Foreign companies still feed 80 per cent of China's $40bn-plus annual demand for chips, despite government and private initiatives to boost homegrown integrated circuit design and manufacture, say local and foreign analysts.

China's chip market is growing rapidly, up 32 per cent last year to about $40.5bn, according to research firm IC Insights. Local research house Analysys International put the market value even higher, at around $46bn.

As a result, China now accounts for 21 per cent of global chip demand, and that figure is predicted to approach 40 per cent by 2010. 

However, while foreign companies like Intel, AMD, Qualcomm and Samsung are earning huge revenues selling high-end integrated circuits in China, local firms are limited to low-end products by their lack of expertise and intellectual property, Analysys reports.

Globally, Chinese chip designs are barely a blip on the semiconductor radar, said analyst Zhao Yazhou of Analysys.

"The total sales of China's integrated circuit design sector [in 2005] accounted for only three per cent of the global market," he said. "China's integrated circuit patents accounted for less than four per cent of the global total."

Meanwhile Taiwanese contract chip manufacturers TSMC and UMC, which provide leading-edge chip making technology to design houses that lack their own production facilities, are still far ahead of China's local chip makers, other industry sources say. 

Previously the Chinese government provided generous tax breaks for locally-made chips, but this practice was stopped in April 2005 following a US protest under WTO rules.