China escalates tech race with $47 billion semiconductor fund

Beijing will invest massive resources into the so-called Grand Fund to pull China out of the technology trap. The Middle Kingdom will transfer $47 billion to domestic semiconductor production. At the same time, Xi is escalating tensions around Taiwan, a key semiconductor production hub for Western companies.

Chinese leader Xi Jinping is launching an offensive, allocating a record amount to technological development in crucial semiconductor areas. The Grand Fund will be increased by nearly $47 billion.

Previously, the national industry promotion fund had a budget of $45 billion, disbursed in two tranches. The goal was to develop chip production in the Middle Kingdom. Most financial aid is allocated to purchasing domestic semiconductor equipment by Chinese companies.

These are further Chinese subsidies in the semiconductor sector. They will likely focus on chip production technologies and machines for their production due to international sanctions limiting China's access to advanced chip manufacturing technologies - comments Marek Wąsiński, head of the global economy team at the Polish Economic Institute.

The leading investor is the state through the Ministry of Finance, but also state-owned banks and companies that have never been involved in financing the technology sector. Among them, Huawei, a well-known giant from Shenzhen, plays a leading role.

A substantial boost for Chinese companies aims to pull the country out of the technology trap and shift the balance of power. Sanctions imposed by the U.S. government on China have almost cut Beijing off from advanced technologies. This is an element of the global chip war.

Recall: In the fall of 2022, U.S. President Joe Biden imposed restrictions on domestic exports. The U.S. Bureau of Industry and Security added dozens of Chinese tech firms to a list of entities subject to export controls. The restrictions aimed to limit production and the ability to purchase advanced computer chips for the People's Republic of China military. Just a few months later, the sanctions were tightened at the beginning of 2023.

The U.S. gained two significant allies in its confrontation with China. Japan and the Netherlands, key suppliers of semiconductor production equipment, joined the sanctions in 2023. As a result, producers like the well-known Dutch company ASML stopped supplying their most advanced machines to China.

As reported by the Financial Times in July last year, the Japanese government introduced an embargo on chip exports, which also affected older-generation integrated circuit production, creating a significant problem for China.

Beijing deemed it necessary to develop its technology. To this end, it decided to combine public funds with private capital. Huawei's solutions became the driving force, dominating chip production and seeking to localize the entire supply chain for Chinese semiconductors.

China is developing older technology devices and seeking solutions for the most advanced semiconductors. Such substantial funds allocated to the chip segment indicate that China has taken steps to shift the balance of power.

As noted in an April analysis by Deutsche Welle, if China manages to flood the market with conventional chips subsidized by Beijing, Western producers could quickly be pushed out of the market. This could result in similar price dumping, as seen with producers of cheap Chinese photovoltaic panels, through which Beijing gained an advantage.

A significant signal to the West was using an advanced chip in Huawei Mate 60 smartphones. In 2023, despite restrictions on technology access, Huawei presented a new device with a 7nm chip from Chinese manufacturer SMIC, demonstrating the potential of the Chinese industry - emphasizes Marek Wąsiński.

TechInsights' expertise for Bloomberg confirmed that Huawei and SMIC built a 7-nanometer processor despite the sanctions regime.

It's impossible to fully determine whether the new funds will be sufficient to further make Chinese semiconductor production independent and create the most advanced and even more efficient chips, including for AI - notes Wąsiński in an interview with money.pl.

However, it is no coincidence that in December, Joe Biden's administration ordered a review of the entire semiconductor supply chain to assess China's dominance in the older chip market. The European Union ordered a similar review.

Beijing's ambitions are high. According to the plan, by 2025, 70% of used chips will be domestically produced. Meanwhile, an analysis by the Taiwanese firm Trendforce, cited by Deutsche Welle and specializing in this sector, indicates that within the next three years, China's commercial semiconductor production capacity will increase to a level that allows it to meet 39% of global demand.

The so-called Taiwan factor is highly sensitive to the entire puzzle. Taiwan is home to the most critical technology companies engaged in chip production. Manufacturers operating on the island produce 90% of high-tech chips used, among other things, in iPhones. This is significant for both civilian technology and potential military applications.

Many technology companies like Acer, Asus, and Foxconn are connected to Taiwan. The island is also crucial for players like AMD and Nvidia, whose high-performance processor technology used in AI development is based on chips manufactured in Taiwan.

The problem is that this is a region of contention between China's and the U.S.'s interests. Beijing claims the territories surrounding Mainland China, recognizing Taiwan as a "rebellious province." The democratic government in Taipei has emphasized its sovereignty and self-governance since 1949, and close relations with the U.S. have solidified its position.

At the beginning of 2024, elections in Taiwan heightened regional tensions. Lai Ching-te, considered a "separatist" by Beijing, won and was inaugurated in mid-May. The situation became critical when, on May 23, the Chinese Ministry of Defense announced the start of People's Liberation Army maneuvers. Naval forces focused on the north, south, and east of Taiwan, as well as around the Kinmen, Matsu, Wuqiu, and Dongyin islands. A few days later, the Taipei Times reported the dropping of propaganda leaflets over the Kinmen Islands.

The U.S. response was not extended in coming. On May 27, American troops stationed in the Philippines started their maneuvers, practicing scenarios for defending Taiwan against a potential Chinese invasion.