(Bloomberg) — China's most promising industries face a growing threat of trade restrictions from Western governments, clouding the outlook for stocks that could fuel growth in the Chinese market.
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Europe and the United States are monitoring a wide variety of sectors, including electric vehicles, wind and solar projects, medical equipment, and chips, but they all have one thing in common. It is of strategic importance as President Xi Jinping aims for global leadership. Race towards green transition and high-tech development.
Escalating tensions come at inopportune times. Stocks were beginning to emerge from years of stagnation as investors bought into China's efforts to build new growth engines and achieve self-sufficiency along key supply chains. If these threats materialize, they could hinder China's global expansion, while Beijing's retaliatory response could spark a full-scale trade war that would significantly change the investment environment.
“Geopolitical pressures are only going to increase. Trade fairness is no longer important, so any export can be targeted,” said Beisaan Lin, managing director of Union Bancare Prive. ” he said. “It will weaken the engine of export growth in the Chinese economy.”
China's CSI 300 index has risen about 3% this year, regaining some footing after a three-year slide. Leaders in green and high-tech industries have had mixed results as geopolitical risks raise concerns about oversupply and price competition.
Battery giant Contemporary Amperex Technology has soared nearly 17% in the domestic market this year, while EV giant BYD has risen 6%. Longhi Green Energy Technology and Semiconductor Manufacturing International each fell about 20%.
China's largest companies, which derive at least one-fifth of their sales from exports, account for more than 14% weight in the CSI 300, and many, including CATL and BYD, have higher stock returns than their benchmarks. It is said that it is traded at a certain rate. Data compiled by Bloomberg.
rising tension
Trade tensions have been a permanent feature of relations between China and the West under Xi, but tensions have worsened in recent months. Amid a complex mix of national security concerns, economic and political considerations, the European Union has joined the US-style protectionist movement.
President Joe Biden's call for tariffs as high as 25% on some Chinese steel and aluminum products shows how China-bashing can intensify in a presidential election year. In Europe, policymakers are responding to growing complaints from local manufacturers that their production is being squeezed out by China's overcapacity.
The range of products covered largely overlaps with President Xi's industrial priorities, dubbed “new productivity.” Investors have been looking for winning stocks since the phrase was placed at the top of the Chinese government's agenda in early March, sparking a brief rally in stocks from robotics companies to chip makers.
Read: Deciphering Xi's new catchphrase as he aims to revive China's economy
“The new productivity may have policy tailwinds, but it could be offset somewhat by rising geopolitical tensions, especially in an election year,” said Marvin Chen, a strategist at Bloomberg Intelligence. “There is a high possibility that noise will increase.”
new battlefield
The focus is now on which sector will attract attention next. Until now, EVs have been a major target, with Gavekal Research pointing to the deterioration of the EU's trade balance with China in this industry.
“The cyclical positioning of Europe and China indicates that the trade balance is tilted in China's favor,” Gabekal analysts Cedric Gemmell and Thomas Gatley wrote in an April 15 note. wrote. The EU's exports to China are likely to remain flat at best due to weak demand.
Shen Meng, director of Chanson & Company in Beijing, expects lithium battery manufacturers to face increasing pressure. The industry falls under the clean technology category and has been the biggest driver of China's export growth over the past few years, he said. Major companies include CATL, Eve Energy Co, and Gotion High-Tech Co.
Read: China's dominance in cleantech supply chains grows: BNEF chart
In a sense, the bright side of this tension is that it may help accelerate China's industrial sophistication. Technological advances by Huawei Technologies Co., which is privately held and subject to U.S. sanctions, are fueling a surge in supplier stocks.
Tarek Horchani, Head of Prime Brokerage Dealing at Maybank Securities, said: “While the immediate impact of these geopolitical tensions may temporarily constrain certain sectors, the “This could favor Chinese companies that innovate and adapt to changing regulatory and market dynamics.”
Various restrictions are also taken into account, and delivery may take some time. Stocks such as Shenzhen Mindley Biomedical Electronics fell sharply following the news that European authorities are planning to investigate China's procurement of medical equipment, but most stocks have since recovered some of their losses.
All things considered, the unpredictable nature of geopolitical tensions has increased the risk of investing in Chinese stocks, an asset class that many were already avoiding due to regulatory uncertainty and economic slowdown. .
Hang Pio Liu, a fund manager at Maitri Asset Management, said: “If the EU takes protectionist moves against China in the future, it will further impede trade and capital flows to the Chinese economy, which is already causing a huge impact on the stock market.'' “There will be significant downward pressure,” he said. “All of this means that investing in Chinese stocks in this environment is a difficult endeavor that requires razor-like focus on stocks.”
–With assistance from Charlotte Yang and Ishika Mookerjee.
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