China's chip industry 'Big Fund' crackdown: Corruptions or failed investments?

As China ramps up its crackdown on corruption in the semiconductor industry, the Big Fund, a state-run investment fund for the chip industry at the centre of the storm, has also come under scrutiny. Some analyses have it that in line with the new climate, it is time to make changes to this "national team" to help China's chip industry come out of its plight of being contained and suppressed.

Since mid-July, at least six senior figures in China's chip industry who are closely linked to the National Integrated Circuit Industry Investment Fund, or known as the Big Fund, are under investigation or have reportedly been taken for investigation.

On 15 July, Lu Jun - former head of investment firm Sino IC Capital, which managed the Big Fund; former executive vice president of the Development Fund Management Department at China Development Bank; and former vice president of the China Development Fund - came under investigation for "suspected serious violations of disciplines and the laws". The same day, Wang Wenzhong - a partner at Shenzhen Hongtai Fund Investment Management, under the Big Fund - was also reportedly taken for investigation. (NB: On 10 August, it was announced that three current and former employees of Sino IC Capital - Du Yang, Yang Zhengfan and Liu Yang - were accused of wrongdoings and are now being investigated by the authorities.)

Subsequently, Zhao Weiguo and Diao Shijing - Tsinghua Unigroup's former chairman and president respectively - were reportedly taken for investigation. Tsinghua's Jointcom communications arm was one of the investors in the Big Fund, and six months after the Big Fund was set up, Tsinghua Unigroup became the first major investment target.

On 30 July, former head of the digital communications department at the Ministry of Industry and Information Technology (MIIT) and Big Fund general manager Ding Wenwu also came under disciplinary investigation by the Central Commission for Discipline Inspection and a Beijing disciplinary committee, pushing this anti-corruption storm to a climax.

Gu Wenjun, a senior analyst at semiconductor consulting firm ICWise, told Zaobao that the current anti-corruption furore did not come without warning. In November last year, former Sino IC vice president Gao Songtao was investigated for violating the law, and since then, the investigative agencies could already begin gathering more evidence to take action at the right time.

Gu also observed that while there are many suspects, only Gao, Lu and Ding are being formally investigated. The others that were not taken in could be assisting with investigations or their offences could be less severe.

Former Minister of Industry and Information Technology Xiao Yaqing was also investigated on 28 July on suspicion of being involved in Big Fund corruption. However, when the Big Fund was set up, Xiao was not yet with the MIIT; judging by how official announcements still refer to him as "comrade", his transgressions may not be as serious.

With the US signing into law the CHIPS and Science Act on 9 August to support the domestic semiconductor industry and ramp up restrictions on China's chip companies, this corruption crackdown has caught the sector by surprise, causing share prices in the semiconductor market to drop.

Rhodium Group senior analyst Jordan Schneider believes that this shake-up is a warning to the next Big Fund head that future investment decisions would need to be more conservative, because "the higher-ups are more likely to attribute failed investments to corruption, rather than admit to wasted investments".

Public information shows that the Big Fund was established in June 2014 by a group of companies including China Development Bank Capital, China Tobacco, E-town International Investment and Development, China Mobile, Jointcom and Sino IC Capital. The Big Fund raised 138.7 billion RMB (US$20.54 billion) for its first round of funding; its investments were completed in May 2018, covering leading enterprises in manufacturing, design, testing and packaging, and facilities and materials. Its second round of funding in 2019 raised US$28.9 billion, with investments focusing on semiconductor facilities and materials.

According to Hua Chuang Securities, as of January 2021, 36.7 billion RMB from the Big Fund's first fund was invested in 20 listed companies with a total market value of 95.9 billion RMB, offering returns of up to 262%. But there were also cases of the Big Fund chasing returns and participating in the placing of shares in mature, 20-year-old companies, rather than investing in key technologies. Some investors believe that continually chasing returns goes against the purpose of the Big Fund and would skew the trend of industry investments.

Following the escalation of anti-corruption efforts, more chatter about the Big Fund has come up. Industry insiders have revealed that the Big Fund is not wholly investing in the chip industry, but has funds in other sectors to reap high returns. There are also claims that the Big Fund had invested in dubious construction projects for semiconductor factories that had inflated costs by ten times.

Chen Bo, director of the Optical Valley Institute for Free Trade, told Zaobao that besides being fixated on chasing returns, the Big Fund might have experienced a problem common to other government investment funds: with the low costs of obtaining government funding, investors have room to buy low and sell high.

Chen noted, "There is a problem of manipulating accounts to hide the fact that funds are not invested in what they are intended for, while high returns are gained through projects in other sectors. Such practices also provide opportunities for the improper transfer of benefits."

Gu Wenjun noted that when the Big Fund was set up in 2014, the semiconductor industry was not favoured by investors due to its long cycle and high risk. The Big Fund mobilised over 500 billion RMB investment funding from society and local governments, which helped to resolve early funding issues in development and acquisitions for companies in the sector, and played a key role in promoting the rapid growth in the semiconductor industry.

But after 2019, US pressure on Semiconductor Manufacturing International Corporation and Huawei disrupted the supply chain for China's chip companies. Meanwhile, the establishment of the Science and Technology Innovation Board or STAR Market pushed more funding from society to the semiconductor industry, so that fund shortage was no longer a bottleneck for the sector's development. At the same time, China's semiconductor industry became increasingly fragmented.

Gu believed that with the changes to the international situation, capital markets and the industry, the Big Fund should also promptly adjust its investment strategy, such as shifting investments towards strengthening supply chain security and reducing industrial supply chain risks. It should leave the investment of quick-return projects to market funds, and focus on the "tough bones" that the market cannot digest and support leading companies in key sectors.

Gu added that the anti-corruption crackdown has brought more attention to the Big Fund and provided an opportunity for dynamic adjustment of its position and mission. He said, "Amid intensifying global competition in the semiconductor industry and continued pressure from the US, the Big Fund should move with the times to help China's semiconductor industry stand out."

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