillo’s party. 

A former regional governor under investigation for corruption, Cerrón has been a shadowy figure throughout the campaign.

Optimists believe Castillo might soften his line in government, citing the example of Ollanta Humala, a leftist who governed more moderately when in power from 2011 to 2016. 

But in the campaign’s final stages “Castillo is not giving any signal of moderation”, said José Carlos Saavedra, chief economist at Apoyo, a consultancy. “On the contrary, he has radicalised.”

As the election draws near, Peru’s professional classes express the sinking feeling that neither candidate is remotely suited to tackling the country’s huge challenges.

“It’s a contest between failures,” lamented Alberto Vergara, a political analyst. 

“The one who fails the least will be the winner.”

The rise of e-money

The digital currencies that matter

Get ready for Fedcoin and the e-euro

Technological change is upending finance. 

Bitcoin has gone from being an obsession of anarchists to a $1trn asset class that many fund managers insist belongs in any balanced portfolio. 

Swarms of digital day-traders have become a force on Wall Street. 

PayPal has 392m users, a sign that America is catching up with China’s digital-payments giants. 

Yet, as our special report explains, the least noticed disruption on the frontier between technology and finance may end up as the most revolutionary: the creation of government digital currencies, which typically aim to let people deposit funds directly with a central bank, bypassing conventional lenders.

These “govcoins” are a new incarnation of money. 

They promise to make finance work better but also to shift power from individuals to the state, alter geopolitics and change how capital is allocated. 

They are to be treated with optimism, and humility.

A decade or so ago, amid the wreckage of Lehman Brothers, Paul Volcker, a former head of the Federal Reserve, grumbled that banking’s last useful innovation was the atm. 

Since the crisis, the industry has raised its game. 

Banks have modernised their creaking it systems. 

Entrepreneurs have built an experimental world of “decentralised finance”, of which bitcoin is the most famous part and which contains a riot of tokens, databases and conduits that interact to varying degrees with traditional finance. 

Meanwhile, financial “platform” firms now have over 3bn customers who use e-wallets and payments apps. 

Alongside PayPal are other specialists such as Ant Group, Grab and Mercado Pago, established firms such as Visa, and Silicon Valley wannabes such as Facebook.

Government or central-bank digital currencies are the next step but they come with a twist, because they would centralise power in the state rather than spread it through networks or give it to private monopolies. 

The idea behind them is simple. 

Instead of holding an account with a retail bank, you would do so direct with a central bank through an interface resembling apps such as Alipay or Venmo. 

Rather than writing cheques or paying online with a card, you could use the central bank’s cheap plumbing. 

And your money would be guaranteed by the full faith of the state, not a fallible bank. 

Want to buy a pizza or help a broke sibling? 

No need to deal with Citigroup’s call centre or pay Mastercard’s fees: the Bank of England and the Fed are at your service.

This metamorphosis of central banks from the aristocrats of finance to its labourers sounds far-fetched, but it is under way. 

Over 50 monetary authorities, representing the bulk of global gdp, are exploring digital currencies. 

The Bahamas has issued digital money. 

China has rolled out its e-yuan pilot to over 500,000 people. 

The eu wants a virtual euro by 2025, Britain has launched a task-force, and America, the world’s financial hegemon, is building a hypothetical e-dollar.

One motivation for governments and central banks is a fear of losing control. 

Today central banks harness the banking system to amplify monetary policy. 

If payments, deposits and loans migrate from banks into privately run digital realms, central banks will struggle to manage the economic cycle and inject funds into the system during a crisis. 

Unsupervised private networks could become a Wild West of fraud and privacy abuses.

The other motivation is the promise of a better financial system. 

Ideally money provides a reliable store of value, a stable unit of account and an efficient means of payment. 

Today’s money gets mixed marks. 

Uninsured depositors can suffer if banks fail, bitcoin is not widely accepted and credit cards are expensive. 

Government e-currencies would score highly, since they are state-guaranteed and use a cheap, central payments hub.

As a result, govcoins could cut the operating expenses of the global financial industry, which amount to over $350 a year for every person on Earth. 

That could make finance accessible for the 1.7bn people who lack bank accounts. 

Government digital currencies could also expand governments’ toolkits by letting them make instant payments to citizens and cut interest rates below zero. 

For ordinary users, the appeal of a free, safe, instant, universal means of payment is obvious.

It is this appeal, though, that creates dangers. 

Unconstrained, govcoins could fast become a dominant force in finance, particularly if network effects made it hard for people to opt out. 

They could destabilise banks, because if most people and firms stashed their cash at the central banks, lenders would have to find other sources of funding with which to back their loans.

If retail banks were sucked dry of funding, someone else would have to do the lending that fuels business creation. 

This raises the queasy prospect of bureaucrats influencing credit allocation. 

In a crisis, a digital stampede of savers to the central bank could cause bank runs.

Once ascendant, govcoins could become panopticons for the state to control citizens: think of instant e-fines for bad behaviour. 

They could alter geopolitics, too, by providing a conduit for cross-border payments and alternatives to the dollar, the world’s reserve currency and a linchpin of American influence. 

The greenback’s reign is based partly on America’s open capital markets and property rights, which China cannot rival. 

But it also relies on old payments systems, invoicing conventions and inertia—making it ripe for disruption. 

Small countries fear that, instead of using local money, people might switch to foreign e-currencies, causing chaos at home.

New money, new problems

Such a vast spectrum of opportunities and dangers is daunting. 

It is revealing that China’s autocrats, who value control above all else, are limiting the size of the e-yuan and clamping down on private platforms such as Ant. 

