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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Swamp Notes newsletter. Sign up here to get the newsletter sent straight to your inbox every Monday and FridayIn October 2022, Joe Biden launched an experiment. The US would try to end America’s role in China’s military modernisation by shutting China out of the high-end semiconductor market. Biden officials were careful to emphasise that they were not aiming to restrict China’s economic growth. This was purely about dual-use technology. That goal seemed — and still seems — reasonable; if there is a danger the two giants will go to war some day, why on earth would we be helping them? Moreover, as Jake Sullivan, Biden’s national security adviser, reminded us in White House remarks last week, the restrictions only affect a tiny share of the chips market. It is a “small yard, high fence” approach. On a political level, it is hard to imagine the Biden administration could have done any less. There is no doubt that America’s most sophisticated chips, including those used for artificial intelligence, have contributed to China’s military growth. Most of the critiques of Biden’s restrictions, particularly from Mike Gallagher, the Republican chair of the House “Select Committee on the Strategic Competition between the United States and the Chinese Communist party”, say that Biden has not gone far enough. To underline: why would America want to sell China the means to make evermore effective weapons systems?It is hard to answer that with anything other than “it shouldn’t”. But most policies have unintended consequences. The more complex the measure, the likelier it is to produce unforeseen results. In this case, restricting the exporters, end users, intermediate suppliers and more recently the outward-bound investors in chips across sophisticated global supply chains is fiendishly complicated. There is evidence that it is accelerating China’s ability to reproduce the technology on its own. If anyone doubts China’s ability to replicate and supplant a leading global industry, they should ask western electric vehicle carmakers, solar panel producers, high-speed rail equipment manufacturers and even quantum computing researchers what they think. China has cleaned up many of these markets. High-end semiconductors is an area where US companies remain dominant — chiefly Intel, Nvidia, Qualcomm, AMD and Micron. These companies fear that their Chinese competitors will now catch up and displace them within five years instead of say, ten or fifteen, had Biden left the world as it was. It is very hard for a non-specialist, such as myself, to know which argument is right. But the evidence is pointing towards Chinese acceleration. Chinese chipmakers, like SMIC, are coming up with increasingly high-end products, according to a report this week by my colleague, Qianer Liu. This includes a new chip that narrows the gap between China’s AI processors and Nvidia’s market-leading ones. To be sure, Chinese companies cannot yet make the current cutting-edge 3-nanometre chips. But SMIC plans to make a 5nm chip as early as this year with Huawei, whose latest smartphone, the Mate 60 Pro, is flying off the shelves in China and abroad. It will probably not be long before they can produce almost good enough 3nm chips.  Remember when we tried to kill off Huawei? For a while, the bans on almost any high-tech sales to Huawei hit it hard, particularly after the company was shut out of US and other western telecoms networks. But in the last couple of years the company, which the Pentagon says has ties to the Chinese military, has come back with a vengeance. Huawei’s booming smartphone business is now sufficiently large to pull along a growing indigenous Chinese chip supply chain. This is having a couple of effects. The first is that Chinese semiconductor companies are starting to flood the global market in certain products. As Chris Miller points out in this recent FT op-ed, this could put a lot of non-Chinese companies out of business. We have seen that movie in other industries before. The second, as this important paper by the Stimson Center’s Ansgar Baums lays out, is that China is rebuilding global chip supply chains at home. Baums says the Biden policy has triggered “the technology equivalent of de-dollarization”. If that is true, then history tells us China will expand its production to the rest of the world, which would make a US sanctions regime increasingly hard to sustain. As the Wall Street Journal’s Greg Ip argues in this sobering piece, expanding US export controls to other countries as China itself offshores more and more of its production is a “recipe for the decoupling of the US not just from China, but the whole world”.As I say, I lack the knowledge to adjudicate this critical debate. But I believe it is too important to be left to the specialists. Thankfully, Chris