China boosts state-led chip investment

What’s happened?

China is reportedly raising more than US$27bn for the third phase of its National Integrated Circuit Industry Investment Fund. Also known as the National IC Fund, or the “Big Fund”, the state-owned investment vehicle is backed by China’s finance ministry and state-owned enterprises, as well as central and local investment vehicles. This follows China’s new special Treasury bonds, which will be directed at “strategic” areas.

Why does it matter?

The latest funding efforts reflect China’s enhanced prioritisation of technological advancement, particularly amid reports that the US hopes to deepen its co‑ordination on export controls with Germany and South Korea. Those tactics mirror the US’s successful lobbying in 2023 of Japan and the Netherlands to tighten their own export controls on China.

EIU estimates that China’s state-led investment in chips has probably exceeded US$150bn since 2014. The Semiconductor Industry Association, a US-based industry group, has also estimated that as at 2021 China had invested US$73bn through direct funding of domestic semiconductor companies, plus another US$50bn through grants, equity investments and low-interest loans. “Phase three” of the Big Fund will add to this sum. 

Each phase of the Big Fund has focused on a different segment of the semiconductor supply chain. The first phase directed resources to semiconductor fabrication and upstream chip design capabilities. The second phase, launched in 2019, targeted apparatus such as etching machines and testing and cleaning equipment, as well as materials like photoresists and specialty gases. The third phase will reportedly invest mainly in chip-making equipment—an area in which China has struggled to break its import reliance (particularly for advanced chips). 

While we continue to expect China’s chip fabrication process to remain several generations behind the global cutting edge, its chip-related investments will position the country to increase mature-node production capacity. US‑led export controls will limit the extent of China’s advantages, but their enforcement will remain imperfect, as evidenced by China’s IC advances in September 2023. China will also seek to blunt US‑led trade restrictions by investing in emerging semiconductor technologies with less certain prospects, such as compound semiconductors and silicon photonics.

What next?

China’s state-driven investment in mature-node production will pressure the prices of “legacy” chips worldwide, through both oversupply and cost advantages. This will pose downside price risks to markets heavily involved in that space; these include Chinese firms, but also players in Malaysia, Vietnam, Taiwan and South Korea. China’s strong financing push will also exacerbate international tensions over its state-backed economic model. In addition, even if China enhances its mature chip production capabilities, geopolitical concerns—including compliance with existing (and future) US‑led export controls—may frustrate its attempts to enlarge its global market share.

The analysis and forecasts featured in this video can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.