SMHC: Investing in China’s Parallel Semiconductor Ecosystem

Key Takeaways

• China is building a domestic semiconductor ecosystem across the entire value chain.
• Tighter global export controls have accelerated demand for domestic chip alternatives.
• Sovereign capital is helping fund China’s push for semiconductor self-sufficiency.
• Traditional semiconductor and broad China strategies may provide limited exposure to this theme.
• SMHC offers targeted exposure to companies driving China’s semiconductor build-out.
• Investing in the ETF is subject to risk, including the possible loss of principal. Main risks include sector concentration, emerging markets and China-specific risks, geopolitical risk, A-share risk and currency risk.

Many semiconductor allocations today are concentrated in US and Taiwanese companies, capturing the design and fabrication layers of the global supply chain. But a separate semiconductor ecosystem is taking shape in China, and conventional allocations may be missing it.

Driven by sovereign capital and structural forces that have strengthened over the past several years, China is building a domestic semiconductor industry spanning chip design, manufacturing, equipment and packaging. For investors, that may mean exposure to companies that are largely absent from traditional semiconductor allocations.

The VanEck China Semiconductor UCITS ETF (SMHC) is designed to access that opportunity directly. It tracks the MarketVector China Semiconductor 10% Capped Screened Index (MVSMCC), which targets 25 of the largest and most liquid Chinese companies across the semiconductor value chain, from design and manufacturing to advanced packaging. These companies carry limited weight in conventional semiconductor and broad China equity strategies, which gives this exposure a distinct profile relative to many portfolios.

The scale of this ambition is perhaps best illustrated by Huawei. Despite being added to the US Entity List in 2019¹, Huawei has continued to develop its own semiconductor capabilities through its HiSilicon chip design unit. Huawei is privately held and not directly investable. However, its trajectory may reflect the broader push across China’s semiconductor industry, and the companies supplying that industry are publicly traded.

The investment case rests on three reinforcing forces: the scale of China’s domestic semiconductor build-out, the push for localization that US export controls may have created, and the sovereign capital backing the effort. Together they may make this a multi-year build-out rather than a passing cycle. However, the theme could prove also short-lived as the success depends on how execution, valuation and geopolitical risks materialize.

China Is Building the World’s Largest Chip Manufacturing Base

Semiconductors are the foundational building blocks of every electronic device, from smartphones to data centers to cars, and China sits at the center of this global industry both as a consumer and, increasingly, as a producer.

In 2025, China was the world’s single largest spender on semiconductor manufacturing equipment, at $49.3 billion or roughly 36% of the global total of $135.1 billion². This reflects how much fabs are spending on the physical tools used to build chips, including lithography systems, etch tools and deposition equipment. It is a measure of where the industry’s infrastructure is being constructed, and the largest share is in China.

China Leads 2025 Spend on Semiconductor Manufacturing Equipment

Source: SEMI (2026). Worldwide semiconductor equipment market statistics, full-year 2025, as of April 2026. Chart for illustrative purposes only. Not intended as a forecast or prediction of future results.

That level of investment points to a deliberate national priority. China sits at the center of the global industry as the world’s consumer electronics hub, with about one-third of all semiconductor devices used in electronics systems assembled there³, but its domestic production has historically fallen well short of that demand. Closing that gap has become a strategic priority as policy makers seek to reduce reliance on foreign technology.

China’s Semiconductor Model Stands Apart from the U.S.

Understanding how the U.S. and Chinese semiconductor ecosystems differ structurally helps illustrate why this opportunity is distinct from existing semiconductor allocations.

The U.S. model is built around design concentration and manufacturing outsourcing. A small number of dominant fabless companies, including Nvidia, Qualcomm, Broadcom, and AMD, design the world’s most advanced chips and outsource their fabrication to foundries in Taiwan, primarily TSMC. The equipment those foundries use comes largely from U.S. and European suppliers, while packaging and testing happens across Asia. The U.S. captures significant value in the design layer but is structurally dependent on foreign manufacturing for everything downstream⁴.

