In China's push to become a semiconductor power, a discreet government-backed fund is playing an outsize role.
The national chip fund has provided financing for deals seen as key in helping Chinese companies produce more powerful, cutting-edge semiconductors. U.S. chip makers Intel Corp. and Qualcomm Inc. each have participated in deals with Chinese companies backed by the fund, said its executive vice president Wei Jun.
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"We maintain frequent exchanges with the U.S. side," Mr. Wei told The Wall Street Journal in a rare interview. "It doesn't matter if it's international or domestic (companies). We will invest or participate in the best development projects in this field in China."
Announced in 2014, the $20 billion government-controlled fund is the centerpiece of Beijing's plan to dominate the computer chip industry. Formally known as the China Integrated Circuit Industry Investment Fund Co., it is known locally as "the Big Fund."
Detractors in the U.S. call it a "slush fund," and American trade groups warn its deep pockets will subsidize so many Chinese factories it will flood the sector with overcapacity.
Mr. Wei said at the fund's Beijing offices that he and his colleagues are a force to keep overcapacity in check by promoting consolidation.
Mr. Wei pointed to Qualcomm's and Intel's willingness to co-invest with the fund, despite the criticisms from Washington that China's massive spending push could distort the market. The American chip makers previously announced their China investments but not the involvement of the Big Fund. Intel and Qualcomm declined to comment on their dealings with the chip fund.
Mr. Wei said he isn't bothered by the criticism from Washington. "In one sense, this means they are taking us seriously," he said.
The chip fund is a new model for China's state-driven economic development. After being criticized by the West for interfering with market forces, Beijing is shifting from government subsidies to investment funds that it says operate on market principles.
The Big Fund is an experiment to try to invest government funds more efficiently, said Wei Shaojun, a government adviser and head of Tsinghua University's microelectronics department.
But the line between government officials and private-sector executives in China is hazy. Many executives of the chip fund, including its head Ding Wenwu and Mr. Wei, are former officials of China's technology ministry. Mr. Wei said the fund aims to generate returns for investors, which are primarily departments of China's central government.
"State-owned investors are the majority, there's no way around it," Mr. Wei said. "But when I sit here, I'm no longer a government employee, I'm a company executive. My interests are tied to the business performance of this company."
The fund had pledged 59% of the total $20 billion by the end of 2016 and will complete investments by 2019, Mr. Wei said. It will seek to recoup its investments in 2024, although fund shareholders can vote to give projects a five-year extension, he said.
The national fund has played a pivotal role in shaping China's chip industry over the past three years. Most of the country's key chip projects count it as a financier.
The fund also brokered an important merger last year, resulting in a domestic company that China hopes can become competitive in capital-intensive memory chips. Memory chips are a main focus for China, as they are used in all smartphones and other gadgets. Tsinghua Unigroup, one of China's strongest chip companies, took over the Wuhan city government-owned XMC, then immediately announced plans to build China's first world-class memory chip factory for $24 billion.
Mr. Wei said XMC was too slow-moving as a local state-owned enterprise.
"With Tsinghua Unigroup partnering with it, we have a greater chance of success for China memory chips," Mr. Wei said.
Mr. Wei said the Big Fund co-invested with Intel in China's top chip designer Spreadtrum -- owned by Tsinghua Unigroup -- and with Qualcomm on a joint venture with China's largest chip manufacturer SMIC and a chip packaging factory in Jiangsu province.
Intel didn't comment on its $1.5 billion investment, other than to say that "Intel has a long and successful history of growing its business in China in a responsible manner that complies with applicable U.S. national-security controls." Qualcomm declined to comment on the joint venture.
The fund's executives agree with western critics that overcapacity is a danger of China's chip drive, Mr. Wei said. But he sees it as a problem caused by provinces across China trying to jump on the bandwagon with their own funds and chip projects. He says he is doing his best to keep such funds in check.
"This industry requires companies to have large scale to survive," he said. "Small companies will surely die, so there's no use investing in a lot of small companies."
--Bob Davis contributed to this article.
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Corrections & Amplifications
This article was corrected at 1137 GMT because the original incorrectly stated the China Integrated Circuit Industry Investment Fund Co. was established in 2013. It was established in 2014.
The China Integrated Circuit Industry Investment Fund Co. was established in 2014. "China-Backed Fund Plays Big Role in Country's Chip Push," at 5:45 a.m. ET, incorrectly stated it was 2013 in the fourth paragraph. (July 31, 2017)
(END) Dow Jones Newswires
July 31, 2017 07:39 ET (11:39 GMT)