Previous efforts to build a chipmaking sector had mixed results, with some notable failures and corruption scandals. But high-profile successes from local chipmaking firms and a widening effort by the U.S. to kneecap China’s chip development could be motivating Beijing to invest even more money in its semiconductor sector and foster more local chipmaking champions.

China’s third “Big Fund” is led by the Ministry of Finance, which holds the biggest stake. It’s joined by an array of state-owned banks and investment firms linked to local governments.

The 344 billion yuan ($47.5 billion) raised for Big Fund III is the largest tranche of funding since the initiative started in 2014. The previous two funds raised 138.7 billion yuan ($19.5 billion) in 2014 and 204.1 billion yuan ($28.7 billion) in 2019.  

China’s Big Fund III is roughly equal in size to Washington’s CHIPS Act, which offered $53 billion in incentives to encourage chip companies to manufacture leading-edge chips in the U.S. Several other governments, including Japan, Germany, South Korea, and India, are also pledging billions of dollars for domestic chipmaking, and the AI boom is boosting demand for leading-edge logic and memory chips as well. 

“This move suggests Beijing is now more confident China will make meaningful progress in semiconductors,” Linghao Bao, a senior analyst at the policy research firm Trivium China, says. “The size of the fundraising speaks for itself.”

Yet the past two rounds of Big Fund-led investments have offered mixed results, with notable successes—and scandals.

Some recipients of Chinese government money, like Semiconductor Manufacturing International Corporation (SMIC) or Yangtze Memory Technologies Co. (YMTC), have become significant players in the Chinese market. 

SMIC manufactured the advanced 7-nanometer chip that powers Huawei’s Mate 60 series smartphone, released last August. The phone’s release surprised both analysts and the Biden administration, as it was thought that strict export controls would have blocked China’s ability to produce such a chip domestically.

SMIC, which is China’s largest foundry, is reportedly now working on a 5-nanometer chip for Huawei. (SMIC was placed on the U.S. Entity List, which bans the export of U.S. technologies to these blacklisted companies, in December 2020.)

YMTC, China’s largest memory chipmaker, reportedly supplies memory chips for Huawei’s Pura 70 series smartphone, released earlier this year. YMTC was on track to challenge established memory chip manufacturers like U.S.-based Micron Technologies and South Korea’s SK Hynix, only to be derailed by Washington’s decision to place it on a trade blacklist in December 2022. 

But while those two companies are the more prominent examples of the Big Fund’s successes, the fund has also seen its share of scandals.

Beijing has investigated chip executives, fund managers, and even government officials for wasteful spending and corruption. In 2022, the country’s corruption watchdog announced investigations into both the head of the Big Fund and the chief executive of the investment company managing the investment itself. Prosecutors indicted the latter on bribery charges in March.

A Wuhan-based foundry’s failure highlights the challenge in developing China’s semiconductor industry. 

Wuhan Hongxin Semiconductor Manufacturing, backed by the Wuhan government, once had ambitions of rivalling leading chipmakers like Taiwan Semiconductor Manufacturing Company and Samsung Electronics, even luring one of Taiwan’s most famous semiconductor engineers to work for the Chinese firm. The company was backed by the Wuhan government. Its ambition was backed by the Wuhan government and construction of the firm’s facilities in Wuhan started in early 2018. But despite three years of investment, the firm shut down in June 2021 without commercially producing a single chip as malpractices and fraud over the three-year period resulted in a huge funding gap.

Beijing’s push to build a local chip industry is taking on greater intensity in recent years, as the U.S. and its allies try to constrain the export of advanced chips and chipmaking tools to China. 

Several of these tools, like the extreme ultraviolet machinery made by the Dutch company ASML Holdings, are highly specialized and made by a handful of non-Chinese companies. The Biden administration is pressuring governments in Japan and the Netherlands to stop offering high-tech equipment and services to Chinese firms. 

But Bao suggests that Washington’s drive to kneecap China’s chip industry could backfire. U.S. export controls make Chinese companies “more willing to seek domestic alternatives,” he says.

For example, Chinese tech firms like Alibaba are reportedly looking to Huawei as a possible supplier of AI chips, after U.S. rules barred Nvidia from selling its flagship products to Chinese companies. 

“The industry needs more money to fuel innovation. Doubling down is the right move,” Bao said.