Tech war: US trade watch list throws 31 Chinese semiconductor-related entities into uncertainty as harsher sanctions loom

Further trade restrictions could be on the cards for a number of Chinese semiconductor-related entities recently put on the US Unverified List
Under updated regulations, Washington may add a number of these Chinese parties to the US trade blacklist to face sanctions

US-China tech war

Che Panin BeijingandIris Dengin Shenzhen

Published: 10:00pm, 11 Oct 2022

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China’s top memory chip maker and 30 other semiconductor-related companies on the mainland now find themselves between a rock and a hard place, according to industry experts, after Washington put them on the US government’s trade watch list.

State-owned Yangtze Memory Technologies Co and 30 other entities in China’s semiconductor sector were recently added by the Bureau of Industry and Security (BIS), an agency under the US Department of Commerce, to the country’s Unverified List (UVL). Parties whose bona fides have not been substantiated by the BIS are put on this list, which serves as a trade restriction since those on it are ineligible to receive items subject to the US government’s Export Administration Regulations.

Under updated rules announced by the BIS on October 7, UVL parties that fail to provide required data for the agency’s verification process may be added to the US trade blacklist, formally known as the Entity List.

None of the Chinese companies and institutions added to the UVL – including Vital Advanced Materials, Beijing PowerMac Co, the University of the Chinese Academy of Sciences, and the University of Shanghai for Science and Technology – have so far made any public comment on the US action or on what they plan to do next.

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Top Chinese semiconductor equipment maker Naura Technology Group, however, reported in a regulatory filing in Shenzhen that its subsidiary, Beijing Naura Magnetoelectric Technology, was on the UVL.

While Naura downplayed the US action by stating that its subsidiary accounted for only 0.5 per cent of its total annual revenue, its shares were down 10 per cent for the second consecutive day on Tuesday on the back of that news.

Naura is unlikely to provide additional data to the US government because of its status as a Chinese state-owned enterprise, according to a company supplier who declined to be named because he is not authorised to speak to the media.

The stakes are high for the Chinese parties on the UVL because Washington is expected to add a number of them to the US trade blacklist, dealing another damaging blow to Beijing’s semiconductor self-sufficiency drive.

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The US government’s latest actions to hold China back in the manufacture of advanced semiconductors mark a significant escalation from previous targeted sanctions against individual mainland tech firms, such as Huawei Technologies Co and Semiconductor Manufacturing International Corp (SMIC).

The whole Chinese semiconductor industry is now being targeted by the US government, according to Gu Wenjun, chief analyst at research firm ICwise, in a note on Tuesday.

“The US had cited grand excuses to justify its past actions,” Gu wrote. “It cited information security [risks] to target Huawei and military links to target SMIC.”

Gu indicated that the US government has been pushing beyond “the red lines”, adding that it has expanded “the list of sanctioned Chinese businesses … using all sorts of strange reasons”.

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The US government can cite “persistent lack of cooperation by the host country” – in this case, China – as a “refusal to cooperate and misrepresentation by the subject”, paving the way for harsher trade restrictions to be imposed, Kevin Cai Kaiming, a senior partner at multinational law firm Dentons, said in a note on Monday.

While this is not the first time that dozens of Chinese entities have been put on the UVL, compliance with the BIS verification process has resulted in nine mainland firms being recently removed from the US trade watch list.

WuXi Biologics said in a statement this week that its subsidiary in eastern Jiangsu province has been removed from the UVL, following the US Commerce Department’s on-site visits to the firm’s end users.

Most companies on the UVL “can be successfully removed” from the list once an end-user check is conducted, according to Lindsay Zhu Ju, a Shanghai-based partner at international law firm Squire Patton Boggs.

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“The 31 Chinese companies [recently added to the UVL] are recommended to immediately communicate with [China’s Ministry of Commerce] to arrange end-user checks” by the BIS, said Zhu, who has had experience in handling similar cases.

China’s Ministry of Commerce has described the US government’s move to add more mainland entities to the UVL as “a typical act of technology bullying”.

The ministry said China strongly opposes Washington’s action, which could “seriously jeopardise normal trade [relations] between Chinese and US businesses … and gravely endanger global supply chain stability”.