The Wall Street Journal today released a report that details the Treasury Department’s plans to curb Chinese firms from buying or investing firms with “industrially significant technology related to the Made in China 2025 plan”. The tech sector is broadly expected to be one of the focal points of this move and the market reacted negatively as closing prices were deep in the red. The move is expected to be made public this Friday.
The rule is (tentatively) that any firm with more than a 25% Chinese owned stake will be blocked from investing in any American business that is deemed important to any of several key industries More on which industries might be affected in a bit.
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The government official stated that the Treasury would invoke the International Emergency Economic Powers Act of 1977 (IEEPA) to impose the restrictions. IEEPA gives the president total authority to restrict deals based on national security concerns. IEEPA was most famously used after the 9/11 attacks in 2001 to stem financing for terrorist organizations.
While our readership here will be more concerned with the technology sector as a whole, other industries may be affected as well. The anonymous official that leaked the news said that the “Made in China 2025” initiative is a key issue the department wants to tackle.
Made in China 2025
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China is rolling out a very aggressive roadmap that calls for the nation to be, among other things, a worldwide leader in semiconductor manufacturing by 2025. China is a well-known mass producer of lower tech goods like textiles, raw materials, and cheaper electronics – but its still the US, Korea, Japan, and Thailand that have the world’s cutting-edge tech manufacturing capabilities and IP.
China isn’t being secretive about its aims to spend $150 billion via its “Big Fund” over the next 10 years to spur the Chinese tech sector’s competitiveness. These monies could easily find their way to American tech firms, via shell corporations set up by the Chinese government. The Trump Administration is aware of this and while the new investment rule is most likely another salvo in the current trade war that is brewing, it is at least founded by realistic concerns.
China currently imports $200 billion in semiconductors and state officials have made no secret of their ambition to wean themselves off of foreign technology. Just a few months ago we reported on China’s plan to slash tax rates for homegrown semiconductor companies.
A Chinese firm partnered with AMD (announced in 2016) to license x86 from AMD to produce modern server computer chips. The deal saw AMD enter into a majority control JV with Tianjin Haiguang Advanced Technology Investment Co., Ltd (THATIC), who is an investment arm of the Chinese Academy of Sciences. Today’s commentary from the White House did say that any existing deals would be left untouched, only new deals moving forward would be subject to the new 25% Chinese ownership restriction, so at least the AMD deal is safe for now.
China has begun to back peddle in how strong its been pushing the Made in China 2025 rhetoric. However while they may begin to speak less strongly and less frequently about the initiative, the efforts will most likely remain the same both in terms of capital funds thrown at the project and overalls state coordination.
Tech sector stocks hit especially hard after news of impending Chinese investment restriction rule spreads
The Journal report sent tech stocks crashing down today. At market close shares of AMD (NASDAQ:AMD) were down 4%, Intel (NASDAQ:INTC) lost 3.4%, Nvidia (NASDAQ:NVDA) plunged almost 5%, Qualcomm (NASDAQ:QCOM) lost nearly 2.5%, and Amazon (NASDAQ:AMZN) dropped 3%.
China is indeed a large buyer of semiconductor chips and Wall Street is aware of this. Angelo Zino is an analyst at CFRA Research and wrote:
Blocking technology exports could be harmful and negatively impact many U.S.-based chipmakers… The 10 largest chipmakers by stock market value generate about 37%
While the investment restriction wouldn’t really be putting any of these firms exports at risk, it still has a chilling effect simply due to the industry’s massive reliance on China as a whole, when it comes to market demand.
Treasury Secretary Mnuchin’s tweet didn’t stop the sell-off, either.
On behalf of @realDonaldTrump, the stories on investment restrictions in Bloomberg WSJ are false, fake news. The leaker either doesn’t exist or know the subject very well. Statement will be out not specific to China, but to all countries that are trying to steal our technology.
— Steven Mnuchin (@stevenmnuchin1) June 25, 2018
In the overall market, the SP 500 index was down almost 2% and the Nasdaq was off close to 3%.
