Punishment of Chinese actions shows that the US still wins the technological battle

The fear that a rapprochement between China and Russia in the midst of the Ukraine war would end in sanctions against China, and the threat of expulsion from Wall Street of several non-transparent Chinese companies, caused the Asian country’s listed companies on the US stock market to falter in the last days. More than a tremor, it was a authentic crash followed by a spectacular rebound. Beijing has promised to take steps to provide stability to markets, amid a quiet but unrelenting dispute for global technological dominance.

The world is divided again, if ever there were no seams. But faced with the harshness of the Russian invasion of Ukraine, which has already raised an iron curtain, the battle for technological supremacy between the United States and China continues on its way, invisible and with no point of return. In October of last year, Nicolas M. Chaillan resigned from his position as CEO of software of the Pentagon – the first to hold this position. He did it as a protest against “the slow pace of technological transformation in the US military,” according to the agency. Reuters.

“The United States has already lost the fight for AI against China,” then headlined the Financial Timesto which Chaillan responded with an explanatory post on his LinkedIn social network account: “I have never said that we have lost. I said that as things are and if we don’t wake up NOW we don’t stand a chance to fight China in 15 years. I also said that they are leading in AI and Cyber ​​NOW. Not in 10 years as some reports mention.”

His testimony somehow personifies the Zeitgeist of the American elites, the spirit of the times, in the midst of what some call war and others The great technological rivalry: China against the USA, the title given to the dissertation by four Harvard Kennedy School researchers, published in December. “Beyond becoming a manufacturing powerhouse, China has become a serious competitor in the foundational technologies of the 21st century: artificial intelligence (AI), 5G, quantum information science (QIS), semiconductors, biotechnology, and green energy,” the researchers wrote.

“In some races, she has already become number 1. In others, based on the current trajectory, will overtake the US in the next decade“, these experts warned. The key lies in who will establish the standards and norms of the future in important technologies.

They are two powers in a melee for world domination, as could be seen on Friday in a Biden and Xi meet to talk about Ukraine. Although they agreed to promote peace and security, the Chinese president once again encouraged the United States and NATO to hold “talks with Russia to solve the problems arising from the Ukrainian crisis”, and ended by “expressing his opposition to sanctions indiscriminate” against Moscow, collected Europa Press.

Donald Trump put the trade war against China at the center of his government, with the prohibition of investing in certain Chinese companies related to the Army. And Joe Biden extended those bans on the basis of a struggle between “autocracy and democracy”blacklisting Huawei, China Unicom, China Telecom, China Mobile –telecoms that were delisted from the New York Stock Exchange in 2021- or the microchip manufacturer SMIC.

Already in 2022, Washington’s pressure on Beijing has intensified. In February, the Biden administration announced restrictions on 33 other entities Chinese whose owner had not been verified. A movement that “narrowed the constriction on China’s technological supply chain, hitting its most vulnerable parts,” according to the South China Morning Post (SCMP), a Hong Kong-based daily newspaper owned by Jack Ma, founder of Alibaba.

Added to these restrictions was the approval this year of the America COMPETES Act, which “is intended to strengthen the competitiveness of the US economy and businesses, and counter anti-competitive measures adopted by the People’s Republic of China”, as can be read on the website of the Financial Services Committee of the House of Representatives. A rule that provides for allocating a lot of money to the manufacture of microchips and scientific research. According to the SCMPa Chinese government spokesman reportedly referred to this law as the result of “a zero-sum, Cold War mentality.”

Technological volatility

In this context, and with the war in Ukraine in the background, Chinese companies listed on the Nasdaq have experienced a resounding crash in recent days, losing almost $200 billion in capitalization, as a result of the US Securities and Exchange Commission indicating that five Chinese companies could be delisted for lack of financial transparency. Investors were also influenced by the fear that China could help Russia militarily in Ukraine and receive economic sanctions for it.

In Beijing, Xi Jinping reacted quickly and promised to maintain the stability of its stock market. The magic words had an effect and the Chinese shares of the Nasdaq -which are traded by means of depositary receipts (ADR)- soared on Wednesday in the stock market as they had not done in twenty years: Pinduoduo (56.06%), JD.com (39.36%), Baidu (39.20%) or NetEase (25.69%).

“What we have seen today [por el 16 de marzo] is the disappearance of regulatory risk premiums,” said Olivier d’Assier, head of applied research Asia-Pacific at Qontigo. “The regulatory risk It was the biggest concern of investors and now they breathe a sigh of relief because of Beijing’s speech”, stressed the expert, in statements collected by Bloomberg.

In addition, as published by Financial Times“China is preparing to make a concession on the disclosure of information of Chinese audits amid efforts to resolve impasse threatening US-listed Chinese companies.”

Faced with the push of the last two years, the indices that bring together the main technology firms are in the doldrums in 2022. The Nasdaq Composite loses 11.7% so far this year and the Nasdaq 100 leaves 12.2 %. By comparison, the Nasdaq Golden Dragon -index of which the 93 Chinese shares listed on the Nasdaq are part- sinks 14.4%.

The index is dragged down by the behavior of firms such as Zai Lab, which lost 39.5%; Bilibili, (-36.1%), Nio (-33.8%), Tencent Music (-26%), Pinduoduo (-22.7%) or iQiyi (-18.75%). The Nasdaq Golden Dragon set an all-time high of 20,688.32 points in February 2021, and has since lost 63%.

Meanwhile, the worst performing U.S. Nasdaq 100 stocks so far this year are: PayPal (-38,7%), Netflix (-36,8%), DocuSign (-36,6%), Zoom (-36,4%) y Meta Platforms (-36%).

“Chinese equities may continue to harbor risks despite the recent hemorrhaging of the market, with the decoupling threats between China and the US, ADR exclusions and virus lockdowns [como el de Shenzhen] that cast long shadows over valuations,” Francis Chan, an analyst at Bloomberg Intelligence.

The investor should note that, as a whole, the Golden Dragon Index is buy cheaper than the Nasdaq, its benchmark. 2022 Golden Dragon earnings are paid multiples of 20.12 times at current share prices, falling to 13.7 times when it comes to 2023 earnings. Instead, the Nasdaq Composite earnings multiplier is 28.07 times and 23.7 times, respectively.

Antonio Castelo, an analyst at iBroker.es, warns that the regulatory risks of Chinese companies in the US and in their own country, as well as greater supervision by Beijing, are very important issues when making investment decisions.

“This minimal analysis is generalized for almost all Chinese companies in the sector, but what happens if there are sanctions by the United States and they are prohibited from operating in the western world? What happens if it is China itself that closes the way for these companies?” the expert asks. “Some time ago perhaps no one would have considered this possibility, but right now it is something that can happen and therefore it would be preferable to contemplate other alternatives that were more conservative”.

Finally, César Pérez, global director of investments at Pictet WM, highlights the macroeconomic data: “China has established a ambitious growth target of 5.5% in 2022 (compared to our forecast of 4.5%)”. In addition, it has set an overall fiscal deficit target of 2.8% and a CPI of 0.9% in February in annual terms ( well below that of the US).According to the expert, this could open the way to greater monetary easing during the next few months.