Shanghai spending big to build the new ‘Silicon Valley’

New Lingang Area, which aims to be a global innovation district, houses Tesla factories that will build electric vehicles and the world’s biggest planetarium; it will be an industrial base for production of integrated circuits and semiconductors, officials say. (ATF) Officials in Shanghai have announced they are investing billions of yuan into building a ‘new Silicon Valley’ set-up, full of companies in emerging industries.

“Over the past year, more than half of 78 policy tasks have been completed; high-end resource elements have accelerated the grouping of Lingang New Area, involving a total investment of more than 270 billion yuan (over US$40.4 billion),” the deputy secretary-general of Shanghai Municipal Government and secretary of the Party Working Committee of Lingang New Area, said.

Known as the Shanghai Lingang New Area, this will be a national rival to similar areas in Beijing and Shenzhen, as well as global innovation centers. Emerging industries have already migrated to the area, while institutional innovations have also set up shop. According to ce.cn this will be a new business district like Lujiazui. Lujiazui is the area of skyscrapers that make up the famous Shanghai skyline.

The Shanghai Lingang New Area is next to the Dishui Lake – an ancient scenic area in the neighbouring city of Suzhou, which is slowly becoming part of the large growing Shanghai metropolis. The area is famous for being the home of ancient scholars. Suzhou is essentially becoming a suburb of Shanghai, only a few minutes away by high-speed train.

Zhu Zhisong, executive deputy director of the management committee, said in an interview with ce.cn: “We have two small goals: one is to invest 200 billion yuan in frontier science and technology industries by the end of this year. The other is to build meeting the needs of modern urban functioning construction.

“We strive to achieve 200 billion yuan in projects started by the end of the year, and make greater contributions to the integrated development of the Yangtze River Delta.

“Our production line is very sensitive to vibration (from traffic), so the requirements for the production environment are very high, so as to ensure continuous operation of the equipment,” Zhu added.

Semiconductor production line 

Shanghai Jita Semiconductor Co Ltd will be based in the new area. CEO Yin Buhua told reporters that according to the plan, the first phase of project plans is to build a 0.11μm/0.13μm/0.18μm (micron)-process production lines with a monthly capacity of 60,000 8-inch wafers. All kinds of production lines will achieve full mass production this year. It plans to expand the 12-inch special-process production line to a monthly production capacity of 50,000 pieces. 

“Our chips are used in automotive electronics, rail transit, smart grid and other fields. After full production, it will become a leading domestic automotive-grade semiconductor production line,” Yin Buhua said.

Wu Qunfeng, director of the Risk Prevention Division, said that the Lingang New Area has signed contracts and plans to implement integrated-circuit projects in the near future with a total investment of nearly 160 billion yuan ($24 billion).

It will build a national integrated-circuit industrial base, with a full supply chain. He said it will be known as the ‘Eastern Core Port,’ and will include aircraft facilities.

Aircraft Park

One portion of the area will be known as the ‘Big Aircraft Park’ to promote the convergence of aviation manufacturing and aviation services, develop final assembly delivery, key facilities, production support, technology research and development, aviation culture and tourism and other industrial fields, and cultivate a world-class aviation industry cluster.

In August this year, the “Lingang New Area Innovative Industry Plan” was released. The industrial development of the new area must not only improve the “quantity”, but also achieve a breakthrough in the “quality” of such zones, officials announced.

On September 7 this year, the commercial entity registration confirmation system was officially implemented in the Lingang New Area Industry-City Integration Zone. It has a range of approximately 386 square kilometres. 

As early as last year, this policy was written into the overall plan of the Lingang New Area; in March this year, after the inauguration of the Lingang New Area Market Supervision and Administration Bureau, it was clearly proposed that the reform of the registration confirmation system for commercial entities would be promoted in a coordinated manner. 

Now that the policy has been implemented, many entrepreneurs have begun setting up shop. “Lingang is becoming more and more like a complete city,” the general manager of Shanghai CRRC Essendi Marine Equipment Co Ltd said.

The world’s most famous and creative high-tech hub is Silicon Valley, in the southern San Francisco Bay Area of California, which has been the home of many start-ups and global technology companies, such as Apple, Facebook and Google. Whether Lingang New Area can match this in any way, only time will tell. But local officials certainly appear to share that ambition.

The power of digital currencies

Central banks in Europe and elsewhere are finally waking up to the risks that fintech innovations, such as digital currencies and stablecoins, could pose to the traditional banking system and financial stability if they become popular.

With an ever increasing need  in reducing morbidity and mortality due to heart attacks and strokes, especially among Indians and  Indian Americans, the American Association of Physicians of Indian Origin (AAPI) and the American Heart Association (AHA) joined hands together for the first time for a Global Initiat (ATF) With a clear eye on China, the European Central Bank has sounded the alarm that Europe could lose its very sovereignty, not just its economic autonomy, if it fails to develop a digital euro. The warning is a reminder of how much is at stake politically in the global race for new electronic forms of central bank money. 

