It has always been the intention of the Chinese government to concentrate resources to a few strategic industries that are heavily state controlled through which to push for upgrade of the Chinese economy.
However such approach has been hardly a success so far mainly due to the economic decentralization. With increased power, in particular the revenue from sale of the land, Chinese provincial governments are able to bargain hard with the central government to set up profitable industries locally. The relaxed control on foreign direct investment after China’s WTO entry facilitated such local initiated projects in accessing to foreign technology and market through incorporation with multinationals.
Talking automotive industry as an example, though the central government has repeatedly declared to support a few major car makers, the majority of thirty Chinese provinces have built up their own car manufacturers with involvement of multinationals.
Assembling vehicles on foreign supplied technology and key components is the most convenient way for those Chinese automotive firms to expand. Therefore despite total investment to the Chinese automotive industry is far more than that to the Korean automotive industry; it has not transferred into breakthroughs in the development of indigenous technology as the capital has been diluted into numerous assembling plants in different provinces.
This problem is common to almost all Chinese manufacturing industries fully open to market competition and foreign investment such as steel, construction material, and ship building.
Ironically it is those Chinese industries of monopolistic in nature and impossible to fully open to foreign investment such as high speed rail, nuclear power, space industry and military industries making fight jets, warships and tanks have benefited the most from China’s opening up in terms of technology improvement.
The Chinese government has been testing ways of breaking up this localised and government driven investment pattern.
To establish Shanghai as an international centre of innovation and finance is a key step in this direction. The Shanghai government is required to produce some duplicable methods in promoting capital being channelled into advanced manufacturing through market based financial mechanisms. Some of the highlights of the steps taken in Shanghai in this regard are as follow:
- Supporting commercial banks to setup subsidies specialized in equity investment targeting high tech startups ;
- Establishing and supporting private banks of diversified ownership to investing in high tech projects so as to provide private capital with new outlet in investment.
- Encouraging small to medium sized high tech companies to be listed in Shanghai Equity Trading Centre;
- Supporting insurance companies to establish equity investment fund and deliver more insurance products on the development of advanced machinery and equipment;
- Testing polices that supporting private capital entering into strategic partnership with the government in forming equity investment fund targeting strategic industries.
The operation of this multilevel capital market is particularly designed to direct capital to strategic industries such as quantum communication, brain technology, advanced medicine, large airliner manufacturing, electrical automobiles, nuclear power, super conductive material, and integrated circuits.
The development of integrated circuit industry, which is one of the priorities listed in the government strategy of “China manufacturing 2025”, demonstrates how this multilevel capital works.
The key step taken by the government was the establishment of a National Integrated Circuit Industry Investment Fund (NICIIF) in September 2014, with contributors ranging from state policy bank, a few local governments and to some major state owned corporations.
Through issue of ordinary and preferred shares, this fund raised capital up to 130 billion yuan by December 2014. Following is an incomplete list of the investment this fund made and involved since its establishment:
It acquired shares valued at 4.7 billion yuan in Semiconductor Manufacturing International Corporation, China’s largest and most advanced semiconductor foundry in February 2015;
By taking part in a consortium, it supported Chinese companies Changjiang Electronic technology and Siltech to acquire STATS ChipPAC ltd, a leading service provider of advanced semiconductor packaging designing, assembly, test and distribution based in Singapore in December 2014;
It made equity investment in Unigroup, which is China’s largest chip designing company originated from China’s prestigious Tsinghua University, worth of 10 billion yuan over the next 5 fears. Unigroup acquired Nasdaq-listed Spreadtrum Communications and RDA Microelectronics in 2014, both are leading Chinese Semiconductor Companies that design, develop and market chips for mobile terminals and wireless communications systems.
In August, Hua Capital Management Company with background of Tsinghai Holdings Co., Ltd. and China Fortune-Tech Capital Co., Ltd led a Chinese consortium acquired OmniVision, a US supplier of chips for image sensor for IPhones with U$1.67 billion.
Recently Unigroup signed an acquisition deal to buy 15% stake in US data storage company Western Digital for U$3.78 billion.
The executive from Huaxin Investment Management which manages NICIIF estimated that the fund could trigger total investment up to 5 trillion yuan to the Chinese integrated circuit industry in the next 10 years. Thanks to this huge investment, the industry is projected to expand by 20% annually in the next 5 years.
The focus of the investment which is more controlled by corporations and professionals is no longer aimed at maximizing local interests but building international competitive companies with value chain ranging from designing, manufacturing to marketing of advanced chips, finished products and equipments. Geographically such capital maneuver is highly concentrated in China’s most advanced regions such as Beijing, Shanghai, Shenzhen and Jiangsu.