The CCP’s long-running anti-corruption drive has found a new target: officials in charge of the country’s semiconductor industry. The highest Party and state investigative bodies simultaneously announced that Xiao Yaqing, the now-former head of the Ministry of Industry and Information Technology, is under investigation for unspecified violations of Party rules and discipline. A number of other officials connected with the “Big Fund,” a state-funded semiconductor manufacturing investment vehicle, have also reportedly been placed under investigation. At The Wall Street Journal, Chun Han Wong and Keith Zhai reported on Xiao Yaqing’s downfall and what now looks like a failed attempt to stave off investigation by hewing closer to Xi:
The investigation of Mr. Xiao makes him the first incumbent minister to face such an inquest since Mr. Xi started his second term as party chief in 2017.
[…] Mr. Xiao wasn’t named as a delegate to the coming party congress at an internal vote this month to pick representatives from among senior central-level party and government officials—an unusual omission given that his predecessor as industry and information technology minister was a delegate to the 2017 congress. Mr. Xiao, who was Sasac chief at the time, was also a congress delegate that year.
Mr. Xiao hasn’t made any public appearance since early July, when he chaired a virtual communications ministers’ conference on July 6 with counterparts from Brazil, India, Russia and South Africa.
The following day, the Ministry of Industry and Information Technology issued a notice saying Mr. Xiao recently chaired a political study session for party members at the agency. Cadres must “unite more closely around” Mr. Xi’s leadership, Mr. Xiao said, and “greet the victorious convening of the 20th party congress with practical actions.” [Source]
I really think this is the result of pouring 150-200 billion dollars into a narrow industry. The rent seeking opportunities were just too good to miss for the decision makers
— Victor Shih (@vshih2) July 28, 2022
As head of the MIIT, Xiao oversaw the development of China’s semiconductor industry, also commonly referred to as the “chip” industry. Many other high-ranking executives involved in that industry are now also under investigation—among them are Ding Wenwu, the head of China Integrated Circuit Industry Investment Fund, commonly referred to as the “Big Fund,”; Lu Jun, the former president of Sino IC Capital, which manages the “Big Fund”; and his former deputy at Sino IC Capital, Yang Zhengfang. Zhao Weiguo, the ex-head of Tsinghua Unigroup, a conglomerate once hailed as China’s state-backed chip giant, is also reportedly being investigated. Taken together, the investigations into Xiao, the former MIIT director; Ding, the head of the “Big Fund”; Lu, the former president of Sino IC Capital; and Yang, his ex-deputy who still works at the firm, mark a massive new front in Xi’s anti-corruption campaign. On July 29, Caixin’s Zhang Erchi and Han Wei reported that Ding Wenwu’s disappearance into the investigative machinery:
Ding was last seen in public July 16, when he attended a semiconductor industry summit in Xiamen, Fujian province, and delivered a keynote speech. Investors’ enthusiasm for the semiconductor industry is cooling after a frenzy over the past two years, Ding said in the speech.
[…] The massive investments by the fund led to a flood of wannabe chip unicorns, with 138,000 chip design startups registered on the Chinese mainland by September 2020. However, the hundreds of billions of dollars in government and private investor cash were piling into an industry with a limited pool of talent, fueling concerns about waste.
The Big Fund adopted a two-tiered management structure in which the board of the China Integrated Circuit Industry Investment Fund set strategies and approved major projects while fund manager Sino IC Capital carried out investments and managed the money. [Source]
More coming I think
— Bill Bishop (@niubi) August 1, 2022
The background to this phase of the corruption campaign is a fierce technological competition between the United States and China for relative supremacy in the semiconductor manufacturing industry, which is currently dominated by the Taiwanese firm TSMC. The United States and China both seem determined to create strong domestic chip manufacturing capabilities to achieve a measure of self-reliance in the industry. The United States Congress recently passed a bill, the CHIPS Act, that allocates billions of dollars towards that goal. The potential law awaits President Biden’s signature before coming into force. The U.S. has also made efforts to curtail China’s access to lithography machines, dizzyingly complex tools crucial to the manufacture of semiconductors, made by Dutch company ASML. Chinese state media outlets have framed the anti-corruption drive as a means of strengthening China’s own chip industry in response to competition with the United States. A Global Times editorial held that the elimination of “vermin” is a prerequisite for escaping alleged American-led efforts to suppress China’s chip industry:
Against this backdrop, China’s chip industry will allow no bubble and “vermin” to exist. At present, the global chip industry is undergoing major changes. China is a latecomer but rising quickly, however, the basic situation of the industry being big but not strong has not changed. The alarm of external “strangleholds” is far from being lifted. It is bound to be a competition of time and endurance. The grim situation is the most sophisticated “X-ray machine”, which puts every move of the industry and whether it is conducive to China’s independent innovation under scrutiny [a reference to lithography machines].
[…] The high-tech industry, including the chip industry, is a special field and needs to counter the capital cycle to a certain extent, especially it needs to prevent short-term speculation. Professionals in the chip industry not only need to have top-level professional knowledge, but also a strong sense of mission. This serious and powerful anti-corruption campaign highlights the country’s serious attitude, and is also a wake-up call to the entire industry: there are difficulties and gaps, but fraud and corruption will by no means be allowed. On the path of independent innovation, there cannot be another “Hanxin” scandal. This is a clear signal sent by the anti-corruption campaign in the chip industry.
[…] The US is now hyping the so-called threat of China’s chips so much. This is largely a response to the political division at home. Washington has not entirely given up looking down and showing arrogance toward China’s scientific and technological innovation capabilities. Of course, this attitude, along with the constant growth of US suppression, should certainly boost our ambition to win the competition. At the same time, we must stay alert to prevent such enthusiasm from developing into eagerness for quick success and be wary of the forces within the system that seek to take advantage of the situation for personal gain. [Source]
At Bloomberg News, Colum Murphy, Yuan Gao, and Debby Wu reported on global reactions to the anti-corruption drive in China’s semiconductor industry:
“The Chinese Communist Party is deadly serious about advancing China’s capacity and self-reliance when it comes to the chip sector. This is vital to the party,” said Alex Capri, a research fellow at the Asia-based Hinrich Foundation. “These important figures take on positions highly instrumental for advancing China’s chip industry but it is not 100% clear whether they are completely toeing the party line. At the same time, the party is trying to control more and more of the tech sector.”
[…] “I don’t think it paralyzes the chip industry, but it scares the living daylights out of whoever is the next person in line to run the big fund,” said Jordan Schneider, a senior analyst at Rhodium Group and host of the China Talk podcast. “It’s also likely that the investing will become more conservative because it’s easier to say that failure was because of corruption, than to own up to the fact that when you’re doing this sort of thing there inevitably is wasteful investment.”
[…] “Perhaps they’re looking for ‘fall men’ for an industrial policy, which hasn’t quite sort of borne the fruit that it was initially promised,” Rhodium’s Schneider said, referring to the recent probes. [Source]