In a recent report on the pros and cons of a digital euro, the ECB doesn’t actually name China. It doesn’t need to. The Federal Reserve is still studying whether to issue a central bank digital currency (CBDC) while Japan has no immediate plan to do so. China, by contrast, is already conducting advanced trials of its Digital Currency /Electronic Payment (DE/EP). 

The ECB says it is examining the idea primarily because people are abandoning cash in favour of fast electronic payments. “It’s simply a matter of making our currency fit for the digital age,” said ECB President Christine Lagarde said when asked by French newspaper Le Monde whether the ECB was mounting a geopolitical response to the emergence of the digital yuan.

That is no doubt true. Central bankers are finally waking up to the risks that fintech innovations pose for the traditional banking system and hence for financial stability. They are also aghast that Facebook’s proposed Libra stablecoin might threaten their monetary monopoly.

But the concerns of the ECB – and of Europe’s politicians – go wider.

Concern over digital currencies

The report notes that if foreign central banks made their digital currencies available outside their jurisdictions, European citizens could switch out of the euro and foreign exchange risk in the euro area would increase. At the same time, instruments like Libra not denominated in euro could become widely used for European retail payments. 

“Such developments would foster innovation but could also threaten European financial, economic and, ultimately, political sovereignty,” the ECB says.

This is strong stuff from a central bank. As Philip Middleton and Alastair Ryan put it in a report for BoA Securities: “We can see why a central bank would not particularly fancy this. If European payments were to be dominated by Mark Zuckerberg and Xi Jinping, the ability of the ECB to influence the Eurozone economy would be severely constrained.” 

The EU has been half-hearted in the past about deploying the euro as an instrument of political power. The dollar towers over the single currency by every measure, from its share in global central bank reserves to its use in trade invoicing and international bond issuance. 

But the ECB report sums up how attitudes are changing: “Euro area leaders recently stressed that a strong international role of the euro is an important factor in reinforcing European economic autonomy.”

Wide acceptance of a means of payment or store of value not denominated in euro could impair the transmission of monetary policy in the euro area and could ultimately affect financial stability, the ECB explains.

‘Digital euro could support sovereignty, stability’

“In such circumstances, issuance of a digital euro could support European sovereignty and stability, in particular in the monetary and financial dimensions,” it says. That word ‘sovereignty’ again.

In case the political motive was still unclear, the report says a cutting-edge digital currency would “preserve the global reputation of the euro” and support its international role.

In a narrow sense, the ECB is worried that widespread use of foreign CBDCs in the euro area would curtail its room for monetary manoeuvre. ECB researchers Massimo Minesso Ferrari, Arnaud Mehi and Livio Stracca posit that it would need to react twice as much to inflation and output in the presence of a CBDC.

But it is left to the less diplomatic Australian Strategic Policy Institute to spell out the geopolitical prizes that China’s DC/EP could deliver for the Communist party, which has a stated aim of challenging the dollar’s global supremacy. 

“DC/EP intersects with China’s ambitions to shape global technological and financial standards, for example, through the promotion of RMB internationalisation and fintech standards-setting along sites of the Belt and Road Initiative,” the ASPI said in a report.

Alternative to SWIFT?

In the long term, a successful DC/EP could therefore greatly expand the party-state’s ability to mould economic behaviour well beyond China’s borders. For one thing, it could serve as an alternative to SWIFT, a secure financial messaging service at the core of the global banking system.

Because it has access to SWIFT communications on national security grounds, the US is able to extend the territorial reach of its laws – a source of deep concern to China and many other countries, especially those under international sanctions, such as Iran. 

If it could provide a functional alternative to the dollar settlement system, DC/EP would blunt the impact of any sanctions or threats of exclusion both at a country and company level, the ASPI argued.

China thus has a powerful incentive to blaze the digital currency trail. It is well ahead of its rivals. Not until this month did a clutch of leading central banks – but not the People’s Bank of China – agree on what the main features of a CBDC should be.

For its part, the ECB won’t decide until mid-2021 whether even to formally investigate a digital euro project. “The primary motivation is not that others are ahead,” said Fabio Panetta, an ECB Executive Board member who oversaw the ECB’s exploratory report

Risk of bank runs, CBDC costs, volatile capital flows

Indeed, the report is laced with warnings about the potential drawbacks of a CBDC. For instance, euro area citizens could swap their commercial bank deposits for central bank money, undermining the banking system and increasing the risk of bank runs. (This is a reservation shared, incidentally, by BoA’s analysts, who are very wary of the policy costs of running a CBDC.)

The report also speaks of the need to discourage excessive use of the digital euro as an investment to reduce the risk of attracting huge international investment flows: “The design of the digital euro should include specific conditions for access and use by non-euro area residents, to ensure that it does not contribute to excessively volatile capital flows or exchange rates.”

These words of caution may be warranted, but they hardly constitute a ringing call for the euro to sally forth, dethrone the dollar and nip the yuan’s challenge in the bud. 

But they will be music to the ears of Chinese policymakers, who are fully aware of the power of currencies. They also know from their own history the advantage of moving first when it comes to currencies. After all, in the 7th century it was China that was the first to use paper money.

(Alan Wheatley is an associate fellow at Chatham House, the London think-tank. He was formerly the global economics correspondent and China economics editor for Reuters.)