Open societies should also proceed cautiously by, say, capping digital-currency accounts.

Governments and financial firms need to prepare for a long-term shift in how money works, as momentous as the leap to metallic coins or payment cards. 

That means beefing up privacy laws, reforming how central banks are run and preparing retail banks for a more peripheral role. 

State digital currencies are the next great experiment in finance, and they promise to be a lot more consequential than the humble atm.


US-China tech war: Beijing's secret chipmaking champions

How Washington's sanctions boosted China's semiconductor sector

CHENG TING-FANG and LAULY LI, Nikkei staff writers

TAIPEI -- Once a month, senior executives of Yangtze Memory Technologies Co. fly to Beijing for a flurry of meetings with China's top economic management bodies. 

They focus on the company's efforts to build some of the world's most advanced computer memory chips -- and its progress on weaning itself off American technology.

Based in the central riverside city of Wuhan, Yangtze Memory is considered at the vanguard of the country's efforts to create a domestic semiconductor industry, already mass-producing state-of-the-art 64-layer and 128-layer NAND flash memory chips, used in most electronics from smartphones to servers to connected cars.

These marvels of nanoengineering stack tiny memory cells in ever-greater densities, rivaling industry leaders such as U.S.-based Micron Technology and South Korea's Samsung Electronics.

That would be hard enough for a company that only opened its doors in 2016. 

But added to the challenge is the ambitious, state-directed aim of weeding out the company's American suppliers, along with those reliant on U.S. technology.

The equipment used to manufacture high-end computer chips is virtually an American global monopoly. 

Eighty percent of the market in some chipmaking and design processes such as etching, ion implantation, electrochemical deposition, wafer inspection and design software is in the hands of U.S. companies.

It is a frustrating area of dependence for China, which imported $350 billion worth of semiconductors last year, according to the China Semiconductor Industry Association.

Removing this source of U.S. leverage over its economy became a national priority two years ago, when Washington put sanctions on China's biggest telecommunications equipment maker, Huawei Technologies, amid spying allegations that the Chinese company has constantly denied.

"Skyscraper": The 32-layer 3D NAND flash chip developed by Yangtze Memory Technologies Co.   © AP

This was followed by sanctions on several other major Chinese technology companies, from its top contract chipmaker, Semiconductor Manufacturing International Co., to Hikvision, the world's biggest surveillance camera maker. 

Over a hundred companies in total have been placed on a trade blacklist prohibiting most U.S. technology to be sold to them without a license. 

That has spurred an aggressive effort by Beijing to identify and replace risky parts and suppliers.

The result has been an unprecedented flourishing of chip-related companies within China. 

Dozens of Chinese companies, with specializations mirroring U.S. incumbents in key areas from ion implantation to etching, have sprung into prominence over the past few years, accelerating as the state realizes the enormity of the self-sufficiency project.

"The clock is ticking because they still know that the U.S. could hit the local industry hard," said Roger Sheng, a chip analyst at consultancy Gartner. 

"New chip competition is evolving as all the major economies, not just China, now recognize the importance of semiconductors."

Plan B

So far, Yangtze Memory, also known as YMTC, has remained under the radar of the U.S. government. 

But the company is taking no chances. 

With the guidance of Beijing, it has launched a massive review of its supply chain in an effort to find local suppliers -- or, at least, non-U.S. ones -- to replace the current dependence on American technology.

The collective effort has occupied over 800 people, full time, and including staff from its multiple local suppliers, for two years. 

And they have not finished yet.

YMTC is seeking to learn as much as it can about the origin of everything that goes into its products, from production equipment and chemicals to the tiny lenses, screws, nuts and bearings in chipmaking machinery and production lines, multiple sources familiar with the matter said. 

The audit extends not only to YMTC's own production lines, but also to suppliers, suppliers' suppliers, and so on.

"The review is as meticulous as knowing where the screws and nuts are coming from, the lead time, and if those parts have alternatives," one person familiar with the matter told Nikkei Asia.

Yangtze Memory Technologies Co. plant in Wuhan. (Photo by Yusho Cho)

Each supplier is assigned a score for geopolitical risk, identified in many pages of documents detailing the components they use in its machines. 

YMTC has sent engineers to audit local equipment suppliers' production sites to verify that the origins of parts have been truthfully reported, one of the people told Nikkei.

American-made parts are scored highest for risk, followed by parts bought from Japan, Europe and those made locally, the person said. 

Meanwhile, suppliers are asked to provide corrective action reports to explain how they can together diversify procurement and find alternatives.

"Previously, when China talked about self-sufficiency, they were thinking about starting to cultivate some viable chip developers that could compete with foreign chipmakers," a chip industry executive told Nikkei. 

"However, they did not expect that they would need to do all that, starting from fundamentals.

"It's like when you want to drink milk -- but you not only need to own a whole farm, and learn how to breed dairy cows, and you have to build barns, fences, as well as grow hay, all by yourselves."

The purge of YMTC's supply chain has been handled with the spirit of a national emergency. 

Based in the city of Wuhan, the effort did not pause even when the virus epicenter was ravaged by COVID-19 last spring.

While the rest of the city endured a brutal quarantine, high-speed trains remained in service to ferry YMTC employees to its $24 billion 3D NAND flash memory plant that began producing chips in 2019. 

All the while, delivery trucks for critical chipmaking materials drove to and from the production campus.

After Wuhan reopened last April, YMTC mobilized hundreds of engineers, including many from little-known emerging local semiconductor equipment suppliers. 

