China: we will retaliate against Japan if US-led chip restrictions continue to stem sales

China has threatened "severe economic retaliation against Japan" if Tokyo continues restricting sales and servicing of chipmaking equipment to Chinese companies, reports Bloomberg.

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In the report, the outlet adds that this complicates US-led efforts to cut the world's second-largest economy off from the world of advanced technology, mostly semiconductor manufacturing equipment, although Chinese companies are still getting ASML machines into the country.

Senior Chinese officials have "repeatedly outlined" that position in recently meetings with Japanese officials, "according to people familiar with the matter". One of the fears in Japan is that Toyota Motor Corp. privately told officials in Tokyo that Beijing could react to new semiconductor controls by cutting Japan's access to critical minerals that are essential to automotive production.

The US has been pushing for Japan to impose new rerstrictions on the ability of companies including Tokyo Electron to sell advanced chipmaking tools to China. In those talks, senior US officials have been working with senior Japanese officials on ensuring adequate supplies of critical minerals, as China has imposed restrictions on exports of gallium, germanium, and graphite in 2023.

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This isn't the first time that China has threatened (and taken action) against Japan and in particular, Toyota, where in 2010, China temporarily suspended the exports of rare earth minerals to Japan after a clash in the waters of the East China Sea claimed by both sides.

China had a huge effect on the Japanese electronics industry, threatening to cull global supplies of high-power magnets produced in Japan, using rare earth minerals from China. Tokyo has been working since to reduce its reliance on China, but hasn't had much success so far.

Akira Minamikawa, an analyst with the research firm Omdia, said: "Japan shouldn't tighten its export control just because the US is making such a request. Japan should have its own philosophy, decide what's best for the country and stand firm".

Representative Zoe Lofgren and Senator Alex Padilla, both California Democrats, in an August 13 letter to senior Commerce Department officials, wrote: "We are deeply concerned about the harm being done to US companies and US leadership in semiconductor innovation by unilateral export controls with questionable national security benefits".

Andrew Jackson, head of Japan equity strategy at Ortus Advisors Pte. added: "I think this points to new restrictions from the US shortly. I am telling my clients to keep shorting names with high China sales weightings".