China Gets $48 Billion For Fund To Make Chips

"SINGAPORE -- China raised about $48 billion in its third installment of a national semiconductor fund, aiming to increase its chip-making capabilities in the face of an escalating technology competition with the U.S.

This latest financing round is the largest for the state-owned National Integrated Circuit Industry Investment Fund, created in 2014. Commonly known as the "Big Fund," it directs state support to build up the country's semiconductor-supply chain and has played an outsize role in its development.

The third tranche of the fund, which was registered on Friday, counts China's Ministry of Finance as its largest investor and has attracted funding from the country's biggest state-owned banks and investment vehicles linked to local governments such as Shanghai, Beijing and Shenzhen. It has yet to release any investment plans.

Beijing's national efforts to wean itself off foreign technology have been turbocharged over the past years, as U.S. authorities increasingly cut China's access to American technology and know-how. Chinese leader Xi Jinping is seeking self-sufficiency in critical technology ranging from semiconductors and jet fighters to the production of grain and oilseeds.

Governments across the world are pouring billions of dollars into nurturing domestic semiconductor industries as a boom in artificial intelligence drives demand for advanced chips, and after the pandemic laid bare supply-chain constraints.

The U.S. earmarked more than $50 billion to expand chip manufacturing and research at home. South Korea, home to chip makers Samsung Electronics and SK Hynix, announced a $19 billion tax-incentive this month to bolster its semiconductor sector.

In the past, China's government semiconductor fund has concentrated its investments in areas that buttressed the country's overall chip-making capabilities.

Bernstein analyst Qingyuan Lin said manufacturing would remain the main focus of fund allocation this time, as it requires the biggest financial investment. Other analysts said the money is expected to promote technological advancements in sophisticated chip-making technologies, such as advanced high-bandwidth memory chips, an area where China currently has no production capabilities.

The fund raised about 138.7 billion yuan -- equivalent to about $19 billion based on the current exchange rate -- from entities like the central government, banks and companies during its first phase. It raised another 204.2 billion yuan -- or around $28 billion -- in a fresh round in 2019.

China offers a mechanism of support for the chip sector, including government grants, tax breaks, equity investments and low-interest loans.

Such state support has already resulted in the growth of a burgeoning chip industry in China, primarily in older-technology chips that are widely used in automobiles and other electronics. Research consulting firm Gavekal Dragonomics said China is bolstering its chip-making capacity in such legacy chips, and will add more production capacity than the rest of the world combined in 2024.

Government funds also supported the development of Chinese companies specializing in chip-making equipment and materials helping them win market share.

"Beijing is now more confident China will make meaningful progress on semiconductors. Otherwise, they wouldn't have raised more money this time around," said Linghao Bao, a senior analyst at research firm Trivium China.

Bao said U.S. export controls created a tailwind for Chinese companies to succeed, as more local chip foundries -- firms that produce chips designed by others -- are willing to adopt domestic alternatives.

The Ministry of Finance holds about 17%, the largest share in the latest third tranche, according to Tianyancha, a company registration database.

China's biggest banks, including the Industrial & Commercial Bank of China and China Construction Bank, said in filings to the Hong Kong stock exchange on Monday that the fund had an investment focus on "the full industrial chain of integrated circuit."

China's efforts to incubate its chip industry with state capital have helped companies grow but also resulted in corruption and waste. A former top executive at the fund was probed by China's anticorruption agency in 2022. The fund didn't respond to a request for comment. Some Chinese companies meant to produce sophisticated chips went belly-up after burning through massive amounts of state funding, illustrating the challenges Beijing faces." [1]

1. China Gets $48 Billion For Fund To Make Chips. Lin, Liza.  Wall Street Journal, Eastern edition; New York, N.Y.. 28 May 2024: B.1.