They were stationed inside the production campus, laboring for three shifts a day with the aim of overhauling all of its production processes and replacing as many foreign tools as possible, sources said.

"Senior management is raising targets of using locally built chip production machines almost every month, and they hope we could at least know what kind of alternatives we have and have a Plan B of the production line that will be free from U.S. control," one of the people told Nikkei.

YMTC declined multiple requests by Nikkei to interview the company about its supply chain reviews, progress and capacity expansion plans, as well as its localization efforts.

'Secure and controllable'

This effort to localize production has been the opportunity of a lifetime for a new generation of Chinese chip champions like YMTC and their suppliers, whose fortunes have risen sharply following the start of the U.S.-China trade war.

While the threat of sanctions hangs over them, so too does the largesse of state aid -- subsidies and investment from local governments and the private sector have amounted to at least $170 billion since 2014, according to the state-backed China Securities Journal. 

There are also guaranteed orders with other Chinese chipmakers and domestic tech giants like Xiaomi, Oppo, Vivo and Lenovo.

"It's not like it has been written down on a public posting or an official announcement," another Chinese chip executive told Nikkei, "but everyone in the industry now has a mutual understanding that if anyone is building a new chip plant or expanding a semiconductor manufacturing line, at least 30% of production tools must be from local vendors."

Every U.S. market leader in the computer chip industry now has a Chinese doppelganger that is being positioned to take its place as a vendor to the Chinese chip industry. 

YMTC, for example, is strikingly similar in its approach and strategy to Boise, Idaho-based Micron, while Beijing-based Naura Technology Group represents China's hope to later challenge Applied Materials, which is headquartered in Santa Clara, California, and makes a wide range of chip production equipment.

Shanghai's Advanced Micro-Fabrication Equipment (AMEC) is China's version of Lam Research of the U.S., renowned for building essential etching machines. 

Tianjin-based Hwatsing Technology produces cutting-edge chemical-mechanical planarization equipment and is set to break Applied Materials' monopoly on the technology.

See the full graphic at the end of this article for more of China's upcoming chipmakers.

These and dozens of other state and private companies have become the focus of an industrial policy known by the slogan "secure and controllable," which has found its way onto posters and into speeches, backed up by immense state investment and guaranteed contracts.

"We have to strengthen self-innovation and to make breakthroughs in some core technologies as soon as possible," Chinese President Xi Jinping told a group of economic and social experts in remarks published in January.

YMTC, for one, is followed closely by China's leadership, supervised by officials in the State Council -- the country's top administrative authority -- as well as the China Integrated Circuit Industry Investment Fund, the nation's premium seed fund for the semiconductor industry, which also owns a 24% stake, two people with direct knowledge told Nikkei.

"We are not sure how fast and how well they could build their own independent semiconductor industry, but certainly they will try," said Chad Bown, a senior fellow with Peterson Institute for International Economics.

'The whole country is rooting for this.'

In fact, the U.S. trade war and Huawei sanctions have arguably given China's government the necessary cover for something it has long desired. 

Since the revelations by Edward Snowden in 2013 that detailed the participation of American tech companies in U.S. government surveillance, Beijing has seen dependence on American technology as a national security threat.

But grand plans to end this dependency have been made in the past, and, despite massive injections of state investment, progress has been slow. 

For example, when China's State Council set out its "Made in China 2025" industrial policy in 2015, aimed at promoting China's high-tech exports, it set a goal of 70% self-sufficiency in semiconductors by 2025.

But the industry has so far fallen short of this goal, according to U.S.-based research firm IC Insights. 

In 2020, China-based chip production accounted for only 15.9% of the domestic market, the firm estimated in January, predicting it would reach only 19.4% in 2025. 

Of the 2020 total, China-headquartered companies accounted for only 5.9% of domestic sales, while foreign companies headquartered in China accounted for the rest of the China-based sales.

Under threat: surveillance cameras near the headquarters of Chinese video surveillance firm Hikvision in Hangzhou.   © Reuters

However, the U.S. sanctions may have removed the main domestic obstacle to the goal of China's chip self-sufficiency effort, which is the lack of cooperation by China's own local buyers. 

They have always preferred buying from tried-and-tested foreign vendors rather than inexperienced local companies. But that, crucially, has now changed.

"Previously, domestic chip manufacturers only used leading production equipment that all the other top global chipmakers like Samsung and Intel also use in their production lines," another manager with a China-based chipmaker told Nikkei, preferring not to be named. 

"Who would bother to use and try these local-made machines that could possibly affect production quality?"

As the threat of sanctions hits close to home, however, these same producers are increasingly exploring domestic-made alternatives to the top-end U.S.-made technology, the manager said. 

"That also means these local players finally have a chance to practice and really upgrade their products in an atmosphere that the whole country is rooting for this," he said.

Sheng of Gartner told Nikkei that U.S.-China tensions have consolidated industry opinion around the necessity to localize production. 

"It's the whole country's consensus now that building a viable semiconductor industry and boosting self-reliance is the top priority. ... The top policymakers know, company executives know and even local people know," said Sheng.

For Chinese chipmaking tool and material makers -- mostly little known, with limited presence in the industry -- the trade disputes serve as the once-in-a-lifetime opportunity to grow business, a chip executive with Kingstone Semiconductor Joint Stock Co., a local ion implanter maker, told Nikkei.

"Not only is our production capacity fully booked for 2021 and needs to expand ... but also many of our peers' capacities are fully reserved," the executive said.

