[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.

[alephnerd]

> the rest is in debt/equity swaps which aren't going to be upfront costs

Those are still an upfront cost on Anhui's treasury as it is counted as a liability, and a liability with limited ability to service due to the relatively weak municipal and provincial bonds market due to the ongoing LGFV crisis.

> Ohio's situation is similar, with ~8% of yearly revenue spent on that one single TSMC [Intel, not TSMC - good catch selimthegrim] 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)

Ohio only gave $0.6B - ie. 2.4% [0] (and even that was controversial [1]). The rest of the $7.4B came from the CHIPS Act.

Furthermore Ohio has a AAA credit rating score [2] meaning it can borrow at low-to-no interest, which doesn't really exist as an option at scale in most Chinese provinces.

And finally, this investment by Ohio generated jobs within Ohio. The Tsinghua Unigroup bag-holding isn't allocating Capex for Anhui, as most of Tsinghua Unigroup's assets are not in Anhui.

That said, a capex-to-jobs case could be made for JAC Group and Volkswagen China which have Anhui government ownership stakes, but then again they themselves are losing marketshare to BYD - a privately funded company - like just about every other car manufacturer in China (the majority of whom are SOEs or have an ownership stake from Provinces or Central Ministries).

It's not so say American states haven't made similar mistakes before (eg. the NY Corruption indictments following the Buffalo Billions Scandal), but the fact that Buffalo Billions was news is itself a major deal - corruption and misallocation of capital within the BigFund and SOEs is sadly the norm in China, and everyday I can see CCDI arresting yet another person, while ignoring others until they piss off the wrong guy (and occasionally, even CCDI themselves are found to be corrupt).

> 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

And my argument is that this leads to a "to big to fail" situation which is extremely risky at the provincial and local level because of the lack of fiscal fallback options for local and provincial governments in China as well as the fact that all that capital could have been better spent by provinces to uplift their population's living standards instead of essentially acting as a wealth transfer to much richer coastal provinces or the 3 provincial level cities.

Tsinghua Unigroup is not a one-off example of this risk, plenty of similar crises and failures have happened in recently in China. And Anhui is not the only Chinese province faced with this situation - almost all are (except Guangdong, as usual).

Those tens of billions Anhui has spent not just on Tsinghua Unigroup in 2022, but the dozens of other similar ventures like JAC Group, Volkswagen China, etc could have been better spent on building it's human capital. For a government that should be the primary "decent outcome".

It's a middle-of-the-pack province in China with developmental indicators comparable to Ecuador, Cuba, and Peru and well behind Thailand's poorest region (Isaan). Think about how many more cars JAC could sell, how many more electric toilets RSD Group could sell, and how much more chicken 老乡鸡 could sell if Anhui's ytd median disposable income per capita was greater than $4,100 [3], and if Anhui's rural median disposable income per capita was greater than $2,500 [4].

You can argue purchasing power all you want but more of the high value goods that a company like Tsinghua Unigroup, JAC Group, etc are producing and intending to sell are at price points that are unaffordable at that level of disposable income.

By every standard it is a misallocation of capital, and sadly a very common one across China.

[0] - https://www.policymattersohio.org/files/assets/odod-intelons...

[1] - https://www.dispatch.com/story/news/2022/07/28/chips-act-fou...

[2] - https://en.wikipedia.org/wiki/List_of_U.S._states_by_credit_...

[3] - https://www.ceicdata.com/en/china/income-per-capita/disposab...

[4] - https://www.ceicdata.com/en/china/disposable-income-per-capi...

[selimthegrim]

Since when is the TSMC fab in Ohio? You mean the Intel one?

[maxglute]

>building it's human capital. For a government that should be the primary "decent outcome

>Province in China with developmental indicators comparable to Ecuador, Cuba, and Peru

Disproportionate resources was concentrated to built Hefei, Anhui, new tier1 city with ~10 million people and per capita income of ~$20,000 build off 2600% growth in last 20 years because local gov focused on making it tech/innovation centre. The one elevated by Western Development Strategy, that built out industrial clusters and R&D hotspots like USTC to raise and retain human capital. The entire point is _UNEQUAL_ development so a few 100 millions of disproportionately affluent / educated urbanites with $20000+ income can buy high value goods that would have no market if everyone was elevated to 10000 per capita doing less advanced work, they already sell enough 老乡鸡. Still waiting on OLED panels from Ecuador, Cuba and Peru.

