China’s $30 billion Big Fund corruption stunts chip development, Biden signs Chip Act into law & US reaffirms Philippines defense treaty after Pelosi visits Taiwan-- China Boss News 8.15.22
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China’s $30 billion Big Fund corruption stunts chip development
“China’s chipmaking industry descended into chaos last week” in “an explosive turn of events that could force the country to fundamentally rethink how it invests in chip development,” MIT Technology Review’s Zeyi Yang said.
Yang, MIT Technology Review:
On July 30, China’s top anticorruption institution announced that Ding Wenwu, the chief executive of the China Integrated Circuit Industry Investment Fund, nicknamed the “Big Fund,” had been arrested for “suspected serious violations of the law.” Ding is not the only person in trouble. Two weeks ago, Lu Jun, a former executive at the Big Fund’s management institution, was also taken into custody, along with two other fund managers, according to the Chinese news outlet Caixin.
The Big Fund was established in 2014 to reduce China’s dependence on semiconductor technology from US and its allies as part of Beijing’s supersized industrial policy package to win the tech war. It was created to funnel tens of billions in government money to advance semiconductor manufacturing with little in the way of oversight to stop it.
But “[e]ight years later, a total of $30 billion poured into the industry—with $20 billion more on the way—has yielded a complicated mix of successes and failures,” and “[t]he fact that the fund was driven by a political mission and not financial interests made it ripe for corruption,” Yang said.
Bloomberg’s Shuli Ren highlighted the dangers Big Fund and other heavyweight industrial policies present to China’s economy despite their potential geopolitical advantages, noting that “guidance funds are known for the use of their reputation as leverage, and “[a]n initial contribution from the government - often seen as a stamp of approval - can attract many multiples of the sum from other investors…”. The ripple effect risks turning markets for new technologies in a country with weak accounting standards and business laws into unproductive and over-leveraged “free for all’s.”
Ren, Bloomberg:
Gavekal Research gave a good example: the massive Yangtze River Industry Fund that Hubei province established in 2015. The provincial government initially injected 40 billion yuan into the parent fund, with the aim of raising 200 billion for a group of sub-funds. These sub-funds, in turn, aspired to catalyze 1 trillion yuan of additional capital, the equivalent of almost one-third of Hubei’s annual economic output.
But who are the co-investors? A sizeable chunk came from banks’ wealth-management products, a form of shadow financing. Local governments’ financing vehicles, which are largely shell companies funded by loans, are big participants, too.
In other words, these state-sponsored venture capital funds enabled China’s already indebted corporates to borrow even more. Guidance funds’ investments, including those in strategic emerging sectors, are expected to slow this year, according to Fitch Ratings.
Ren says the example of the Big Fund scandal dials back distortions of Chinese competitiveness and serves as a cautionary tale for lawmakers who recently passed the Chips Act which “includes $52 billion of grants to support advanced chip manufacturing as well as research and development in the US.”
Ren, Bloomberg:
That’s not much for cutting-edge manufacturing plants that cost more than $10 billion to build. And its scale matches only the Big Fund and its co-investors, which collectively expanded China’s chip manufacturing capacity by $70 billion in the five years between 2014 and 2019. There were thousands of other Chinese guidance funds out there, propping up nascent industrial technology firms.
But that debate is misguided once we dig deeper into China’s state-directed industrial model. Yes, China has leapfrogged competitors in some strategic technologies. But behind every success are many more stories of waste, broken promises, corruption scandals and misuse of capital — while adding to a troublesome pile of corporate debt. Is the US willing to borrow billions more for projects that can easily go sour, just to reclaim its manufacturing glory back from China?
For the rest of Yang’s report in MIT Technology Review, Corruption is sending shock waves through China’s chipmaking industry, click here. For Ren’s analysis in Bloomberg, The Dark Side of Xi Jinping's $920 Billion Venture Capital Push, click here.
Law and International Xi
Biden signs landmark Chip Act that China says is “reminiscent of Cold War”
Meanwhile, as Beijing was trying to prevent corruption from corroding the nation’s tech development, Aljazeera reported that “US President Joe Biden on Tuesday signed into law “ the Chip Act, “providing $52.7bn in subsidies for US semiconductor manufacturers and research.”
Aljazeera:
“The future is going to be made in America,” Biden said at the White House signing, calling the law “a once-in-a-generation investment in America itself”.
“A continuous chips scarcity has impacted everything from vehicles, guns, washing machines, and video games” and is being especially felt in the auto industry, news staff added.
Aljazeera:
China has opposed the semiconductor law through lobbying. The Chinese embassy in Washington said China “firmly opposed” it, calling it reminiscent of a “Cold War mentality”.
Many US lawmakers have said that they usually would not support hefty subsidies for private businesses but also noted that China and the European Union had been awarding billions in incentives to their chip companies.
For the rest of Aljazeera’s update, Biden signs CHIPS Act to boost US chipmakers, compete with China, click here.
US says Philippines defense treaty “ironclad” after Pelosi visits Taiwan
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