Miller, whose seminal book, Chip War, won the FT’s 2022 business book of the year award has agreed to reply to this note. Chris, you are immersed in this subject: which of the two arguments that I have laid out has greater merit?Recommended readingMy column this week looks at America’s “do-harm Congress” following this week’s debacle over the border security bill. “In today’s hallucinogenic politics, Republicans still own the phrase ‘Washington is broken’”, I write. “Could there be a greater irony?” Do also listen to mine and Alex Rogers’ Swamp Notes podcast on how money is shaping the 2024 presidential election.This Patrick Radden Keefe essay in the New Yorker (A teen’s fatal plunge into the London underworld) left me mortified about the ineptitude and likely corruption of London’s Metropolitan Police. I still believe the city of my birth is the most exciting in the world but it’s a moral quagmire in so many ways.Chris Miller respondsThe biggest policy experiment we’re watching isn’t Biden’s: it’s Xi Jinping’s. The idea of tech “decoupling” wasn’t invented by anyone in Washington. For a decade, China’s leaders have been trying to wean themselves off foreign products, which is why China’s imports as a share of GDP have fallen from nearly 30 per cent around 2005 to slightly over 15 per cent today. Chips are now China’s largest remaining import. The idea that Biden’s chip controls inspired China to seek self-sufficiency gets the causality backward: Beijing’s been spending tens of billions of dollars annually on chip subsidies since around 2014, before almost anyone in Washington knew what a semiconductor was. China’s technological advances — which are real — stem from this decade of state-led investment. Before the US imposed chip controls in 2022, China’s Yangtze Memory Technologies Corp was near technological parity in Nand memory chips. As early as the mid-2010s, Huawei’s chip design team was recognised as one of the world’s best. Fears that China’s state-backed firms would catch up and then drive US tech firms out of the market inspired Washington to take a tougher stance and impose restrictions on selling high-end chips and chipmaking tools.America’s chip choke hasn’t halted all of China’s technological progress — how could it? — but it has certainly hurt. In the memory chip space, YMTC’s capacity expansion has been significantly delayed. In AI, Chinese firms either say they’ve stockpiled Nvidia chips or insist they’re skilled at responding to adversity — neither of which is a ringing endorsement of Huawei’s homegrown graphics processing units. China can produce some fairly advanced 7nm chips, and — according to reporting by your colleague Qianer Liu — a much smaller volume of 5nm chips. Yet she also reports that these chips sell for 40 to 50 per cent more than comparable semiconductors from Taiwan. In other words, the US restrictions are adding friction and driving up China’s cost of computing power, the most limited resource in AI development today. That’s why White House officials think their chip strategy is working.Chris Miller is the author of ‘Chip War’, a professor at the Fletcher School, a non-resident senior fellow at the American Enterprise Institute and a partner at GreenmantleYour feedbackWe’d love to hear from you. You can email the team on [email protected], contact Ed on [email protected] and Rana on [email protected], and follow them on X at @RanaForoohar and @EdwardGLuce. We may feature an excerpt of your response in the next newsletterRecommended newsletters for youUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up hereThe Lex Newsletter — Lex is the FT’s incisive daily column on investment. Local and global trends from expert writers in four great financial centres. 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KYIV (Reuters) – Ukraine’s government is working to overhaul its business regulation system to scrap and update hundreds of documents to help entrepreneurship and boost the war-ravaged economy, a deputy economy minister said.The reform to review about 1,300 existing regulatory documents, licences and permits began last year.About 100 documents had been already cancelled. Another 400 would be eliminated this year and 500 procedures would be updated and digitized, Oleksiy Sobolev, a deputy economy minister overseeing the changes, told Reuters.”The main idea is that now people should either fight or work,” Sobolev said in an interview in Kyiv’s government quarters, which are cordoned off by military patrols and sandbag defences at entrances.”So we need to create an environment that does not prevent businesses from working, and where the business can work under the most convenient conditions.” Russia’s invasion of Ukraine on Feb. 24, 2022, severely hit the Ukrainian economy as millions of people fled the country, cities and infrastructure were bombed, and logistics, supply chains