Other domestic champions have done similarly well. Naura Technology Group, China's largest chip equipment maker, generated a record profit in 2020, up more than 73% from a year earlier. 

Meanwhile, despite being added to the U.S. trade blacklist in late 2020, the earnings for AMEC, the etching machines maker, hit a record high last year.

Previously a third choice at best, Hwatsing Technology's chemical-mechanical planarization equipment has already been widely adopted by Chinese chipmakers like SMIC, Hua Hong Semiconductor Group and YMTC, according to the prospectus it released late last year as it filed an application to list on Shanghai STAR stock market, China's version of the Nasdaq.

Shanghai Micro Electronics Equipment, under majority control by the Shanghai government, has been cemented as a key local player that China's government hopes to one day compete against global chip lithography machine builders of ASML, Nikon and Canon, several people with knowledge told Nikkei.

Employees of ASML working on the final assembly of semiconductor lithography tools in Veldhoven, Netherlands.   © Reuters

For now, China's global market share in the advanced chip fabrication equipment sector is 2% at most. 

Bernstein Research estimated, while its self-sufficiency rate is about 10% -- a very low figure, but one that suggests massive room for future growth.

Crashing the market?

This new push by China has already begun to make waves in the global semiconductor industry, threatening to disrupt the delicate equilibrium between supply and demand. 

A global chip shortage has swept many industries partly due to "panic buying" by Chinese companies, spooked by the risk of U.S. sanctions, said Eric Xu, the current rotating chairman of Huawei, in remarks last month.

One example is that YMTC and other domestic chip companies, such as China's top contract chipmaker, Semiconductor Manufacturing International Co., have begun to stockpile "at-risk" parts in a jointly owned warehouse that just went into operation this year, sources told Nikkei Asia.

At the same time as they brace for shortages, however, the global chip industry is simultaneously making preparations for a massive glut of chips as Chinese companies like YMTC hit their stride.

The Wuhan-based national champion, for example, plans to double its monthly output of memory chips to 100,000 wafers by the second half of 2021, giving it 7% of the global NAND flash memory market measured in wafers, two people with knowledge of the matter told Nikkei.

Measured in gigabit equivalent terms, Taipei-based consultancy Trendforce predicted YMTC would take 3.8% of the global market share in NAND flash memory for 2021 and likely grow its share to 6.7% in 2022 -- a precipitous climb, considering it was close to zero two years ago. 

Samsung, the leader, has a 34% share.

"We expect YMTC will start to affect the overall NAND flash market price by next year and the market may also face some oversupply issues," said Avril Wu, an analyst with Trendforce.

Yangtze's CEO Simon Yang has tried to allay fears of a massive glut of chips. 

"We want to tell everyone that we are not here to crash the market, and we hope that the industry could be sustainable and healthy," he told a business forum in 2018, when the company started producing 64-layer NAND flash memory chips.

Anticipating just such an oversupply, however, Intel -- the world's biggest microprocessor maker and sixth-largest NAND flash maker -- sold its Dalian-based NAND flash memory plant to SK Hynix last year, bowing out in the face of future competition.

The vertiginous rise of YMTC has shown just what China is capable of in the chip industry. 

It started operations in 2016 and within four years was mass producing some of the most advanced 3D NAND flash memory chips in the world. 

Memory chips used to be flat wafers with one layer of memory cells, but recently "3D stacking" chips have become the cutting-edge standard for almost all electronics from computers and smartphones to servers and connected cars, with memory cells layered on top of each other in ever-higher stacks.

In 2017, chipmaker Western Digital introduced the "skyscraper," a 64-layer chip, while Micron last year announced the 176-layer chip, the proportions of which it compared to the Burj Khalifa in Dubai.

YMTC has been mass-producing 64-layer chips for two years and has just started mass-producing 128-layer chips at its NAND flash memory factory in Wuhan. 

It is said to be in the process of developing a 192-layer chip that one industry analyst referred to as the "Himalaya." 

The company declined to comment.

'Neck-choking' technology

In reality, though, the massive growth scenarios for YMTC and the rest of China's semiconductor industry remain predicated on continued access to Western chips and other key equipment. 

For all the patriotism and rhetoric around self-sufficiency, few believe 100% "de-Americanization" is a genuinely realistic goal in the near future.

"If Yangtze Memory could continue to buy from U.S. suppliers, they will definitely do that," Mark Li, a veteran chip analyst with Bernstein Research, told Nikkei. 

"We all know that it's an irreversible trend that China is keen to have their own version of everything," Li said. 

"However, in reality, it will take a lot of time and great execution and we don't expect to see them cut significantly from the amount of chipmaking equipment procurement from the U.S. very soon."

YMTC's own supply chain audit, for example, found that many vital processes were not immediately replaceable with domestic vendors: high-end lenses, precision bearings, quality vacuum chambers, and motors, radio frequency components and programmable chips all still come from foreign manufacturers in the U.S., Japan and Europe, people briefed on the matter told Nikkei.

Meanwhile, the entire industry is still reliant on foreign equipment for lithography, ion implantation, etching, and chemical and physical vapor deposition and chemical-mechanical planarization -- all indispensable in manufacturing chips, experts say.

The Chinese government refers to such technologies as "neck-choking," referring to potential points of U.S. pressure. 

To build advanced semiconductors, there is presently no way around the leading American players. 

Applied Materials, for example, leads the world in chip production technology such as ion implantation, physical and chemical vapor deposition, and chemical-mechanical polishing; Lam Research makes etching, chemical vapor deposition and wafer-cleaning equipment.

