China scoffed at US accusations it was rigging its $30 billion chip market against American imports, which could result in the first complaint lodged with the WTO against the world's sixth-largest economy.
The potential complaint would be the latest in a string of pre-US election skirmishes as Congressional anger grows over low-cost China's $125 billion surplus with the United States.
The United States could soon lodge a complaint to the World Trade Organisation against China - breaking from a trend of resolving spats directly with Beijing - over tax breaks enjoyed by chip companies based on the mainland, US officials say.
Washington says these impede imports of US semiconductors, and aid local players such as Shanghai foundry Semiconductor Manufacturing International Corp (SMIC), which debuts on the New York and Hong Kong stock markets on Wednesday and Thursday.
Industry officials and analysts say the chips may be stacked against the United States if they decide to press ahead. But the move could hasten plans by China to reduce value-added taxes on imported semiconductors.
Zhang Qi, a director-general at the Ministry of Information Industry, dismissed charges of protectionist policy on Wednesday.
"We've known about their intent for some time. If they want to lodge a complaint, let them go ahead," she told Reuters on the sidelines of a chip conference in Shanghai, China's financial stronghold.
"Last year, we imported more than 80 percent of our semiconductors and I don't see how much more open our market could be," said the senior official with China's tech overseer.
US semiconductor companies complain that China's practice of rebating more than 80 percent of the VAT tax to domestic chip firms - but not to foreign suppliers - puts them at a disadvantage in the Chinese market.
The stakes are high. Analysts say the country could consume nearly $40 billion worth of microchips this year, as demand for everything from cellphones to personal computers booms.
"We believe we can walk and chew gum at the same time. Stay tuned later this week, maybe you'll get some evidence of that," US Trade Representative Robert Zoellick told reporters this week. US industry officials said later in Washington that he was referring to Chinese chips.
China's market still pales beside global semiconductor consumption of $166 billion in 2003, according to Stanley Myers, the head of trade organisation Semiconductor Equipment and Materials International (SEMI).
But its 20 percent annual growth is attracting investments from NEC Corp to Grace Semiconductor Manufacturing Corp, which are ramping up capacity to keep pace with galloping growth.
Now the brewing US-China spat over chips threatens to cloud an industry already accused of exacerbating global over-capacity.
The US Semiconductor Industry Association, which groups the likes of Intel and IBM, says "a fraction of a percent can make the difference in winning or losing a sale".
Foreign firms could qualify for similar rebates if they established research and development facilities that ultimately led to chip sales in China, the executive told.
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