The Biden administration has done little to lower tensions in sectors where the US and China are in strategic competition, casting a pall over prospects for Chinese equities.
Sam Chan, Dong Chen, Julien Holtz, Andreina Low, Hong Li Tan, Pictet Wealth Management.
More than a year after Joe Biden became US president, there has been little material improvement in tensions between the US and China. And the announcement on 8 February that a further 33 Chinese entities were to be added to the US government’s ‘unverified list’ (UVL) is a reminder of on-going US-China strategic competition.
The UVL is the least restrictive of the four lists maintained by the US Department of Commerce to enforce export controls. Inclusion on the UVL signals that the US authorities have some concerns about an entity’s bona fides, but does not mean embargos on or immediate disruption to a company’s operations. But the UVL triggers additional due diligence, reporting and license requirements and could be a prelude for moving a company to the Department of Commerce’s ‘Entity list’, which would have more serious consequences. In addition, the latest moves could well dampen market sentiment towards Chinese assets in general and have a material impact on Chinese companies’ operations to varying degrees.
Our preliminary assessment of the UVL and recent additions to it bring us to the following two general conclusions. First, the immediate fallout from UVL inclusion might be limited, but needs monitoring.
Second, US-China tensions are generally negative for Chinese assets, although their impact varies from sector to sector. The tech and healthcare sectors are likely to bear the brunt due to their high dependence on US technologies and equipment. Giant Chinese software technology/internet companies (for example, Alibaba , Tencent and Baidu ) have not been particularly exposed to US-China tensions and should remain relatively immune should these tensions escalate. But Chinese tech hardware company Huawei suffered badly from its dependence on foreign microchip supplies when the US imposed sanctions on it in 2019. Based on this example, inclusion on the UVL and a rise in broader US-China tensions could have wide implications for Chinese tech hardware companies. By contrast, the impact of tensions is likely to be lower on basic metals and the industrial sectors due to their low dependence on the US.
Developing US-China tensions, including the threat of sanctions, could pose a tail risk to the Chinese/Hong Kong financial sector. Under the Hong Kong Autonomy Act passed by Congress in June 2020, the US Secretary of State is required to update Congress regularly on foreign persons that have materially undermined HK’s autonomy Possible penalties for violations of the Act up to now have included fines but in severe cases could extend to suspension from dollar clearing as well as exclusion from the US financial system and the SWIFT cross-border payments service. It that happened, disruption to China’s and Hong Kong’s financial infrastructure would be tremendous.
