Insights
China has yet to shake off the short-term risk of deflation, according to data released by the National Bureau of Statistics on November 9.
China’s Consumer Price Index (CPI) rose by 0.3% year-on-year in October , marking a 0.1 percentage point decline from the previous month. On a month-on-month basis, CPI decreased by 0.3%, reflecting a similar 0.3 percentage point drop.
Breaking down the components, food prices—a key driver of CPI growth—slowed to a 2.9% year-on-year increase, representing a 0.4 percentage point deceleration. Non-food prices, however, recorded a deeper year-on-year decline of 0.3%, mainly due to falling international crude oil prices. Service-related prices edged up by 0.2 percentage points to a 0.4% annual growth rate, driven by a temporary boost in travel costs during the National Day holiday, but still registered a 0.4% year-on-year decline. Excluding food and energy, core CPI rose by just 0.2%, a modest increase of 0.1 percentage points from the previous period.
On the Producer Price Index (PPI) side, China’s PPI contracted by 2.9% year-on-year in October, with a marginal decline of 0.1 percentage points from the previous month. The month-on-month figure showed a decline of 0.1%, albeit an improvement of 0.5 percentage points.
The breakdown indicates that producer prices for means of production remained down 3.3% year-on-year, though month-on-month growth of 0.1% suggests short-term support from recent stimulus measures targeting construction-related industries. Conversely, prices for consumer goods saw a broader decline, with a year-on-year decrease widening by 0.3 percentage points to 1.6%. Among durable goods, the decline in automobile factory prices expanded to 3.1%, while prices for computers, communications, and electronic products contracted by 2.9%.
Overall, the impact of China’s September monetary easing policies appears limited, as consumer confidence remains weak and spending sluggish. This continued weakness has forced businesses to further lower prices, compressing margins and sustaining deflationary pressures in the economy.
A day before the data release, China’s National People’s Congress Standing Committee approved a fiscal package totaling approximately 10 trillion yuan. This package aims to raise the annual ceiling for special local government bonds by 2 trillion yuan over the next three years to replace implicit local government debts. Additionally, 800 billion yuan per year over the next five years will be allocated to addressing these hidden debts through special bond issuance.
However, these measures primarily address debts accumulated through Local Government Financing Vehicles (LGFVs), which local governments have used to fund infrastructure projects and meet central GDP growth targets. By not appearing on local government balance sheets, these debts have enabled governments to bypass borrowing limits, leading to a massive buildup of hidden liabilities.
Banks often repackage LGFV bonds as high-yield wealth management products sold to domestic savers. Even though these savers know the low or non-existent economic returns of many of these projects, they continue to invest, confident that the central government will ultimately guarantee repayment. This has led to broad participation in what could be described as a “Ponzi scheme” with little regard for moral hazard.
The results are evident: the persistent decline in China’s real estate market appears to be leading the country toward a balance sheet recession, with private consumption and investment weighed down by high private sector debt repayment pressures. Although the government is aware of the issue, its approach has been largely confined to “new debt to replace old debt,” preventing meaningful economic recovery and efficient capital allocation.
News
Vanguard International Semiconductor Corporation (VIS) today announced that its Fab 3 in Taoyuan experienced a power supply issue at 12:10 PM, leading to a power outage.
VIS stated that as a precaution, the cleanroom was promptly evacuated, and all personnel were confirmed to be safe. Power was restored at 12:34 PM, and the company has taken steps to fully resume operations, with all facility systems now back to normal.
The company is currently conducting standard checks on the equipment and evaluating any potential impact on products. VIS has immediately informed the affected customers of the situation, and the impact on operations is still under assessment.
(Photo credit: VIS)
Insights
Since June 2022, the Federal Reserve has been reducing its balance sheet to restrict liquidity in financial markets in response to elevated inflation levels. Initially, the Fed reduced its monthly reinvestments by $60 billion in U.S. Treasuries and $35 billion in mortgage-backed securities (MBS), amounting to a total reduction of $95 billion per month. By June 2024, the Fed announced a slowdown in its balance sheet reduction pace, lowering the amount of U.S. Treasuries not reinvested to $25 billion per month, bringing the overall reduction amount down to $60 billion.
The Fed’s balance sheet size has decreased from a peak of approximately $9 trillion in May 2022 to around $7 trillion currently. Following the Fed’s decision to cut rates by 50 basis points in September 2024, discussions about potentially halting balance sheet reductions have intensified. Market attention has focused on the Fed’s overnight reverse repurchase (RRP) operations, which have seen volumes decline steadily. This tool allows the Fed to absorb excess liquidity by selling securities to counterparties and repurchasing them the next day.
The volume of overnight RRP operations reached a peak of $2 trillion during 2022-2023 but has since fallen to below $200 billion, indicating a steady reduction in excess liquidity within the financial system. This trend has raised concerns among market participants about potential tightening of market liquidity if the decline continues.
However, an examination of the Fed’s balance sheet structure reveals that, despite the decline in RRP volumes to approximately $144 billion, reserves held by banks at the Fed remain at a historically high level of around $3.2 trillion. Therefore, market expectations of continued rate cuts by the Fed suggest that overall liquidity remains sufficient.
Additionally, in October 2024, the Fed introduced a new liquidity monitoring tool—the Reserve Demand Elasticity (RDE) indicator. A lower RDE value implies that changes in reserve demand have a more significant impact on interest rates, signaling tighter reserves. Current data shows that the RDE remains near zero, indicating stable liquidity conditions. Moving forward, attention will be focused on whether the Fed adjusts or halts balance sheet reductions before the depletion of RRP operations.
