Some fund managers have ditched companies that are vulnerable to US export bans. Photo / Getty Images
Some fund managers have ditched companies that are vulnerable to US export bans. Photo / Getty Images
COMMENT:
China and the US are "embracing while fighting", to use a Chinese phrase. The concealed aggression may serve some purpose for the combatants, but for investors it makes it hard to know where the next punches may land.
So far, the main target has been Huawei, the unlisted Chinesetelecoms equipment giant which has been blacklisted by the Trump administration.
But there are five other Chinese tech companies — Hangzhou Hikvision, Zhejiang Dahua, iFlytek, Xiamen Meiya and Beijing Megvii — that are also spoken of in Washington as possible subjects of US export bans. All aside from Megvii are listed on China's A-share market.
Beyond them, the broader implications for investors both in China and in the US depend on whether the current trans-Pacific conflagration remains merely a trade war or turns into a fundamental reordering of the US-China relationship.
"Will this week be remembered as the one when the US-China relationship irrevocably changed?" asks Miranda Carr, a strategist at Haitong, a Chinese brokerage.
"At the moment, it certainly seems that way and so requires a fundamental rethink of assumptions on both future economic growth — and which industries and companies will benefit," she adds.
Such a rethink implies two basic approaches for the China investor. The first is a forensic dissection of which companies are most at risk from potential US broadsides. The second is an appreciation of China's key vulnerabilities if the current bout of fisticuffs spirals into an economic cold war.
US President Donald Trump (right) talks to Chinese President Xi Jinping. China and the US are "embracing while fighting". Photo / AP
In the case of the first, overseas investors in A-shares find themselves in unfamiliar territory. With the first tranches of A-shares being added to the main MSCI Emerging Markets index only last year, the antennas of some investors have been insufficiently attuned to danger.
Hikvision — a key supplier of the face-recognition technology that has enabled China to throw a security chokehold over its Muslim minority region of Xinjiang — is a case in point.
As late as last November — by which time reports of the company's role in internment camps were already common — Hikvision remained a favourite for international fund investors in A-shares.
Indeed, some 19 per cent of around 180 of the world's largest emerging market funds held Hikvision last November, according to Copley Fund Research, a consultancy, placing the company in the top three most favoured A-shares.
Since then, however, international institutions have pared back their holdings. Nine funds — including Fidelity Emerging Markets, UBS Global Emerging Markets and American Funds' New World Fund — have got out of the company completely, while several others have slashed their stakes.
Nevertheless, 16.9 per cent of the funds still held Hikvision at the end of April this year, even after the US administration's displeasure with the company had been publicly communicated. These funds included Aberdeen Emerging Markets, Magellan and Comgest Growth EM among many others.
Thus if Hikvision is added to the US "entity list", which prohibits US companies from exporting key components and services to the Chinese firm, it will have been a well-telegraphed move.
More broadly, though, investors need to take a close look at which A-share companies are vulnerable to US export bans. Sectors such as artificial intelligence, communications equipment and semiconductors are regarded as a few most at risk, partly because of the competitive threat they pose to US counterparts, analysts said.
Aside from tech issues, a broad range of Chinese macroeconomic vulnerabilities are also seen as susceptible to an intensification of US economic pressure on China.
So far, Huawei has been the main target of the Trump Administration. Photo / Getty Images
The most basic is that it could threaten China's charmed decade of "double surpluses", meaning surpluses to the capital and current accounts. This pushed money into the economy and kept most of it hemmed in behind China's largely closed capital account.
If now — partly as a byproduct of US trade pressure — China were to experience a reduction in inflows from trade and from capital investments, support for the renminbi against the US dollar could wilt and place upward pressure on domestic interest rates, analysts said.
Indeed it may be, as JP Smith of Ecstrat, an advisory firm, says that key underpinnings of China's economic model are starting to fray.
"The paradox of the Chinese variant of state capitalism is that it relies on the US-led international trade and investment community being prepared to tolerate a very unbalanced pattern of market access," Smith says.
Of course, a White House run by Trump can turn on a dime. Some analysts see the possibility of a trade agreement as early as next month when the G20 group of nations meets in Japan.
But even if that occurs, the broad support in Washington for getting tough on China, could inform a more uncompromising set of policies for years to come.
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