In Their Own Words: Misallocation of Capital as Economic Statecraft

In Their Own Words: a series that highlights captains of industry explaining their country’s economic statecraft strategy in their own words.

Key industry leaders in the People’s Republic of China (PRC) view the misallocation of capital, and the global overcapacity that it generates, as a key tool of PRC economic statecraft.  While this approach is counterintuitive, the PRC has a track record of purposefully using government support to flood the global market with capacity, crippling foreign competitors, and then becoming the dominant producer in the industry once things have normalized.

In February 2018, Chen Datong, a Founding Partner of Hua Capital and manager of the Beijing government’s semiconductor industry investment funds, delivered a speech on the strategy of PRC government semiconductor industry investment funds – including local government funds and most notably the National Integrated Circuit Industry Investment Fund (the “Big Fund”), launched in 2014.

Speaking as an insider, Chen said the Big Fund aims to “subvert” the global semiconductor industry by creating overcapacity, just like China did in the solar industry, which in the end will benefit the domestic PRC semiconductor industry.[1] 

This is happening.  Although recent headlines highlight a temporary global semiconductor shortage, longer-term trends show a major shift in semiconductor manufacturing capacity.  According to the Biden Administration’s June 2021 supply chain review, U.S.-installed semiconductor production capacity accounts for approximately 12 percent of the global total, down from 37 percent in 1990.  Meanwhile, China now accounts for 16 percent of global capacity, up from negligible levels in 1990.

A few excerpts from Chen’s speech:

Strategy of the Big Fund

“When it was first established, there was a lot of debate about the Big Fund. At the beginning, many people thought the Big Fund was still just a state-owned enterprise mechanism and questioned whether it could be effective.  But the progress in the past three years has greatly exceeded expectations; everyone can see the results!  In the past, China’s semiconductor industry had several issues that caused headaches, and now they are all beginning to be solved.  For example, [globally] there are only six or seven 12-inch wafer fabs, so we just need to build two or three more wafer fabs to subvert the entire global wafer market.  This situation reminds me of polysilicon in the solar industry ten years ago.  As soon as Chinese enterprises started to make it, other countries began to fail [emphasis added].”

Successful Historical Cases in Solar and LED Industries

“This is very similar to the solar and LED industries in the past few years…The investment of local governments was not rational, and it quickly created overcapacity which depressed prices in the whole industry.  But after this pain, when the industry recovered, we found that our foreign counterparts had failed, and only Chinese solar companies remained [emphasis added].”

PRC industry leaders view state-directed investment leading to global industrial overcapacity as a tool of economic statecraft that has effectively devastated foreign competitors. Now, tool of economic statecraft aimed at other strategic industries, like semiconductors.

[1] Chai Zhongsheng [柴宗盛], The Paper [澎湃新闻], Chen Datong: Semiconductors will have Overcapacity like Polysilicon, February 22, 2018.