China showcases its export control regime with new critical minerals curbs

Chinese authorities are ramping up their use of export controls to hit back economically at the US – and they’re just getting started.

The latest:

• On Monday, the Biden administration unveiled new updates to its export controls on sales of semiconductors and semiconductor equipment to China.
• The rules – released by the US Commerce Department’s Bureau of Industry and Security (BIS) – impose controls on 24 types of semiconductor manufacturing equipment and three categories of software tools.
  • They also restrict sales of high-bandwidth memory chips (HBM), crucial for greatly accelerating AI training and inference.
  • Simultaneously, the Commerce Department made 140 additions to the Entity List, targeting chip fabs, tool companies, and investment firms.
  • The agency also expanded Foreign Direct Product Rules (FDPR) – an extreme long-arm jurisdiction measure regulating products made with even minimal amounts of American know-how, regardless of where they are manufactured.

That didn’t take long: Within 24 hours, China’s Ministry of Commerce (MofCom) hit back, announcing a ban on exports to the US of certain dual-use critical minerals and materials, effective immediately.

• Now, gallium, germanium, antimony, and superhard material exports are “in principle” not permitted to be sold to the US.
• Graphite exports are also subject to stricter end-use reviews.

Make no mistake: This move represents a marked change in China’s approach for retaliating against US export controls.

• Over the past two years – since the US first released its watershed semiconductor export controls for China in October 2022 – China’s response has been measured and relatively restrained.
• But now, the gloves are off, and Chinese authorities are signaling – to the new Trump administration, the US more broadly, and US allies – that they are ready to counter US moves much more aggressively.

We hate to say we told you so: While there was some debate in the broader China-watcher community as to whether China would meaningfully hit back against US moves, Trivium has consistently argued that retaliation was becoming increasingly likely, and has chronicled the steps Chinese authorities have taken as they prepared to respond.

• Back in November 2023, we highlighted new rules requiring exporters of rare earth elements to report all shipments to MofCom.
• At that point, it seemed evident that officials were looking to catalogue the export of critical minerals – as a key first step in curtailing those exports if and when needed.
• In February 2024, we published the findings from our export control risk model, highlighting what we saw as the most likely minerals to be targeted next by Chinese authorities.
• Through that work, our critical minerals team called out antimony as a key prospect, six months before China adopted export controls on the mineral.
• Then just a few weeks ago, we flagged updates to the Export Control Law for our readers, which seemed like the most obvious sign yet that more aggressive moves were coming.
• Our team was surprised by the lack of wider coverage of a law clearly intended to produce the outcomes we saw this week.

With that self-congratulation out of the way: What do we expect will happen next?

Here’s what to watch: In addition to known controls on gallium, germanium, and antimony, the latest MofCom announcement indicated that Chinese officials will likely expand rules to control exports of “superhard materials.”

• While it’s not yet clear exactly which materials are officially targeted, the Global Times – a state-sponsored propaganda rag – hints at Beijing’s focus, noting that “superhard materials play an important role in the cutting, grinding, and polishing processes in chip manufacturing.”
• Reporting from The New York Times suggests tungsten is likely a top focus – an assessment we share.
• In our view, the key “superhard materials” that would make most sense for upcoming controls include:
  • Tungsten carbide
  • Industrial-grade diamond
  • Cubic boron nitride
  • Silicon carbide
  • Boron carbide
• FWIW: Tungsten was already the top at-risk mineral in our export control risk model.

China will also likely move to shut down compliance loopholes: The latest announcement suggests that China is looking to not only curtail direct sales of key minerals to the US, but also to close a range of legal gaps that would allow export leakage.

• The new dual-use export ban highlights extra-territorial application of the law – i.e. invoking China’s own long-arm jurisdiction.
• The idea here is to close the potential loophole for domestic firms to try and reroute exports through third counties to the US.
• Otherwise, Chinese producers would have a clear financial incentive to orchestrate exports to a third country that would allow re-export to American companies.
• We don’t yet have a clear view on how far Beijing might go to investigate or punish third countries suspected of prohibited re-exports, but we expect at very least, Chinese producers will be strongly discouraged from – and painfully punished for – trying to skirt the rules.

Our take: This is a brand-new approach from Beijing, especially compared to the bide-your-time strategy pursued over the past two years.

• Both Beijing’s updates to the Export Control Law and the new regs enabling controls on dual-use goods are a clear expansion of retaliatory capability.
• Now authorities look ready to flex their muscles – or at the very least to test out the tools.

The big questions: What pushed Chinese authorities to act on this now?

• Did the most recent US export control updates cross a line?
• Or did they hand Beijing the perfect opportunity to warn the incoming Trump administration of the consequences of further ramping up economic and trade pressure on China?

Either way: Beijing is now poised for much more aggressive economic retaliation against the US when it comes to the export control game.

