When Li Keqiang stood up in the Great Hall of the People last month to deliver his annual work report, he spoke for more than an hour and a half. Yet, the Chinese premier was notably silent about one high-profile government policy. Not once did he mention Beijing’s flagship “Made in China 2025” industrial strategy, unveiled with such fanfare back in 2015. Since then, of course, MIC2025 has attracted intense criticism internationally. Beijing’s plan to pour vast state resources into seizing a dominant position in emerging high-technology industries was one of the main complaints in the US Section 301 report that last year led Washington to impose punitive tariffs on imports from China. And MIC2025 was one of the main reasons the European Union last month declared China a “systemic rival” and promised curbs on Chinese state-backed businesses in Europe. But anyone who thinks Li’s uncustomary silence on the subject means that Beijing is backing away from its signature strategy is barking up the wrong tree. Far from crumpling in the face of foreign pressure, the Chinese government is more likely to double down and pursue its policy with even greater vigour. One of the principal aims of MIC2025 is to sever, or at least reduce, the dependence of Chinese industry on imports of sophisticated foreign-made technologies, such as advanced semiconductors. This dependence was thrown into sharp relief last year. In April, the US Department of Commerce banned American companies from selling components to state-owned Chinese telecommunications equipment company ZTE for breaches of US sanctions on Iran and North Korea. With ZTE’s viability threatened, Chinese President Xi Jinping was obliged to intervene personally to get the ban lifted . Don’t mention ‘Made in China 2025’: Beijing budget vow has notable omission Then in November, the US cited national security concerns to impose controls on exports of all “commodities, software and technology” to Fujian Jinhua Integrated Circuit , a move that quickly brought the state-owned semiconductor manufacturer to its knees. Meanwhile, both the US and the EU are moving to tighten controls on inward investment from China to restrict the ability of Chinese state-backed companies to obtain strategically valuable technologies by acquisition. While these moves make it more difficult for China to acquire technologies it needs for MIC2025 from abroad, they also reinforce the determination of China’s leaders to achieve the technological self-sufficiency goals outlined by the MIC2025 plan. These are ambitious, with Beijing demanding 70 per cent self-sufficiency in critical components across a range of hi-tech industries including aerospace and telecommunications by 2025. So, although the Chinese authorities have stopped referring in public to MIC2025, they continue to pursue the plan’s objectives, talking instead about the necessity of developing “high quality manufacturing”. This much is clear from the amount of money the central and local governments are pouring into the development of new industries. As of the middle of last year, they had set up 1,940 “government guidance funds” to finance technology investment. On paper, these are modelled on the sort of private venture capital funds that financed the early development of Silicon Valley’s tech giants. In reality, however, they are government-run bodies set up to direct capital to chosen sectors in accordance with government policy. China calls on private sector to beef up investment in basic science as it seeks to become tech powerhouse The headline sums are enormous. The central government’s National Integrated Circuit Industry Investment Fund has a war chest of 139 billion yuan (US$20.7 billion), while the National New Emerging Industries Fund has 40 billion yuan, and the Advanced Manufacturing Industry Investment Fund has 20 billion yuan. And that is just a handful of central government funds. Provincial and city governments have also raced to set up their own versions. In the semiconductor sector alone, at least 20 local governments have set up guidance funds with investment plans worth a combined 600 billion yuan. Overall, government guidance funds are targeting investments totalling more than 10 trillion yuan (US$1.48 trillion). Wisely invested, that would surely be sufficient to achieve many of MIC2025’s goals. But not everything is as it seems. In many cases, the headline sums claimed by guidance funds are vastly inflated. The ostensible idea was for local governments to seed the funds with capital, and then attract private sector investments to make up the greater part of their equity. But investors proved cautious. As a result, the funds have taken to offering generous guaranteed returns to pull in money. In short, they are raising debt, not equity. This might sound familiar. In effect, government guidance funds have become the new equivalent of the highly leveraged “local government financing vehicles” (LGFVs) set up in the early years of this decade to fund lavish infrastructure and property developments. Can China’s tech industry innovate its way to leadership? Aghast at the financial risk, the central government has gone to great lengths over recent years to crack down on LGFVs. Now, with government guidance funds set up to support MIC2025, it is in danger of creating a whole new class of high-risk financial vehicles. With some 45 new semiconductor fabrication plants set to begin production in the next two years, and 40 robotics parks in development, the headlong investment rush threatens to lead to heavy excess capacity in Beijing’s chosen technology sectors. That will make it difficult for many guidance funds to service the debt they are accumulating, and challenging, if not impossible, for China’s new industries to generate the returns on invested capital needed to drive the longer term technological advances the government demands. Li Keqiang may have gone quiet about MIC2025, but the policy is not dead. On the contrary, it may already be out of control. ■ Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 25 years