[sudosysgen]

SMIC is partly state owned, so funding them doesn't have the same issues with misaligned incentives as shoveling money into private corporations who may just pocket it through a loophole (remember the Broadband Act?). This makes the funding issue much easier, but it introduces other issues and requires very significant technical expertise from the state which can take a long time to build.

[alephnerd]

> so funding them doesn't have the same issues with misaligned incentives

Not exactly.

China is federal, and funding comes from both local government and central government.

This can lead to local governments burning money on less successful ventures because of the close nexus between leadership and local politicians. China still has a severe problem with Access Corruption for this reason.

Also, at the Central Government level, ministries and SOEs will have their own funds and competing interests which leads to the occasional backstabbing

The collapse of Tsinghua Unigroup and much of the investments from Big Fund 1 are a good example. Big Fund 2 is only just closed recently, so it will take a couple years to judge the results of that batch.

After the 2015-16 market crash, China basically migrated towards a State Capitalism model with SOEs and Governments (local and central) acting as fund managers. This has pros in the sense that you can act quickly on political directives, but this has massive cons in that your incentives are aligned with keeping your direct managers who are political/party appointees happy.

Political Incentives (local or federal) might not always align with what's best for a product or company. EVs are a notable example of that, with private BYD and Tesla out-competing every other state funded EV and car manufacturer in China.

[sudosysgen]

> Not exactly.

The problem you are describing is fundamentally different from that in the US.

The problem in the US is that in many cases the money is literally just pocketed and returned to shareholders. The problem with funding of groups who are likely to fail due to connections is significant of course, but at least even in that failure mode money is spent on R&D and infrastructure, which at least has a chance of some success and even in failure will develop talent.

Tsinghua Unigroup is a good example. Yes it failed and defaulted, but from it's failure there is YMTC which is a huge strategic success and UNISOC which is a moderate success.

The issue you're describing is also present in the US, by the way, with local governments using tax rebates or direct incentives to lure corporations, and lobbying for subsidies to unsuccessful businesses due their locality/connections.

[alephnerd]

> with local governments using tax rebates or direct incentives to lure corporations

But local governments do not have a controlling stake and actual CapEx investments in those ventures in the US.

If Tsinghua Unigroup goes belly-up again or can't meet it's targets as part of the reorg, the Anhui Province is on the hook, as they have the controlling stake in it after the cleanup.

This is a risk that a lot of people on HN seem to ignore (I think because of the complexity of the Chinese federal system).

In most cases, it's provinces that are on the hook for these ventures, and if they fail, it's a significant chunk of cash that is lost. Unlike the Central Government, Local and Provincial Governments have weak financials because they traditionally couldn't raise bonds in the financial sector directly plus they have the added welfare and pension liabilities as part of the Deng-era financial reforms where welfare and pensions were devolved to Provincial and Local Governments.

> but from it's failure there is YMTC

Rewrite of history. YMTC was always a success as a BU, and that's why it was split off from Tsinghua Unigroup because the overall structure of Tsinghua Unigroup was inherently unstable and put Hubei's CapEx at risk as they gave the capital to Tsinghua Unigroup to create YMTC.

[sudosysgen]

> But local governments do not have a controlling stake and actual CapEx investments in those ventures in the US.

The impact is not very different as they grant billions in subsidies which they hope to recoup in tax revenues later. I don't see how this provides incentives that are significantly different except that there is no ownership, which is objectively a worse deal for the local government.

> If Tsinghua Unigroup goes belly-up again or can't meet it's targets as part of the reorg, the Anhui Province is on the hook, as they have the controlling stake in it after the cleanup.

Anhui Province will lose at most the ~5 billion it put into buying a stake of Unigroup. It will not be on hook for outstanding debts as far as I can tell, so I don't understand how this arrangement is any worse for Anhui than giving 5 billion in subsidies and tax credits as a US state would - for example Ohio provided an additional 2 billion in funding for the TSMC fab, NY around 10 billion, etc...

