The Chinese Government will set up a special fund to promote research and development (R&D) in the country's semiconductor industry.

This move comes from the Ministry of Finance, together with the Ministry of Information Industry (MII) and the National Development and Reform Commission.

It is seen as providing stronger support to the industry than the earlier valued-added tax (VAT) rebates policy.

The new fund's usage is subject to clear rules and regulations.

"The government has been consistent in its efforts to foster the domestic semiconductor industry," said Ding Wenwu, director of the Electronics and Information Technology Products Department of the MII.

"There's no change in our attitude," Ding added.

Since April 1, China has lifted the VAT rebates on Chinese-made semiconductors as promised in a memorandum of understanding (MOU) with the United States last year.

The VAT rebates, adopted in 2001, led to rapid growth of 30 per cent per annum in the sector's total sales revenues.

Ding told China Daily that the size of the fund was not known and would be decided by the Ministry of Finance, but certain sectors would get priority in allocations.

Under the newly detailed rules regarding the R&D fund, all semiconductor companies registered in the Chinese mainland - including designers, manufacturers, testers and packagers - can apply to use the fund.

A team of experts will assess the applications on merit.

In principle, a company will be eligible for no more than 50 per cent of its R&D outlay from the fund.

According to Li Ke, vice-president of the semiconductor business section of CCID Consulting, the new R&D fund will help the industry more than the VAT rebates.

CCID Consulting is a leading domestic market research firm under the MII.

Although many semiconductor manufacturers benefited from the VAT rebates, the returns of about 10 million yuan (US$1.2 million) each on average each year was of little help as chip makers need hundreds of millions to expand their capacity or improve their R&D competence, he said.

"An applicant is very likely to be rendered that amount under the fund mechanism," noted Li.

He added that the size of the fund is expected to be based on the VAT rebates and the industry's investment in the past few years.

Meanwhile, the government may also roll out preferential policies on corporate income taxes and provide loans and subsidies, he said.

"Compared with the VAT rebates that encouraged chip export, the fund mechanism aims to enhance the R&D capabilities of domestic players," said Yu Zhongyu, president of the China Semiconductor Industry Association.

"A change in the policy is needed to encourage technological innovations in the semiconductor industry, even without the Sino-US MOU," he said. "China is in urgent need of large IC (integrated circuit) designing houses."

Despite the skyrocketing revenue growth, domestic companies remain weak in chip designs with self-owned intellectual property rights.

The average registered capital of major domestic IC design houses is only dozens of million yuan, while those in the US could hit billions of yuan.

Also, domestic chip makers on average spend about 10 per cent of their annual revenues on R&D.

The corresponding figure in the global semiconductor industry is about 20 per cent, Yu said.