China’s $47.5 Billion Fund to Boost Semiconductor Industry Will Likely End in Failure: Analysts

A worker produces a semiconductor chips at a workshop in Suqian, in China's eastern Jiangsu province, on Feb. 28, 2023. (STR/AFP via Getty Images)

Amid heightened U.S. technological controls over China’s chip and AI industries, the Chinese Communist Party (CCP) has launched its largest semiconductor investment fund to date. However, experts predict that this effort, much like the historical Great Leap Forward, will likely end in failure.

On May 28, state media CCTV reported that Beijing will inject 344 billion yuan ($47.45 billion) into the National Integrated Circuit Industry Investment Fund’s third phase (the Big Fund III), with six state-owned banks participating for the first time. This phase aims to enhance social capital investment in the entire IC industrial chain through multi-channel financing support.

The first phase of the Big Fund, established in September 2014, had an initial investment of 138.7 billion yuan ($19.3 billion) to support leading Chinese semiconductor companies like SMIC, YMTC, HLMC, and Tsinghua Unigroup. The second phase, announced in October 2019 amid U.S. sanctions, had an initial investment of over 204 billion yuan ($28.14 billion), focused on China’s weaker semiconductor equipment and materials sectors, according to a report by the Taiwan-based Institute for National Defense and Security Research.

Lai Jung-wei, Executive Director of the Taiwan Inspiration Association (TIA), likened the Chinese IC industry’s development to the primitive steelmaking of Mao’s Great Leap Forward in 1958. That campaign aimed to surpass Great Britain and the U.S. in steel production but resulted in widespread fraud, failure, and the Great Chinese Famine.

Mr. Lai believes that Beijing’s chip initiative is not about economic development but political stability. “The national development of this industry ultimately aims to stabilize the regime. It’s for military power and the CCP’s ruling stability,” Mr. Lai told the Chinese language edition of The Epoch Times.

Mr. Lai noted the high threshold for chip manufacturing, which requires 600 to 700 processes and “a dust-free, moisture-resistant environment—standards that Chinese plants lack, according to a Taiwan-based sociologist who visited China’s semiconductor wafer fabrication plants.” He believes the failure of the first two phases prompted the third, and the outlook remains bleak.

A Global Industry

Mr. Lai highlighted the global nature of the chip industry, which has evolved over three decades. Countries collaborate and share responsibilities, leveraging their respective advantages. “The CCP cannot overtake others in a short period to establish a complete and self-reliant supply chain,” he believes.

“The CCP cannot overtake others in a short period of time to establish a complete and self-reliant supply chain, from upstream to downstream; it is impossible, it cannot happen,” according to Mr. Lai.

A 2020 joint report by Accenture and the Global Semiconductor Alliance (GSA) emphasized this global dispersion, noting that wafer fabrication involves 39 countries in the supply chain and 34 in market support, with direct involvement in wafer design spanning 12 countries and product testing and packaging across 25 countries.

A March 2023 report by Shanghai-based Tebon Securities highlighted that China leads the capital expenditure and labor-intensive segments like packaging and testing, while the design, equipment, and R&D-intensive segments are dominated by regions like the U.S. and Europe.

Flaws of Authoritarian Leadership

Mr. Lai believes that communist leadership is a major obstacle to the success of the third phase. “China’s economic layout has always been planned and command-oriented,” he said. The initiative is driven by political loyalists without relevant expertise, who prioritize political goals over market-oriented strategies.

He said, “The key players are political loyalists, particularly to Xi Jinping; they have no relevant vision, and the experts must obey these decision-makers.”

He said it’s a flaw of the party-state system. “You can’t expect a system like this to be productive and innovative,” said Mr. Lai.

Beijing appointed Zhang Xin, a former deputy director of the Cybersecurity Administration under the Ministry of Industry and Information Technology (MIIT), as the legal representative and chairman of the third phase of the Big Fund.

Plagued by Corruption

The capital scale of the third phase of the Big Fund is nearly as large as the combined first two phases. Mr. Lai warned of the temptation of corruption for officials to lead the fund allocation. “Every political figure within the party-state is corrupt,” he claims.

Corruption plagued the first two phases of the Big Fund. On July 30, 2022, Ding Wenwu, the general manager of both phases, was placed under investigation. Between July and September 2022, seven high-ranking officials, including Lu Jun, the former deputy director of the Fund Management Department at China Development Bank (CDB), Gao Songtao, a former vice president of Sino-IC Capital, and Zhao Weiguo, chairman of Tsinghua Unigroup.

Tsinghua Unigroup, which received a significant 10 billion yuan ($1.41 billion) investment from the first phase of the Big Fund, began defaulting on its debts in November 2020.

According to China Economic Weekly, in early October 2020, there were over 50,000 chip-related companies in China. However, many of these companies failed, with more than 22,000 disappearing since 2019 and a record 10,900 losing registration in 2023 alone. That’s an average of 30 Chinese chip-related companies shut down each day in 2023, according to a 2023 report by Chinese media, TMTPost.

American economist Davy J. Wong believes that during the first two phases, most funds were misused by companies built on hype and deception. “Under CCP rule, it is very difficult to succeed in genuine R&D. Often, money comes easier and faster with scamming than the pace of actual R&D achievement,” he said.

Mr. Wong is skeptical that the third phase can avoid similar problems. “Changing the regulatory system, whether it’s the government’s role or the implementation and use of funds, is highly unlikely,” he said. “The bureaucratic promotion system is tied to personnel mechanisms and the economic management system,” leading him to expect that the third phase will continue to be a failure like the previous two.

Zhang Hong and Yi Ru contributed to this report.