Good luck trying to sanction China's 4,762 little giants

AN unprecedented catalogue of sanctions has proven to be a powerful weapon in hobbling the Russian economy in response to Vladimir Putin's unprovoked invasion of Ukraine. And the threat of ensnaring Chinese companies in their web has restrained Beijing's backing for its ally.

But sanctions lose their bite if one's adversary is woven into the global supply chain. And that's what China has done this century - it has moved up the value chain from socks to robots.

Beijing has stepped up efforts to nurture innovative small and mid-sized enterprises (SMEs), hoping some will become indispensable to multinational companies.

The so-called "little giants" initiative is not new, going back more than a decade. But it was in 2018, after the trade war between the US and China heated up, that Beijing began to seriously push this programme. The government picked up the pace last year, offering 10 billion yuan (S$2.1 billion) in grants and subsidies, as well as new financing channels. The new Beijing Stock Exchange, launched in November, is designed to help fund innovative SMEs.

As of 2021, China has recognised 4,762 little giants, with 74 per cent in manufacturing and another 20 per cent in scientific research and technology services, according to data compiled by HSBC. It plans to spot 3,000 more this year.

These little giants are nothing like big tech behemoths such as Alibaba or Tencent, whose businesses span social media, cloud computing to e-commerce. They are highly specialised.

For instance, Beijing-based ForwardX Robotics, which recently raised US$31 million from a Series C funding round, makes robots for warehouses and logistics companies. They aim to burrow deep in the global supply chain.

Cold feet

To be sure, the West is willing to take a hit to make a point. The US sanctioned Huawei Technologies, which once spent US$11 billion a year on its suppliers. However, when the risk of disruption is too great, cold feet can ensue.

This is so even when it comes to Putin's Russia. While the Treasury sanctioned oligarch Alisher Usmanov, detaining his yachts and private jets, it exempted his businesses, many of which are important inputs to manufacturing. His companies supply half of the world's merchant hot briquetted iron, a raw material for steel production. Officials worry that acting against Usmanov could drive up prices of metals, The Wall Street Journal reported. After all, inflation has already hit 7.9 per cent, the highest since the Organization of Petroleum Exporting Countries's 1970 oil embargo.

By the same token, will the Treasury want to sanction a Chinese firm that is an essential supplier to American businesses such as Apple? Sanctions are meant to inflict damage on one's adversary, not on oneself. While behind on semiconductors and aerospace, Chinese firms are already leading forces in electric-vehicle batteries, machine tools and robotics, said research firm Gavekal Dragonomics.

US sanctions have clearly damaged some of China's tech ambitions. Huawei's 29 per cent slide in revenue last year is testament to that. But they also have forced Beijing's policymakers to shore up their economic vulnerabilities.

These days, by thinking little, they are actually aiming big. BLOOMBERG