The Fog Of (Cold) War

These are the bad times.

“Some US politicians are trying to incite a technology cold war” in hopes of impeding the development of other nations, the People’s Daily said Thursday. The Party mouthpiece accused the Trump administration of attempting to enforce US tech hegemony.

“Where is the market economy they flaunted?”, the commentary derisively chides. “Where is the free trade they advertised?”

That was hardly the end of it. Another column in the Party’s flagship megaphone finds the People’s Daily warning that flouting international rules is a “sure way to get hurt.” Trump’s MAGA catchphrase is “making the US a laughing stock”, the column says. “Hostility to international norms” is now the signature of US foreign policy.

Later, Ministry of Commerce spokesman Gao Feng weighed in at his regular press briefing. “The US unilaterally escalated trade tensions and if they want talks to resume, they needs to correct their wrong actions and show sincerity”, he said, when asked what it would it would take to get China back to the negotiating table.

“The art of the deal”, it would appear, has failed.

Global markets on Thursday reeled as the reality of the situation began to set in. An allegedly imminent move against Hikvision, Dahua and at least three other surveillance companies makes it clear that the Huawei broadside was part of a larger plan to contain Beijing’s global tech ambitions.

Chinese equities fell hard on Thursday. The CSI 300 was down 1.8% by the close and is on track for a third consecutive weekly loss. Hikvision and Dahua have lose a third of their value since the beginning of April, with the selloff accelerating this month after Trump reignited the trade conflict.

Voice recognition company Iflytek Co. (“China’s Siri”, if you like) was crushed on Thursday on reports it too will be cut off from access to US components. Meiya Pico is rumored to be on Trump’s list as well. The shares were similarly routed.

If you’re wondering whether the vaunted “national team” has been completely MIA, the answer is probably no. There have been several well-documented instances of state buying over the past couple of months and as Goldman wrote Monday, anyone’s “tactical preference for H over A” is challenged by mainland shares being “empirically more sensitive to domestic policy/liquidity, and is more likely to benefit from the support from the ‘National Team’, which may have turned more active in the past week per our real-time indicators.”

(Goldman)

Mainland equities may need that support. The imminent expansion of the A-share weighting in MSCI benchmark indexes bodes well for inflows, but as Bloomberg wrote Wednesday, “overseas investors have sold about 50 billion yuan of equities in May, in line to smash the monthly record of 18 billion yuan set just last month.”

Meanwhile, H-shares are on track for their worst month since January of 2016, down nearly 10%. Implied vol. on the Hang Seng has actually come off the highs hit earlier this month, but is still elevated.

Chinese media went out of their way on Thursday to remind the rest of the world that nobody is immune to Trump’s irrationality.

“There is a lesson for other countries in this”, the People’s Daily said. “When one’s policies are driven by zero-sum mentality and confrontational thinking, that country will not stop hunting for new targets.”