Head of China’s homegrown microprocessor industry fund arrested in fraud scandal

• Plan to “leapfrog” developments in the semiconductor industry could fall flat on its face
• “Big Fund” financing model “ripe for corruption”
• Echoes of 2006’s Hanxin debacle?
• Or just too many unfulfilled pledges to hit unachievable targets?

A major corruption scandal is convulsing the Chinese semiconductor manufacturing industry, with a number of senior executives from the state-owned China Integrated Circuit Industry Investment Fund under arrest and police investigations in progress. The fund was set up in 2014 by the Ministry of Finance and China Development Bank Capital as part of a government strategy to "leapfrog" developments in the semiconductor industry. It is rumoured that the Chinese government is so concerned about the potential ramifications of the scandal that it might be necessary to change how investments are made, managed and policed in the strategically vital microchips sector. In 2017, a former chairman of the fund said it can “reflect the national will and meet the strategic industry’s need for long-term investment”. It looks as though that may not be the case.

According to a report in the influential and really rather splendid daily download from the prestigious MIT Technology Review (always worth a read), four of the top bods of the investment vehicle (which is known colloquially simply as the “Big Fund”), are in custody. On 30 July, China’s anti-corruption agency, the Orwellian-sounding Central Commission for Discipline Inspection, announced the detention of Ding Wenwu, the Big Fund’s CEO for “suspected serious violations of the law”. The exact charges are yet to be revealed. Ding was once the director of an important department at China’s Ministry of Industry and Information Technology, and knows his way around IT and telecoms. After Ding’s arrest, Lu Jun, a former CEO of the Big Fund’s sole manager, Sino IC Capital, was detained along with two other unnamed fund managers.

The China Integrated Circuit Industry Investment Fund was set up with the equivalent of $20bn in government cash and other funding in 2014 as part of an effort to end reliance on US semiconductors by designing and fabricating them within China itself. Some of China’s largest state-owned companies, including China Tobacco and China Mobile, invested in what was lauded as the proper Chinese way to finance the highly capital-intensive microprocessor industry.

In 2020, a further $30bn went into the fund, and another $20bn injection is due soon. According to the MIT report’s author, Zeyi Yang, the fact that money flowed into the Big Fund from government coffers and public companies rather than from via private investors and venture capitalists made it “ripe for corruption”.

The authorities will be hoping that the Big Fund scandal will not be as significant or embarrassing as the Hanxin farrago of 2006, when China’s much trumpeted first home-designed and manufactured chip was proven to be a complete fake. In that case, Chen Jin, a 37-year-old academic who had spent six years in the US working in high-tech before returning home, claimed to have developed a digital signal processing (DSP) chip capable of handling 200 million instructions a second. It was all a lie. A whistle-blower blew the gaff and revealed that the chip was, in fact, a product made by Freescale Semiconductors, a one-time Motorola subsidiary. Chen had simply rubbed all the identifying marks off the Freescale chip and claimed that all the research and development was his alone. He hasn’t been heard of much over the past 16 years.

In 2019, during the Trump administration, the US blacklisted the mega-technology conglomerate Huawei and forbade US companies from supplying it with chips made using US technologies. Before long, Huawei was struggling as it pivoted to alternative suppliers, including South Korean company Samsung of South Korea and TSMC of Taiwan, countries whose political alliances sensibilities favour the US and not mainland China. These developments spurred China’s determination to found its own fabs.

Joe Biden defeated Donald Trump in the 2020 US presidential election but continued the latter’s policy with regard to Huawei and ZTE in particular, and Chinese technology companies in general, keeping them screwed down and unable to access US chips and advanced semiconductor technologies. This made the Big Fund even more important and central to China’s push for self-sufficiency.

The Chinese authorities have not so far revealed exactly what charges the CEO and the three others arrested might face, or how the corruption manifested itself, but we can be pretty sure there will be some big money involved. It is possible that it’s not necessarily a matter of simply fiddling the books but more a case of overspending on untried or under-tested technology to meet unfeasible targets set by the government. Either way, the future doesn’t look bright for those scooped-up so far. Nor is it known if other arrests are likely. Obviously though, the Chinese government will be sure to parachute in a squeaky-clean, politburo-approved, experienced financial apparatchik to head up the investment vehicle and change its methodologies and systems. It will keep a very beady eye on the Big Fund from now on.