California-based KLA and Boston-based Teradyne specialize in providing testing and measuring equipment for defect analysis and failure inspection. 

Aside from tools, materials suppliers Dow, DuPont and 3M and other U.S. companies also dominate the supplies of special chemical formulas used in advanced chip production.

They collectively control the global market share of more than 80% in equipment and materials for some vital steps in building advanced semiconductors, said Li of Bernstein. 

In some specialized segments like electrochemical deposition and gate stack tools, the U.S. share could be nearly 100%.

Another key vulnerability in China's ecosystem was exposed when Huawei's chip designing arm HiSilicon -- China's No. 1 chip developer -- lost access to technical support and software updates for electronic design automation tools due to sanctions. 

That restricted the software used by HiSilicon to lay out blueprints for integrated circuits as well as printed circuit boards and other electronic systems. 

These tools are 90%-dominated by U.S. companies such as Synopsys, Cadence Design Systems, Ansys and Siemens EDA (which, before its acquisition, was known as Mentor Graphics and is still located in America).

On China's part, it has been gearing up to cultivate its own players by luring many talented former employees of Synopsys and Cadence. 

But Chinese efforts remain far short of the required standard.

Huawei displays its Ascend 910 AI chip at the World Artificial Intelligence Conference in Shanghai, Aug. 2019.    © AP

"We have gained some business because of China's de-Americanization campaign," a manager of Empyrean Technology, China's biggest local chip design toolmaker, told Nikkei. 

"However, asking us to fully replace Synopsys and Cadence is like coming to carmakers and asking to build rockets."

In some crucial areas, such as the field-programmable gate array -- a type of programmable semiconductor component essential for satellites and advanced jet fighters -- the market leaders are Xilinx or Intel's Altera, while for China, this space is largely still blank. 

In central processing units, the U.S. maintains a tight grip, with leaders including Intel and Advanced Micro Devices that dominate more than 90% of the global market.

This virtual monopoly on chip design and chipmaking equipment sectors has given the U.S. vast powers to control the flow of technology to China, even from non-U.S. companies. 

Industry leaders like Samsung Electronics, Taiwan Semiconductor Manufacturing Co., Infineon Technologies, SK Hynix and Sony, all still use massive amounts of American technologies on their production lines and in their development processes, giving Washington a veto over their product sales.

"Once the U.S. names anyone on a trade blacklist, most of the Asian suppliers will see it as a serious warning, and even if legally they could continue to ship to the blacklisted entities, they will self-censor to stop shipping due to political pressure, or consider stopping," a chip industry legal director told Nikkei.

"No one wants to openly and publicly violate Washington's will. ... That could be dangerous, and your own company could become a target too."

Europe's biggest chipmaking tool maker, ASML of the Netherlands, is the exclusive supplier of extreme ultraviolet (EUV) lithography machines -- the world's most costly but top-notch tool essential to producing the world's most advanced chips, including Apple's latest iPhone core processors.

ASML has a production plant in the U.S., and around one-fifth of the components that ASML needs to build its machines are also made at its U.S. plant in Connecticut, Nikkei has learned. The Netherlands has halted shipments of China's first orders of the EUV machine amid U.S. pressure since 2019, Nikkei Asia first reported in November of that year.

For Chinese companies, therefore, localization efforts must be carried out quietly. By far the most preferred course of action is not to fall into Washington's crosshairs.

"We have to recognize and realize that we are still far lagging behind instead of thinking that we could quickly rock the world. ... The best way, under the geopolitical climate, is to keep our head low and do our work and grow silently," said a chip executive with ChangXin Memory Technologies, another of China's key memory chipmakers, based in Hefei, Anhui Province.

All while it pursues "Plan B" of self-sufficiency, YMTC still sees it as extremely unrealistic to strip all foreign equipment from its production site.

It still hopes to maintain good relationships with American, Japanese and European suppliers, according to people familiar with the company's thinking. 

In parallel to its localization efforts, YMTC keeps building production lines that use American equipment and parts to facilitate its expansion.

"It's really an irreversible trend that China wants to switch to local suppliers," said Li of Bernstein, "but in reality and in real practices, there are still hurdles and could still take a lot of time. 

If they want to grow faster and quickly gain more business, it's more practical that they still use the tools and equipment that all of the foreign market leaders also use."

In an effort to fend off future sanctions, meanwhile, the Chinese company has also boosted its legal compliance team since 2019, citing the "highly challenging, complex and changing environment in the chip industry" -- a step aimed at giving the U.S. no excuses to make it a target.

Martijn Rasser, a senior fellow of the technology and national security program at Center for a New American Security, told Nikkei: "China's goal of total self-sufficiency in semiconductors is unrealistic. 

It is unaffordable to create a China-only supply chain, and there will almost certainly be some reliance on foreign technology and expertise. 

What it can do is build a globally competitive industry, and that is something that U.S. policymakers are eyeing closely."

Decoupling do's and don'ts

Despite China's considerable efforts, few experts believe that its chip sector will ever be genuinely free of U.S. parts. However, most also believe that the doomsday scenario -- a complete blockade of China's tech and semiconductor industries -- is not realistic, either.

The world's two largest economies are still interconnected, and they are also the two biggest semiconductor markets: China accounts for at least 25% of the sales of most U.S. chip companies, according to a January report by the Brookings Institution, and few want to see that market disappear.

Bown of the Peterson Institute, said U.S. President Joe Biden administration's approach on China is not yet clear. On the one hand, the U.S. expects China to buy more chips as promised in recent trade talks but has also continued restricting its use of American technologies.

