Graft scandal casts long shadow over China’s chipmaking ambitions

An anti-graft storm is sweeping China’s semiconductor industry that is at the heart of the country’s quest for self-sufficiency in technology.

Since mid-July, several senior executives connected to China’s largest semiconductor industry investment fund and a high-profile chipmaker have been placed under investigation, sending shockwaves through the industry.

The probes have brought down Ding Wenwu, the president of the China Integrated Circuit Industry Investment Fund, Lu Jun, a former head of the fund’s sole manager Sino IC Capital and several others. A graft scandal has also rocked Tsinghua Unigroup, the biggest recipient of the fund’s support with former company chairman Zhao Weiguo and two other executives detained by authorities.

Known as the “Big Fund,” the China Integrated Circuit Industry Investment Fund was a central part of Beijing’s national blueprint to develop a homegrown industry and came into being long before Washington’s sanctions on Huawei Technologies and others.

Set up in 2014 as China’s largest industry investment fund, it initially raised over 130 billion yuan (S$26.1 billion) of capital from deep-pocketed state investors like the Ministry of Finance, China Tobacco, and China Mobile, as well as the China Development Bank, with the goal of nurturing a domestic chip industry.

After the first round of funding was exhausted by the end of 2018, having been invested in over 60 domestic companies with businesses related to chipmaking, the fund raised a second round of capital totaling over 200 billion yuan in 2019.

Over the years, the Big Fund has built up a sprawling portfolio through direct and indirect investments, backing the growth of industry leaders like Semiconductor Manufacturing International Corp. (SMIC) and Hua Hong Semiconductor.

It currently holds stakes in 34 listed companies while operating as a fund of funds by investing in other semiconductor-focused investment institutions such Oriza Holdings and SummitView Capital. It also holds a stake in financial leasing company Sino IC-leasing Co., through which it provides debt financing for companies in need of quick support with liquidity.

The series of scandals, however, have sparked questions over the fund’s efficiency and future value. Criticism has mounted over the past few years after several high-profile projects the fund invested in ran into trouble, including the bankrupt Tsinghua Unigroup. Some argue that the mission of the Big Fund has largely been completed, and it is time to leave the market to local government-backed funds and private investors.

But other experts said it still has a role to play, especially as major economies such as the United States and the European Union have stepped up government support to their domestic chip industries after last year’s global supply shortage.

Added to this is the fact that many Chinese semiconductor companies are still fledgling and not yet profitable. They face challenges simply to survive and assistance from the Big Fund will help them break through bottlenecks and grow more steadily, said Li Hongtao, chief telecom industry analyst at Founder Securities.

The Big Fund has set up an unprecedented model by combining state strategy and a market-oriented investment approach, which has inspired many other funds, said a venture capital manager. What it needs is to improve the system and governance to prevent corruption, said the manager.

SOURCE: NEWS AGENCIES