Tech war: China's Big Fund III brings US$47.5 billion in fresh outlay for nation's semiconductor supply chain, analysts say

China's largest-ever chip investment fund is expected to bolster Beijing's support for the nation's leading contract semiconductor manufacturers and other enterprises in the value chain, including equipment and material suppliers, according to analysts.

The third phase of the China Integrated Circuit Industry Investment Fund, also known as the "Big Fund", was established last week with a registered capital of 344 billion yuan (US$47.5 billion) as part of the country's efforts to build a self-sufficient semiconductor sector.

The fund is aimed at enhancing the nation's "ability to supply [semiconductors] internally", reinforcing Beijing's goal to "build up the capability and strengths" of this industry, despite mounting US tech sanctions, Randy Abrams, the head of Taiwan research at Swiss investment bank UBS, said on Wednesday.

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While mainland chip foundries such as Semiconductor Manufacturing International Corp and Hua Hong Semiconductor are expected to benefit from the latest funding resource, Abrams said: "There will be some [investments] on capacity, equipment and materials, as well as investments tied to advanced packaging."

Outlay from the third phase of the China Integrated Circuit Industry Investment Fund is expected to benefit local suppliers of chip-manufacturing equipment, materials and advanced semiconductor packaging services. Photo: Shutterstock alt=Outlay from the third phase of the China Integrated Circuit Industry Investment Fund is expected to benefit local suppliers of chip-manufacturing equipment, materials and advanced semiconductor packaging services. Photo: Shutterstock>

The size of the new fund - roughly on par with the US$53 billion in incentives under the Chips and Science Act, which was enacted by US President Joe Biden in 2022 - reflects the massive backing from state-owned enterprises and Beijing's "whole nation" approach to building a self-sufficient semiconductor industry amid Washington's tech export restrictions.

Big Fund III has 19 equity investors, led by China's Ministry of Finance. Other stakeholders include China Development Bank Capital, Shanghai Guosheng Group, China Construction Bank, Bank of China, Agricultural Bank of China, Bank of Communications, Postal Savings Bank of China, Industrial and Commercial Bank of China and China National Tobacco Corp.

The new fund will be managed by Zhang Xin, an official at the Ministry of Industry and Information Technology, which is the principal agency overseeing China's semiconductor industry. Zhang had replaced Ding Wenwu to oversee the Big Fund after the latter was put under investigation for possible corruption in July 2022.

Launched in 2014, the Big Fund had raised 204.1 billion yuan in 2019, up from its initial financing of 138.7 billion yuan.

Semiconductor Manufacturing International Corp, mainland China's biggest contract chip maker, will benefit from the third phase of the China Integrated Circuit Industry Investment Fund. Photo: Shutterstock alt=Semiconductor Manufacturing International Corp, mainland China's biggest contract chip maker, will benefit from the third phase of the China Integrated Circuit Industry Investment Fund. Photo: Shutterstock>

In spite of corruption scandals, the Big Fund has been successful in fostering the development of key domestic enterprises, including memory chip giant Yangtze Memory Technologies Corp and top DRAM producer ChangXin Memory Technologies.

Apart from chip makers, Big Fund III is also expected to provide more support for equipment suppliers like Naura Technology Group and Advanced Micro-Fabrication Equipment, as well as raw material providers such as National Silicon Industry Group, according to analysts.

But the jury is still out on whether China can overcome US tech restrictions, which have created "choking points" in the domestic semiconductor industry.

"It's very challenging to see the gap narrowing because of export controls, which make it very difficult to get the right [chip-making] equipment to operate at the right production yields and cost," Nicolas Gaudois, UBS head of Asia-Pacific technology research, said.

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