"It's likely that we are looking at more precisely confined export controls at some areas such as military uses and areas that are really linked to national security," Bown said. "After all, it's a trade-off. China is a massive consumer market, and if you restrict a lot of semiconductor shipment, many U.S. companies will be hurt too."

"Neck choking" technology: U.S. President Joe Biden holds a chip prior to signing an executive order aimed at addressing a global semiconductor shortage in Feb. 2021.   © Reuters

So far, the Biden administration has not yet softened on China's technological advancement. 

A total of 162 Chinese entities had been sanctioned by the Trump administration since 2018, while in April, the U.S. Commerce Department added a further seven Chinese supercomputer makers to the so-called Entity List to restrict their use of American technologies, citing alleged links with the Chinese military.

On April 12, the White House hosted a virtual CEO summit on semiconductor and supply chain resilience, which included the world's top three chip producers -- Intel, Samsung and TSMC -- as well as multiple executives from carmakers, including Ford Motor and General Motors, to discuss how to maintain U.S. leadership in the global semiconductor industry.

The Chinese Communist Party "aggressively plans to reorient and dominate the semiconductor supply chain," Biden said in opening remarks of the virtual CEO summit, quoting a bipartisan letter from 23 senators. "China and the rest of the world is not waiting, and there's no reason why Americans should wait," he said.

The administration has also proposed a $50 billion funding program for chip manufacturing and research and development, mirroring China's efforts.

The Committee on Foreign Investment in the United States, or CFIUS, last year tightened the rules for examining the national security risks posed by foreign deals, followed by the Taiwanese government's Investment Commission announcing a new set of rules to intensify screening of Chinese investments in Taiwanese tech companies. 

Meanwhile, the Italian government rejected a takeover bid for a Milan-based semiconductor equipment provider by a Shenzhen-based Chinese investment company.

South Korea and Taiwan -- two leading Asian chipmaking economies -- all face growing pressure to help the U.S. boost local chip manufacturing.

TSMC, the world's largest contract chipmaker, based in Taiwan, and South Korea's Samsung, the world's biggest memory chipmaker, were both forced to cut off supplies to once-major customer Huawei following the U.S. sanctions.

TSMC's share of revenue from China plunged to 6% in the January-March period from 22% the same time a year earlier. Samsung also saw its revenue from China trending down in the past three quarters.

Most of the global chip developers and manufacturers will currently still have to side with the U.S., as American technologies still prevail in their products or services, said Su Tzu-yun, senior analyst at the Institute for National Defense and Security Research. 

"They have to choose what are their best interests if they get caught between the world's two biggest economies."

However, it is still hard to fully decouple the semiconductor supply, involving thousands of suppliers from around the world that have been tightly intertwined for decades. 

China can try to reduce its reliance on the U.S., but without American technology sources, it can hardly speed up its technological advancement.

Neither is it practical for the U.S. to exclude China from all of its supply chains, as the country is still a big source of critical raw materials and rare-earth elements used in semiconductors and electronic components, according to a recent report by the Semiconductor Industry Association, an American industry organization.

"In the short term, due to geopolitical uncertainties, China's tech development could be slowed a bit," said Miin Wu, founder and chairman of Macronix International, a leading memory chipmaker in Taiwan that serves Apple, Sony and Nintendo. 

"However, in the longer run, from China's perspective, it will definitely hope to build a competitive industry. 

It's a trend that is hard to resist, and there is no turning back."

The ESG revolution is widening gaps between winners and losers

Fund managers find that trying to seek cheap and unloved stocks no longer pays

Robin Wigglesworth

While dedicated ESG funds remain a tiny part of the global stock market, the broader trend is towards all asset managers becoming more focused on these issues © AP

Interest in environmental, social and governance-oriented investing has soared lately. 

It now appears to be having a subtle but noticeable impact on some stock prices, widening an already big divergence between different parts of the equity market.

ESG-focused equity funds have taken in nearly $70bn of assets just over the past year, according to EPFR, while traditional equity funds have suffered almost $200bn of outflows over the same period. 

No wonder then, that asset managers seem to be engaged in a war of one-upmanship in touting their ESG credentials.

It is important to remember that while dedicated ESG funds remain a tiny part of the global stock market, the broader trend is towards all asset managers becoming more focused on these issues, whether their funds are explicitly ESG-oriented or not. 

This is now having a real impact — with potentially profound implications for frustrated “value” investors such as hedge fund managers Seth Klarman and Bill Ackman, who try to seek out unloved and cheap stocks.

What constitutes a virtuous company is woolly. Asset managers tend to define ESG, or its cousin “socially responsible investing”, differently, or weight metrics in conflicting ways. 

But look under the hood of some of the biggest ESG funds and it becomes apparent that they are heavily tilted towards tech stocks, including Microsoft and Alphabet, plus a smattering of consumer-oriented companies, such as Johnson & Johnson and Procter & Gamble. 

In the jargon of finance, ESG investing leans towards stocks classified as “growth” (fast-expanding, often racier companies) and “quality” (those with little debt and stable earnings growth).

The ESG boom might, therefore, partly explain both why growth stocks have done so well lately, and why the underperformance of value — embodied by energy stocks — has gone from extreme to record-shattering. 

“Given the unprecedented media attention focused on sustainability and its relative immaturity as an investment style, ESG is having a fast-growing impact on equity market positioning,” Barclays said in a recent report.

“We believe that it is likely contributing to widening the valuation dispersion between ‘winners’ and ‘losers’.”

