The sudden disappearance in July last year of Gao Songtao, the bespectacled former vice-president of government fund manager Sino IC Capital, was a warning of a coming storm.
Months later, the Chinese Communist party’s internal watchdog confirmed that Gao had been under investigation for corruption. Yet it was not President Xi Jinping’s public campaign to eliminate graft from financial markets that was behind the detention.
Instead, the deeply feared and highly secretive Central Commission for Discipline Inspection had been running a different operation. The target: China’s massive semiconductor sector and what has been happening to the Rmb340bn ($47bn) raised to invest in it.
Gao was one of the first executives to face corruption allegations in a CCDI crackdown that has sent a chill through the sector. In the process, it has highlighted the heavy-handed role of the state, which some analysts believe has laid the groundwork for graft and wasteful spending to flourish and has delivered a setback to China’s aim of achieving self-sufficiency in chips.
“The anti-corruption campaign is a warning to me and my team,” said a senior official at a local government semiconductor fund in southern China. Corruption had been “nurtured” by civil servants who “do not understand the industry”, he said.
Over the past three months, at least 12 fund managers and company executives, and one government minister — all with deep ties to the chip industry — have come under investigation or disappeared from public view, according to CCDI announcements and local media reports.
The CCDI’s targeting of such senior people has left the industry confused and anxious, according to another government official involved in semiconductor investments, in Jiangsu, north of Shanghai.
“We will all be slowing down to see what exactly crosses Beijing’s red lines,” the official said.
A dozen disappearances and detentions
Chip executives, fund managers and government officials under CCDI investigation or reported missing or detained since 2021
Gao Songtao, former vice-president of Sino IC Capital
Lu Jun, former chief executive at Sino IC Capital
Zhao Weiguo, real estate tycoon and former chair of Tsinghua Unigroup
Xiao Yaqing, minister for industry and technology
Diao Shijing and Li Luyuan, two of Zhao’s lieutenants at Tsinghua
Ding Wenwu, former head of Sino IC Capital
Wang Wenzhong, partner of Hongtai Fund Investment Management, a small fund in partnership with the Big Fund
Du Yang, former director of Sino IC Capital
Yang Zhengfan and Liu Yang, former Sino IC Capital investment managers
Ren Kai, director of SMIC and a vice-president at Sino IC Capital
Sources: CCDI notices, China state-affiliated media (unverified by the FT)
The Big Fund
At the centre of the storm is the National Integrated Circuit Industry Investment Fund.
Known to most as “the Big Fund”, it is one of Beijing’s most important government guidance funds, with the public-private investment vehicle raising $50bn to chase Xi’s dream of ending China’s heavy reliance on foreign semiconductor technology. Before his arrest, Gao, who had worked at the Ministry of Industry and Information Technology for years, led Sino IC Capital, which managed the Big Fund’s assets.
Set up in 2014, the Big Fund has a complex web of interests. Shareholders include the finance ministry, state lender China Development Bank, powerful monopoly China Tobacco and telecom giant China Mobile.
Now, according to the official in Jiangsu, the fund’s investment operations have almost ground to a “standstill”.
“State agencies have come in to audit and review the financial data of the people and companies involved. They will impose stricter requirements on the organisation and investment operations that follow,” the official said.
According to data from ITjuzi, a business data provider, the fund has so far only spent about Rmb880mn in 2022, compared to Rmb13.8bn last year.
A tech-focused Chinese private equity executive was blunt. Many semiconductor-focused investment managers and institutions have been following the Big Fund’s direction, and they are in step with it now in a sector tainted by the corruption campaign. “There are no good projects to invest in,” he said.
There is an atmosphere of uncertainty, with Beijing not elaborating on the extent of the campaign and only scant details of any alleged crimes being given, typical of CCDI opacity.
In explaining the corruption probe, China’s nationalist tabloid, the Global Times, insisted that “a few corrupt officials” and “vermin” did not reflect a broader culture of corruption in the sector.
However, others warn the crackdown might not yet have ended. Over recent months, executives linked to state-backed chipmaker Tsinghua Unigroup have come under investigation.
“How far do they want to go? The Big Fund invested in dozens and dozens of companies,” said a Beijing-based tech consultant.
They include China’s biggest chipmakers, such as Semiconductor Manufacturing International Corp (SMIC) and Hua Hong Semiconductor. The group has also taken stakes in smaller funds run by municipal governments, including those for Beijing and Shanghai.
The consultant, who asked not to be named, said there was ripe potential for conflicts of interest in the sector because of “tremendous movement between government ministries and the private sector, or quasi private sector”.
Yuen Yuen Ang, author of China’s Gilded Age, believes that the “root cause” of corruption in China stems from the state’s enormous influence over the economy.
Particularly susceptible, Ang says, are the 1,800-plus government guidance funds that act like the Big Fund.
The combination of “mega transactions, complex financial instruments and the lack of transparency and accountability may present fertile soil”, Ang said.
Change of direction needed
The corruption crackdown is coming at a critical juncture for Xi and his ambition for technological self-reliance.
The imperative for achieving this has never been greater, with US president Joe Biden rallying Washington’s partners in Seoul, Tokyo and Taipei to stymie Beijing’s progress, through snowballing restrictions on exports and sales of key technologies.
China sees few options other than to ramp up spending on chips to counter what Beijing sees as a “blockade” on the development of its tech sector.
However, many inside the industry believe an overhaul of Beijing’s approach is needed as well.
When the Big Fund was established, its core focus, as dictated by Xi’s state planners, was chip manufacturing rather than the underlying technologies needed to build a self-reliant industry from the ground up.
The southern China official said that decision was made despite some experts arguing China should have taken a longer-term approach. This would have involved a far greater focus on research and development and building up talent to lay stronger foundations for the longer term.
“It’s fair to say that many colleagues and even senior leaders do not have such a perspective . . . Beijing’s intention to decrease the reliance on foreign technology has been so clear. We have to follow and put it into practice,” he said.
Beijing’s emphasis on manufacturing has underpinned an industry focus on the fabrication plants, or fabs, that build lower-end chips on a large scale. The Big Fund also channelled much of its funding into companies that would soon be profitable, leaving less cash for longer-term research and development efforts.
Homegrown chipmakers, like SMIC, Hua Hong and YMTC, have grown rapidly. Yet China has remained deeply reliant on foreign groups for the design of chips and the equipment needed to make them. For the most advanced semiconductors, critical to products from the latest smartphones and electric vehicles to artificial intelligence and cloud data centres, they are dependent on those made by foreign groups.
In response to the sector’s failures, and pressure from the US, Beijing might respond with a “pivot” that directs investment to focus more on research and development alternatives to “American and allied technology”, said Douglas Fuller, an expert in China’s semiconductor industry and associate professor at Copenhagen Business School.
“But replacing such technologies will be very, very difficult in the short to medium term,” he noted.
Szeho Ng, managing director of investment bank China Renaissance, believes the investment ecosystem is maturing.
Going forward, he says, money will be redirected from manufacturing. Instead it will be targeted at research areas such as obtaining intellectual property in software tools used for designing chips.
“Some investments may not be that successful. But nowadays, they know that they need to invest in R&D and fundamental research to get things done,” Ng said, adding that officials finally realised that catching up with the west “will take longer than expected”.
Additional reporting by Nian Liu and Maiqi Ding in Beijing