China’s Economic Downturn Hampers $41bn Chip Fund Raising Initiative

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The most ambitious funding round launched to date by China to support its semiconductor industry is struggling in the initial phases to raise its target of Rmb300bn ($41bn), with the difficult economic climate being blamed, according to three people familiar with the situation.

Beijing recently approved a third round for the China Integrated Circuit Industry Investment Fund, also known as the Big Fund, which has been instrumental in propelling the chip industry’s growth since it was established in 2014 and has served as a key tool in President Xi Jinping’s drive towards technological self-sufficiency.

The fund raised capital of Rmb139bn and Rmb200bn, respectively, in its first two phases and supported Chinese chip champions while investing in research and development.

However, the Ministry of Industry and Information Technology, which leads the initiative, has run into difficulty raising its new target from local governments and state-owned enterprises, which are struggling in an economic slowdown, said the three people.

The sluggish recovery from the coronavirus pandemic has put a financial strain on local governments, including heavy debt problems for some, making them “more cautious and conservative” in their investments, said one person close to a provincial-level government.

The finance ministry was the biggest contributor in the first and second phases of the Big Fund, providing more than 44 per cent and nearly 15 per cent of the capital, respectively. Local governments and state-owned enterprises such as China Telecom were responsible for the rest, as Beijing encouraged Chinese industry to take a stake and use its expertise to help identify possible national champions.

A lack of major candidates to support with the new backing is also contributing to a disappointing response. Industry insiders and analysts said investment decisions had become more passive in the face of US restrictions on the industry’s access to advanced technology.

“Instead of solely considering investment value, the Big Fund has to take into account the direction of US restrictions when deciding who to bet on, leading to it having more limited options,” said a China-based analyst who wished to remain anonymous due to the subject’s sensitivity.

The fund had already adopted a more cautious approach in its second stage. More than 30 per cent of the amount raised was used for follow-on funding for companies backed in the first phase, according to data from Wind analysed by the Financial Times.

An anti-corruption investigation into the Big Fund, which has lasted more than a year, has also affected investment pace and market confidence. Since July last year, more than 10 executives linked to the fund have been taken in for investigation, leading to a slowdown in investment activities.

Two people familiar with the fund said capital raised in the second phase remained underutilised.

Despite these challenges, the Big Fund, which was financed in 2014 and 2019, is still trying to stay on a five-year schedule. “It’s about time to do another round. Not doing it would hurt confidence,” said Linghao Bao, an analyst at research group Trivium China.

The latest round will concentrate mainly on chipmaking equipment, said the three people close to the fund, after the previous two stages focused on semiconductor manufacturing, with foundries Semiconductor Manufacturing International and Hua Hong Semiconductor among those supported.

China’s chipmakers, including leading memory-chip manufacturer Yangtze Memory Technologies, have had to rely more on domestic equipment as the US and its allies have tightened restrictions over the past year on exports of advanced semiconductor production equipment to China.

The State Council Information Office, the Ministry of Industry and Information Technology and the Big Fund did not respond to requests for comment.