The worsening outlook for value has caused anguish and frustration among many investors that have dedicated themselves to the style, which was first formulated by Benjamin Graham and most famously espoused by Warren Buffett. 

Mr Klarman of Baupost, a value-oriented hedge fund, bemoaned the environment in his latest letter to clients, but argued that the “ongoing selling pressure of value names has contributed to mispricings that represent potential opportunity for long-term investors”.

Over time, the shunning of companies that lag behind on ESG metrics may indeed lead to investors being able to harvest a “sin premium” by buying systematically underpriced stocks. 

However, given the fact that ESG-focused investing is likely to prove a secular trend, it might also mean that value will stay in a funk far longer than its proponents might like.

Calm breaks out in bond markets despite inflation fears

Longer-term risks remain over what kind of exit strategy Fed pursues over stimulus support

Michael Mackenzie

This year’s rise in market borrowing costs has not triggered a bigger shock at least for now © Financial Times

Calm has descended across one of the most influential markets for all investors: government bonds.

Investors fearing a rolling interest rate shock unfolding in 2021 with the potential for puncturing high-flying equities, housing and highly indebted economies have been breathing easier of late.

Courtesy of central banks’ sustained presence in bond markets, this year’s rise in market borrowing costs has not triggered a bigger shock at least for now.

Expectations of a punchy restoration of economic activity back in January was the trigger for the US 10-year benchmark rising from below 1 per cent to a peak of 1.77 per cent during the first three months of the year. 

After that rapid market shift, a period of consolidation has played out with the US 10-year idling this week near 1.60 per cent.

The present tone of relief in bond land has not been ruffled by the evidence of hotter inflation readings, or hints from central bank officials that they are looking at a “taper” or a reduction in their brimming punch bowl of monetary liquidity.

The US central bank is still purchasing $120bn of Treasury and mortgage debt each month and its balance sheet has doubled in size to $8tn from the start of 2020. 

Its overall holdings are seen reaching $9tn by 2023, or 39 per cent of GDP according to estimates published this week by the Federal Reserve Bank of New York.

There is another powerful explanation for why bond market rates are steady and could well handle a gradual reduction in central bank buying. 

The current level of interest rates endorses the view of Fed officials that hotter consumer price pressure will prove transitory.

The US 10-year benchmark yield is only seen climbing to 1.90 per cent by the end of this year and to 2.17 per cent when the calendar flips into 2023, according to economists surveyed by Bloomberg this month.

That looks low when gauging the trajectory of the economic recovery and the ongoing boost from stimulus. 

In the wake of the financial crisis, the 10-year yield rose above 3 per cent and stayed there until mid-2011. 

Today’s bond market appears confident that any eventual tightening of financial conditions will be slow and measured, illustrated by the current pegging of interest rates for the next five years below 1 per cent.

But a sense that something does not seem right within markets is perhaps best explained by how a financial system that has enjoyed substantial support from central banks is inherently less robust. 

Both equities and housing are asset classes for example that have appreciated substantially in a climate of cheap borrowing costs.

“The paradox is that the more successful central banks are in driving up valuations of risky assets using stimulus, the harder it becomes for them to exit,” said Matt King, global markets strategist at Citigroup.

An important US policy lesson from 2018 was that even a modest tightening in financing costs became very uncomfortable for equities and credit markets. 

While there are grounds for the economy being supported by fiscal stimulus and therefore sparing housing and equities from being hit hard by higher interest rates, King said: “It is much more likely that rising yields prove destabilising as there is more debt outstanding.”

Assessing the “great unwind” of monetary and fiscal support features prominently in the latest edition of the annual Barclays Equity and Gilt study on long-term asset returns in the UK and the US.

The bank wrote this week that the restoration of activity after the pandemic “raises questions about the degree that support will be withdrawn”. 

Among various scenarios, they said, “the risk of disorder seems meaningful in the US, where policy responses have been especially forceful” and “the prospect of a messy unwind could emerge for the Federal Reserve”.

Barclays focuses on an issue that is top of many investor minds at the moment: the trend in “long-term inflation expectations”. 

Should this bond market measure rise meaningfully and become “unanchored” after 2021’s “transitory” supply chain ructions, it “would likely involve painful trade-offs between prolonged unemployment and longer-term inflation”.

Maintaining central bank credibility on stemming entrenched inflation would require a sharp rise in interest rates that hits the economy and in all likelihood asset prices. 

What Barclays calls “a more balanced approach” would involve the central bank tolerating “a longer and shallower recession that is accompanied by more prolonged inflationary pressures”.

While interest rates presently slumber, investors should be mindful that the fortunes of highly valued equity and housing markets rest on just what kind of central bank exit strategy eventually unfolds.

“The Fed says it has the tools to fight inflation, and it does,” said Steven Blitz, chief US economist at TS Lombard. 

But a question also awaits answering he said: “Is it willing to accept the end of capital market pricing distortions that their policies have created?” 


By Egon von Greyerz

The number one objective of a US president is to be reelected. To achieve that, it is not enough to be good looking or to speak well.

No, the only way to be reelected is to buy votes. The price of votes varies depending on the state of the economy. At the bottom of a cycle, relatively little is needed since the economy was about to turn anyway.


A president or prime ministers are instruments of their time and therefore put there to execute the only workable plan. A good example of leaders who made a timely arrival were Thatcher and Reagan. After a period of high inflation and slow growth, combined with weak stock markets, these two leaders were elected, rightly, to manage the upturn and the strong growth period ahead.

Another example of a leader who became Prime Minister at the right time was Churchill who was appointed at the start of WWII. He was a brilliant leader in a war period.

