US-China Tech Rivalry Adds to Headaches for Stock Investors

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(Bloomberg) — China’s simmering rivalry with the United States for technological supremacy is adding new pain points to the world’s second-largest stock market, as the Biden administration steps up efforts to reduce reliance economy of the Asian nation.

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From biotech to electric vehicles, shares of China’s top manufacturers have recently seen a sharp sell-off as US initiatives to secure domestic supply chains and consolidate its industrial superiority raised uncertainties for to Chinese companies. The MSCI China index has fallen more than 7% this month, compared with a 2.5% drop in the global gauge.

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Investors also fear that rising tensions over Beijing’s stance toward Russia and Taiwan could accelerate economic decoupling. President Xi Jinping’s meeting with his Russian counterpart last week has been closely watched by traders for any gesture that could serve as a basis for US sanctions.

“China’s relationship with the United States will remain challenging in 2022 and beyond as geopolitical risks remain high as both growing economies are seen as competitors,” said Zhikai Chen, head of income BNP Paribas Asset Management’s Asian and Global Emerging Markets variable. “We focus on defensive and political beneficiary names and avoid those subject to higher geopolitical risk.”

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The latest developments are further dampening sentiment in a market reeling from tight Covid restrictions, a weakened economy and a slumping housing market. Chinese stock benchmarks are among the worst-performing major benchmarks this year.

Additional points could emerge as President Joe Biden and Xi face key political tests in the coming months: the U.S. midterm elections and the Communist Party Congress. Nicholas Yeo, head of China equities at abrdn plc, said market volatility may increase with the risk of “noise in China” in the US campaign.

Last week, biotech company Wuxi Biologics Cayman Inc. fell nearly 20% in one day after Biden’s executive order to bolster domestic biomanufacturing. Electric vehicle makers also fell as China’s ambassador to the United States warned of the risk of trying to cut the country off from vehicle supply chains.

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Investors will have to prepare for more changes. Biden appears poised to sign an executive order in the coming days that steps up national security reviews of foreign investments, with new criteria applied to sectors such as semiconductors, artificial intelligence, biotechnology and clean energy technologies.

Technological battlefield

On the other hand, some see investment opportunities as China’s push for self-sufficiency picks up pace.

“Any homegrown semiconductor company will get support from the Chinese government,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis Corporate & Investment Banking, adding that questions remain about how successful they can have these companies with the pressure of the US.

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China’s largest chipmaker Semiconductor Manufacturing International Corp. beat second-quarter profit estimates and its Hong Kong-listed shares rose 3.2% in September, against a 6% drop in the Hang Seng index.

Earlier this month, Xi renewed calls for increased technological development. This came after he prioritized the role of state institutions over private giants such as Alibaba Group Holding Ltd in recent years. or Tencent Holdings Ltd. to stimulate technological progress.

But the unpredictable nature of geopolitical tensions makes China stocks a market to avoid for some investors.

“I see decoupling increasing, and my allocation to Chinese equity 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 associated risks,” he added.