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China’s $47 billion semiconductor fund puts chip sovereignty first

China has closed a third state-backed investment fund to bolster its semiconductor industry and reduce its reliance on other countries for either using or making wafers, prioritizing so-called chip sovereignty.

The China National Integrated Circuit Industry Investment Fund (“Big Fund”) has previously established two phases: Big Fund I (2014-2019) and Big Fund II (2019-2024). Public documents show that the scale of the latter is significantly larger than the former, but the scale of Big Fund III is larger than the previous two, reaching 344 billion yuan, or about 47.5 billion US dollars.

The size of the Big Fund III exceeded expectations, and with Huawei’s recent increased reliance on Chinese suppliers, it confirms China’s goal of becoming self-sufficient in semiconductor production. It’s also a reminder that the chip war between China and the West is a two-way street.

The United States and Europe aren’t the only countries looking to reduce their reliance on their tech rivals. China has reason to worry about its supply, too, and it’s not just exports from the United States and its partners that are at risk.

When it comes to chip manufacturing, Taiwan is a major concern. China seizing control of its production capabilities would put the United States and its allies at a huge disadvantage; Taiwan Semiconductor Manufacturing Company (TSMC) currently produces about 90% of the world’s most advanced chips.

On the other hand, Bloomberg learned from sources that if China invades Taiwan, ASML and TSMC, headquartered in the Netherlands, have ways to paralyze chip manufacturing machines.

U.S. Commerce Secretary Gina Raimondo recently said China produces about 60% of traditional chips, which are used in cars and appliances.

The chip war has spread to both traditional and advanced chips, with uneven results.

The official Chinese line is that U.S. policies are counterproductive, with exports from major U.S. chip companies falling, a view shared by others.

In any case, this leaves companies like Nvidia walking a tightrope between “maintaining the Chinese market and dealing with U.S. tensions,” IG market analyst Hebe Chen recently told Reuters. The company tailored three chips for China after U.S. sanctions blocked it from exporting its most advanced semiconductors, but competition forced it to adopt lower prices than it had expected.

However, it could also be argued that these costs might be worth it if commercial struggles among Western chip companies prevent China from developing and acquiring more advanced chips as quickly as its competitors.

There are signs that the restrictions could cause pain for China; for example, if its artificial intelligence companies were unable to access Nvidia’s cutting-edge chips, or if its leading company, Semiconductor Manufacturing International Corporation, had a harder time making its own chips.

The Big Fund III itself is a sign that China is feeling the pressure. The money will reportedly go toward large-scale wafer manufacturing like previous funds, but will also go toward making high-bandwidth memory chips. These chips, known as HBM, are used in AI, 5G, the Internet of Things, and more.

However, it’s its size that’s most telling.

The size of the third major fund, backed by six major state-owned banks, is larger than the $39 billion in direct incentives the U.S. government provided to the chip industry under the CHIPS Act, though the total federal funding is as high as $280 billion.

Compared to these two bills, the EU chip bill, at €43 billion, seems small, as does South Korea’s $19 billion support plan, and the market may have noticed this.

News of the Big Fund III sparked a rally in the share prices of Chinese semiconductor companies, which are expected to benefit from the new capital. However, Bloomberg noted that Beijing’s past investments have not always paid off.

In particular, “China’s top leaders are frustrated by their failure over the years to develop semiconductors that can replace American circuits. In addition, the former head of the Big Fund was removed from office and is under investigation for corruption,” the media noted.

Even without corruption, major changes in semiconductor manufacturing are a slow process. In Europe and the United States, it will take time, but there are some interesting new developments.

For example, French deep tech startup Diamfab is developing diamond semiconductors to support the green transition, especially in the automotive industry. It’s still a few years away, but this kind of Western innovation may be as worthy of attention as what traditional Chinese companies may do.

Additional reporting by Rita Liao.

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