China probes government, bosses as chip race with US heats up

Minister of Industry and Information Technology Xiao Yaqing is among those facing a disciplinary probe. PHOTO: REUTERS

BEIJING (BLOOMBERG) - China has begun a series of investigations into key figures responsible for shaping chip policy and investment, raising questions about the impact on Beijing's blueprint for challenging US dominance of a US$550 billion (S$759 billion) industry.

The top anti-graft agency this week launched an investigation into the minister who spearheads the country's plan to build a world-class chip industry and wean itself off American silicon.

Minister of Industry and Information Technology Xiao Yaqing, whose agency oversees giants from Huawei Technologies Co to Xiaomi Corp, became the most senior sitting Cabinet member to face a disciplinary probe in almost four years.

The same day, Caixin reported that Mr Ding Wenwu, head of a high-profile state-backed fund that invested tens of billions of dollars in the semiconductor industry, was unreachable after he became the target of a probe.

Beijing hasn't linked the two cases nor specified allegations beyond legal and disciplinary violations.

But they come on the heels of several cases since late 2021 that have unnerved an industry accorded priority status by Mr Xi Jinping and long accustomed to government funding and support.

Just days before Mr Xiao's probe was announced, Caixin reported that an investigation had also started against Mr Zhao Weiguo, who had served as the chairman of Tsinghua Unigroup before that company - once regarded as one of China's national champions in semiconductors - collapsed under a mountain of debt.

Mr Zhao had publicly fought a US$9 billion bailout of Tsinghua Unigroup, led by state-backed funds, before he was ousted from the group.

"The Chinese Communist Party is deadly serious about advancing China's capacity and self reliance when it comes to the chip sector. This is vital to the party," said Mr Alex Capri, a research fellow at the Asia-based Hinrich Foundation.

"These important figures take on positions highly instrumental for advancing China's chip industry but it is not 100 per cent clear whether they are completely toeing the party line. At the same time, the party is trying to control more and more of the tech sector."

The MIIT didn't respond to faxed inquiries, while representatives for the IC fund weren't available for comment. Mr Ding and Mr Zhao didn't answer phone calls from Bloomberg News seeking comment.

Mr Xiao's ministry and Mr Ding's fund - the National Integrated Circuit Industry Investment Fund Co. - are instrumental in Beijing's struggle with Washington for tech supremacy.

They often act in concert to spur development of the semiconductors crucial to everything from phones to cars, as well as future applications in AI and robotics.

The probe into Mr Xiao raises questions about the effectiveness of a campaign that's swallowed billions of dollars in funding, but has yet to produce technologies to truly challenge Silicon Valley.

His plight caught many by surprise. One senior executive at a major electronics maker was still preparing to meet with the minister to discuss supply chain issues before the news emerged, according to a second person familiar with the arrangement, who asked not to be identified discussing a sensitive topic.

The minister also spearheads China's efforts to build technologies from aviation to networking, and supports the nation's most promising startups in areas from chipmaking to bio-tech.

While Mr Xiao's agency also oversees automobiles and heavy industry, Mr Ding's National Integrated Circuit Industry Investment Fund Co is the signature Beijing-controlled vehicle that drives government capital into the sector.

Better known as the "Big Fund" in the industry, it's made a series of high-profile investments including in Yangtze Memory, China's biggest producer of memory, and top chipmaker Semiconductor Manufacturing International Corp.

Yangtze Memory, which Unigroup controlled before its bailout, is now seeking to oust Mr Zhao from its board, according to a person familiar with the matter, who asked not to be identified discussing internal deliberations. A representative for the company declined to comment.

Mr Xiao was the latest of several industry honchos caught up in investigations, with opaque allegations and uncertain outcomes.

In November, authorities announced a probe into Mr Gao Songtao, deputy of an investment firm that managed capital for Mr Ding's fund. Shortly after, the former head of the same firm was named in an official investigation.

Graftbusters have yet to publicly link any of the investigations into the chip industry figures.

Mr Xiao's ministry is also the regulator for the country's heavy industry, automobile, telecom and electronics sectors. Prior to his political career, Mr Xiao mainly worked in the aluminum industry and was president of Aluminum Corp of China when it bought a US$14 billion stake in Rio Tinto Group with Alcoa Inc. in 2008.

The probes are unfolding weeks before the Communist Party's 20th congress later this year, which is expected to reshuffle the country's leadership.

Mr Xi, who's expected to secure a third term in the shake-up, has consolidated power over the past decade in part due to an enduring corruption crackdown that brought down dozens of former top cadres.

But the series of official notices are bound to reverberate among the tightly knit semiconductor circle.

"I don't think it paralyses the chip industry, but it scares the living daylights out of whoever is the next person in line to run the big fund," said Mr Jordan Schneider, a senior analyst at Rhodium Group and host of the China Talk podcast. "It's also likely that the investing will become more conservative because it's easier to say that failure was because of corruption, than to own up to the fact that when you're doing this sort of thing there inevitably is wasteful investment."

Critics of Beijing's top-down policies have pointed out the enormous inefficiency that can result from freely doling out subsidies.

Local media have reported about companies with scant experience winning incentives or grants for pursuing research, while others point to the persistent lack of genuine breakthroughs. Powerful local interests have chased government money by championing projects in hopes of securing subsidies and, at times, political prestige.

About 15,700 new semiconductor companies registered from January to May 2021, three times the number from the same period the previous year, according to an analysis by the South China Morning Post.

Last week, Bloomberg News reported SMIC likely advanced its production technology by two generations, defying US sanctions.

Yet experts said it still lags by far sector leaders Taiwan Semiconductor Manufacturing Co and Samsung Electronics Co.

"Perhaps they're looking for 'fall men' for an industrial policy, which hasn't quite sort of borne the fruit that it was initially promised," Rhodium's Mr Schneider said, referring to the recent probes.

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