China’s state-run semiconductor fund engulfed in scandal as Beijing probes three senior executives for alleged corruption

China’s state-run semiconductor fund engulfed in scandal as Beijing probes three senior executives for alleged corruption

3 Aug 2022 (South China Morning Post)

China’s state-run chip industry investment fund, a central plank in Beijing’s efforts to achieve “semiconductor independence”, has become engulfed in anti-corruption probes, with a number of its executives under investigation, according to official announcements and local media reports.

While authorities have released few details, the scope of the probe – which involves at least three senior executives from the fund – shows that it could be another scandal as big as the Hanxin chip case in 2006 when the country’s first home-grown computer chip was exposed as a fake.

China’s Central Commission for Discipline Inspection, the country’s top disciplinary watchdog, confirmed over the weekend that Ding Wenwu, the former president of the China Integrated Circuit Industry Investment Fund, was being investigated for suspected “serious violations of discipline and laws”, a term that usually refers to corruption. The announcement came two weeks after Lu Jun, the fund’s former chief executive, became the target of a similar probe.

Separately, Chinese magazine Caixin reported on Sunday that Yang Zhengfan, another executive at the fund, was also being investigated.

While there is no evidence or official announcements to confirm any links between the three cases, the fact that they all worked for the Big Fund – as it is known in China – has invited scrutiny of its operations amid a nationwide push to achieve self sufficiency in semiconductor production.

The fund was set up in 2014 by the Ministry of Finance and China Development Bank Capital, as part of a plan to “leapfrog” developments in the semiconductor industry.

Backed by some of the country’s biggest state-owned companies such as China Tobacco and China Mobile, the first round managed over 138 billion yuan (US$20 billion) and was seen as the country’s primary financing vehicle to support the capital-intensive chip industry.

“The fund can reflect the national will, and meet the strategic industry’s need for long term investment,” Wang Zhanfu, former chairman of the Big Fund, was quoted saying in a 2017 article published by the National Manufacturing Strategy Advisory Committee, a think tank advising Beijing on plans to upgrade the manufacturing sector.

The first fund mainly focused on advancing China’s semiconductor manufacturing capability by backing major chip makers, including Shanghai-based foundry Semiconductor Manufacturing International Corp and Yangtze Memory Technologies Corp. The push did indeed lead to a jump in chip production, with the nation’s semiconductor output almost doubling to 185.1 billion units five years after the fund was set up.

Spurred by Beijing’s push, provincial governments across China jumped on the bandwagon with their own chip-related ventures. By 2019, the combined government-backed chip investment funds in China had reached almost 500 billion yuan, according to an estimate by the China Semiconductor Industry Association.

Amid rising geopolitical tensions with the US that year, the Big Fund raised a second round of US$29 billion and started to lean towards applications in the downstream supply chain, including chip design, advanced materials and manufacturing equipment in an effort to realise self-reliance.

However, despite the large pool of funds, the money was not always efficiently used. Big Fund-backed Tsinghua Unigroup, a once high-flying chip maker, was saddled with more than 200 billion yuan in debt after too much expansion, and was forced into a restructuring process last year.

The track record of being able to produce more locally made chips has also been spotty lately. In 2019, local companies accounted for only 15.7 per cent of the country’s US$125 billion integrated circuit market, up only slightly from 15.1 per cent five years earlier when the Big Fund was set up, according to US research firm IC Insights.

The corruption probes into the Big Fund executives come after a separate investigation into former Tsinghua Unigroup chairman Zhao Weiguo, who led the company’s aggressive and highly leveraged mergers and acquisitions until the group defaulted on its debts in 2020.

Tsinghua Unigroup has since gone through bankruptcy restructuring and is now under the management of a new owner.