Semiconductor Manufacturing International Corp., or SMIC, China's largest chipmaker, will build a new $2.35 billion facility in Shenzhen.
The government is looking to make China less reliant on foreign companies for semiconductors.
SMIC already has five factories in China - including one in Shenzhen manufacturing 200 millimeter and state-of-the-art 300 millimeter silicon wafers. The second Shenzhen plant will increase production of 28-nanometer and above chips used in motor-vehicle electronics.
A shortage of chips is hindering production of both electric cars and conventional fuel vehicles. Analysts say cars will be fine using 28-nanometer chips and don't necessarily need the latest technology.
The 28-nanometer chips are old technology, dating back to 2011, compared with 5 nanometer chips currently fabricated by Taiwan Semiconductor Manufacturing Company, Ltd., or TSMC, the world's largest chipmaker. These are used mainly in smartphones.
The Shenzhen government will jointly build the new foundry. SMIC said the government money would allow it to "expand production, advance its nanotechnology service and thus achieve a higher return."
SMIC will own a 55% stake in the Shenzhen subsidiary and the local government's investment arm will own no more than 23%.
SMIC is important to China becoming self-sufficient in semiconductors. Trade tensions with the U.S., blacklists and sanctions have highlighted China's reliance on foreign companies for state-of-the-art chips.
In December the Donald Trump administration included SMIC on a roster of companies ineligible to acquire items subject to export administration regulations without a license.
Samsung Electronics said in January it was spending $10 billion on a Texas factory that would produce 3 nanometer chips by 2022. TSMC intends to make 5 nanometer transistor chips at a new plant in Austin by 2024.
