China to invest $143bn to boost domestic chip production and compete with US

China is working on a support programme of more than 1-trillion yuan ($143bn) for its semiconductor industry, say three sources.

This is a major step towards self-sufficiency in chips and to counter US moves aimed at slowing its technological advances.

Beijing plans to roll out what will be one of its biggest government incentive packages over five years, mainly as subsidies and tax credits to bolster semiconductor production and research activities at home, said the sources.

It signals, as analysts have expected, a more direct approach by China in shaping the future of an industry which has become a geopolitical hot button due to soaring demand for chips and which Beijing regards as a cornerstone of its technological might.

The plan could be implemented as soon as the first quarter of next year, said two of the sources who declined to be named as they were not authorised to speak to the media.

The majority of the financial assistance would be used to subsidise the purchases of domestic semiconductor equipment by Chinese firms, mainly semiconductor fabrication plants, or fabs, they said.

Such companies would be entitled to a 20% subsidy on the cost of purchases, the three sources said.

The support plan comes after the US commerce department in October passed a sweeping set of regulations that could bar research labs and commercial data centres’ access to advanced AI chips, among other curbs.

The US has also been lobbying some of its partners, including Japan and the Netherlands, to tighten exports to China of equipment used to make semiconductors.

And US President Joe Biden signed a landmark bill in August to provide $52.7bn  in grants for US semiconductor production and research as well as tax credits for chip plants estimated to be worth $24bn. 

With the incentive package, Beijing aims to step up support for Chinese chip firms to build, expand or modernise domestic facilities for fabrication, assembly, packaging, and research & development, the sources said.

Beijing’s latest plan also includes preferential tax policies for the country’s semiconductor industry, they said.

China’s state Council Information Office did not immediately respond to a request for say.

LIKELY BENEFICIARIES

The beneficiaries will be state-owned and private enterprises in the industry, notably large semiconductor equipment firms like NAURA Technology Group, Advanced Micro-Fabrication Equipment Inc China and Kingsemi, the sources said.

Some Chinese chip shares in Hong Kong rose sharply after news of the package. Semiconductor Manufacturing International Corp (SMIC) added more than 8%, sending its daily gain to nearly 10%. Hua Hong Semiconductor closed up 17%. Mainland markets were closed when the report was published.

Achieving self-reliance in technology featured prominently in President Xi Jinping’s full work report at the Communist Party Congress in October. The term “technology” was referred to 40 times, up from 17 times in the report from the 2017 congress.

Xi’s call for China to “win the battle” in core technologies could signal an overhaul in Beijing’s approach to advancing its tech industry, with more state-led spending and intervention to counter US pressures, analysts have said.

The US sanctions published in October have caused major overseas-based chip manufacturing equipment companies to cease supplying key Chinese chipmakers, including Yangtze memory Technologies (YMTC) and SMIC, and makers of advanced artificial intelligence chips to cease supplying companies and laboratories.

The world’s second-largest economy has launched a trade dispute at the World Trade Organisation against the US over its chip export control measures, China’s commerce ministry said on Monday.

China has long lagged the rest of the world in the chip manufacturing equipment sector, which remains dominated by companies based in the US, Japan and the Netherlands.

A number of domestic firms have emerged in the past 20 years, but most remain behind their rivals in terms of ability to produce advanced chips.

NAURA’s etching and thermal process equipment, for example, can only produce 28-nanometer and above chips, relatively mature technologies.

Shanghai Micro Electronics Equipment Group,  China’s only lithography company, can produce 90-nanometers chips, well behind that of the Netherlands’ ASML, which is producing those as low as three nanometres.

Reuters