China's Big Fund China is investing significantly more money in its chip industry

Related Vendors

FAULHABER Drive Systems

Wuxi InfiMotion Technology Co., Ltd.

China is investing more in its semiconductor industry than ever before. With 44.3 billion euros (approx. 47.5 billion  USD) for the partially state-owned "Big Fund III", the now published amount of funding is much higher than originally assumed. Not only the large foundries, but also other important parts of the chip supply chains in the People's Republic are expected to be supported over the next 15 years.

Henrik Bork, a longtime China correspondent for the Süddeutsche Zeitung and the Frankfurter Rundschau, is Managing Director at Asia Waypoint, a Beijing-based consultancy specializing in China.

The third phase of the "National Integrated Circuit Industry Fund" was registered with the financial authorities in Beijing at the end of May with capital of 344 billion yuan (equivalent to around 44.3 billion euros or 47.5 billion USD), according to publicly available documents.

This means that the latest edition of the subsidy program for China's semiconductor industry, which has been running since 2014, has roughly the same volume as the "Chip and Sciences Act" announced by US President Joe Biden in 2022 (53 billion US dollars, equivalent to around 49.5 billion euros at today's exchange rates).

The volume of the Big Fund III is almost identical to the volume of funding that the EU is offering with its Chip Act through public-private partnerships to build its own chip industry. In Europe, it is 43 billion euros.

The actual sum in the Big Fund III had surprised observers once again, although its planned issue has been known for months. So far, slightly lower sums had been speculated (we reported).

In light of Washington's ongoing efforts to deny China access to advanced chips and the lithography machines needed for their production through boycotts, and also in light of the global wave of protectionism and economic nationalism currently being observed, the communist leadership has evidently decided to significantly increase its own support for its semiconductor industry once again.

Funding with the watering can

When China launched the first phase of the program, the "Big Fund I" with just under 139 billion yuan (around 17.9 billion euros or 19.2 billion USD at today's rates) in 2014, this was a novel approach in the People's Republic because instead of the usual government mega-projects, a more market-oriented approach was introduced. China's Big Fund combines not only government funds, but also investments from large companies, financial institutions and private investors.

In the second phase, the Big Fund II, 204 billion yuan (about 26.3 billion euros or 28.2 billion USD at today's rates) were raised. With the Big Fund III, Beijing is therefore investing about as much in the industry again as has flowed in total in funding since 2014. The duration for the new investments has been extended to 15 years.

From the Chinese perspective, it's no longer simply about the "competitiveness" of the domestic semiconductor industry, which might have been the case a decade ago. 

Today, in the face of US embargoes on advanced AI chips and pressure from Washington on manufacturers in the Netherlands and Japan not to deliver the latest generation of lithography machines to China, it is more about the continuation of its overall economic development.

The chips and equipment that Washington wants to deny the Chinese are also needed for the expansion of electric mobility, the wind and solar industry, and other modern key sectors such as big data, AI and autonomous driving. If China does not make major efforts to become more self-sufficient in chip production, it would be severely affected in its overall economic development by the embargoes.

Investments making a difference?

Over the years, the Big Fund has had mixed results. Some leading companies in the Chinese semiconductor industry, such as SMIC (Semiconductor Manufacturing International Corporation) or Huahong Semiconductor Ltd., have clearly benefited from it. Many smaller companies and specialized providers in the areas of packaging, edging and other process steps, as well as materials, have also been helped.

On the other hand, money has probably also disappeared, as can be observed time and again with government programs worldwide. In July 2022, Chinese state prosecutors initiated an investigation into corruption against Ding Wenwu, the then head of the Big Fund. Other managers are also implicated.

Since March 2023, Zhang Xin, a former official from the planning department of the Chinese Ministry of Industry and Information Technology (MIIT), has taken over the management of the Big Fund.

How far private investors will be involved this time is currently unknown. However, it is already noticeable that Beijing has secured more direct state control with the Big Fund III than ever before following the corruption scandals.

State controlled

The Chinese Ministry of Finance is the largest investor in Big Fund III with a share of 17% and a contribution of 60 billion yuan (around 7.7 billion euros or 8.3 billion USD), according to publicly available registration data. The China Development Bank holds 10.5%.

For the first time, five major state banks have also been required to participate in this national effort with a lot of money, the Industrial Commercial Bank of China (ICBC), the China Construction Bank, the Agricultural Bank of China, Bank of China and the Bank of Communications, each of which hold around 6% of the shares. This makes it even easier for the Ministry of Finance to keep track.

As far as the future direction of the Big Fund III's investments is concerned, all current analyses are necessarily still based on somewhat shaky forecasts. Insiders in Beijing expect that China will pursue a "dual approach" this time. On the one hand, the entire semiconductor ecosystem, starting from design and production, to packaging and testing, to equipment and materials for modern chips, will continue to be promoted.

On the other hand, Beijing now apparently wants to specifically close certain gaps in its supply chains. This includes large foundries as well as the production of critical components such as HBM ("high-bandwidth memory").

In general, it is currently assumed that Big Fund III will focus even more than before on the establishment of a Chinese industry for lithography machines. Therefore, the name "Naura Technology Group", the largest producer of semiconductor equipment in China, is currently appearing again and again when talking about the possible beneficiaries of Big Fund III. (sb)

Resilience of supply chains

Summit: China, Japan and South Korea and the "stabilization" of their high-tech supply chain