China’s leading semiconductor policy fund, the IC Industry Investment Fund, has been on a spree to reduce its stakes in some of China’s main semiconductor companies. Lately, it has been revealed that in 2021 alone, the investment fund has reduced stakes in 13 publicly listed companies. At its peak, the fund held stakes in 22 companies publicly listed in China.
The IC Industry Investment Fund’s recent actions will impact Chinese stock market in the short term. For example, on August 31 the fund has reportedly reduced close to 25% of its holding in San’an Optoelectronics Co., China’s largest LED maker and also a main player in China’s policy to lead in compound semiconductor development. The news sent San’an Optoelectronics’ share price plummeting by 6.6%, even though the reduced shares accounted for only less than 2% of the LED maker’s stock. Likewise, when the fund reduced its shares in SMIC, China’s largest foundry, in June 2021, the share prices of SMIC dropped by 1.26% and 1.43% respectively in Hong Kong and China.
The recent wave of stake reductions, however, is in accordance with the IC Industry Investment Fund’s strategic roadmap. The policy fund comes in two phases: Phase I began in 2014, raising an estimated total of 140 billion CNY which was eventually distributed across 23 companies, based on publicly available information. Between 2019 and 2024, Phase I has officially entered its payback period, which explains its recent trajectory of stake reductions.
Meanwhile, the fund’s Phase II began in 2019, raising 200 billion CNY. In contrast to its precursor, which allocated 67% and 17% of its investment to the chip manufacturing and design sectors, Phase II mainly targets the chokepoint of China’s semiconductor industry threatened by US sanctions, focusing on the equipment and materials crucial to semiconductor manufacturing. For example, Advanced Micro-Fabrication Equipment Inc. (AMEC), a micro-fabrication equipment company specialized in plasma etching and chemical vapor deposition, became the first IC equipment company invested by the fund under Phase Two.
Notably, AMEC, alongside Xiaomi and seven other Chinese companies, were targeted by U.S. sanctions in early 2021 for alleged ties with the Chinese military – an accusation that AMEC denied.
Meanwhile, Jiangsu Nata Opto-electronic Material Co., China’s only domestic provider of the metal organic (MO) source critical to semiconductor manufacturing, also sought investment from Phase II as it undertook the development of the 193 nm photoresist material necessary to photolithography. In addition, Phase II also invested in China Resources Microelectronics, the country’s largest power semiconductor IDM.
As Phase I is to wrap up its payback period in 2024, it is worth noting that the fund will kick in a fresh round of investment, starting in 2025. Officially known as the “Extension Period”, the 5-year duration will see Phase I of the IC Industry Investment Fund taking on a new role within the China’s semiconductor industry.