> Rewrite of history. YMTC was always a success as a BU, and that's why it was split off from Tsinghua Unigroup because the overall structure of Tsinghua Unigroup was inherently unstable and put Hubei's CapEx at risk as they gave the capital to Tsinghua Unigroup to create YMTC.

This doesn't change my point that the investment into Unigroup directly led to YMTC which is a massive success. I'm not saying that Unigroup is responsible for YMTC's success, I'm saying that investments into Unigroup - in this case including Hubei's investment - had good outcomes even if Unigroup as an entity failed.

[alephnerd]

> The impact is not very different as they grant billions in subsidies which they hope to recoup in tax revenues later

Yes, but it's not a CapEx investment (as in upfront capital taken out of a treasury and invested), and is subject to public notices so there at least is an auditable trail. And unlike China, municipalities and States in the US can directly raise capital via bonds.

> so I don't understand how this arrangement is any worse for Anhui than giving 5 billion in subsidies and tax credits as a US state would

Because that stake in one venture is 10% of Anhui Province's entire Revenue in 2022 - Anhui's total revenue was only $49B in 2022 but it's expenditures were $115B in 2022 [0]. And that's just one venture.

A provincial government like Anhui has invested in dozens (if not hundreds) of large scale ventures such as the legacy automaker JAC Group and Volkswagen China. While these amounts might not necessarily at the same amount as SMIC (excluding JAC Group and Volkswagen China), they are still fairly significant. And Anhui is a middle of the pack government in China - all provinces (as well as the local governments within provinces) themselves have actual CapEx on the line in ventures.

This is a significant risk, as local and provincial governments also have a duty and requirement to provide public services, and ventures not doing well can have an impact on the financial health of provincial and local governments, yet they still have the developmental indicators of Ecuador or Cuba. Spend those billions actually alleviating the urban-rural gap instead of acting as a wealth creation mechanism for much richer Beijing, Tianjin, and Shanghai, where most of Tsinghua Unigroup's CapEx is spent.

> This doesn't change my point that the investment into Unigroup directly led to YMTC which is a massive success

It does though. Even though YMTC was under the Tsinghua Unigroup umbrella, it's primary capital came from a separate government and remained autonomous of Tsinghua Unigroup, and Unigroup's larger failures impacted actual deliveries and roadmap items for YMTC [1]

[0] - https://data.stats.gov.cn/english/easyquery.htm?cn=E0103

[1] - https://asia.nikkei.com/Business/China-tech/China-s-Tsinghua...

[sudosysgen]

> Yes, but it's not a CapEx investment (as in upfront capital taken out of a treasury and invested), and is subject to public notices so there at least is an auditable trail. And unlike China, municipalities and States in the US can directly raise capital via bonds.

This is also true for Anhui. Out of the ~5 billion about 2.6 billion was in direct funding, the rest is in debt/equity swaps which aren't going to be upfront costs.

Similarly in the US, for this kind of project you can expect about half of the funding to be a direct grant and the other half to be deferred.

> Because that stake in one venture is 10% of Anhui Province's entire Revenue in 2022 - Anhui's total revenue was only $49B in 2022 but it's expenditures were $115B in 2022 [0]. And that's just one venture.

Ohio's situation is similar, with ~8% of yearly revenue spent on that one single TSMC building. Ohio's direct revenue is only around 25B/yr, with the vast majority of the budget being funded by the federal government (mostly pass through, for example Medicare)

> It does though. Even though YMTC was under the Tsinghua Unigroup umbrella, it's primary capital came from a separate government and remained autonomous of Tsinghua Unigroup, and Unigroup's larger failures impacted actual deliveries and roadmap items for YMTC [1]

Again, the argument from the start was about outcomes in funding for the industry. I have not argued anywhere that Unigroup's leadership deserves any credit, just that some of the funding allocated to Unigroup - chiefly the one earmarked for YMTC - ended up with decent outcomes.