China Sets up the Third Phase of Its Semiconductor Fund with a Massive $47.5 Billion Investment

• China has set up its third fund to boost the country's semiconductor industry.
• The third fund has a registered capital of 344 billion yuan ($47.5 billion), with the Finance Ministry as its biggest investor.
• The main purpose of the third phase of the fund will be to focus on chip-making equipment.

China continues to race ahead in the semiconductor industry with its third state-backed fund.

The third phase of the China Integrated Circuit Industry Investment Fund was officially established on May 24. Known as The Big Funds, the latest phase has a registered capital of 344 billion yuan ($47.5 billion).

This phase is the biggest of the three.

• The first phase was established in 2014 with a registered capital of 138.7 billion yuan
• The second phase was established in 2019 with a registered capital of 204 billion yuan.

Together, these funds have helped establish the two biggest chip foundries in China: Semiconductor Manufacturing International Corporation and Hua Hong Semiconductor.

They also helped Yangtze Memory Technologies (a company that makes flash memory) and a bunch of other smaller companies.

After the news of the third fund was announced, the share prices of SMIC went up by 7% and that of Hua Hong went up by 13%.

Who Are the Investors in the Fund?

The Finance Ministry of China is the biggest shareholder of the fund with a stake of 17% (60 billion yuan), followed by China Development Bank Capital which has a 10.5% stake.

Other than this, 17 other investors have pitched in for the fund, including 5 major Chinese banks:

• Bank of China
• China Construction Bank
• Bank of Communications
• Industrial and Commercial Bank of China, and
• Agricultural Bank of China

Each of them has contributed about 6% of the total capital.

Problems with the Big Fund

The Big Fund is a great initiative by the Chinese government to bring the country's chip industry to international standards by 2030.However, it's not as perfect as it seems. Lately, the fund has been riddled with controversies.

For example, in 2022, Lu Jun (former chief executive of Sino IC Capital), who managed the Big Fund, was investigated and indicted on bribery charges.

However, it's also fair to say that such hiccups are not unprecedented-and that they're somewhat expected with a project of this size.

Growing International Tension over Chip Manufacturing

China has always wanted to be at the forefront of technological innovation. So, it's no surprise that it's trying to lead the semiconductor industry.

However, there's another reason behind such vigorous investments-growing tensions between the U.S. and China.

The US has imposed several restrictions on the export of advanced semiconductor chips and chip-making equipment to China. Not just that, but it has also forced its allies such as the Netherlands and Japan to impose similar restrictions.

However, that hasn't stopped China. It hit back with its own restrictions on the export of two raw materials that are very important to the global chip-making industry. Plus, it's also considering a ban on Intel and AMD chips from Chinese government devices.

On top of that, the Chinese phone company Huawei surprised the world by launching a new smartphone made with a 7-nanometer processor made by SMIC. The move was so epic that it even confused analysts, who couldn't wrap their minds around how the company could create this chip amidst such severe trade restrictions from the US

No force can stop China's scientific and technological development," Xi Jinping said in a meeting with Dutch PM Mark Rutte in March and it looks like he meant every word.

It will be interesting to see if the US has something up its sleeves. As of now, China seems to be in the lead in this technology battle.

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