China Markets

Going Nuclear.

“[It’s] nothing short of bullying”, Chinese Foreign ministry spokesman Zhao Lijian said Tuesday, responding to the latest US broadside against Huawei. 

Zhao reiterated that China is prepared to retaliate against the move, which aims to close loopholes embedded in previous actions against the company. The Trump administration has worked tirelessly for more than a year to make Huawei a global pariah, but the decision to “almost completely curtail Huawei’s ability to source any semiconductor from anyone”, as Credit Suisse put it, was variously described as the “nuclear option” Tuesday.

Bloomberg opinion columnist Tim Culpan called it “more than just an incremental measure”. Rather, the decision to effectively ban Huawei from acquiring off-the-shelf chips “threatens to kill the company”, Culpan warned. “This is Trump launching a nuclear warhead aimed directly at Huawei”, he added.


Wilbur Ross said Monday that amid US efforts to choke the company, Huawei and its affiliates “have worked through third parties to harness US technology”. The new rule, which Ross described as “multi-pronged”, is indicative of the Trump administration’s “continuing commitment to impede Huawei’s ability to do so”.

“From now on, China’s flagship tech firm can’t access US technology directly or indirectly, an action which leaves it in extremely difficult circumstances: how do you have a tech product without the tech?”, Rabobank’s Michael Every wondered.

Huawei’s “handset business will likely disappear”, Jefferies remarked, in a note. “The hope [that] Huawei could rely on third-party chip designers such as MediaTek and Unisoc to continue making handsets has been dashed”, the bank added. “It also puts Huawei’s survival at risk”.

“Huawei is probably finished as a maker of 5G network equipment and smartphones once its inventories run out early next year”, another analyst said, piling on.

Asian chipmakers saw their shares pummeled Tuesday, with MediaTek plunging 10%.

Earlier this month, the above-mentioned Tim Culpan wrote that MediaTek “has made a career out of being the backup quarterback in the world’s most ubiquitous devices”. The company was able to step in when the Trump administration moved to cut Huawei off from custom-designed chips.

“[MediaTek] designs 5G chips for both smartphones and base stations, and has them manufactured by Taiwan Semiconductor, making it the perfect replacement for the Huawei-designed chips that can no longer be made”, Culpan explained, adding that “the trick [for MediaTek] will be to remain indispensable without becoming collateral damage”.

That subtle warning, delivered on August 5, looks prescient just weeks later.

On Tuesday, MediaTek said it’s “closely monitoring changes to export restrictions in the US and consulting external legal advisers”. Although the statement says MediaTek doesn’t see a “materially adverse impact on near-term operations”, it was downgraded by Credit Suisse.

Other names, including Novatek Microelectronics, Realtek, Sunny Optical, and AAC Technologies, all fell in sympathy.

Now, the market is concerned not just about more disruptions to the global semi supply chain, but about possible retaliatory action against, for example, Apple and Qualcomm, which were mentioned by CLSA as possible targets.

Although the Commerce department’s latest action leaves room for special licenses, this move is the most aggressive yet, and it comes just days after Trump’s latest edict on TikTok and amid thinly-veiled threats that the likes of Alibaba could be next on the administration’s hit list.


 

4 comments on “Going Nuclear.

  1. devon fay says:

    While I’m sure Trump loves punishing Huawei due to his inveterate racism and anti china bias, one is left to assume that his anti china policy isnt “rogue” but represents US establishment policy. If this is true, are we to assume that America’s essential purpose is to inflame the thucydides trap? War with china may be unthinkably unavoidable, but that doesnt mean we should expedite it. China isnt some nation we can “first strike” to victory — setting back their 5g clock a few years will do little more than humiliate them. it is sad that such reflexive cold war thinking still has purchase in US policy circles.

    • calh0025 says:

      I suspect the plan is to destroy their artificial island chains and maybe kick their navy in the teeth then re-open negotiations given they will still need the US for international trade security. China will lose face so they’ll probably need to get some kind of win like take Taiwan back. China goes back to being the complaint US supplier while they work out their global road plan and India keeps their ground military in check. A quick little dust up with minimal damage to productive capital. Anything resembling a “war” would see mutually assured economic destruction.

  2. With the Apple event on Sept 10, it would not surprise me to see Apple be banded from China the week of that event. It really depends on how China reads the situation. If they are ready to go nuclear, then that is their best play. Apple’s over representation in every index and ETF would topple equities in the US at a time when they are decidedly fragile. China might also see toppling US equities as a positive for Biden and thus a knock-on effect they like. Biden will have a tough on China policy position, but China would rather be pitted against a rational sane person who doesn’t want to go Nero and watch it burn.

    • Anonymous says:

      Why haven’t they done that yet (or done something similar)? The only thing we know for certain is that Trump is doing this for the benefit of himself. So the escalation of tensions with China he’s hoping will prompt a response that will benefit him. What would that be? A war around Taiwan (rally around the flag)? Does he think a ban of Apple will rally Americans economically? Hell maybe he bought a bunch of Apple puts.

      I don’t know the answer but the framework should always be . . what would help Donald Trump.

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