The expansion by China's largest chipmaker comes as the shortage rattled the automotive and electronics industries, spurring new capacity plans by firms like Taiwan Semiconductor Manufacturing Corp Ltd and GlobalFoundries.
SMIC said it agreed to build a production line with monthly capacity of 100,000 12-inch wafers in the Lingang Free Trade Zone (FTZ) in the Pudong district of China's business hub.
The plan will focus on integrated circuit foundry and technology services on process nodes for 28-nanometers and above, backed by a joint venture majority-owned by SMIC.
The joint venture partner is the Lingang FTZ, and the company said it would seek other investors in the firm with registered capital of $5.5 billion.
Other companies with plants in the zone are Contemporary Amperex Technology Co Ltd and Tesla.
SMIC is partly backed by China's state-affiliated chip fund.
In the last decade, the government has poured billions from the fund into helping domestic chip companies catch up with global rivals in the Japan, Korea and the United Staets, though SMIC lags counterparts there. SMIC's unveiling of the new fab follows similar expansion plans in recent months for new plants in Shenzhen and Beijing.
The firm is also on a U.S. government blacklist that denies it advanced manufacturing equipment from U.S. suppliers. The United States cited national security concerns and SMIC has denied having ties to China's military.
The measures disrupted the company's plans to move into high-end chip making, but its financial performance has been strong as the chip shortage has boosted demand.
(Reporting by Josh Horwitz; Editing by Clarence Fernandez)