China Bolsters Semiconductor Sector with Enormous Investment Fund

Nvidia Corp. (NVDA) and Advanced Micro Devices, Inc. (AMD) may feel the pressure as China's revenues dip, prompting speculation about shrinking U.S. chipmaker market share. However, recent developments suggest China is fortifying its own chipmaking capacity in response.

China's Strategic Fund Injection

A sizable investment, dubbed Big Fund III, has been initiated by China, amassing a colossal 344 billion yuan (around $48 billion). This fund is China's most substantial commitment to semiconductor investment to date. It derived its funding from the Chinese central government and various state-owned banks and enterprises, displaying a concerted effort to advance China's chip production abilities.

Bypassing U.S. Restrictions

The decision to create Big Fund III on May 24 comes as part of China's strategy to navigate around the U.S. government's chip ban. This move is also a counteraction against the United States, which has been rallying its allies to adopt similar restrictions toward China.

The fund's prime investor is the Ministry of Finance, complemented by local government investment firms from Shenzhen and Beijing. These regional contributions are particularly significant as the Shenzhen government actively supports local chipmakers supplying semiconductor components to Huawei, which is hampered by U.S. embargoes.

History of China's National Chip Fund

With its inception over a decade ago, the national chip fund has been a key part of China's ambitious goal to become more self-sufficient in industrial production. Originally started with 100 billion yuan, the fund significantly grew with Big Fund II in 2019 during the U.S.-China trade standoff under former President Donald Trump. Supplementing this financial impetus is China's 'Made in China 2025' initiative launched in 2015, aiming to bolster domestic capabilities in various sectors including semiconductors.

Potential Setback for U.S. Firms

Nvidia and AMD may find their market positions compromised as China's recent technological advancements indicate a shift towards self-reliance. A smartphone featuring a 5G processor made by China's SMIC, instead of prominent U.S. tech, demonstrates this emerging trend. Moreover, the U.S. ban has prompted China to escalate investments in their less-advanced, yet crucial, legacy chip production.

With Big Fund III, a more robust network of Chinese chip companies centering around Huawei might surge, catalyzing advancements in high-end chip development. This push could dilute the effectiveness of U.S. export limitations imposed on the trade of sophisticated tech such as AI accelerators and chip equipment.

Despite these challenges, the ETF landscape showed mixed results with iShares MSCI China ETF (MCHI) slightly down and the iShares Semiconductor ETF (SOXX) experiencing an uptick.

China, Semiconductor, Investment