China's $70 Billion Chip Incentive: A Strategic Inflection Point for Domestic Semiconductor Leaders

China's $70 billion chip incentive program, announced in late 2025, represents a pivotal moment in the country's quest for semiconductor self-sufficiency. This unprecedented financial commitment-ranging from 200 billion to 500 billion yuan-aims to accelerate domestic production, reduce reliance on foreign technology, and counter U.S. export controls. For investors, the initiative signals a strategic inflection point for Chinese semiconductor leaders like Semiconductor Manufacturing International Corp. (SMIC), Huawei, and Cambricon Technologies. However, the path to self-reliance remains fraught with technical, geopolitical, and market challenges.

The $70 Billion Incentive: A National Imperative

The program operates independently of existing funding mechanisms, such as the $50 billion Big Fund III equity-investment vehicle, and is part of a decade-long national strategy to close the gap with global leaders like TSMC. By 2025-2026, the government plans to prioritize next-generation equipment, 5G/6G components, and advanced packaging technologies. This aligns with Beijing's broader "whole-nation" approach to semiconductor development, driven by concerns over U.S. technological dominance and the need for national security resilience.

The initiative also reflects a shift in procurement policies. For instance, state-funded data centers are now required to use exclusively domestic AI chips by November 2025. This regulatory push is expected to drive demand for homegrown solutions, with domestic AI chip market share projected to rise from 34% in 2024 to 82% by 2027.

SMIC: Progress Amid Persistent Gaps

SMIC, China's largest foundry, has made incremental strides despite being six years behind TSMC in advanced lithography capabilities. In Q1 2024, the company achieved a 19.7% year-over-year revenue increase to CNY 12.594 billion. Its collaboration with Huawei on the Kirin 9030 processor-manufactured using an updated 7-nanometer process (N+3)-marks a critical milestone. However, SMIC still faces yield-rate challenges on its N+2 process and relies heavily on foreign equipment for critical manufacturing steps like lithography.

The $70 billion incentive package is expected to provide SMIC with subsidies and financing to scale production and invest in next-generation tools. Yet, its financial health remains a concern: declining gross margins and rising debt levels could strain its ability to sustain long-term growth.

Huawei: A Strategic Anchor in the Ecosystem

Huawei's role in China's semiconductor strategy is unparalleled. As a key partner to SMIC, the company has leveraged state-backed funding to develop cutting-edge chips like the Kirin 9030, which circumvents U.S. export restrictions. Huawei's inclusion in government procurement lists for AI processors further underscores its strategic importance.

However, U.S. export controls have forced Huawei to innovate in efficiency, optimizing existing hardware like the H800 to compensate for compute limitations. While this has spurred advancements in AI research, the company's ability to compete in high-performance computing remains constrained by access to advanced HBM memory and lithography tools.

Cambricon: Scaling AI Ambitions

Cambricon Technologies, a leader in AI accelerators, has set an ambitious target of producing 500,000 AI chips by 2026, including 300,000 units of its Siyuan 590 and 690 processors. These chips are critical for AI training and inference, with major domestic firms like ByteDance and Alibaba adopting them for infrastructure needs.

Despite this, Cambricon faces significant hurdles. Its reliance on SMIC's N+2 process, which suffers from low yield rates, and limited access to advanced HBM memory could delay production timelines. The company's success will depend on SMIC's capacity to scale and the government's ability to secure domestic alternatives for critical components.

Geopolitical and Market Risks

The U.S. and its allies continue to enforce stringent export controls on advanced lithography equipment and high-end chips, directly hampering China's progress. These restrictions have forced Chinese firms to focus on mature nodes (28nm and above), where domestic demand remains strong. However, the global semiconductor supply chain is increasingly fragmented, with national strategies prioritizing self-sufficiency over integration.

For investors, this fragmentation raises concerns about market access and the long-term viability of China's ecosystem. While the $70 billion incentive provides a short-term boost, the sector's ability to compete globally will hinge on overcoming technical bottlenecks and geopolitical tensions.

Investment Considerations

The $70 billion program offers a strong tailwind for domestic semiconductor leaders, particularly in AI and mature-node manufacturing. SMIC's partnerships with Huawei and Cambricon's AI ambitions position them as key beneficiaries of state-backed procurement and subsidies. However, investors must weigh these opportunities against structural challenges:

1. Technological Gaps: China lags in advanced lithography and ion implantation, critical for leading-edge chips.
2. Financial Health: Companies like SMIC face declining margins and debt burdens.
3. Geopolitical Uncertainty: U.S. export controls and global tech nationalism could further isolate China's ecosystem.

Conclusion

China's $70 billion chip incentive program is a bold bet on self-sufficiency, reflecting the government's determination to counter U.S. technological dominance. For SMIC, Huawei, and Cambricon, the initiative offers a lifeline to scale production and innovate in constrained environments. However, the road to semiconductor independence remains long and arduous. Investors should view this as a high-risk, high-reward opportunity, with success contingent on sustained state support, technological breakthroughs, and a shift in the geopolitical landscape.