(Source: Federal Reserve Bank of New York)
News
Following previous controversies of supplying 7nm chips to Huawei through proxies, TSMC is rumored to be requested by the U.S. Department of Commerce to suspend shipments of all its 7nm or more advanced chips to the AI/GPU clients in China, starting from today (November 11), according to the reports by the Financial Times and Reuters.
Though the information has yet to be confirmed, neither does TSMC make a clear statement to its clients, market sources seems to increase the credibility of the matter. A report by TechNews, therefore, compiles the development and the possible impact of the incident, providing further insights into the current situation. Please read below for the report’s analysis on four key aspects:
Why Now?
According to Reuters, the Department of Commerce sent an “informed” letter to TSMC to make the request, enabling the U.S. to bypass lengthy rule-making procedures and swiftly impose new licensing requirements on specific companies. The action comes shortly after TSMC told the Department that one of its chips had been found in a Huawei AI processor.
The move, in some way, reportedly indicates growing concerns from both Republican and Democratic lawmakers about the effectiveness of export controls on China as well as the U.S. authority’s enforcement of these regulations.
Earlier in July, the Biden administration reportedly drafted new rules targeting chipmaking equipment exports and aimed to add around 120 Chinese companies to the restricted entity list. However, despite initial plans for an August release, the rules have not yet been issued, according to Reuters.
Current Scenario of TSMC and Its Clients in China
However, things aren’t as bad as they seem, as sources tend to indicate that TSMC is not truly halting supply of 7nm and below advanced processes to China, but is instead required to conduct individual project reviews for each customer wishing to place orders. Production will only proceed after obtaining the necessary permits, according to TechNews.
According to another report by TechNowvoice, the main focus of the current restrictions would be on AI chips, which means products such as GPUs will be closely monitored. On the other hand, mobile and automotive chips may be excluded from the restrictions.
The TechNowvoice report further suggests that within the AI chip category, those responsible for training will be the key target of the restrictions, while chips used for AI inference may have a chance of passing the review.
Criteria for Export Restrictions
According to TechNowvoice, market speculations indicate that there are four criteria for evaluation, including transistor count (exceeding 300 billion), chip size (exceeding 300mm²), HBM incorporation, and whether the chip leverages CoWoS packaging.
Given these standards, it will be increasingly difficult for AI chips based on current mainstream architectures to pass the review and obtain approval from the U.S. Department of Commerce, the report indicates.
The report further suggests that the move will likely impact the four major cloud computing companies in China, including Huawei, Baidu, Tencent, and Alibaba. While Huawei has already been included in the blacklist, the other three companies, which have been collaborating with TSMC on AI chip development, may also require further reviews in the future.
What Would the Impact Be?
TSMC’s decision would be a major blow to China’s AI ambition, as AI and GPU companies in China will no longer have access to TSMC’s advanced process, which could lead to higher costs and longer time-to-market, and significantly impact their product performance and market competitiveness.
A supply chain reshuffle is likely to follow, as Chinese chip design companies may need to seek alternative foundries, according to TechNews.
According to the latest research report by TrendForce, if the policy takes effect, it could impact TSMC’s revenue performance and utilization rates of its 7nm and below advanced process capacity, while also affecting the future development of China’s AI industry.
For the first three quarters of 2024, TSMC’s revenue distribution shows that advanced nodes accounted for 67% of its total revenue—a key revenue source. However, TrendForce highlights that the major clients for TSMC’s 7/6n, 5/4nm, and 3nm processes are primarily from the U.S., Europe, and Taiwan. Consequently, even if regulatory actions impact business some Chinese clients may be lost, TrendForce expects other customers to offset this loss, limiting the potential effect on advanced process utilization rates.
TSMC’s revenue from China has remained steady at 11% to 13% for the full year of 2023 and the first three quarters of 2024. If regulatory scrutiny of TSMC’s advanced processes intensifies, or if certain Chinese clients are added to the Entity List—particularly affecting Chinese AI-related IC design companies, IP providers, third-party design services, or other businesses that depend on TSMC’s advanced processes for project initiation, tape-outs, and mass production—TSMC could face a revenue impact of approximately 5% to 8%.
However, strong global demand for AI chips and TSMC’s planned price increases for advanced process clients are expected to help mitigate some of this impact, according to TrendForce.
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(Photo credit: TSMC)
News
According to Liberty Times, citing Chinese meida outlet TMTPost, as the U.S. has imposed sanctions on China’s semiconductor industry since 2019, over 22,000 Chinese chip companies have shut down as of the end of 2023.
The report pointed out that a large number of Chinese chip companies have gone out of business, mainly because many small and medium-sized companies lack the necessary core technologies and face difficulties overcoming technical barriers
Another issue is the lack of investment, particularly for smaller chip companies, as the report indicated. The U.S. restricts investment in China’s semiconductor industry, and under U.S. sanctions, European investors are also hesitant to invest in Chinese chip companies.
The report mentioned that while large companies have invested billions of dollars to secure alternative suppliers, and Huawei is said to have established a network of foundries to sustain its business, smaller chip companies lack the resources to keep up without government financial support.
On the other hand, China recorded a trade deficit in chips totaling USD 122 billion in the first seven months of 2024, highlighting its continued reliance on imported high-end chips, as the report noted.
According to the report, citing data from China’s General Administration of Customs, in the first seven months of this year, China imported 308.1 billion chips with a total value of approximately USD 212 billion, marking year-on-year increases of 14.5% in quantity and 11.5% in value compared to the same period in 2023, which suggests that Chinese companies were actively stockpiling high-end chips, such as high-bandwidth memory (HBM), ahead of U.S. export restrictions on these products.
Meanwhile, in the first seven months of this year, China exported 166.6 billion chips, mainly traditional chips used in automobiles, home appliances, and various consumer electronics, totaling USD 90 billion, with year-on-year increases of 10.3% in quantity and 22.5% in value, as the report pointed out.
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