China’s heated rivalry with the US for technological supremacy is adding new pain points to the world’s second-largest stock market as the Biden administration ramps up efforts to reduce economic dependence on the Asian nation.
From biotechnology to electric vehicles, shares of major Chinese manufacturers have seen strong selling lately as US initiatives to secure domestic supply chains and solidify its industrial dominance created uncertainty for Chinese companies. The MSCI China Index is down more than 7% this month versus a 2.5% decline in the global index.
Investors also worry that rising tensions over Beijing’s stance on Russia and Taiwan could accelerate economic decoupling. President Xi Jinping’s meeting with his Russian counterpart last week was closely watched by traders for gestures that could provide a basis for US sanctions.
“China’s relationship with the US will remain challenging in 2022 and beyond, with geopolitical risks remaining elevated as both economies increasingly view each other as competitors,” said Zhikai Chen, Head of Asian and Global Emerging Markets Equities at BNP Paribas Asset Management . “We are focusing on the defensive and policy-favored names and avoiding those that are exposed to higher geopolitical risk.”
The latest developments continue to dampen sentiment in a market battered by tough Covid restrictions, a sluggish economy and a slump in the property market. Chinese equity gauges are among the top worst-performing benchmarks this year.
More trouble spots could arise as President Joe Biden and Xi face key political trials – the US midterm elections and the Communist Party Congress – in the coming months. Nicholas Yeo, head of China equities at abrdn plc, said market volatility could increase with the risk of “noise about China” in the US election campaign.
Just last week, biotech pioneer Wuxi Biologics Cayman Inc. plunged nearly 20% in one day after Biden ordered the executive to boost domestic bio-manufacturing. Electric vehicle makers also fell as China’s ambassador to the US warned of the risk of trying to cut the country off vehicle supply chains.
Investors must be prepared for further fluctuations. Biden is expected to sign an executive order in the coming days that will step up national security reviews of foreign investments, with new criteria applying to sectors like semiconductors, artificial intelligence, biotechnology and clean energy technologies.
On the other hand, some are seeing investment opportunities as China’s drive towards self-sufficiency gathers momentum.
“Any domestic semiconductor company gets support from the Chinese government,” said Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis Corporate & Investment Banking, adding that questions remain about how successful these companies are with U.S. pressure be able.
The win of China’s largest chipmaker, Semiconductor Manufacturing International Corp. for the second quarter beat estimates and its Hong Kong-listed shares rose 3.2% in September, while the Hang Seng Index fell 6%.
Earlier this month, Xi again called for accelerating technical development. This comes after he has seen the role of state institutions vis-à-vis private giants like Alibaba Group Holding Ltd in recent years. or Tencent Holdings Ltd. prioritized in promoting technological progress.
But the unpredictability of geopolitical tensions means Chinese stocks are a market to avoid for some investors.
“I see decoupling on the way and my equity allocation in China remains zero,” said Brock Silvers, chief investment officer at private equity firm Kaiyuan Capital. The weakness of the Chinese economy “has significantly reduced its attractiveness relative to the risks involved,” he added.