E:

And as I've responded in the past, you don't get to decide what I reply to. This is the internet, you are not the only audience in a conversation. I make effort to ignore you posts, and have, but when it needs to be called out on, I will. And again, my custom HN CSS doesn't even display screen names, but your identifiable writing pattern and questionable use of stats makes it obvious.

Questionable in this case, as in the past, you're using selective stats and omitting useful context to insinuate Anhui is somehow cuba tier shithole (no offense to fellow Cubans) who failed to develop / exploit human capita. An claim that can only be made by dancing around the development AND mere existence of Hefei, Anhui, one of PRC's innovation hubs that specifically and successfuly developed on the back of building human capital and high tech, which makes comparisons to Ecuador, Cuba and Peru even more perplexing. One simply doesn't drop stats about Anhui without knowing Hefei. You are not a stupid person. Your omissions in these arguments can only be interpreted as intentional by me, and while I try to avoid interacting with you (rather comments that reads like yours), I'm still going to call out bad analysis/arguments. I will edit original response for tone and stop relying here. But I encourage other readers to look up Hefei and how it grew in last 20 years, and understand that is the deliberate result of industrial policy (not just semi, but high tech).

[sudosysgen]

> Those are still an upfront cost on Anhui's treasury as it is counted as a liability, and a liability with limited ability to service due to the relatively weak municipal and provincial bonds market due to the ongoing LGFV crisis

The same is true for tax credits and indirect subsidies.

> Furthermore Ohio has a AAA credit rating score [2] meaning it can borrow at low-to-no interest, which doesn't really exist as an option at scale in most Chinese provinces.

So did Unigroup when most of it's debt was issued and now assigned to Anhui's investment vehicle, so in fact for this transaction they may as well have a AAA rating.

> Ohio only gave $0.6B - ie. 2.4% [0] (and even that was controversial [1]). The rest of the $7.4B came from the CHIPS Act.

Ohio really did earmark 2 billion dollars for the fab, not 600 million. The existence of one grant for 600 million is not evidence against the other 1.4.

https://www2.deloitte.com/us/en/pages/tax/articles/chips-act...

> For example, Ohio has publicly announced more than $2 billion of state grants, credits, and incentives to construct a new semiconductor manufacturing plant in Ohio.

>> And finally, this investment by Ohio generated jobs within Ohio. The Tsinghua Unigroup bag-holding isn't allocating Capex for Anhui, as most of Tsinghua Unigroup's assets are not in Anhui.

> And my argument is that this leads to a "to big to fail" situation which is extremely risky at the provincial and local level because of the lack of fiscal fallback options for local and provincial governments in China as well as the fact that all that capital could have been better spent by provinces to uplift their population's living standards instead of essentially acting as a wealth transfer to much richer coastal provinces or the 3 provincial level cities.

They are not too big to fail in the sense the word is commonly used. If they fail, the investment vehicle is bankrupt and Anhui doesn't incur any liabilities (remember that they can't issue bonds).

Sure, and if Intel eventually leaves before Ohio makes money from the jobs, nothing is seen - this happens often. On the other hand if Unigroup is succesful, Anhui has equity.

> Those tens of billions Anhui has spent not just on Tsinghua Unigroup in 2022, but the dozens of other similar ventures like JAC Group, Volkswagen China, etc could have been better spent on building it's human capital. For a government that should be the primary "decent outcome".

The primary outcome of semiconductor investment is to prevent an external dependency that is already being exploited to cause a general slowdown on the economy which will affect everyone.

> It's a middle-of-the-pack province in China with developmental indicators comparable to Ecuador, Cuba, and Peru and well behind Thailand's poorest region (Isaan). Think about how many more cars JAC could sell, how many more electric toilets RSD Group could sell, and how much more chicken 老乡鸡 could sell if Anhui's ytd median disposable income per capita was greater than $4,100 [3], and if Anhui's rural median disposable income per capita was greater than $2,500 [4].

No matter what speeches Chinese officials make, the truth is that China is not and cannot at this stage execute equal development in economic terms. The absolute medium-term priority of the Chinese government is to create high quality development in key cities in order to move up the value chain before it is too late. In the meantime, redistribution is the most efficient way to deal with less productive regions - it is simply not viable to invest in rural communities at the current stage of Chinese development. China is not a unique countries, many other countries have tried either strategy and it turns out that investment in less productive localities in the name of equality simply does not work for a dozen different reasons.

If your understanding of either the CHIPS act or the Big Funds is that they are vehicles trying to uplift the median standard of life, there is no point having this discussion. It just isn't the purpose. The purpose is strategic, and cannot be understood using the same metrics as, say, countercyclical investment into medium businesses after a recession.