China’s semiconductor industry could soon get a $47 B funding boost

The US-China trade war appears to be on the path of steady escalation. The delegation of economic advisers from US President Donald Trump left Beijing on Friday, May 4, with no clear progress from the two-day trade talks they conducted. According to Fortune, the US delegation walked away empty-handed after making a series of high-handed demands from China, demands which Financial Times columnist Martin Wolf says Chinese leaders find “incomprehensible”. Now, it appears that China is about to announce a new fund that could likely heighten those trade tensions even further.

According to a report in The Wall Street Journal, the government-backed China Integrated Circuit Industry Investment Fund Co. is soon to announce a new fund of around 300 billion yuan (about US$47.2 billion) in the coming weeks. The new fund will be focused on pushing the development of China’s fledgeling semiconductor industry as the country tries to cut its reliance on overseas chip manufacturers and reduce the technology gap with the US and other rivals said The Journal, citing sources familiar with the impending announcement.

According to research firm PriceWaterhouseCoopers (PwC), China bought 58.5 percent of the semiconductor chips manufactured globally in 2016, but its own in-country manufacturers accounted for only 16.2 percent of the industry’s global sales revenue. For a country that has built a massive industry on the manufacture and sale of cheap consumer electronics, China still relies heavily on external suppliers for the components of those electronics, notably semiconductors and related hardware. The China Integrated Circuit Industry Investment Fund Co. previously raised 139 billion yuan (around US$21.8 billion) in 2014 from central and local government-backed enterprises and industry players, and plans to use the new fund’s money “to improve China’s ability to design and manufacture advanced microprocessors and graphic-processing units”, according to one of The Journal’s sources. Another source stated that the exact details of the fund, including the amount, could change in the future.

China has steadily intensified efforts to build a homegrown semiconductor manufacturing industry, particularly in the light of opposition by US regulators to takeover bids by Chinese firms for US chip manufacturers. US regulators have also cried foul over the large-scale involvement of state-owned enterprises and government agencies in the 2014 development fund. In a telling March 22 report on China’s trade practices, the US Trade Representatives’ office noted this dominance, saying it indicated “the high degree of Chinese government involvement in establishing the funds to meet national strategic objectives.”

For its part, China has openly embraced foreign investment in its development funds. In a news conference in Beijing on April 26, Chen Yin, Chief Engineer and spokesman of the Chinese Ministry of Industry and Information Technology, said the China Integrated Circuit Industry Investment Fund was open to foreign investment, “The second phase of fundraising is underway, and we welcome foreign companies to participate in this round of financing.” He further added, “China has a vast electronics information market, and we will continue to take the path of innovation and international cooperation...We will push ahead with speedier breakthroughs in key technologies in the industry, which is technology, talent and capital intensive.”

There has been no official comment from the Investment Fund about the proposed round of funding, or official reaction from US authorities. However, as China moves to openly push its own indigenous industry, it is likely to face opposition from the US. What this could mean for the fraught political relationship between the two countries is anybody’s guess. For now, the world waits and watches.