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UK, US bans show Beijing is trying to buy the high-end electronics know-how it lacks

Beijing wants China's economy to become more technologically self-sufficient, but huge barriers remain.

By Lee Yuk Yue for RFA Cantonese 2022.08.22 -- The blocking of a planned acquisition of a U.K. tech company by a Hong Kong company backed by Chinese capital has sparked renewed concerns in the country over the national security threat from tech companies backed by the Chinese Communist Party (CCP).

British secretary of state for business, energy and industrial strategy Kwasi Kwarteng put a stop last week to the planned acquisition of Bristol-based Pulsic by Super Orange HK Holding Ltd, citing national security laws.

Super Orange had wanted to acquire the entire share capital of Pulsic, and was judged a "trigger event" under the National Security and Investment Act, Kwarteng said in an official document banning the deal.

The document cited a national security risk if Pulsic's software and know-how passed into Chinese hands, as its electronic design automation [EDA] products "could be used in a civilian or military supply chain."

"Those risks would arise on the transfer of [Pulsic] to the Acquirer," it said.

The order was the second in as many months issued by Kwarteng. In July, Kwarteng made a similar order targeting the would-be acquisition of intellectual property developed by the University of Manchester by the Beijing Infinite Vision Technology Co, which wanted to buy SCAMP-5 and SCAMP-7 vision sensing technology.

That deal was also nixed on the grounds that the technology could be used to "build defense or technological capabilities which may present national security risk to the United Kingdom."

The British orders come as the global supply chain for electronics components has been hit hard by shutdowns linked to COVID-19 and natural disasters, and as China tries to play catch up with Taiwan's TSMC, which dominates the global high-end semiconductor market.

M & A to gain technology

Taiwanese strategic analyst Shih Chien-yu said China is very keen to use mergers and acquisitions to acquire the technology it needs to make more advanced semiconductors, of which there is currently a global shortage.

"There may be only a few companies in the world that work exclusively in certain fields, and if one is successfully acquired, it may then be possible to acquire others," Shih told RFA. "China wants to keep acquiring technology in this way."

"While China is hoping to acquire these technologies and transfer them through Hong Kong companies, there is less and less opportunity to do this," he said, citing the passage of the CHIPS Act in the United States in July 2022.

The act aims to strengthen domestic semiconductor manufacturing, design and research, fortify the economy and national security, and reinforce chip supply chains for U.S. companies.

"Clearly, they failed this time," Shih said. "It's not surprising that Super Orange was unable to acquire this British company."

He said Hong Kong companies' intermediary role as instruments of Beijing's economic aspirations could be at an end, as the CHIPS Act has a ripple effect on the global industry.

But he said Beijing's support for the Russian invasion of Ukraine, its mass incarceration and persecution of Uyghurs in Xinjiang and its ongoing military threats against the democratic island of Taiwan meant it could be hard to reverse its international image.

An investigation into Super Orange HK found that it was incorporated in Hong Kong on Aug. 11, 2021. Its first director, a Chinese national identified as Zhou Nuo, resigned in December, and was succeeded by another Chinese national, Xu Yun, who also directs another company of the same name incorporated in March 2022.

Both companies give an address in Phase II of the Lippo Centre, Admiralty, Hong Kong.

The second company is wholly owned by a Nanjing-based company, Nanjing Spectrum Software Co. Ltd, which was itself only set up two months beforehand.

Jinping in email address

The parent company of Nanjing Spectrum is listed as Shanghai Hejian Industrial Software Group, and both companies use the same email address, apparently containing CCP leader Xi Jinping's given name: "jinping".

Its co-president is listed as Xu Yun.

Shanghai Hejian was incorporated in May 2020 with a registered capital of more than 230 million yuan. Its largest shareholder is Shanghai Yuqi Enterprise Management Partnership, with a 25.37 percent stake. One of its investors is a company linked to a national-level high-tech industrial development zone.

Shares in Shanghai Hejian are held by the National Integrated Circuit Industry Investment Fund Phase II, which is backed by the Chinese finance ministry, and the China Internet Investment Fund, which is backed by the finance ministry and the Cyberspace Administration of China.

Since 2021, Shanghai Hejian has held a stake of 15 percent in integrated circuit-maker Shanghai Arkas Microelectronics, alongside Hubble Technology Investment Co., which holds five percent.

Hubble Technology was founded in April 2019, just before Huawei arrived on the Commerce Department's entity list, and has a registered capital of three billion yuan, according to the Asset Management Association of China.

While Shanghai Hejian is described in official media as "a leading enterprise in China's domestic EDA sector," it has emerged rapidly and attracted considerable funding from more established players.

In April 2022, U.S.-based Synopsys, a top maker of EDA software, said it had been subpoenaed by the Department of Commerce to see whether it had worked with a subsidiary of Huawei, HiSilicon, and Shanghai-based chip foundry SMIC, both of which are on a list of banned entities.

HiSilicon and SMIC were put on the list in 2019 and 2020 respectively, for national security reasons. The company said at the time it believed it was in full compliance with all regulations.

Translated and edited by Luisetta Mudie.

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