Amid an increasingly tense geopolitical situation, Hong Kong is well positioned to play a pivotal role in China's national strategy and semiconductor development, particularly in circumventing U.S. export controls and driving technological innovation. Recent developments in Hong Kong's third-generation semiconductor investments highlight a deliberate strategy to exploit gaps in U.S. regulations to serve China's objectives.
Hong Kong's latest semiconductor investments
In May 2024, the Legislative Council Finance Committee discussed a significant investment of HK$2.83 billion to establish the Hong Kong Microelectronics Research and Development Institute, which will focus on third-generation semiconductors. The initiative will include setting up a pilot production line with essential tools such as I-line lithography equipment, photoresist development tools, high-temperature ion implantation equipment, high-temperature annealing furnaces and thin-film tools. The funding was quickly approved in just 84 minutes, at the urging of Hong Kong's Technology and Innovation Secretary, Sun Tung.
When asked by a pro-Beijing lawmaker whether the technology in question was banned by the US government, Sun stressed that I-line lithography tools needed to make third-generation semiconductors are fortunately not subject to US export controls, so the funding should be approved quickly before the loophole is closed.
In other words, Hong Kong is seeking to develop technologies that are not yet subject to strict scrutiny, in line with China's broader strategy to achieve technological self-sufficiency amid rising tensions with the United States.
Understanding 3rd Generation Semiconductors and I-line Lithography Tools
I-line lithography tools are a type of photolithography equipment used in the semiconductor manufacturing process. These tools use ultraviolet light with a wavelength of 365 nanometers to pattern intricate designs onto silicon wafers. I-line lithography is an older technology compared to deep ultraviolet (DUV) and extreme ultraviolet (EUV) lithography, but it still plays an important role in the manufacture of certain types of chips. This includes third-generation semiconductors such as silicon carbide (SiC) and gallium nitride (GaN) that are used in high-performance applications, but don't always require the extremely fine resolution that newer lithography techniques offer.
These third generation semiconductors, primarily comprised of wide bandgap materials such as SiC and GaN, offer significant advantages over their first generation (silicon-based) and second generation (compound semiconductor) counterparts: These materials boast higher efficiency, better thermal stability, and higher power density, making them ideal for applications in electric vehicles, renewable energy systems, and high frequency communication devices.
The choice to focus on third-generation semiconductors is a strategic move by China and Hong Kong to circumvent existing U.S. export controls: Hong Kong is effectively creating a buffer against possible future sanctions by investing heavily in less advanced technologies and equipment that are not yet subject to U.S. restrictions.
Sun's emphasis on the need for rapid funding approval and procurement before it's too late reflects a strong awareness of the volatile export control environment and policies of the Bureau of Industry and Security within the US Department of Commerce, and a sense of urgency to establish such capabilities before further restrictions are imposed.
Hong Kong's Technology Blueprint and its Strategic Implications
This strategy is not new. In 2022, the Hong Kong Applied Science and Technology Research Institute (ASTRI) advocated attracting Chinese-American scientific talent to Hong Kong and increasing resources to contribute to China's semiconductor development. ASTRI CEO Ye Chung-hui said, “Currently, semiconductor companies in mainland China may find it difficult to recruit Chinese-Americans. If Chinese-Americans are willing to settle in Hong Kong, they can bring these technologies to China, representing the most advanced and outstanding fields, and ultimately driving the semiconductor development of the whole country.”
This reflects China's long-standing operating model of using nationalism and a united front strategy to recruit overseas Chinese talent and advance its technological ambitions. In the case of Hong Kong, the hope is that its society and economy, which are still freer than mainland China's although significantly restricted by the 2020 National Security Law, will prove more attractive to overseas Chinese.
Moreover, highlighting a decade of collaboration especially on semiconductors, the National Engineering Research Centre for Application Specific Integrated Circuit Systems (Hong Kong Branch), established in 2012 with the approval of China's Ministry of Science and Technology, will focus on research in areas such as 3D integrated chips, third generation semiconductors, and low-power wireless connectivity chips.
Hong Kong's latest 2024/2025 Policy Address further reinforces the city's grand strategy to become an international innovation and technology hub. Hong Kong has outlined comprehensive plans to strengthen its innovation infrastructure, research capabilities and talent pool. The establishment of the Hong Kong Microelectronics R&D Institute is a key component of this strategy, aiming to foster collaboration between universities, research centres and industry to advance third-generation semiconductor technologies.
A key pillar of this strategy is the Hong Kong-Shenzhen Innovation and Technology Park, located on Lok Ma Chau Loop. The Park is designed to integrate Hong Kong more deeply into the Greater Bay Area and align with China's national development strategy, while also deepening links with global markets. The Park's first building will be operational by the end of this year, and efforts to attract investment and talent have already begun. The Government's continued support for the Park's development, including the drafting of a development white paper, underscores its strategic importance.
In addition to the park, Cyberport is also establishing an AI Supercomputing Centre to meet the computing needs of research institutes and industries. The first phase of the facility is expected to be operational by the end of this year and will provide up to 300 petaflops of computing power by early 2026, equivalent to processing approximately 10 billion images per hour. The initiative is part of a broader HK$30 billion funding plan to support AI development in Hong Kong, attracting AI experts and companies from around the world.
A notable aspect of Hong Kong’s strategy is the use of university technology transfer offices. Starting in the 2024/2025 academic year, each of the eight subsidized universities will receive up to HK$16 million per year to enhance their technology transfer and market expansion services. This approach suggests a dual-use strategy in which academic institutions could act as conduits for transferring advanced technologies that could benefit China’s broader strategic objectives. Minimal oversight and collaboration with international organizations raises concerns that these technologies could end up in the hands of Chinese authorities and align with the CCP’s military-civil integration goals.
Conclusion
Currently, China lags significantly in producing the primarily silicon-based first and second generation chips that are essential for artificial intelligence (AI) and graphics processing units (GPUs). These chips are the backbone of modern computing and are driving innovation in AI, big data, and high performance computing. China's inability to produce these advanced chips domestically has left it dependent on foreign technology, creating strategic vulnerability. Third generation chips have potential for growth, but China's ability to advance its position in the global semiconductor industry remains uncertain and must be watched closely.
Nonetheless, Hong Kong's strategic investments in third-generation semiconductors and AI are noteworthy. These investments are a calculated response to a changing geopolitical and economic context. By focusing on technologies that are not yet heavily regulated by international regulations, Hong Kong is positioning itself as a key player in China's national strategy toward technological self-reliance. This approach helps it circumvent U.S. export controls and fosters innovation in high-impact sectors, in line with China's long-term goals. The situation in Hong Kong should be closely monitored by U.S. authorities and relevant stakeholders.
