An “inauspicious” start to the new week morphed into a full-on rout in Asia Monday as purported “liquidity pressure” tied to forthcoming IPOs helped push Chinese stocks to their worst loss in months and tensions with Tokyo tanked South Korean equities.
The Shanghai Composite dove the most in the region, falling 2.6%, in the worst session since May 6, the day after Donald Trump restarted the trade war. The CSI 300 fell 2.3%, while small caps and tech shares ended the session down 2.7% after shedding as much as 3.4%.
While some of the selling was attributed to the prospect of a less accommodative Fed following Friday’s blockbuster June payrolls print, the imminent launch of China’s new tech board (later this month) sparked concern about liquidity being pulled away from other mainland shares.
Meanwhile, the Kospi dropped the most since May 9, diving 2.2% as the spat with Japan adds insult to trade war injury for South Korea’s critical semiconductor space.
Apparently, Samsung has less than 30 days worth of inventory for some of the materials affected by Shinzo Abe’s export ban. The tensions (tied to a decades-old dispute around the Japanese occupation) raise serious questions about Samsung’s ability to produce chips and screens for laptops, servers and phones. SK Hynix is obviously in the firing line as well.
According to Morgan Stanley, South Korean manufacturers have less than 90 days worth of inventory needed to make memory chips and while things might be ok for a while in terms of chip exports, a prolonged spat with Japan (i.e., longer than three months) could end up throwing a monkey wrench in the supply chain. Korean DRAM chip makers account for ~75% of global market share, the bank notes.
This is just another example of politics inserting itself in markets to the detriment of supply chain management and, ultimately, global trade and commerce. As one CEO told Bloomberg, “just one word from Abe could decide anything”.
It could get worse before it gets better if Tokyo decides to take South Korea off a list of countries that don’t represent a weapons proliferation threat.
If this all sounds similar to what the Trump administration is doing to Huawei, that’s because it generally is – at least in terms of mechanics. Japanese companies have to get a government license to sell the targeted materials. Lengthy delays and uncertainty aren’t things that jibe particularly well with the tech industry.
And so, geopolitics rears its (sometimes) ugly head again, as an age-old conflict over conscripted labor and “comfort women” is now set to affect products that the people involved in the painful historical episode couldn’t even fathom, like foldable displays and whatever a “7 nanometer line-width chip” is.