Like oil and auto, the chip sector has been anointed with special status as one of China's key strategic industries seen as crucial to adding technological muscle to the country's increasing global economic clout.

"It's important for China to gain the advantage in this core industry which is related to the country's strategy," said Li Ke, a director with the China Semiconductor Industry Association.

"With such a big domestic market and so much (government) support, there's no reason that China can not surpass Taiwan and South Korea and have the world's third largest sales volume after the US and Japan."

Already China is one of the largest consumers of semiconductors, the micro-chips that are the brains behind everything from refrigerators and CD players to mobile phones and computer servers.

Sales this year are expected to rise 31 percent to about 270 billion yuan (32 billion dollars), according to CCID Consulting, a group attached to China's Ministry of Information Industry.

By the time the 2008 Beijing Olympic Games, sales are expected to more than double to 630 billion yuan, making China one of the world's major chip markets, according to the CCID.

Whether China will eventually surpass neighbours Taiwan and South Korea as major producer of chips is unclear but the government has laid out aims to turn the Chinese semiconductor industry into a major player by 2020, with investment of 10 billion US dollars in the sector by 2005 alone.

"The decision by the Chinese government to support and develop the semiconductor industry will not be pushed back no matter what kind of fluctuations (occur in the market)," said Yang Xueming, senior advisor at the

"Without it, there would be no achievements in other fields such as genetics, space and bio-technology. It is the tool and the foundation of other industries," Yang said.

Like Taiwan, China has carved out a niche market in the contract manufacturing of chips, known as 'foundry', even though mainland chipmakers are far from being able to match overseas rivals, said Byron Wu, an analyst at iSuppli, a technology research firm.

Foundries, such as world leader Taiwan Semiconductor Manufacturing Co., aim to serve customers such as semiconductor design and marketing groups which lack the funds to operate their own billion-dollar fabrication facilities and who do not want to take the production route themselves.

Also like Taiwan, China has coddled the industry by providing billions of dollars in funding and value added tax (VAT) rebates on semiconductor products manufactured and sold within the country.

Foreign competition meanwhile has been charged the full 17 percent VAT on imported semiconductors, which last week led to the United States lodging the first filing with the World Trade Organisation against China since it joined in late 2001.

While the US filing is caught up in the electoral politics of this year's US presidential race, with China being the target for charges of unfair trade practices and restrictions, chip giants such as California-based Intel are eager to capture a bigger slice of the burgeoning China market.

Foreign firms currently supply 80 percent of China's chip market, in part explaining the obvious desire of the authorities to boost the home-grown industry, and clearly want in on the country's economic boom.

The blistering pace of growth of Chinese manufacturing means it could account for as much as one-third of the global electronics industry by 2005, according to the information industry ministry.

That, according to industry research firm Gartner, translates into chip-using electronics markets worth some 37 billion dollars in 2004, jumping an additional 27 percent or 10 billion dollars by next year.

Mainland companies, meanwhile, are forecast to account for some 4.18 billion dollars or 2.5 percent of the total world market, a fraction when compared to the 166 billion-dollar global market predicted for 2005.

Yang of the CCID said China will aim for niche products so as to boost that to six or eight percent by 2010 and then go much better in the next decade.

"In my view, I think it will grow to 15 percent by 2020," he said.

SPACE.WIRE