China is building something different. Rather than specializing in one layer of the stack, China is constructing every layer simultaneously and domestically, covering fabless design, foundry capacity, manufacturing equipment and advanced packaging⁴. The goal, as articulated through state policy, is greater self-sufficiency across the semiconductor supply chain⁵. That goal remains distant, and execution risk is significant.

Source: TrendForce. (2026); TechInsights. (2026). China semiconductor value-chain analysis. Company names illustrate each value-chain layer and are not recommendations. Holdings may vary. Huawei is privately held and not investable.

The practical implication is that these are two largely separate groups of companies. An investor who holds conventional semiconductor exposure may hold few or none of the Chinese companies capturing this domestic build-out.

Restrictions May Have Accelerated China’s Domestic Chip Build-Out

The relationship between US export controls and China’s semiconductor investment is one of the more counterintuitive dynamics in markets today. The conventional expectation would be that restrictions slow China’s development. The data so far point in a different direction.

Since 2019, the U.S. has progressively tightened controls on the technology China can access, including adding Huawei and SMIC to the Entity List¹. This expanded in October 2022 with sweeping controls on advanced chip exports and semiconductor manufacturing equipment. The U.S. then coordinated with the Netherlands and Japan to restrict ASML and Tokyo Electron equipment sales in 2023, before expanding controls further in 2024 and 2025. Over the same period, China’s equipment spending rose from about $13 billion in 2019 to about $49 billion in 2025². The path was not linear, as spending dipped slightly in 2022 and was flat in 2025. The data may suggest that restrictions increased the incentive for Chinese companies to localize the supply chain.

China’s Equipment Spending Grew as Export Controls Expanded

China’s semiconductor-equipment spending, 2019-2025 (US$ bn)

Source: Spending data: SEMI (2026). Export-control timeline: U.S. Bureau of Industry and Security. (2022-2025). Export-control rules on advanced computing and semiconductor items. U.S. Department of Commerce; Center for Strategic and International Studies. (2025); Congressional Research Service. (2025). For illustrative purposes only.

Terms: BIS (Bureau of Industry and Security) is the US export control authority. HBM (High Bandwidth Memory) is a type of fast memory used in AI chips. FDPR (Foreign Direct Product Rule) is a US rule that applies export controls to certain foreign-made products that use US technology.

The mechanism is straightforward. Each restriction may create a procurement incentive that could benefit a local provider. Chinese fabs that can no longer source etch and deposition tools from Applied Materials or Lam Research may source from NAURA. Chinese data centers that cannot purchase Nvidia GPUs may source from Huawei or Cambricon. Every foreign supplier locked out of the Chinese market may create a potential customer for a domestic Chinese company. It is important to highlight that potential changes in restrictions create uncertainty for investors, and may also influence demand for domestic Chinese suppliers.

Foreign Supplier Restrictions Create Domestic Beneficiaries

Source: Company annual reports (FY2024-FY2025); U.S. Bureau of Industry and Security. (2022-2025). For illustrative purposes only. Companies shown are examples only. Business models and export controls may change. Not recommendations to buy or sell any security.

Terms: EUV (Extreme Ultraviolet lithography) is the most advanced technology for printing the smallest chip circuits. DUV (Deep Ultraviolet lithography) is an older printing technology that can reach small circuits only with extra process steps. CVD/ALD (Chemical Vapor Deposition and Atomic Layer Deposition) are processes that apply ultra-thin layers of material onto chips.

China and U.S. Take Different Paths to Semiconductor Funding

Underpinning China’s build-out is a level of state financial commitment that stands out in scale compared with Western industrial policy.

China’s National IC Fund has committed approximately $98 billion of registered capital across three phases since 2014 (converted at each phase’s exchange rate), including $47.5 billion for Phase III, registered in May 2024⁵. That capital is deployed through directed procurement, subsidized fab construction, and preferential financing from state banks. The scale is significant, but so are the structural risks. State-directed investment at this magnitude can lead to overcapacity and boom-bust cycles, and below-market financing can sustain uneconomic capacity over time.

