China recently pulled up short in its race with the U.S. for dominance in chip manufacturing. While the U.S. has strengthened its commitment to rebuilding its domestic production through the passage of the Chips Act this past summer, spurring nearly $200 billion in private investment in manufacturing projects, China has abruptly paused its investment of 1 trillion yuan (about $148 billion) in the industry.
August reports from the Chinese government revealed a flurry of antigraft probes that investigated many of the industry’s top figures, including
Ding Wenwu,
general manager of the China Integrated Circuit Industry Investment Fund. This $45 billion fund, known as the “Big Fund” in the industry, is the Chinese government’s official vehicle for managing its colossal investments in the chip industry. The fund invested in a host of companies, including China’s largest chip-makers,
Semiconductor Manufacturing International Corp.
and Yangtze Memory Technologies Co., both of which have been crippled by U.S. sanctions.
According to Bloomberg, Chinese officials “are now asking local semiconductor material suppliers to cut prices to provide support to their domestic customers,” and “China may also choose to divert its limited state capital toward selective areas . . . that are relatively nascent, and where no one nation can claim dominance.”
With this retreat, China is quietly admitting the failure of its whole-of-government approach to developing advanced technologies that can compete internationally. America’s ban on exporting advanced chipmaking technologies to China has prevented key partners, including the Netherlands and Japan, from exporting such technology to China, smothering China’s emerging semiconductor industry.
But there is a bigger reason that China’s ambitious technology endeavors are failing: Its communist system stifles innovation. In China, all major funding is controlled and distributed by the Communist Party. Top scientists must be in the party system to advance their careers and get funding. The higher they rank within the party, the more funding they can receive. They can also make fortunes steering projects and government funds to companies owned by their associates and earning huge kickbacks. The recent corruption investigations have implicated key Big Fund officials and executives of…
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