and exports disrupted.The economy shrank by about a third in 2022 in the biggest annual fall in Ukraine’s 30 years of independence.With Ukraine’s Western allies pouring in billions of dollars in financial aid, the government maintained economic stability and businesses adjusted to war-time reality.TO SUPPORT SMES, RESILIENCE In particular, Ukraine’s small and medium-sized businesses proved adaptable, helping the broader economy, Sobolev said.”SMEs in Ukraine are diversified, varied and it adds to the economic stability. SMEs adapt faster, we really see this resilience at SMEs, so it is important for us to support it.”Once the regulatory changes are implemented, businesses would be able to save between 12 billion and 13 billion hryvnias l($320 million – $345 million) annually, Sobolev estimated. Agriculture, a key sector and top hard currency earner, would benefit the most from the ongoing reform, he said. An overhaul of the regulations was also part of the “home work” for Kyiv, Sobolev said as the government continued work with the European Union on Ukraine’s four-year facility.Earlier this month the EU approved the 50 billion euros ($54 billion) package. Sobolev reiterated the government hoped to receive 18 billion euros as budget support this year.A total of 39 billion euros would be channelled for Ukraine’s budget needs until 2027. Sobolev said the government hoped most of that amount would be received in the first two years.The Ukrainian government also wants to increase economic self-reliance and the EU package included 8 billion euros earmarked to help bring in more investment into priority sectors that can drive economic growth. The agriculture, energy, IT, logistics and transport and industry are singled out as priority industries.Sobolev expected better access to capital this year for Ukrainian businesses, saying bankable projects and transparency would be key.”We together with the Europeans expect that it would help bring up to $30-40 billion of additional investment to Ukraine in the next four years,” he said. More

SAN FRANCISCO (Reuters) – Nvidia (NASDAQ:NVDA) is building a new business unit focused on designing bespoke chips for cloud computing firms and others, including advanced artificial intelligence processors, according to nine sources familiar with the company’s plans.The dominant global designer and supplier of AI chips aims to capture a portion of an exploding market for custom AI chips and to protect itself from the growing number of companies interested in finding alternatives to its products.The Santa Clara, California-based company currently controls about 80% of the market for high-end AI chips, a position that has sent its market value up 40% so far this year to $1.73 trillion after it more than tripled in 2023.Its customers, which include ChatGPT creator OpenAI, Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) and Meta Platforms (NASDAQ:META), have raced to snap up the dwindling supply of Nvidia chips to compete in the rapidly emerging generative AI sector.Nvidia’s H100 and A100 chips serve as a generalized, all-purpose AI processor for many of those major customers. But the tech companies have started to develop their own internal chips for specific needs. Doing so helps reduce energy consumption, and potentially can shrink the cost and time to design.Nvidia is now attempting to play a role in helping these companies develop custom AI chips that have flowed to rival firms such as Broadcom (NASDAQ:AVGO) and Marvell (NASDAQ:MRVL) Technology, according to the sources who declined to be identified because they were not authorized to speak publicly.”If you’re really trying to optimize on things like power, or optimize on cost for your application, you can’t afford to go drop an H100 or A100 in there,” Greg Reichow, general partner at venture capital firm Eclipse Ventures said in an interview. “You want to have the exact right mixture of compute and just the kind of compute that you need.”   Nvidia does not disclose H100 prices, which are higher than for the prior-generation A100, but each chip can sell from $16,000 to $100,000 depending on the volume purchased and other factors. Meta has said it plans to bring its total stock to 350,000 H100s this year.Nvidia officials have met with representatives from Amazon.com (NASDAQ:AMZN), Meta, Microsoft, Google and OpenAI to discuss making custom chips for them, according to two sources familiar with the meetings. Beyond data center chips, the company has pursued telecom, automotive and video game customers.In 2022, Nvidia said it would let third-party customers integrate some of its proprietary networking technology with their own chips. The company has said nothing about the program since, and Reuters is reporting its wider ambitions for the first time.A Nvidia spokesperson declined to comment beyond the company’s 2022 announcement.Dina McKinney, a former Advanced Micro Devices (NASDAQ:AMD) and Marvell executive, heads Nvidia’s custom unit and her team’s goal is to make its technology available for customers in cloud, 5G wireless, video games and automotives, according to a LinkedIn profile. Those mentions were scrubbed and her title was changed after Reuters sought comment from Nvidia.Amazon, Google, Microsoft, Meta and OpenAI declined to comment.