By Elias Glenn

TIANJIN, China (Reuters) - State-backed Chinese technology group Tsinghua Holdings plans to spend $7.5 billion on research and development over the next five years, accelerating China's drive to build a high-value semiconductor industry to challenge global chipmaking rivals.

As the firm that controls acquisitive chip supplier Tsinghua Unigroup outlined the target, its chairman, Xu Jinghong, also said China has been too slow to reform its economy, and must move faster to promote high-margin tech operations rather than cheap manufacturing.

In the chip development drive - a strategic priority for Beijing - Tsinghua Unigroup aims to become the world's No. 3 chipmaker after Intel Corp and Samsung Electronics Co. The firm has proposed buying stakes worth nearly $1 billion in two Taiwanese chip firms - deals now under review by a new Taipei government that is less friendly toward China.

Speaking to Reuters on the sidelines of a World Economic Forum gathering in Tianjin on Sunday, Xu said the pace of progress in China in broad economic terms was too slow. The old investment-led growth model produces diminishing returns and ever-larger amounts of debt, Xu said.

"This is a key time for China's economy. We must restructure, but it will be very painful. Industries facing over-production must be restructured, while new industries need support," Xu said.

Controlled by Tsinghua University in Beijing, Tsinghua says it operates on market principles but is still a state-owned behemoth: revenue topped 70 billion yuan ($10.5 billion) last year.

As well as pledging 50 billion yuan in research and development spending over the next five years, Tsinghua will set up a 10 billion yuan fund to support commercialization of new technology.

Xu said Tsinghua had also kicked off a plan to open 1,000 startup incubation centers in 100 cities in China.

Officials in Beijing acknowledge the urgent need to pursue more productive new technologies, and ensure a level playing field for private firms.

China could add $5.6 trillion to gross domestic product, and $5.1 trillion of new income for households, by 2030, if it can switch to a productivity-led growth model, the McKinsey Global Institute said earlier this month.

However, Xu said progress has been too slow.

"We need to step up reform. We should let the market decide how resources are allocated. We need a fair market, and improved legal environment," said Xu.

(Reporting by Elias Glenn; Editing by Kenneth Maxwell)