China Accelerates Measures to Boost Local Software and Circuitry Sectors

China's IC industry, however, is heavily dependent on imports. The country's annual imports of semiconductor chips, for example, rose 30% over four years to $260 billion in 2017. But for the Chinese government to achieve its “Made in China 2025″ industry strategy of becoming a global leader in new technologies, it needs to do more than just aid domestic players. It also needs to get foreign investors to pour money into the industry, and bring in expertise.

China has long had incentives to encourage foreign investment in the sector. Since 1998, it has been establishing high-tech economic zones throughout the country, which now number about 170. In 2001, Shenzhen introduced a raft of tax incentives for foreign investment in hi-tech enterprises, and the city has now emerged as the “Silicon Valley” equivalent of China. In 2012, the Ministry of Finance and the State Taxation Administration released further tax preferential measures to develop the country's IC and software industries.

Four governmental departments followed with their tax preferential measures in 2016, the year when Chinese President Xi Jinping officially announced that China planned to join the ranks of advanced nations in terms of technological progress by 2020, and become the leading global innovator by 2030.

However, the successes in China's efforts have now run into a major hurdle with the intensifying trade war between China and the US. The war has now spilled over into the technology industry. “The technology blockade by the US is escalating and China has to do something in the technology area if it wants to rise as a super power,” Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai, told the South China Morning Post.

Last year, Chinese tech giant ZTE was temporarily brought to its knees by U.S. sanctions, before $1.4 billion in fines were agreed, allowing the company to continue. More recently, the Trump administration has placed China's biggest maker of telecommunications equipment, Huawei Technologies, on a blacklist that prevents it from buying American technologies and goods, as well as pressuring some of its allies to do the same. The U.S. is also considering banning American technology firms from doing business with as many as five Chinese video surveillance firms, according to a Bloomberg report.

Consequently, the pressure to accelerate the development of domestic alternatives in those sectors in which China's relies on foreign imports to underpin its high technology successes has become acute. These new tax incentives should help, and more measures are likely to follow soon.

China set up the China National Integrated Circuit Industry Investment Fund in 2014 to nurture the development of local technology, and to acquire foreign patents and designs, and the fund has made about a dozen such investments. However, In terms of providing a real alternative to foreign technology, new domestic companies still have a long way to go.

China may be a world leader in areas such as 5G and e-commerce, but it is still behind the U.S. in chip design and manufacturing, and some critical software. These foreign-made products are vital for many of China's top technology firms, but they are still made by U.S. companies such as Intel, Qualcomm, Google and Microsoft.