A Storm in Tech Stocks

Tech stocks have taken a beating since the start of the US-China trade disputes, with Nasdaq falling as much as 30% from 8,109.54, and the MSCI China Information Technology Index down 23.59% in 2018. Both indices are now in the bear market territory. But for all of the United States’s saber-rattling about trade imbalances, the real roots of this conflict lie in U.S. concerns about China’s theft of its intellectual property.

Trump and his advisers have a plan to curtail the mass transfer of technology to China to end China’s goal of “Made in China 2025” launched in 2015. The 10 sectors included in the 2025 goal are:

1) Next-generation information technology.

2) High-end numerical control tools and robotics.

3) Aerospace equipment.

4) Ocean engineering equipment and hi-tech ships.

5) Advanced railway equipment.

6) Energy-saving and new energy vehicles.

7) Power equipment.

8) Agricultural machinery.

9) New materials.

10) Biomedicine and high-performance medical devices.

This ambitious goal irked the US so much that the plan to stop China’s progress is hatched. Once sworn in as the USTR, Robert Lighthizer hit the ground running and began to work on the plan. “There are things China listed and said, ‘We’re going to take technology, spend several hundred billion dollars, and dominate the world,’” Lighthizer told senators at a March hearing. “And these are things that if China dominates the world, it’s bad for America.”

Collateral Damage

As a result of the curtailment, ZTE(0763.HK) was fined US$1b for violation of an agreement that was reached in March 2017 after it was caught illegally shipping U.S. goods to Iran and North Korea. The fine came after Trump and Xi stepped in to save the company after US regulators barred it from doing business in the US, an effective death blow for the company.

Then, Fujian Jinhua Integrated Circuit Co., Taiwan’s United Microelectronics Corp(TPE:2303) and three individuals were indicted in October last year for stealing trade secrets from U.S. semiconductor companyMicron Technology Inc(NASDAQ:MU) relating to its research and development of memory storage devices. Fujian Jinhua built a $6 billion plant to produce semiconductors as part of China’s goal of making the country a self-sufficient technology powerhouse allegedly with stolen technology from Micron Technology. The company halted almost all its activities, and the management hopes that a successful trade deal would allow it to continue with business. UMC is not so sure; it has denied any wrongdoing and tries to distance itself from Fujian Jinhua. And, most recently, Meng Wanzhou, CFO of Huawei, and daughter of the founder, was arrested while transiting Canada. Ms Meng had allegedly used a Huawei subsidiary called Skycom to evade sanctions on Iran between 2009 and 2014.

China also acted swiftly with its own retaliation. Qualcomm Inc.(NASDAQ:QCOM) had to walk away from its US$44b bid for NXP Semiconductors(NASDAQ:NXPI) after China blocked the deal. Apple(NASDAQ:AAPL) reported dismal sales due to China’s deteriorating economic outlook, according to Apple’s CEO Tim Cook. Analysts, however, speculates that American companies, including Apple, are facing consumer backlash in protest of the trade war, and the arrest of Huawei’s Meng. This “Informal Boycott” would probably continue if the US sticks to its plan to end China’s goal of “Made in China 2025”. The Tit-for-Tat has resulted in a severe rout in tech stocks from both markets.

Going Forward

Officials from China and US completed the latest round of talks in Beijing on 9 Jan 2019, aimed at resolving their trade disputes after “a good few days”. The scheduled two-day talks, extended for a third day, mark the first formal meeting since the 90-day truce struck during the G20 summit. Although the current truce has provided some temporary relief, there is still skepticism over the possibility of a breakthrough, after all, there is more to it than meets the eye about the current trade war. If no deal is reached by March 2, Trump will proceed to raise tariffs to 25 percent from 10 percent on $200 billion worth of Chinese imports, at a time when China’s economy is slowing significantly. If the Wall Street would have it, we expect to see an end to the trade dispute, but Trump must have the determination to stop the hawks from exploiting the National Security. Otherwise, the trade disputes would deteriorate into a Tech War. Meanwhile, investing in tech stocks comes with much higher risks.     

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