Inside China's US$40 billion semiconductor investment plan

China is reportedly preparing to roll out a US$40 billion state-backed investment fund to turbocharge its semiconductor sector.

Inside China's US$40 billion semiconductor investment plan
People walk past a Huawei store with advertisements for the Mate 60 series smartphones, at a shopping mall in Beijing, China August 30, 2023. REUTERS/Yelin Mo/File Photo

The backstory: It's no secret that China and the US have been locked in a tech competition, especially when it comes to areas like semiconductors. One notable chapter was back in October when the US imposed restrictions on Chinese companies, saying they needed licenses to get their hands on high-tech US chips and chipmaking gear.

This triggered a chain reaction of moves aimed at tightening the flow of technology to China. China fired back with a cybersecurity probe into Micron, a big shot in the US chip world. The nation expressed concerns about security risks and accused the US of mixing business with politics. On top of that, China started putting restrictions on exporting gallium and germanium, which are important components in electronics and chip production.

In the world of domestic funding for semiconductors, there's a big player called the China Integrated Circuit Industry Investment Fund Co., aka the “Big Fund,” which has been backing major Chinese chip foundries like SMIC and Hua Hong Semiconductor.

More recently: Zooming out to the bigger economic picture, China's economy has been facing some recent obstacles. For instance, the nation initially targeted an around 5% growth rate this year but now faces the possibility of missing that goal. Plus, China's population is declining, and the post-COVID economic bounce-back has been slower than expected. To kickstart the economy, the country has pursued strategies like wooing foreign investments and fine-tuning the rules for AI to boost support in that developing sector.

The development: China is reportedly preparing to roll out a US$40 billion state-backed investment fund to turbocharge its semiconductor sector, according to Reuters. This move underscores the country’s determination to compete head-on with global tech heavyweights like the US.

This fund is part of efforts by the "Big Fund" mentioned earlier, and it’s aiming to raise about 300 billion yuan (around US$41 billion), which beats two other similar funds launched in 2014 and 2019. So, what's the game plan? One main focus is investing in chip manufacturing equipment.

Insiders revealed that authorities have given the green light for the fund, with the finance ministry pledging 60 billion yuan (US$8.2 billion). But when it comes to other contributors, lips are sealed for now. As for the launch date, it's still up in the air, and there's a possibility of some tweaks to the plan down the road. The discussions are still confidential, so all those insiders wanted to stay anonymous.

Also, China is considering getting a couple of institutions to handle all that cash. It’s expected that SINO-IC Capital might be one of them, and the Big Fund also has eyes on China Aerospace Investment.

Key comments:

"To open up new areas and new arenas in development and foster new growth drivers and new strengths in face of fierce international competition, China should ultimately rely on scientific and technological innovation," said Chinese President Xi Jinping in March.

“The economic relationship between the United States and China is one of the most significant in the world. We share over US$700 billion of trade,” said US Commerce Secretary Gina Raimondo as she kicked off a meeting in Beijing.

"We seek a healthy economic relationship with China: one that fosters growth and innovation in both countries," said US Treasury Secretary Yellen in April.