The contrast with U.S. industrial policy is meaningful. The CHIPS Act appropriated $52.7 billion in 2022, of which $39 billion was earmarked for manufacturing incentives. Direct funding was expected to cover 5 to 15% of a project’s capital expenditures, and total incentives, including loans, were not expected to exceed 35%, so awardees must fund the remainder privately⁶. Funds are disbursed as projects reach agreed milestones, and Commerce may demand recovery if a project is not completed by an agreed date. As of July 15, 2026, Commerce had awarded approximately $31.7 billion in direct funding across 49 projects, and about $13.1 billion had been disbursed as of April 2026⁷.

The two approaches differ in scale, structure, and risk profile. China’s capital is larger and faster-moving, while the U.S. model is more conditional and slower to deploy. Both carry real tradeoffs.

Invest in China’s Semiconductor Build-Out with SMHC for Targeted Exposure

SMHC tracks the MarketVector China Semiconductor 10% Capped Screened Index (MVSMCC), a rules-based index designed to provide pure-play exposure to the Chinese semiconductor industry.

Eligibility begins with a revenue purity screen. Companies must be headquartered or incorporated in China or Hong Kong and derive at least 50% of their revenues from semiconductors or semiconductor equipment (25% for current constituents). This is intended to ensure that every constituent is a meaningful participant, rather than a diversified technology conglomerate with incidental chip exposure.

From this universe, 25 companies are selected based on a combination of scale and liquidity, to help keep the portfolio investable. Constituents are weighted using a modified free-float market capitalization approach, with a 10% cap to balance exposure to the largest names with representation across the broader opportunity set. The index is reconstituted semi-annually, in March and September, and rebalanced quarterly.

The index also applies exclusion screens. These cover sanctioned companies, norm-based research, controversial weapons and revenue thresholds for sectors such as tobacco, gambling, military equipment and fossil fuels. The Fund does not have sustainable investment as its investment objective. It applies screenings as defined in the index methodology. Please refer to the sustainability-related disclosures in the Prospectus and KID.

For investors looking for access to China’s domestic semiconductor build-out, the VanEck China Semiconductor UCITS ETF (SMHC) may offer a means of accessing a theme that remains largely absent from traditional semiconductor allocations.

Risks to Consider

Investing in the ETF involves risk, including the possible loss of principal. The main risks are described below.

• Emerging markets and suitability: The ETF invests more than 20% of its net asset value in emerging markets. An investment in the ETF should not make up a substantial proportion of an investment portfolio and may not be suitable for all investors.
• Concentration risk: The ETF’s index holds a very limited number of companies, all in one industry. Negative economic, political or other developments affecting the semiconductor sector may hurt the ETF more than a fund spread across many sectors.
• Semiconductor industry risk: Semiconductor companies are exposed to rapid product obsolescence, aggressive pricing as manufacturing capacity grows, high capital costs and cyclical earnings. They also depend heavily on intellectual property, face competition from new entrants and subsidized foreign competitors, and are exposed to trade disputes and tariffs. Their share prices have been, and are likely to remain, extremely volatile compared with the overall market.
• China risk: Investing in Chinese companies involves risks not typically found in developed markets. These include trading suspensions, government intervention in markets and industries, currency revaluation or blockage, possible nationalization or expropriation of assets, higher inflation, and political, economic and social uncertainty. The Chinese government has influenced prices, encouraged investment in particular industries and induced mergers, and may do so again. Auditing and accounting standards may differ from those in developed markets. The ETF’s rights to seek redress may be limited.
• Geopolitical and trade risk: Tariffs, trade disputes, embargoes, sanctions, investment restrictions, regional or territorial conflicts and other geopolitical events could disrupt markets and cause sudden, severe losses. Certain securities may become restricted, and the ETF may be forced to sell them at a loss.
• Currency risk: The ETF’s base currency is the US dollar, while its holdings are mainly in other currencies, including the Chinese yuan and Hong Kong dollar. Changes in these currencies against the dollar may reduce returns, and converting currencies carries costs. Emerging market currencies can be highly volatile, and some are managed at artificial levels. The ETF may use currency forwards to hedge, which may not remove the risk completely.

Further details on these and other risks are available in the Prospectus and the Key Information Document (KID).