US-China tech war: Beijing’s main policy lender pledges US$62 billion to fund tech innovation

China Development Bank has earmarked financing to support strategic emerging industries and advanced manufacturing
The funding support for hi-tech innovation forms part of a state-orchestrated strategy to reduce China’s reliance on imported technologies

China technology

Celia Chenin Shenzhen

Published: 9:00pm, 4 Mar, 2021

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China Development Bank (CDB), a policy lender that finances high-priority government programmes, has earmarked 400 billion yuan (US$62 billion) of loans this year to support strategic emerging industries and advanced manufacturing, as Beijing accelerates moves to cut reliance on imported technologies amid trade frictions with Washington.

The pledge was announced days before the country’s political elite gather in Beijing for the annual meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference, known as the “two sessions”, to spell out economic and development goals for 2021 to 2025.

“We’re selecting 100 leading companies in the field of technological innovation, and 1,000 firms along the upstream and downstream industrial chains and [will] offer them special financial services support,” said CDB chairman Zhao Huan at a press conference on Tuesday. “This year, we plan to arrange loans of more than 400 billion yuan for strategic emerging industries and advanced manufacturing.”

CDB is also infusing resources in China’s semiconductor industry amid the intensifying US-China tech war. Zhao said the China Integrated Circuit Industry Investment Fund “has raised 200 billion yuan and fully entered the investment stage”.

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That amount is more than what Taiwan Semiconductor Manufacturing Co, the world’s largest dedicated chip foundry, recently budgeted for capital spending. The company’s capital expenditure this year is expected to reach US$28 billion, up from US$17.2 billion in 2020.

CDB’s massive funding support for hi-tech innovation forms part of a state-orchestrated strategy to reduce the country’s reliance on imported technologies, particularly semiconductors. It is an issue that has been aggravated by stifling US trade restrictions imposed against major Chinese hi-tech companies, including telecommunications equipment maker Huawei Technologies Co and chip maker Semiconductor Manufacturing International Corp.

“China lags behind the US in many areas, especially in semiconductors,” said Xu Hongcai, deputy chief economist at think tank China Centre for International Economic Exchange. “The top authorities have the duty to lead the country in making some breakthroughs in basic science research.”

“In the US, when the research comes to basic science, it is the same – the authorities also provide top-down support,” he said.

Beijing placed self-reliance in innovation front and centre under the country’s 14th five-year plan. This is expected to spur China’s technology sector to double down on research and development from 2021 to 2025.

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While state support in the form of fiscal subsidies of cheap loans from state banks were previously criticised for inefficiency, the vast resources now being used by China to catch up with the US in hi-tech development have not gone unnoticed in Washington.

Last month, US President Joe Biden said he anticipates America’s rivalry with China will take the form of “extreme competition” rather than conflict between the two world powers.

China’s policy of using government incentives to boost its semiconductor industry has hurt innovation at companies in the US and other market-driven economies, according to Washington-based think tank Information Technology and Innovation Foundation. It advised the US government to boost federal subsidies to the domestic semiconductor industry, including allocating US$10 billion to attract chip manufacturing facilities and investing US$7 billion in semiconductor research agencies over five years.

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US Republican Senator Tom Cotton, who is on Beijing’s sanctions list, has joined the public debate among industry groups and think tanks in advocating US government support for the country’s semiconductor industry as part of a broader effort to win the tech war with China. Cotton said the US must upgrade its own chip manufacturing capacity to “build more independence and resiliency into the US semiconductor value chain” through federal grants and public-private partnerships.

In China, economist Xu said “some problems in the technology industry, especially in semiconductors, cannot be solved only by money”. He said the country “needs to be patient to get more experience with attracting more talent” in the industry.