Corruption is sending shock waves through China’s chipmaking industry

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China’s chipmaking industry descended into chaos last week, with at least four top executives associated with a state-owned semiconductor fund arrested on corruption charges. It’s an explosive turn of events that could force the country to fundamentally rethink how it invests in chip development, according to analysts and experts. 

On July 30, China’s top anticorruption institution announced that Ding Wenwu, the chief executive of the China Integrated Circuit Industry Investment Fund, nicknamed the “Big Fund,” had been arrested for “suspected serious violations of the law.” Ding is not the only person in trouble. Two weeks ago, Lu Jun, a former executive at the Big Fund’s management institution, was also taken into custody, along with two other fund managers, according to the Chinese news outlet Caixin.

Established in 2014, the Big Fund was intended to use government money to build a supply chain of chips made in China, thus reducing reliance on the US and its allies. The fund epitomizes the way the Chinese government can throw its weight behind a strategic industry—in this case, semiconductors. 

Eight years later, a total of $30 billion poured into the industry—with $20 billion more on the way—has yielded a complicated mix of successes and failures. The fact that the fund was driven by a political mission and not financial interests made it ripe for corruption, and analysts say the latest investigations may push China to manage semiconductor funding with more precision and professional knowledge.

The idea of the Big Fund was to pour money into industries not getting funding from traditional routes like venture capital. Instead of startups, its first $20 billion funding round, in 2014, went after publicly listed companies and their subsidiaries, often in semiconductor materials and manufacturing, according to Rui Ma, a tech analyst and host of the podcast Tech Buzz China. These companies find it harder to make money because any progress in chipmaking requires a long period of time and significant investment in research. Therefore they’re less attractive to venture capitalists, Ma says. 

The Big Fund was arguably ahead of its time. In 2014, China’s central government decided it could use public funding to address the capacity gap in ...

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