Lack of chipmaking tools hinders China's goal of semiconductor self-sufficiency.

• Since the U.S. imposed stricter export restrictions in October 2022, China has increased its spending on semiconductor equipment.
• In the more intricate chip sector, "it's more challenging to surpass the technological threshold," stated Camille Boullenois, associate director at Rhodium Group, emphasizing that "the conventional tools of Chinese industrial policies appear to be less potent."
• In May, Beijing launched a $47.5 billion state-backed investment fund for chips, which is larger than the previous two funds combined. However, the most recent fund has fewer local governments contributing.

Despite spending billions, China's efforts to produce critical technology demonstrate that countering U.S. chip restrictions is not solely about money.

The Netherlands is the only company globally that produces cutting-edge lithography scanners for printing intricate circuit designs onto microchips. However, the Dutch government has prohibited the sale of its most advanced equipment to China.

Building those machines is a key aspect of China's efforts to strengthen its domestic semiconductor industry with $96.3 billion in subsidies and favorable policies, as calculated by CNBC based on the three largest state funds.

China has unveiled a new lithography scanner capable of achieving a resolution of 65 nanometers or higher, a substantial advancement from its previous 90-nanometer machine. However, its technology still lags behind ASML's machines, which can achieve resolutions below 10 nanometers. The ability to produce smaller resolutions allows for the creation of more powerful chips.

Leping Huang, managing director and chief technology analyst at Huatai Securities, stated that a significant technological advancement is required to transition from the current 65 nm model to the latest immersive deep ultraviolet (DUV) lithography machines from ASML.

Despite the ongoing trade tensions between the US and China, ASML continues to sell to Chinese clients. In the second quarter of 2023, the company's revenue from Chinese clients more than doubled to 49%, compared to 17% in the last quarter of 2022.

According to John Lee, director at East-West Futures, the spike implies that China's industry is not yet confident in the availability of a viable domestic substitute.

Technological chokehold

Since October 2022, when the U.S. implemented stricter export restrictions, China has increased its spending on semiconductor equipment.

According to Paul Triolo, Partner and Senior VP for China at DGA Group, with substantial state investment, China could potentially replicate some of ASML's leading systems within the next two to three years. However, any system produced by Chinese firms is unlikely to be an exact copy of what ASML has achieved, and it will not be as advanced, Triolo stated in an email.

Triolo stated that developing advanced lithography systems similar to those created by ASML over several decades is a challenging task for any individual Chinese company.

This year, ASML faced increased pressure to withhold even its less advanced deep ultraviolet (EUV) machines from being shipped to China.

The urgency of Beijing increased as the U.S. continues to seek export restrictions on high-end technology to China. In the first half of the year, China spent a staggering $24.73 billion on stockpiling chipmaking equipment, surpassing the total amount spent by the U.S., Taiwan, and two other major countries during the same period.

According to Lee, while throwing money at problems can provide some assistance, the development of crucial technologies, including lithography, and a skilled workforce are equally, if not more, important.

China seems to be following its traditional approach of implementing long-term plans and providing subsidies to support industries, such as electric cars.

The electric car market in China has witnessed a surge in success, with domestic manufacturers gaining a foothold in the market share of international automotive giants.

Chinese companies were able to rapidly expand their market share due to subsidies that boosted demand in the EV industry, creating a large, protected market, according to Camille Boullenois, associate director at Rhodium Group.

In the more intricate chip sector, "it's much more challenging to surpass the technological threshold," she stated. "The conventional tools of Chinese industrial policies appear to be less productive."

The U.S. is limiting China's access to chips while simultaneously promoting its own industry, thereby increasing the technological divide.

In 2022, the U.S. Chips Science Act provided $52 billion in funding for the development of domestic chip manufacturing capabilities.

Nearly 30% of the most advanced chips below 10 nanometers in the U.S. is projected to grow from zero in 2022 to 2032, while China's share is forecast to barely reach 2% over those 10 years, according to a joint report by Semiconductor Industry Association and Boston Consulting Group.

Priorities at odds

Beijing's ambitions for self-reliance in the chip technology are being hindered by China's economic slowdown, making it harder for local governments to support these efforts.

In May, Beijing established a $47.5 billion state-backed investment fund for chips, surpassing the combined size of the previous two such funds.

The latest fund has seen a decrease in contributions from local governments. Only larger cities such as Beijing, Shanghai, and Guangdong, which have stronger chip industries, have committed to investing, according to local media citing the National enterprise credit information publicity system.

Then there's the question of whether that money will be used effectively.

The allocation of financial support frequently deviates from the central government's strategic objectives, according to a report by the Rhodium Group.

Local governments often prioritize supporting well-established industries over promoting semiconductor innovation, despite facing issues such as overcapacity, according to a report.

Due to budget constraints, local governments are becoming more risk-averse when allocating grants, according to analysts.

— CNBC's Evelyn Cheng contributed to this report.