Shares in China’s largest contract chipmaker tumbled on Monday after reports that the US was planning to blacklist the company in a move that could neuter the country’s semiconductor industry.
Shares in Semiconductor Manufacturing International Corporation (SMIC) fell nearly 20 per cent in Hong Kong and shed almost 10 per cent in Shanghai, wiping more than $5bn off the company’s stock market capitalisation.
SMIC said in a statement on Saturday that it was “in complete shock and perplexity” over the news that Washington was considering barring it from any transactions with US companies. The potential blacklisting was first reported by Reuters.
The company is fighting the plans as Washington looks to close another loophole in Washington’s sanctions against Huawei, the telecoms and technology group.
“SMIC is open to sincere and transparent communication with the US government agencies in hope of resolving potential misunderstandings,” the company said.
According to three people familiar with the discussions, the US government is considering adding SMIC to the so-called entity list of companies with which Americans can only do business if they receive a special licence.
The Trump administration has used the export control list to target a broad range of Chinese companies including Huawei, dozens of Chinese military suppliers and Chinese companies involved in human rights violations in Xinjiang.
Discussions about blacklisting SMIC were held as the grace period Washington set for additional sanctions against Huawei draws to a close on September 15. Under those sanctions, companies anywhere in the world are barred from selling chips destined for Huawei or its products without a licence if those chips are designed using US software or manufactured using American equipment.
Two people familiar with the situation said SMIC had neither applied for a licence nor made it publicly clear beyond doubt that it intended to comply with the rules.
Blacklisting SMIC itself would mean the company, which needs US-made semiconductor tools for its manufacturing operations, would quickly lose the capability of fabricating chips for Huawei.
A US government official and another person briefed on the issue said the proposal to blacklist SMIC had been made by the Pentagon because it was worried the company was enabling the technological advancement of China’s military.
“The administration is laser-focused on civil-military fusion,” said one person, referring to Beijing’s policy of encouraging technological co-operation between the private sector and the armed forces. “But they had so far missed SMIC.”
SMIC denied any military links. “The company manufactures semiconductors and provides services solely for civilian and commercial end users and end-uses. We have no relationship with the Chinese military. Any reports on the company’s ties with the Chinese military are false accusations and fake news,” a spokesperson told the Financial Times.
However, a report on SMIC authored by a US defence contractor said that various researchers at universities affiliated with the People’s Liberation Army were using SMIC processes and had their research devices manufactured by the company.
The US government official said the report was “informing the ongoing discussions”.
It also pointed to press releases and Chinese media reports about business co-operation between SMIC and CETC, a defence electronics contractor with many affiliates already on the US blacklist.
“A series of PLA university and defence industrial complex researchers use SMIC processes and chips to conduct their research, indicating that this research is tailored to SMIC production specifications, making it impossible for them to manufacture their chips at another foundry,” the report said.
Examples it cited with reference to published papers included research of radiation hardened integrated circuits designed using SMIC process tools. The report said military electronics designed to withstand electromagnetic pulses like those emanating from a nuclear blast were one of the main applications of radiation hardened chips.
SMIC did not answer questions about the specific issues raised in the defence contractor’s report.