Biden is another excellent example of a leader who was elected because he is the best candidate for the US to survive the next 4 years.

The problem is that the patient – USA – might not survive?


So will it be that the operation will be successful but the patient died?

Sadly I think the latter is more likely. Because the programme that Biden and his consorts are embarking upon will be the biggest test of MMT (Modern Monetary Theory) in history.

Clearly Biden has misunderstood the abbreviation and thought that it meant MORE MONEY THEORY since he just spends more and more and still more.

MMT is just an extension of Keynesian economics. In simple terms, whatever is needed in the shape of monetary requirements the country has, you just print.

So if people have no job, just print money and give it to them. If companies go under just give them sufficient funds to survive. If banks with their reckless lending and speculation are on the verge of being insolvent, just print and give them whatever they need so they can continue their irresponsible credit policies. After all the top management needs their big bonuses and someone or something has to pay for that – and MMT is the perfect instrument for achieving this.

And Biden has already after 100 days been a masterful user of MMT.

His initial programme of spending $6 trillion is perfect for MMT.

For the ones who can’t keep up with his profligate spending, let me remind you that these “puny” $6 trillion consist of the $1.9t stimulus plan, $2.3t infrastructure spending and $1.8t expansion of the social safety net.


Amazing how elegantly MMT can be applied to spend $6 trillion in 100 days OR $60 BILLION PER DAY

The good thing is that the money never needs to be repaid. No, instead of repaying you must print more and more and more. And to service the debt you print still more.

It is of course easy to service the debt at virtually zero interest rates. So what happens if rates go up to 5% or 10% or even 15% like in the 1970s? (I remember it well).

Well, that poses no obstacle either based on MMT. You just print even more.

America is “ready for takeoff” Biden just declared to Congress!

How right he is and with the MMT launch rocket not even the sky is the limit.


Spending $6 trillion is nothing, once Biden & Yellen get going, the total spending and the deficits will most certainly be over $30 trillion in the next 4 years.

In November 2016 when Trump was elected, I forecasted that US debt would be $28 trillion and the end of his 4 years and then $40t in 2025.

The $28t has already happened and although no one in 2016 thought $40t as possible by 2022, that forecast now seems much too low. At least $50t is now fairly certain. And it could be much higher.

The $28t in 2021 and $40t in 2025 required no genius. Human beings are very predictable and the includes presidents. In the last 40 year, US debt has doubled every 8 years. Thus, the forecast was based on the most basic and at the same time most reliable tool which is history.


What is even more frightening in the table above is that whilst debt has gone up 31X in 40 years, tax revenue is only up 6X.

So no one must believe that the US government has any intention of repaying its debt. With a couple of years exception (not the Clinton years when debt went up every year) US debt has increased every year since the early 1930s.

And as I said earlier in the article, there is no need to ever repay debt with MMT. The whole purpose of MMT is to constantly and irresponsibly print ever increasing amounts of worthless money.

Because this beautiful MMT theory can by definition never run out of money.

But as Ayn Rand said:



The MMT clan (including the current Administration) clearly ignores reality. And sadly they are totally oblivious of the fact that THE PIPER MUST BE PAID.

To ignore the consequences of reckless actions is always very costly in the end. A long row of presidents have managed to fool the people for decades by handing over an economy which is burdened by ever increasing debt.


The risks that now are threatening the US are each one of a magnitude of a missile with a nuclear warhead.

The Bubble is very likely to be pricked by one of the missiles in the illustration well before the next 4 years are over.

It is impossible to say which missile will hit first but what is very clear is that any one of them would have a devastating impact on the US economy.

Let us say that MMT will work for yet some time since it greatly benefits the leaders and the wealthy. But one consequence which most observers ignore is the currency. The dollar has already lost 84% in real terms in this century. The current rate of money printing will accelerate this fall.

This in turn will put enormous pressure on the bond market, interest rates and the stock market.

With all these ominous threats, this saga just cannot end well. The Bubble Trouble US economy is so fragile that it cannot be saved. We will soon learn that MMT was a massive lie and the biggest economic hoax in history.


Stocks are in the process of finishing a major secular bull market whether it has lasted for 200 years or even 2000 years. Only future historians will know.

What we do know is that it is a mug’s game to forecast the exact timing of the end of a cycle of this magnitude.

If we take the Dow as an example, we can see from the chart that this exponential move is unlikely to end well. The steepness of the rise since March 2020 is historical and has not occurred before in the last 50 years.

Both technically and fundamentally stocks are now reaching the end of this secular cycle whether it takes a few weeks or a few months.

Some people might say that I sound like a broken record. But they are missing the point. I don’t care when the market tops. All I care about is that investors protect themselves from losing a major part of their wealth when this market turns. Because risk is now at an extreme.

I received an email from a reader today who understands what I am endeavouring to achieve:

“Thank you for these articles you write! I try and read every one you mail me. I heard someone say you are like a broken record, you keep saying the same message over again. I prefer to say that you are one of the most important voices that has not strayed from the unfortunate realities that we all have really no choice but to deal with. I agree with much of your opinions. Thanks again”.

We are now at a point in history and in investing when it is not about making the most amount of money but instead about losing the least.

There will be virtually no winners in the coming secular bear market for the world economy. It will be all about survival.

As most readers know, the team at Matterhorn Asset Management believe that the highest chance of financial survival is holding a major investment in physical gold and silver, stored outside a fragile banking system.

Throughout history, this has consistently been the best form of wealth preservation.