$30 BILLION MARKETAccording to estimates from research firm 650 Group’s Alan Weckel, the data center custom chip market will grow to as much as $10 billion this year, and double that in 2025.The broader custom chip market was worth roughly $30 billion in 2023, which amounts to roughly 5% of annual global chip sales, according to Needham analyst Charles Shi.Currently, custom silicon design for data centers is dominated by Broadcom and Marvell.In a typical arrangement, a design partner such as Nvidia would offer intellectual property and technology, but leave the chip fabrication, packaging and additional steps to Taiwan Semiconductor Manufacturing Co. or another contract chip manufacturer.Nvidia moving into this territory has the potential to eat into Broadcom and Marvell sales.”With Broadcom’s custom silicon business touching $10 billion, and Marvell’s around $2 billion, this is a real threat,” said Dylan Patel, founder of the silicon research group SemiAnalysis. “It’s a real big negative – there’s more competition entering the fray.”BEYOND AINvidia is in talks with telecom infrastructure builder Ericsson (BS:ERICAs) for a wireless chip that includes the chip designer’s graphics processing unit (GPU) technology, according to two sources familiar with the talks.650 Group’s Weckle expects the telecom custom chip market to remain flat at roughly $4 billion to $5 billion a year.Ericsson declined to comment.Nvidia also plans to target the automotive and video game markets, according to sources and public social media postings.Weckel expects the custom auto market to grow consistently from its current $6 billion to $8 billion range at 20% a year, and the $7 billion to $8 billion video game custom chip market could increase with the next-generation consoles from Xbox and Sony (NYSE:SONY).Nintendo’s current Switch (NYSE:SWCH) handheld console already includes an Nvidia chip, the Tegra X1. A new version of the Switch console expected this year is likely to include a Nvidia custom design, according to one source.Nintendo declined to comment. More

(Reuters) -U.S. stock index futures edged higher on Friday, a day after the benchmark S&P 500 breached the 5,000-mark for the first time, while investors looked ahead to inflation data for hints on the timing of the Federal Reserve’s first interest-rate cut.The S&P 500 and the blue-chip Dow both hit all-time highs on Thursday, while the tech-heavy Nasdaq closed less than 2% away from its peak as investors cheered strong earnings, particularly from companies poised to benefit from the boom in artificial intelligence.Investors will now focus on the U.S. Bureau of Labor Statistics’ revised inflation figures for 2023, calculated using new seasonal adjustment factors – statistical weights that aim to reflect how prices behaved over the year more accurately.The updated Consumer Price Index data will be released around 8:30 a.m. (1330 GMT), with new inflation data for January coming next week.”This is something the Fed are watching, and Governor Waller explicitly mentioned these revisions in his speech last month, so it’ll be an important one for the timing of any rate cuts,” said Deutsche Bank strategist Jim Reid.”I don’t think there’s any analytical reason to believe the bias will continue to favor higher H2 inflation over H1, but the market is a bit nervous after last year that the same seasonal adjustment pattern could repeat.”Strong economic data and hawkish comments from Federal Reserve policymakers in recent weeks have pushed back traders’ bets that the U.S. central bank will start cutting rates in March. At 7:10 a.m. ET, Dow e-minis were up 19 points, or 0.05%, S&P 500 e-minis were up 7 points, or 0.14%, and Nasdaq 100 e-minis were up 55.75 points, or 0.31%.The three main indexes were set for their fifth consecutive week of gains as upbeat earnings reports offset jitters around the interest-rate path and concerns about U.S. regional banks’ exposure to commercial real estate.With the U.S. earnings season past the halfway mark, more than 80% of the S&P 500 companies topped profit estimates in the fourth quarter, according to LSEG data on Thursday. In a typical quarter, 67% of companies beat estimates. PepsiCo (NASDAQ:PEP) slipped 2% premarket after its fourth-quarter revenue fell short of estimates as multiple price hikes crimped demand for its juices and Lay’s crisps. Peer Coca-Cola (NYSE:KO) inched 0.5% lower.Pinterest (NYSE:PINS) plunged 8.9% after it forecast first-quarter revenue largely below Wall Street estimates, a sign that it faces tough competition from larger social media players, even as the digital advertising market stabilizes.Cloudflare (NYSE:NET) rallied 28.2% as it forecast first-quarter revenue and profit above market estimates, betting on strong demand for its cloud and content delivery services. Expedia (NASDAQ:EXPE) fell 14.5% after the online travel platform warned that revenue in 2024 would moderate as air ticket prices drop and said CEO Peter Kern was stepping down.Crypto stocks such as Coinbase (NASDAQ:COIN), Riot Platforms (NASDAQ:RIOT) and Hut 8 rose between 7.0% and 14.9% as bitcoin, the world’s most valuable cryptocurrency, hit its highest level since the launch of spot ETFs. More

