China's equity markets and yuan currency are clearly indifferent to American hostility

by David P. Goldman August 18, 2020

A pacifist meme from the Vietnam protest era asked what would happen if they gave a war and nobody came. The US is conducting a tech war, but equity markets don’t appear to care. Neither did the Chinese currency, which strengthened sharply overnight.

Harsher-than-expected US sanctions against Chinese telecom manufacturers failed to ruffle A-Share and H-Share markets Tuesday, as the Shanghai Composite and the Hang Sheng Chinese Enterprises indices rose by 0.36% and 0.38%, respectively. One of Hong Kong’s best performers was the budget smartphone manufacturer Xiaomi, which is likely to gain market share in China due to Huawei’s inability to source top-of-the-line smartphone chips.

The new US sanctions not only block Huawei from fabricating its own chip designs at Taiwanese foundries that use American semiconductor manufacturing equipment, but also prevent the Chinese company from buying off-the-shelf chips from Taiwanese producers like Mediatek. Taiwan’s stock market lost 0.65% overnight, despite a 10% decline in Mediatek and other suppliers of Chinese smartphone companies. Huawei’s biggest competitor, Samsung, was up marginally in Seoul on Tuesday. The KOSPI index lost 2.36% mainly due to sharp declines among heavy equipment producers.

Because Chinese brands like Xiaomi and Oppo continue to have access to high-end chips, the overall impact on the Chinese economy will be negligible. The new US rules will not affect the domestic buildout of China’s 5G network, with an investment budget larger than the rest of the world combined, because the relevant equipment doesn’t require the 7-nanometer chips that power high-end smartphones. China can source the required chips from a number of vendors and in case of need produce them at home.

Confidence in China’s 5G buildout supported the two Chinese mobile service providers, China Unicom (+11.05% in Hong Kong) and China Telecom (+3.69%), the best performers in the Hang Sheng China Enterprises Index. The two telecoms were among our top recommendations.

Chinese financials were mixed in mainland A-shares trading. China Life, one of our top recommendations, rose 5.05% in Shenzhen but the corresponding H-share was unchanged in Hong Kong. Declines in regional bank shares left the Shenzhen 300 Financials Index with a modest loss for the day.