Semiconductor Manufacturing International Corp, the largest chipmaker on the Chinese mainland, has signed a cooperation agreement with a Shenzhen government fund for joint investment in a new $2.35 billion wafer fabrication plant.

According to experts, SMIC's move to set up a chip plant is part of the efforts to develop more semiconductors at home and reduce reliance on foreign companies.

In a regulatory filing on Wednesday, SMIC said the new plant will focus on producing 28-nanometer and above integrated circuits and technical services, with the aim of producing 40,000 12-inch wafers per month. The new factory is expected to begin production next year.

The 28-nanometer chip is the most widely used fabrication node in integrated circuits. The node is considered a cost-effective sweet spot that can meet the majority chip demand from industries like automobiles, home appliances, transportation and aerospace.

SMIC will hold a 55 percent stake in the Shenzhen unit while the local government's investment arm will have 23 percent. The remaining capital will come from third-party investors.

Industry experts said the deal comes at a time when several industries like automobiles are facing production delays due to the global shortage of semiconductors. The new plant is expected to meet the demands of these sectors, they said.

"It will add much-needed extra production capacity to SMIC amid a global chip shortage, so that the mature process of SMIC can be fully loaded," said Xiang Ligang, director-general of the Information Consumption Alliance.

"To realize an independent industrial chain, expanding its mature technologies and making breakthroughs in advanced technologies are equally important,"Xiang said.

SMIC said the investment from the fund will enable the company to "expand its production scale, advance its nanotechnology services and achieve higher returns".

Wu Hanming, an academician at the Chinese Academy of Engineering, said the existing production capacity of the country's chip industry is lagging demand and the gap is steadily increasing.

"If it continues, the gap will be at least equivalent to the current production capacity of eight SMICs in a few years. Therefore, the production expansion must be accelerated," said Wu.

Despite the US sanctions, SMIC reported record full-year results last year due to robust demand for semiconductors from the consumer electronics sector.

SMIC is among a group of pioneering Chinese companies that are working to sharpen their technological prowess. Founded in 2000, SMIC has successfully mass-produced a smartphone processor for Huawei with the 14-nanometer manufacturing process, marking a breakthrough in a push to boost the chipmaking industry.

The Shenzhen government fund has been investing in strategic and innovation industries. The Shenzhen government launched an action plan in 2019 to promote the development of the integrated circuit industry in the city.

By 2023, the city is expected to build an integrated circuit industry cluster with international competitiveness with independent innovation capability and a number of key core technologies further improved.

The overall integrated circuit industry sales revenue will exceed 200 billion yuan ($30.75 billion) by that time.

Since Taiwan Semiconductor Manufacturing Co Ltd and Samsung are manufacturing 5-nanometer semiconductors, the cutting-edge chips used in smartphones, Xiang said it was necessary for local companies to put more effort into improving the manufacturing process for advanced chips to catch up with industry leaders.

Zhou Mo contributed to this story.