Market-Beating Chinese Chip Rally At Risk As U.S Tensions Flare

A ferocious surge in Chinese semiconductor stocks is coming to an end, as investors fear that rising tensions with the US will stifle the sector's growth, despite Beijing's efforts to attain self-sufficiency. 

‍

A FactSet index that tracks the nation's chip-related businesses fell more than 5% on Friday, bringing the year's gain to 15%. Despite a 4.2% gain in the onshore CSI 300 benchmark, Advanced Micro-Fabrication Equipment Inc. and the nation's largest chip foundry, Semiconductor Manufacturing International Corp., have increased by more than 50%.  

‍

Because semiconductors fuel everything from cellphones to artificial intelligence and military gear, the industry has found itself in the crosshairs of escalating Sino-American tensions. As President Joe Biden prepares to sign an executive order limiting investment in key high-tech industries, investors are wondering if Beijing's policy drive will overcome such challenges and allow the surge to continue.

‍

The penalties "will require Chinese chipmakers to develop their ecosystem, which will be quite challenging but something they will have to do," according to Roxy Wong, senior portfolio manager for Asia and Global EM stocks at BNP Paribas Asset Management. "This will prompt additional investments by Chinese chipmakers to evolve and possibly leapfrog the technology." 

‍

The US has progressively restricted advanced chip exports to Chinese clients, while also attempting to convince important equipment producers such as the Netherlands' ASML Holding NV to join the embargo. According to those familiar with the situation, the Biden administration is hoping to get international backing and sign the measures during the Group of Seven conferences next month.  

‍

So far, the developments have bolstered Beijing's goal for self-sufficiency, with authorities pressing industry participants to increase chip production capacity and hasten the switch to domestic equipment providers. The country is also granting some corporations better access to subsidies and more influence over government-funded research. 

‍

"The Chinese government will choose to introduce more sector-specific growth stimulus because it considers semiconductors to be one of the strategically important sectors for national security and economic developments," BNP Paribas SA strategists including Jason Lui said in a report this week.   

‍

The excitement around ChatGPT and other generative AI systems has also contributed to the advances. Cambricon Technologies Corp., a local manufacturer of core AI processor chips, has seen its stock rise more than 350% this year.  

‍