[Weekend Money]"Declared Independence from the U.S."... Time to Buy Chinese Semiconductor ETFs?

China AIDC projects and U.S. sanctions driving up demand for domestic chips
Expanded fiscal support from the Chinese government amplifying ripple effects
"ETFs including seven promising Chinese stocks worth watching"

Expectations for Chinese semiconductor stocks are rising as China expands its artificial intelligence (AI) infrastructure and supplies of foreign-made graphics processing units (GPUs) are reduced. For domestic retail investors, direct investment in some of these stocks is restricted, so related exchange-traded funds (ETFs) are expected to serve as an alternative.

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AI data center projects driving up demand for domestic chips

According to a report by Mirae Asset Securities, the size of China’s AI data center projects is expected to grow at an average annual rate of 30% over the next five years. Last year, the size of China’s AI data center projects was estimated at 135.6 billion yuan (approximately 28 trillion won). In February last year, private company Alibaba also announced a three-year capital expenditure plan, stating that it would invest 380 billion yuan (about 75 trillion won) in AI infrastructure over the next three years.

At this point, the U.S. government, following restrictions on exports of Nvidia’s A100 and H100 to China, moved to restrict exports of the H200 and even its performance-downgraded versions to China starting from the end of 2024. The H200 is a GPU regarded by Chinese cloud service providers as the core of next-generation large language model (LLM) inference infrastructure.

Due to regulations on foreign-made GPUs and the build-out of AI infrastructure, demand for domestic AI chips is increasing, brightening the outlook for Chinese AI chip companies such as Cambricon and Hygon. Cambricon’s sales this year are expected to reach 13.9 billion yuan (2.9 trillion won), up 101% year-on-year, while Hygon’s sales are projected to reach 22.1 billion yuan (4.6 trillion won), a 52% increase from a year earlier.

Chinese government’s fiscal support..."Ripple effects will be significant"

The third phase of the National Integrated Circuit Industry Investment Fund (commonly known as the Big Fund), which the Chinese government officially established in May 2024, is also a positive factor for the semiconductor industry. After announcing the "Made in China 2025" plan in May 2015, China designated semiconductors as one of 10 key national strategic industries and unveiled a plan to raise its self-sufficiency rate to 70% by 2025.

The first Big Fund injected 138.7 billion yuan (about 27 trillion won), and the second injected about 204 billion yuan (about 40 trillion won) in capital to support the semiconductor industry and the equipment and materials sectors. The third Big Fund will receive about 344 billion yuan, the largest capital commitment to date, and is expected to attract 1.5 trillion yuan (313.8 trillion won) in private capital. In the third phase, strategic private equity (PE) structures such as Huaxindingxin (materials and equipment) and Guoduzhixin (AI and advanced semiconductors) are expected to be formed to implement a policy of concentrated investment in core sectors.

Agence France-Presse and Yonhap News Agency

With the U.S. tightening AI-related sanctions, additional support measures from the Chinese government beyond the Big Fund are also anticipated. Although the specific targets and methods of support have not yet been finalized, the package is reported to be a fiscal support program worth between 200 billion and 500 billion yuan (41.7 trillion to 104.46 trillion won).

Kim Younggeon, a researcher at Mirae Asset Securities, said, "Considering that Chinese materials, equipment, and component companies grew their top-line revenues by three to five times during the execution of the first and second phases of the Big Fund, the ripple effects of the third phase of the Big Fund and new funding over the next 10 years are expected to be greater than those of the past decade."

Seven Chinese firms expected to deliver strong returns... ETFs more realistic for domestic retail investors

Based on this analysis, Mirae Asset Securities projected strong results for seven Chinese semiconductor companies: AI semiconductor firms such as Cambricon and Hygon; memory and interface companies such as GigaDevice and Montage; foundry companies such as SMIC and Huahong Semiconductor; and semiconductor equipment company Naura.

However, Kim noted, "For five of these seven Chinese semiconductor companies, direct investment by domestic retail investors is limited because they are listed on the STAR Market," adding, "Therefore, investing through ETFs is a realistic option." He added, "'Global X China Semiconductor ETF' and 'TIGER China Semiconductor FACTSET' are noteworthy as representative ETFs that include all seven of the above companies in their portfolios."