China’s big fund corruption probe casts shadow over chip industry

In July last year, Gao Songtao, a glasses-wearing former vice president of Huaxin Capital, a government fund management company, suddenly disappeared, heralding a storm to come.

A few months later, the Chinese Communist Party’s internal watchdog confirmed that Gao was being investigated for corruption. However, the reason behind the detentions is not President Xi Jinping’s overt campaign to eradicate corruption in financial markets.

Instead, the deeply feared and highly secretive Central Commission for Discipline Inspection has been acting differently. Target: China’s massive semiconductor industry and the tens of billions of dollars in investment raised.

Gao was one of the first executives to face corruption charges in the CCDI crackdown that sent chills across the industry. In the process, it highlights the state’s tough role, which some analysts say has set the stage for rampant corruption and wasteful spending and thwarted China’s goal of becoming self-sufficient 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, he said, was “bred” by civil servants who “did not understand the industry”.

In the past three months, at least 12 people, including fund managers, company executives and a government minister — all with deep ties to the chip industry — have been investigated or removed from the industry, according to CCDI announcements and local media reports. disappeared from public view.

Another government official involved in semiconductor investment in Jiangsu province, north of Shanghai, said CCDI’s targeting of these high-level talents has caused confusion and anxiety in the industry.

“We’re all going to slow down and see what actually crosses Beijing’s red line,” the official said.

More than a dozen disappearances and detentions

Chip executives, fund managers and government officials who have been investigated or reported missing or detained by the Central Commission for Discipline Inspection since 2021

July 2021

Gao Songtao, Vice President of Yuanxin Capital

July 2022

Lu Jun, former CEO of SMIC

Zhao Weiguo, a real estate tycoon and former chairman of Tsinghua Unigroup

Xiao Yaqing, Minister of Industry and Technology

Diao Shijing and Li Luyuan, two of Zhao’s lieutenants at Tsinghua

Ding Wenwu, head of the original core crystal capital

Wang Wenzhong, investment management partner of Hongtai Fund, cooperates with small funds and large funds

August 2022

Du Yang, director of the original core crystal capital

Former Huaxin Capital Investment Managers Yang Zhengfan and Liu Yang

September 2022

Ren Kai, Director of SMIC and Vice President of SMIC Capital

Source: Central Discipline Inspection Commission announcement, Chinese state media (not verified by FT)

big fund

The center of the storm is the National Integrated Circuit Industry Investment Fund.

Known as the “big fund”, it is one of the most important funds in Beijing Government Guidance Fundpublic-private investment vehicle raises 340 billion yuan ($47 billion) to chase Xi Jinping’s dream China relies heavily on foreign semiconductor technologyBefore the arrest, Gao, who had worked in the Ministry of Industry and Information Technology for many years, led Xinxin Capital and was responsible for managing the assets of the large fund.

Founded in 2014, Big Fund has a complex web of interests. Shareholders include the Ministry of Finance, state-owned bank China Development Bank, powerful monopoly China Tobacco and telecom giant China Mobile.

Now, according to the relevant person in charge of Jiangsu, the fund’s investment business is almost “stagnant”.

“State agencies have stepped in to audit and review the financial data of the people and companies involved. They will impose stricter requirements on the subsequent organization and investment operations,” the official said.

The fund has spent only about 880 million yuan in 2022, compared with 13.8 billion yuan last year, according to business data provider ITjuzi.

A tech-focused Chinese private equity executive was outspoken. Many semiconductor-focused investment managers and institutions have been following the direction of the big funds, and they are now in step with it in an industry tainted by corruption campaigns. “There are no good projects to invest in,” he said.

There is an atmosphere of uncertainty, with Beijing not specifying the scope of the campaign or providing scant details of any alleged crimes, typical of the opacity of the CCDI.

Explaining the corruption investigation, the Global Times, a Chinese nationalist tabloid, insisted that “a handful of corrupt officials” and “vermin” did not reflect the wider culture of corruption in the industry.

Others, however, warned that the crackdown may not be over yet. In recent months, executives linked to state-backed investor Tsinghua Unigroup have been under investigation.

“How far do they want to go? Big funds have invested in dozens of companies,” said a technology consultant in Beijing.

These include China’s largest chip makers, such as Semiconductor Manufacturing International Corporation (SMIC) and Hua Hong Semiconductor. The group also holds stakes in small funds managed by the city government, including those in Beijing and Shanghai.

The adviser, who asked not to be named, said there was a ripe potential for conflict of interest in the sector due to “the enormous flow between the government sector and the private or quasi-private sector.”

Yuen Yuen Ang, Author China’s Gilded Agearguing that the “root” of corruption in China stems from the state’s enormous influence on the economy.

Particularly vulnerable, Ang said, were the more than 1,800 government-led funds that operate like big funds.

“The combination of large transactions, complex financial instruments and a lack of transparency and accountability could create fertile soil,” Ang said.

need to change direction

The anti-corruption drive comes at a critical time for Mr. Xi and his ambition to achieve technological self-reliance.

The need to achieve this has never been stronger, with U.S. President Joe Biden rallying Washington’s partners in Seoul, Tokyo and Taipei to stymie Beijing’s progress by snowballing restrictions on the export and sale of key technologies.

China sees no other options increase spending Dealing with what Beijing sees as a “blockade” of its tech sector development on chips.

However, many in the industry believe that Beijing’s approach also needs to be overhauled.

When the Big Fund was established, its core focus was on chip manufacturing, as directed by Xi’s state planners, rather than building from scratch the underlying technology needed for a self-reliant industry.

The South China official said the decision was made even though some experts believe China should take a longer-term approach. This will involve a greater focus on R&D and nurturing talent, creating a stronger foundation for the long term.

“To be fair, many colleagues and even senior leaders don’t see it that way. . . Beijing’s intention to reduce its reliance on foreign technology is very clear. We have to follow it and put it into practice,” he said.

Beijing’s emphasis on manufacturing has underpinned the industry’s focus on fabs or fabs that mass-produce low-end chips. Big Funds also invest most of their money in companies that will soon be profitable, reducing cash for long-term R&D efforts.

Local chip makers such as SMIC, Hua Hong, and YMTC are developing rapidly. However, China still relies heavily on foreign groups for chip design and the equipment it needs to manufacture. For the most advanced semiconductors, which are critical to products, from the latest smartphones and electric vehicles to artificial intelligence and cloud data centers, they rely on semiconductors made by foreign groups.

Douglas Fuller, a Chinese semiconductor industry expert, said that in response to the failure of the industry and pressure from the United States, Beijing may take a “pivot” to direct investment to focus more on research and development of “US and related technologies” alternative plan. Associate Professor at Copenhagen Business School.

“But it will be very, very difficult to replace such technology in the short to medium term,” he noted.

Wu Sihao, managing director of investment bank China Renaissance, believes that the investment ecosystem is maturing.

Going forward, funds will be diverted from manufacturing, he said. Instead, it will target areas of research, such as acquiring intellectual property rights for software tools used to design chips.

“Some investments may not have been that successful. But now, they know they need to invest in R&D and basic research to get the job done,” Wu said, adding that officials are finally realizing that catching up with the West “will take longer than expected.”

Additional reporting by Nian Liu and Maiqi Ding in Beijing

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