• And depending on how forcefully the new Trump administration pursues such controls, things could ratchet up bigly.

Andrew Polk, Co-founder Trivium China, and Cory Combs, Trivium China Head of Critical Mineral and Supply Chain Research

What you missed

Tech

On Wednesday, the central bank (PBoC) and six other departments issued a high-level plan to promote the development of digital finance.

• According to the plan, by 2027, financial institutions should upgrade digital infrastructure, implement data sharing, and establish better data governance processes.
• The plan also calls on banks to leverage internal and external data, novel metrics, and new techniques to improve risk assessment and financing of innovative tech companies.

On Tuesday, Xinhua reported that the SOE regulator (SASAC) and macro planner (NDRC) issued measures encouraging central SOEs to expand their VC investments.

• The measures encourage SOEs to establish VC funds targeting small and early-stage startups, with a focus on investing in cutting-edge technologies over long-term horizons.
• Our take: Unlike cash-strapped local governments that currently dominate China’s VC funding landscape, industrial SOEs have the advantage of deeper industry expertise and a clearer understanding of sector-specific needs and priorities.

Econ and finance

Bloomberg reported on Tuesday that China’s top leaders are expected to gather December 11–12 for the annual Central Economic Work Conference (CEWC).

• The CEWC – typically chaired by Xi Jinping – is the forum where top Party officials set the economic agenda for the year ahead.
• Among other things, the meeting will set next year’s GDP growth target, which won’t be announced until the legislature (NPC) meets for its annual plenary session in March.

Top economic policy advisor Liu Shangxi is arguing that Beijing has recently become more tolerant of local governments’ giant debt loads.

• According to Liu, Beijing previously focused on reducing local governments’ overall debt burdens, but officials have recently changed course, to zero in on alleviating liquidity risks.
• This adjustment is partly due to the fact that raising non-debt funding – for example by selling state assets – has proven difficult in this challenging economic environment.

Business environment

Premier Li Qiang beseeched multinational companies not to de-risk from China at a symposium held alongside the second China International Supply Chain Expo (CISCE) last week.

• The symposium, where Li reiterated his promise that China is open for business, was stacked with senior executives from foreign and domestic companies.
• Get smart: Ongoing pleas against de-risking by China’s top leadership are unlikely to have much effect.

Last Wednesday, the Party Central Committee and State Council issued an action plan on lowering logistics costs.

• A previous action plan, issued just two weeks prior, covered the exact same topic.
• The latest plan outlines a range of measures to improve logistical efficiency and commits to reducing logistics costs while making operations smarter and more sustainable.

Corporates

On Friday, the US Commerce Department announced preliminary anti-dumping tariffs on imported solar modules and cells from Cambodia, Malaysia, Thailand, and Vietnam.

• Some context: China’s leading solar manufacturers established large-scale production facilities in the above-listed countries during the 2010s to bypass tariffs and continue exporting to the US, allowing them to maintain dominance in the market.
• Get smart: Sky-high tariffs will erode the significant cost advantages of Southeast Asian-manufactured modules over US-made alternatives.

Also on Friday, the National Health Commission released a work plan for the September policy to permit wholly foreign-owned hospitals to set up shop in nine pilot cities.

• In 2014, officials announced a similar policy – but it was short-lived. We’re optimistic that this latest effort will avoid the same fate.
• Get smart: Many foreign hospitals will struggle in a market dominated by state-backed public hospitals. Their best bet is to focus on providing premium services for China’s growing high-income population.

Politics

The Financial Times reports that China’s defense minister – Dong Jun – is under investigation for corruption.

• ICYMI: The armed forces have been plagued by a series of high-level corruption cases over the past 18 months.
• Dong was just appointed to his post in December 2023, replacing Li Shangfu – who was also removed for corruption after just seven months on the job.

Foreign affairs

On Monday, Xi Jinping outlined his latest vision for the future of the Belt and Road Initiative (BRI) – at the Belt and Road Construction Symposium in Beijing.

• Xi acknowledged the geopolitical challenges facing the BRI, highlighting “rising unilateralism and protectionism” alongside “frequent local conflicts and turmoil.”
• To address the challenges, he stressed the importance of balancing “enhancing the sense of gain for [BRI partner] countries” with “adhering to what is beneficial to us” – i.e., safeguarding and advancing China’s own interests.

Xi Jinping also met with another clutch of foreign leaders over the past two weeks.

• On Tuesday, he met with Nepali Prime Minister KP Sharma Oli, to talk up bilateral development opportunities.
• Last week, he sat down with Singapore’s long-serving former Prime Minister Lee Hsien Loong and Samoan Prime Minister Fiamē Naomi Mataʻafa.

As always, it was a busy week in China.

• Thank goodness Trivium China is here to make sure you don’t miss any of the developments that matter.