Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder. Read more opinion LISTEN TO ARTICLE 4:47 SHARE THIS ARTICLE Share Tweet Post Email

Photographer: STR/AFP/Getty Images Photographer: STR/AFP/Getty Images

China has made developing its own chip industry a matter of patriotic pride. It helps that “China chip” and “China heart” sound the same in the local language. The strain of this 1.7 trillion yuan ($243 billion) endeavor may be too much for the debt-clogged arteries of its municipal governments, though.

Over the past decade, Beijing hasn’t hesitated to deploy its fiscal might in pursuit of economic and social objectives. After the 2008 collapse of Lehman Brothers, the government spent 4 trillion yuan building roads and railways to bolster the economy, sending growth into overdrive. Between 2015 and 2018, authorities poured roughly 3.5 trillion yuan into shanty-town developments to aid the poor.

Lately, fiscal spending has turned to loftier aspirations. With its national champions ZTE Corp. and Huawei Technologies Co. pinched by U.S. sanctions, China has become more determined to develop its own 5G, artificial-intelligence and chip technologies. More than 50 large-scale semiconductor projects have sprung up across the country, with a total of 1.7 trillion yuan of investment pledged, online media outlet Caixin estimates.

Most of these multibillion-dollar projects will be state-financed. For instance, the government holds 74% of the equity in three-year-old Yangtze Memory Technologies Co. The company is managed by Tsinghua Unigroup Co., the business arm of prestigious Tsinghua University, President Xi Jinping’s alma mater.

Yangtze Memory’s NAND memory technology shows potential, and is only half a generation behind the global flash memory leaders. Huawei subsidiary HiSilicon, meanwhile, is seen as a leading design house for smartphone applications.

These promising examples are too few and far between, though. Elsewhere, it’s mostly too much effort for too little reward. China’s chip manufacturing technology is three to five years behind Taiwan Semiconductor Manufacturing Co., the world’s leading contract supplier, and the country is sub-scale in assembly and testing, industry experts say.

Meanwhile, financial cracks are showing. A chip park in eastern China, with 4.5 billion yuan already spent, has ground to a halt after the impoverished municipal government failed to cough up more money, a Caixin investigation found. Another industrial park in the central city of Wuhan had its land usage rights frozen by a court because of financial difficulties. Wuhan has positioned itself as an inland technology hub in the mold of Phoenix, Arizona.

As Korean and Taiwanese industry leaders know, chip manufacturing is a terribly expensive business. Samsung Electronics Co., for instance, splashed out about $25 billion annually in capital expenditure over the past five years. To catch up with TSMC’s leading-edge wafer capacity, a Chinese chip park needs to spend about $60 billion to $80 billion on equipment alone, Credit Suisse Group AG estimates.

To make matters worse, bureaucrats from regions rich and poor are vying with each other to produce a national champion, seeing that the project is close to President Xi’s heart. As I wondered a year ago, what’s the advantage for Xiamen, a sleepy coastal city in southern China, or Guizhou, one of China’s poorest provinces, of getting into chip manufacturing? The result is resources spread too thin, wages bid up, and billions of dollars wasted in a business that’s all about scale.

To be sure, bureaucrats the world over launch pet projects to please their bosses. But this chip craze begs the question of whether public funding is being properly used, especially as China’s economy struggles. The central government’s Big Fund and its clones aren’t dumb money — they will only finance true national champions such as Yangtze Memory; local industrial parks will have to be funded locally. The Tianjin government, for instance, doesn’t have the cash to bail out state-owned commodities trader Tewoo Group Corp., but nonetheless has a $16 billion fund for AI technology, another theme close to Xi’s heart.

China’s local governments are notoriously poor: Municipals do all the dirty work of generating cash, but remit those funds to the Ministry of Finance, which then decides how to dole it out. As a result, even cities as wealthy as Beijing are deep in the red. As the economy slows and tax collection sputters, the situation will only get more severe. Local governments continue to spend more than they earn, with this year’s funding gap at 7.6 trillion yuan, Moody’s estimates.

China’s desire for self-reliance is understandable. Last year, its trade deficit in chips widened to $228 billion, more than double what it was a decade earlier. Meanwhile, U.S. restrictions on exports of chip technology have provoked an intense nationalist backlash in China. Yet so far, this semiconductor drive has been all heart and no brain.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.