Federal Reserve Board staff note examines China’s chipmaking expansion and constraints from advanced chip and equipment export controls

The Federal Reserve Board published a staff FEDS Note assessing China’s efforts to expand domestic semiconductor manufacturing and how recent trade and investment restrictions shape its prospects, against a backdrop of a highly specialized and geographically concentrated chip supply chain with limited substitution options. The note finds that China has rapidly increased spending on fab construction and chipmaking equipment, supported by state-led funds and subsidies, lifting its overall fabrication capacity while production remains concentrated in legacy nodes and with essentially no capacity at the high end. It reviews U.S. export controls culminating in broad licensing and end-use restrictions introduced in October 2022 and reports that China’s total chip imports fell after controls were imposed but have remained broadly in line with pre-pandemic trends because access to legacy chips was largely unaffected. The analysis highlights intensified constraints on China’s ability to obtain cutting-edge inputs, including 2023 restrictions by Japan and the Netherlands on exports of chipmaking equipment to China, with the Netherlands stopping sales of extreme ultraviolet lithography machines, and notes evidence of front-running via a nearly sevenfold increase in China’s imports of chipmaking equipment from the Netherlands between the announcement and imposition of restrictions. It concludes that limits on advanced equipment could materially slow China’s progress at the technology frontier, although Chinese firms have demonstrated innovation, including claims of 5 nm production capability by Semiconductor Manufacturing International Corporation.