Chinese semiconductor makers are racing to meet surging demand from local electronics manufacturers, analysts reported today.

But the shortfall between China's chip supply and demand, which was $36bn in revenue last year, will continue to grow as foreign chip manufacturers are providing about 80 per cent of the chips used in Chinese-made products.

"The supply and demand gap will widen to $44bn in 2006," said Dr Robert Castellano, president of research consultancy The Information Network. 

China's internal chip production only generated $9bn in sales last year, compared with overseas manufacturers which earned $27bn selling into the local market.

After suffering worse than expected results in the past couple of years, during which some production space was left unused, local chip manufacturers are now expanding capacity and accelerating their climb up the technology ladder.

Problems with production quality and technological level were blamed for an inability to compete with foreign products, despite local demand.

China's largest chipmaker, Semiconductor Manufacturing International Corporation (SMIC), is building its second cutting-edge 300mm wafer plant in Shanghai. The facility is expected to open at the end of this year. 

Larger wafer sizes increase production capacity and provide the economies of scale necessary to introduce more advanced, and expensive, technology.

"This will be the most advanced semiconductor plant in China and is likely to receive financial support from the Chinese government," said analyst Tetsuya Wadaki of Nomura Securities in Tokyo.