China’s trade ministry responded to Biden’s executive order by saying it was “gravely concerned” and retained the right to take counter-measures.
While the market mostly ignored President Joe Biden‘s China tech sanctions, US investors expressed concern that Beijing might retaliate or refrain from purchasing American technology.
To defend national security and prevent US finance and knowledge from supporting China’s military modernization, Biden signed an executive order this week prohibiting new US investments in critical industries like computer chips while controlling others.
US investors were unconcerned by the original report, claiming that the limitations were more restricted than expected and unlikely to extend to passive purchases in publicly traded Chinese firms. However, other portfolio managers expressed concern that China might retaliate, as it has in the past.
“A lot depends on how China reacts to that.” “The administration appeared to be trying to make that announcement without making too many waves with China,” said Rick Meckler, a partner at Cherry Lane Investments in New Jersey.
The iShares MSCI China Exchange Traded Fund, one of the largest ETFs of US-listed Chinese businesses, concluded the day up 0.7%, while the rest of Wall Street was flat.
China’s trade ministry responded to Biden’s executive order by saying it was “gravely concerned” and retained the right to take counter-measures. According to some China observers, Beijing’s options are limited and it is doubtful that the situation would be escalated.
Others, however, believed such a viewpoint was overly optimistic.
China targeted US chipmaker Micron Technology in May after Washington imposed a series of export curbs on American components and chipmaker equipment to China, and the US has accused Beijing of penalizing other US firms as tensions between the two global economic powerhouses rise.
“It is naive to believe that China will not retaliate,” said Tom Plumb, CEO of mutual fund Plumb Funds. According to Plumb, China may restrict shipments of rare earth used in consumer electronics, electric cars, and other components, or target other US technological businesses.
Self-sufficiency
Washington’s China hawks claim that American investors have moved wealth and valuable know-how to Chinese technology firms, which might help Beijing enhance its military capabilities. Beijing, for its part, has been pursuing self-sufficiency in the escalating tech conflicts, which may also halt money flows into US firms and markets.
“This obviously puts China in a position where they’re going to try to reduce their dependency on any US company for higher levels of technology,” Plumb added.
Reuters reported on Wednesday that US private equity and venture capital investors, who have already withdrawn from China, are likely to remain on the sidelines until more clarification on how the guidelines will be enforced becomes available. Some investors are limiting their exposure to China as well.
Running Point Capital Advisors’ chief investment officer, Michael Ashley Schulman, stated that some customers have already requested decreased or zero China exposure through equities, bonds, and ETFs.
“I suspect that after the government’s announcement, we will receive a few more similar requests,” he added.
According to Phillip Wool, co-portfolio manager of Rayliant Quantamental China Equity ETF, investors are missing out on China growth due to US-China tensions.
“The greater risk for investors is not allocating to a market where valuations are so low – relative to other equity markets and China’s own history – and where there are many companies with strong fundamentals experiencing rapid growth.”