LONDON (Reuters) -The dollar headed for a fourth weekly gain on Friday, pushing the yen to a 10-week low, as traders dialled back bets on how quickly the Bank of Japan might raise interest rates and how soon the Federal Reserve will cut them.BOJ Governor Kazuo Ueda said on Friday there was a high chance for easy monetary conditions to persist even after the central bank ends negative interest rate policy, which the market expects to happen as early as next month.That echoed dovish comments from his deputy, Shinichi Uchida, a day earlier that “it’s hard to imagine” that rates would rise “rapidly.”In contrast, a raft of U.S. Federal Reserve officials this week have signalled the central bank has no pressing need to cut interest rates, thereby giving the dollar an extra tailwind.”A word of caution is coming through that rates will stay higher for longer and early rate cuts are unfounded. That is giving the dollar extra strength … (and) is what is propelling the yen weaker again,” Hargreaves Lansdown head of money and markets Susannah Streeter said.The yen was little changed at 149.42 per dollar after trading at 149.575 earlier, its weakest since Nov. 27. It is heading for a 0.68% slide this week, having fallen in value in five out of the last six weeks. On Friday morning in Tokyo, Japanese Finance Minister Shunichi Suzuki said that he was “watching FX moves carefully,” uttering the well-worn phrase for the first time since Jan. 19. Traders were unfazed by the warning.The dollar index ticked up slightly to 104.19, for the week it has climbed 0.2%, getting off to a strong start after blowout monthly payrolls data last Friday and a hawkish tilt from Fed Chair Jerome Powell in a “60 Minutes” interview aired Sunday.The next major scheduled U.S. data release is January’s Consumer Price Index (CPI) inflation reading on Tuesday, though traders are also waiting for Friday’s annual update of seasonal adjustment factors for consumer price inflation. “Last year’s update of CPI seasonal adjustment factors was a big deal, showing inflation momentum was stronger than thought at the end of 2022, catching both the market and the Federal Reserve off guard,” said James Knightley, ING’s chief international economist in a note. “The market (is) watchful to what it may mean for the timing of the first Fed rate cut this year” Traders have all but ruled out a cut at the Fed’s next policy meeting in March, versus a chance of 65.9% a month ago, according to CME Group’s (NASDAQ:CME) FedWatch Tool. It shows around a 60% chance of a cut by the Fed’s May meeting. The euro was little changed at $1.0773, while sterling held at $1.260. Both currencies have been relatively resilient this week, with officials from the European Central Bank and Bank of England pushing back against market wagers on early rate reductions.The Swiss franc weakened to 0.8762, with the dollar up nearly 1% on the safe haven currency this week, as traders digested data suggesting the Swiss National Bank could be intervening in markets to weaken the unit. Leading cryptocurrency bitcoin rose 3% to around $46,688, on course for a weekly gain of 9.3%, its best performance in two months. More

The ECB has singled out wages as the single most important variable in determining whether it can start cutting interest rate and call time in fight against high inflation.Its new wage tracker, detailed for the first time in a paper published on Friday, showed growth in compensation was seen hitting a peak at around 5% early this year.But the jury was still out on whether and how quickly pay rises would fall back towards the 3% level that the ECB considers compatible with its 2% inflation goal.”Negotiations over the first quarter of 2024 are likely to be decisive for the development of wage pressures over 2024,” the authors of the paper wrote.Often cited by ECB chief economist Philip Lane, the ECB’s new tracker uses data from individual pay agreements in Germany, France, Italy, Spain, the Netherlands, Austria and Greece to estimate wage pressures and gauge sentiment.The ECB then tries to forecast future wage-settlement growth based on how key macroeconomic variables tend to predict pay deals in each country. More