Value-added tax for chips - also called integrated circuit (IC), will be reduced from 6 percent to 3 percent, one of the lowest rates among all kinds of products, in a bid to help the industry, said Zhang Qi, director of Electronic Products Management Department of the Ministry of Information Industry (MII).

After the central government issued the No 18 Document last year, which gives preferential treatment to the chip and software vendors, its supplement - involving another 13 items, for chips only - was drafted recently.

The government has now made up its mind to significantly upgrade the capability of China's IC industry, said Zhang.

At present, her department is busy making the 13 items into more detailed rules, to further encourage the development of the chip industry.

According to Zhang, if the IC makers export a considerable amount of chips - an exact number was not divulged - 40 percent of its tax would be returned.

The government would also help set up venture capital, which would only be invested in IC and software.

Chip makers would also enjoy special treatment in the purchase of raw materials, said Zhang.

"We are going to give chip makers the best policies in the world," she said.

China has become one of the top producers for many electronic products, such as color TVs, mobile phones and computers. However, the whole IT industry has a low profit rate, as the chips have to be imported at high costs, because vendors do not have core products.

China consumed 12 billion chips last year, with only 16 percent home made, according to MII statistics.

In the global economic downturn, the chip industry, unexceptionally, was also severely hurt, with demand decreasing by over 30 per cent.

According to Zhang, the multinationals are making adjustments, reorganizing, repositioning and waiting for another major leapfrog development.

She added that China should grasp this opportunity, as more investors regard the country as their haven.

Statistics from the MII indicate that China has set up seven chip manufacturing factories, 20 packaging houses and more than 80 designing centers. However, most of them focus on the low-end market, and their combined production accounts for approximately only 1 per cent of the international market.

The government has set its chip development target to produce 20 billion chips annually by 2005, which will satisfy 30 per cent of the domestic demand and account for 2 percent of the international market.

By 2010, homemade chips will satisfy half of the domestic demand with 50 billion chips and 5 percent of the global market.

In the past 20 years, total investment in the capital-swallowing chip-making sector was just 25.7 billion yuan (US$3.1 billion), which is tiny compared with the expensive chip manufacturing line.

In last year's No 18 Document, the government reduced tax from 17 percent to 6 percent, promising to charge no import tax on all manufacturing equipment and ensuring zero corporate income tax for the first five years after profitability.

(China Daily 10/5/2001)