Battered by Covid-19, China hits pause on giant chip spending

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China is pausing massive investments aimed at building a chip industry to compete with the United States, as a nationwide Covid-19 resurgence strains the world’s No. 2 economy and Beijing’s finances.

Top officials are discussing ways to move away from costly subsidies that have so far borne little fruit and encouraged both graft and American sanctions, people familiar with the matter said.

While some continue to push for incentives of as much as 1 trillion yuan (US$145 million), other policymakers have lost their taste for an investment-led approach that has not yielded the results anticipated, the people said.

Instead, they are seeking alternative ways to assist home-grown chipmakers, such as lowering the cost of semiconductor materials, the people said, asking not to be identified revealing sensitive negotiations.

That would mark a shift in Beijing’s approach towards an industry regarded as crucial to challenging American dominance and safeguarding Chinese economic and military competitiveness.

It underscores how the country’s economic strains are taxing Beijing’s resources and hobbling its chip ambitions, one of President Xi Jinping’s top priorities. That could have ramifications for spending in other critical areas, from the environment to defense.

It is unclear what other chip policies Beijing is considering, or whether it will ultimately decide to ditch the capital investment-heavy approach that has worked so well in propelling its manufacturing sector over the past decades.

China’s government could still decide to divert resources from other areas to fund its chipmakers.

The discussions now under way are in stark contrast to Beijing’s prior efforts of pouring colossal resources into the chip industry, including setting up the National Integrated Circuit Industry Investment Fund in 2014.

That vehicle lies at the heart of Xi’s unhappiness with Beijing’s prior philosophy. Known within the industry as the Big Fund, it drew about US$45 billion in capital and backed scores of companies, including China’s chipmaking champions Semiconductor Manufacturing International Corporation (SMIC) and Yangtze Memory Technologies.

Xi’s administration grew frustrated that tens of billions of dollars funneled into the industry over the past decade have not produced breakthroughs that allow China to compete with the US on a more equal footing.

In fact, SMIC and Yangtze, arguably the two most advanced Chinese semiconductor players, were crippled by US sanctions.

Senior Beijing officials ordered a flurry of anti-graft probes into top industry figures last summer, blaming corruption for wasted and inefficient investment. The Big Fund is likely to lose its stature as a result, the people said.

All that happened as semiconductors increasingly became a key battleground in the rivalry between China and the US.

Xi has repeatedly talked about the need for a sense of urgency to resolve China’s so-called chokepoints: areas where the country still relies heavily on the US and other foreign powers, including critical technologies such as chips.

He has implored top officials to achieve self-sufficiency in key technologies as the US moves to isolate China.



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