Chinese stock sell-off harks back to 2008 and leaves tech shivering

Another bad day for Chinese equities. Not even the good consumption and investment data confirming that China’s economy has started the year better than expected have managed to revive the Asian giant’s stock markets, which have added a new session of sharp declines. Behind the falls is the new covid outbreak that has once again confined several cities and paralyzed the activity of many companies, with millions of citizens affected, but the pandemic is not the only explanation. Beijing’s ties with Moscow and the eastern country’s lack of condemnation of the Russian invasion of Ukraine put its market, especially the technology market, at great risk.

Uncertainty about the effect of sanctions on Russia have led Hong Kong’s tech Hang Seng to trade at its lowest level since 2016. So far this year, the stock has lost 16.5% on the Hong Kong selective and 15% in that of the continental indicator compared to the 13% that the European stock market yields or the 12.5% ​​of the S&P 500. Only the Nasdaq 100 corrects more than it in the year, which loses 19.5% since January.

As the war in Ukraine progresses, the situation in China is increasingly compromised. The absence of a condemnation of the Russian attack and news such as Russia’s request for military aid to the Xi Jinping government, including drones or espionage systems, puts the Asian giant in question before the international gaze.

In his analysis of this issue for Bloomberginvestor Mark Mobius pointed out that Washington’s decision to extend sanctions on Chinese companies doing business with Russia is the biggest concern for investors: “We must remember how much money investors who had significant amounts of shares in Russia have already lost. and then those who lost money on Chinese stocks affected by the Chinese government’s crackdown.”

“It could be worse than the financial crisis of 2008”

The explanation for the massive sale of Chinese shares, especially in the technology sector, cannot be left out of the regulatory pressure that does not rule out a possible exclusion from the US stock markets. If already in the middle of last year, Beijing’s persecution of Chinese actions in the US worried experts, the current scenario increases the risk.

This cold War technology is added to the war started by neighboring Russia and the sanctions to the action of Vladimir Putin, which, if not respected by China, will also affect the Asian giant. Echoes of the sanctions that the US applied in 2020 to prohibit US companies from working with Huawei without a special license still resonate.

China, at the crossroads of technology exports made in USA

Now, in response to the invasion and to prevent access to high-tech Russia, the US has activated the Foreign Direct Product Rule (FDPR), the same one that was used with Huawei, which requires a specific permit to export to Russia any technological product that includes US components. In other words, to trade with the Russian government (it does not include trade if it is for civilians) products that contain, for example, software or semiconductors manufactured in the US, countries should request permission.

Allied countries of the US, among which are all those that make up the EU or Japan, have shown their public commitment to sanctions, but not China, which once again stands out to the West by not opening up to break off its bilateral relationship with Russia; this crossroads puts at stake its strategic development in the field of high technology.

Although the Asian giant is the largest supplier of semiconductors and consumer electronics to Russia, China does not have the capacity to develop high-end semiconductors to continue feeding Russia without using components from the US and any attempt to help in this regard would be considered a non-compliance with the sanction.

‘Bureaucracy’ can be an escape route. Not only is an Export Control Classification Number (ECCN) needed to check if the product is under the FDPR, but controlling exports is not easy because not all manufacturers classify their products, Nikkei Asia collects, so the crossing becomes complicated.

At the beginning of March, the US already warned that trying to evade these controls could lead to heavy sanctions, but China does not move to please the West and the refusal is having repercussions on the companies in its territory, as shown by the latest stock market sessions.

“The technology sector will continue to suffer from the challenges of regulation, in addition to the risk of exclusion from the US stock market and the penalty of growth stocks as rates continue to normalize,” César Pérez Ruiz tells the same outlet. Chief Investment Officer of Pictet Wealth Management.