Chief executive Paul Otellini said at a press conference that Intel's total outlay of almost $4bn will make it "one of the largest foreign investors in China".
The factory will be built in China's north eastern Liaoning province, near the city of Dalian. The area was formerly known for heavy industry, but has begun to lag behind as southern regions have boomed in recent years.
The factory will be one of the most sophisticated in China, producing 300mm wafers to be cut into chips. Intel has seven such factories worldwide.
Many of the chips will be sent to the western Chinese city of Chengdu, and to Shanghai where Intel already has chip packaging plants.
Chip makers in China are supplying a growing demand from the country's huge consumer electronics manufacturing sector, which build products for domestic consumption by China's 1.3 billion people and for export.
China's semiconductor industry was worth more than $13bn last year, and will record a compound average growth rate of close to 30 per cent per year over the next four years.
This means that the size of the market will more than triple to $44bn by 2011, according to Li Ke, an analyst with Beijing-based CCID Consulting.
The Dalian plant will help promote economic growth in Liaoning said Dalian mayor, Xia Deren, according to China's official Xinhua News service.
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