Geopolitics Curbs Tech Gains, Week In Review

Week in Review

• Real evidence of China’s recovery and “revenge spending” came to the fore this week with the release of first quarter GDP growth at 4.5% year-over-year (YoY), exceeding expectations, and March retail sales growth at 10.6% YoY.
• The STAR Board saw some momentum this week on positive earnings releases from technology companies in Mainland China, though gains were clipped on Friday. Nonetheless, the technology-focused STAR 50 Index is up +16% year-to-date.
• In a speech at Johns Hopkins University on Thursday, Janet Yellen said that the US should seek a positive economic relationship with China, cooperating on issues such as debt levels and climate change. She added that this can be achieved while still prioritizing US national security.
• Electric vehicle ecosystem equities were sharply lower this week in China, following Tesla shares on concerns over price cuts.

Friday’s Key News

Asian equities were mixed overnight as China underperformed on geopolitical concerns and the Renminbi depreciated against the US dollar and Euro.

Much of the foreign flight and negative market action last night was driven by the Biden Administration’s proposal to introduce new curbs on certain investments in certain industries in China including AI, chips, and defense-related technology. I do not believe this plan represents anything unexpected and is a natural progression from the export restrictions implemented last year. Furthermore, the new curbs will be focused on new investments, rather than existing ones, and investments where US individuals and firms take an active role in management, i.e. private equity and venture capital investments. We have also been here before with Trump executive orders, which amounted to the exclusion of low-growth, industrial behemoths and state-owned enterprises (SOEs). As always, many market participants shot first and plan to ask questions later as the details will be laid out at a G7 meeting in May.

Officials in Taiwan were bothered by US Commerce Secretary Gina Raimondo’s comments that the country’s chip exports were unreliable. Cross-strait relations are becoming increasingly complex, though they have always been more nuanced than US media and politicians may suggest. I encourage my readers to tune into our webinar this coming Tuesday, where we will break down Taiwanese politics alongside a senior analyst from Gavekal research. Click here to register.

Real estate was one of the only sectors up last night. Developer Sunac gained +6% on reaching a restructuring agreement with creditors.

Gaming companies were lower overnight despite the approvals of 86 different titles by the China National Press & Publication Administration. However, the slew of new approvals did not include games developed by Tencent or NetEase, rather many titles from other developers including Bilibili.

The STAR Board unfortunately gave up the past week’s gains overnight. Positive earnings releases unfortunately were not enough to stem the geopolitical-related selling, even on the Mainland, last night.

The Hang Seng and Hang Seng Tech indexes closed lower by -1.57% and -3.13% overnight on volume that increased +4% from yesterday. The top-performing sectors in Hong Kong were energy and utilities. Meanwhile, information technology, materials, and healthcare were among the worst. Mainland investors net bought $390 million worth of Hong Kong stocks overnight via Southbound Stock Connect.

Shanghai, Shenzhen, and the STAR Board all closed lower by -1.95%, -2.45%, and -4.13%, respectively, overnight on volume that increased +7% from yesterday. The top-performing sectors were industrials, utilities, and consumer staples. Meanwhile, information technology, communication services, and materials were among the worst. Foreign investors sold a net $1 billion worth of Mainland stocks overnight via Northbound Stock Connect, the largest net outflow so far this year, which has seen a cumulative net inflow.

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Last Night’s Performance

Last Night’s Exchange Rates, Prices, & Yields

• CNY per USD 6.89 versus 6.87 yesterday
• CNY per EUR 7.55 versus 7.54 yesterday
• Yield on 1-Day Government Bond 1.60% versus 1.60% yesterday
• Yield on 10-Year Government Bond 2.83% versus 2.83% yesterday
• Yield on 10-Year China Development Bank Bond 3.01% versus 3.02% yesterday
• Copper Price -0.41% overnight