A corruption scandal is engulfing China’s semiconductor industry

As a bill paving the way for $52 billion in incentives for domestic semiconductor manufacturing passed the United States’ congress this week, China’s biggest semiconductor manufacturing investment Fund was thrown into disarray.

Two former executives of the state-operated China Integrated Circuit Industry Investment Fund are being probed by authorities who suspect them of committing “severe violations of discipline and law”.

The phrase is usually used in cases involving bribery and embezzlement.

Executives facing life in jail

Corruption problems in the Fund, established to firm up China’s position in the global semiconductor arms race, first emerged in late 2021.

Gao Songtao, the former vice-president at Sino IC Capital – tasked by the Chinese Government to manage the China Integrated Circuit Industry Investment Fund – was interrogated on suspicion of corruption in November.

Songtao was stood down with investigations still ongoing, but little more was said about the troubles at the Investment Fund until recent days.

On Friday, July 15, China’s Central Commission for Discipline Inspection revealed Lu Jun, President of Sino IC Capital from 2014 to 2020, was also being questioned over suspected corruption. The 54 year old is a respected businessman in China, having also worked for around 15 years at the China Development Bank.

Around a week later, it has now been revealed Yang Zhengfan, Director of Investment Division 3 at Sino IC Capital, is also being probed on suspicion of severe violations of discipline and law.

According to a Chinese state media report , the allegations being levelled again Yang Zhengfan are closely linked to those involving Lu Jun.

All three executives face a maximum penalty of life in jail if found guilty of corruption.

China’s Semiconductor industry “struggling”

The China Integrated Circuit Industry Investment Fund provides funding for semiconductor start-ups and also invests in some of the largest Chinese semiconductor manufacturers including Hong Kong-listed SMIC (HKG: 0981) and Hua Hong Semiconductor Ltd (HKG: 1347).

The Fund was established by the Chinese Government in 2014 with US$20 billion in capital to develop China’s domestic semiconductor industry. A further US$30 billion was injected into the Fund in 2019.

The Semiconductor arms race is seen as one of the the most strategically significant duels in global geopolitics today.

Currently Taiwan’s TSMC (TPE: 2330) dominates 90% of the global market when it comes to the foundry manufacturing of the world’s most powerful semiconductor chips. This dominance has left the United States and China jostling to increase their semiconductor manufacturing capabilities.

Keun Lee, a Distinguished Professor of Economics at Seoul National University, says the United States currently holds an advantage over China when it comes to semiconductors.

“As it stands, the US has a bigger slice of the global semiconductor pie, owing to its strength in chip design and in the fabless segment of the industry,” Lee wrote on Project Syndicate.

“So far, China has struggled to catch up. The typical latecomer strategy – focused on building cheaper, low-end products – cannot be applied to semiconductors, because a more advanced “next-generation” memory chip tends to cost the same or less than its predecessors. Less advanced chips are thus virtually worthless.”