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Can China Become Its Own Semiconductor Powerhouse?

This article was originally published on ETFTrends.com.

As the U.S.-China trade war rages on, the world’s second-largest economy looks to become less independent on the U.S. by shoring up its own semiconductor industry. Can China become its own semiconductor powerhouse to rival the big U.S. chipmakers?

Apparently, this goal is not something new that came as a result of the recent tariff wars with the U.S.

“From what I know, in 1970, there was a slogan encouraging everyone to develop the electronics industry,” said Zhou Zhiping, a Peking University professor of microelectronics. “Moore's Law has just come out for a short time and China did not lag behind the Western countries by much. At that time, the country still spent money and introduced 10 integrated circuit production lines from abroad. And I started to work on microelectronics in a state-run factory.”

So with said, is China’s goal too lofty with regard to its semiconductor industry?

“China can catch up,” said Zhiping. “But the problems it must solve cover the whole industry’s ecosystem and supply chain. I think we need at least five to 10 years [to close the gap with those countries]. It takes time to lift up the whole ecosystem, especially when there is technology lock-in from other countries [in terms of hardware, software, services, and intellectual property]. We have to develop the relevant equipment, tools, and know-how.”

Trade War Ebbs and Flows of Semiconductor ETFs

The sensitivity of semiconductor exchange-traded funds (ETFs) to trade wars was evident in funds like the VanEck Vectors Semiconductor ETF (SMH)  and the iShares PHLX Semiconductor ETF (SOXX)  as U.S.-China trade deal news continued to keep markets guessing.

SOXX seeks to track the investment results of the PHLX Semiconductor Sector Index composed of U.S. equities in the semiconductor sector. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. The underlying index measures the performance of U.S.-traded securities of companies engaged in the semiconductor business.

SMH seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® US Listed Semiconductor 25 Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index includes common stocks and depositary receipts of U.S. exchange-listed companies in the semiconductor sector. Such companies may include medium-capitalization companies and foreign companies that are listed on a U.S. exchange.

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