Trade tensions threaten the rise of China’s stock champs

China’s most promising sectors face a growing threat of trade restrictions from Western governments, clouding the outlook for stocks that have the potential to boost the country’s market growth.

Article content

(Bloomberg) — China’s most promising sectors face a growing threat of trade restrictions from Western governments, clouding the outlook for stocks that have the potential to boost the country’s market growth.

The sectors under scrutiny by Europe and the US are as broad as electric vehicles, wind and solar projects, medical equipment and chips, but have one thing in common: they are strategically important to the president’s pursuit Xi Jinping to leadership in the global economy. race towards a green transition and high-tech development.

Advertisement 2

Article content

Article content

The rising tensions come at an inopportune time. Stocks began emerging from a years-long slump as investors bought into China’s efforts to build new growth engines and achieve self-sufficiency along key supply chains. A materialization of these threats could hamper China’s global expansion, while Beijing’s tit-for-tat responses could lead to a full-blown trade war that would drastically change the investment landscape.

“The geopolitical pressure will only increase – every export can be targeted because it is no longer really about fair trade,” said Vey-Sern Ling, director of Union Bancaire Privee. “It dampens the drivers of export growth in the Chinese economy.”

China’s CSI 300 Index is up about 3% this year, regaining some traction after a third year-on-year loss. Performance of green and high-tech industry leaders has been mixed as geopolitical risks heighten concerns about oversupply and price competition.

Battery giant Contemporary Amperex Technology Co. Ltd is up almost 17% on land this year, while EV leader BYD Co. 6% has increased. Longi Green Energy Technology Co. and Semiconductor Manufacturing International Corp. have lost about 20% each.

Article content

Advertisement 3

Article content

The largest Chinese companies that generate at least a fifth of their revenue from exports have a weight of more than 14% in the CSI 300, with many of them, including CATL and BYD, trading at a higher price-to-earnings ratio than the benchmark, according to on data collected by Bloomberg.

Rising tensions

While trade wars have become a permanent feature of China-West relations under Xi, tensions have worsened in recent months. The European Union has joined U.S.-style protectionist moves as a complex mix of national security, economic and political considerations play out.

President Joe Biden’s call for tariffs of up to 25% on some Chinese steel and aluminum products shows how China bashing will increase in a presidential election year. In Europe, policymakers are responding to growing complaints from local manufacturers that China’s industrial overcapacity is crowding them out.

The range of envisioned products largely overlaps with Xi’s industrial priorities called “new productive forces.” Investors have been looking for stock winners since the term was placed on Beijing’s top agenda in early March, sparking a brief rally in shares from robotics companies to chip makers.

Advertisement 4

Article content

READ: Deciphering Xi’s new slogan aimed at reviving China’s economy

“While the new productive forces may have policy tailwinds, these may be somewhat offset by rising geopolitical tensions, especially in an election year when unrest is likely to increase,” said Marvin Chen, a strategist at Bloomberg Intelligence.

New battlefield

The focus now is on which sector will be targeted next. Electric vehicles have been a key target so far, with Gavekal Research pointing to the EU’s worsening trade balance with China in the industry.

“The cyclical positioning of Europe and China suggests that the trade balance is tipping in China’s favor,” Gavekal analysts Cedric Gemehl and Thomas Gatley wrote in an April 15 note. European domestic demand is strengthening, which should lead to more purchases of Chinese goods, while EU exports to China are likely to stagnate at best due to weak demand, they say.

Shen Meng, director of Chanson & Co. in Beijing, expects lithium battery makers to face increasing pressure. The industry falls under the clean technology category and has been one of the main drivers of China’s export growth in recent years, he said. Major players are CATL, Eve Energy Co. and Gotion High-Tech Co.

Advertisement 5

Article content

READ: China’s Dominance in Clean Technology Supply Chains Grows: BNEF Chart

In a sense, there is a positive side to the tensions, as they could help accelerate China’s industrial upgrade. A technical breakthrough by Huawei Technologies Co., which is unlisted and facing U.S. sanctions, has led to a surge in the shares of its suppliers.

“While the immediate impact of such geopolitical tensions may temporarily constrain certain sectors, the long-term outcome could benefit Chinese companies that innovate and adapt to changing regulations and market dynamics,” said Tareck Horchani, head of prime brokerage at Maybank Securities Pte.

It will also take some time for the various restrictions under consideration to be realized. A planned investigation by Europe into Chinese medical equipment purchases has led to stocks including Shenzhen Mindray Bio-Medical Electronics Co. fell after the report, but most have since partially recovered their losses.

All told, the unpredictable nature of the geopolitical tensions increases the risk of investing in Chinese stocks, an asset class that many have already avoided due to regulatory uncertainties and a slowing economy.

“Any future protectionist action by the EU against China will further hamper trade and capital flows into the Chinese economy and add to the already heavy downward pressure on the Chinese stock market,” said Han Piow Liew, fund manager at Maitri Asset Management Pte. “What all this means is that investing in Chinese equities in such an environment is a tough undertaking that requires a razor-sharp focus on equities.”

—With help from Charlotte Yang and Ishika Mookerjee.

Article content