Chip Stocks Sink as U.S. Considers Further China Curbs

The United States is mulling a new set of restrictions on the export of semiconductors into China, this time specifically targeting chips used in artificial intelligence.

The U.S. Commerce Department will stop shipments of chips made by companies such as Nvidia (NVDA) as early as July, according to The Wall Street Journal, which first reported the development.

High-flying Nvidia shares are taking a hit based on the report, sinking 4.4% in pre-market trading on Wednesday after gains the day before. They have almost trebled this year, and are almost four times the price of a dip last October, when pessimism about interest-rate hikes and the disruptive anti-Covid campaign in China was at its height.

Advanced Micro Devices (AMD) would also be affected. Its shares are down 3.4% in pre-market trade. AMD shares have doubled since October 14.

The boom in Nvidia and AMD is driven by the sudden enthusiasm over AI-related stocks. They have a large head start in making the data-center accelerator chips that help feed huge amounts of data into AI systems.

Micron Technology (MU) is due to report earnings after the bell Wednesday. It has already found itself caught in the crosshairs of the geopolitical fight between China and the United States over high-end tech. China in May said Micron, which has a major factory in Xian, had failed a national-security review due to "severe cybersecurity problems," as I explained at the time.

We'll see how it plans to respond as it discusses results. China's ruling means it cannot sell to companies in critical-information infrastructure, a hefty share of its Chinese sales, which under normal circumstances account for around 15% of revenues.

Micron has built much of that disappointment in. Its shares are down a slimmer 1.4% before the opening bell on Wednesday, and have actually held very steady since the ruling in May, actually notching a slim 0.8% gain.

Bruce Kamich called it right that traders who are long Micron "should continue to hold those longs" despite China's verdict. The share-price movement does, however, mean that Micron has recently underperformed tech more broadly, with Nasdaq having rallied 6.6% since that decision by Beijing on May 22.

Nvidia gets around 20% of sales from China. It and AMD are the market leaders in making accelerator chips for generative AI bots such as ChatGPT. While their shares have risen so fast precisely because of the fervor over AI, it's likely they'll find willing buyers of their chips even if third parties end up attempting to sell them into China.

Chinese traders sold off related companies in Asian trade. Inspur Electronic Information Industry (SZ:000977) instantly dropped the 10% daily limit on Wednesday, as did Unisplendour (SZ:000938). Both provide I/T infrastructure, particularly concerning Big Data.

The voice-recognition AI developer Iflytek (SZ:002230) fell 4.3%. Iflytek is on the U.S. "entity list," a blacklist preventing U.S. companies from supplying it on national-security grounds.

Nvidia earlier this year designed deliberately less-capable chips so it could still sell into China under the thresholds that require a license from the U.S. Commerce Department. The Biden administration is now considering expanding its curbs to cover those chips as early as next month, according to the WSJ report. U.S. officials are also considering restrictions on leasing cloud-computing services to Chinese AI companies, the Journal states.

U.S. President Joe Biden is also working on an executive order, likely to come in the summer, to restrict investment into China. That would seek to prevent U.S. investors from holding shares in companies that could help China get a military advantage. That's a complex task given that so many Chinese companies have a component of state ownership.

China has railed against what it considers discriminatory and harsh treatment from Washington. Chinese Premier Li Qiang used an address to the "Summer Davos" conference now taking place in Tianjin to lambaste "the invisible barriers put up by some people in recent years," which he says are pushing the world into fragmentation and confrontation.

Tech pessimism helped push the CSI 300 index narrowly into the red, down 0.1%, in contrast to the internationally inclined listings in Hong Kong, where the Hang Seng Index ended the day up 0.1%. The Hang Seng Tech Index in fact had a healthy 0.8% gain on the back of the U.S.-listed electric-vehicle makers Nio (NIO) (HK:9866) and and XPeng (XPEV) (HK:9868), both of which stocks I own.

Nio rose 7.2% in Hong Kong and XPeng added 11.2%. China last week introduced a US$72.3 billion package of tax breaks and incentives to roll out over the next four years, its biggest stimulus so far to encourage Chinese citizens to buy electric and green-energy vehicles. On the company-specific level, Nio has just announced partnership with state-owned oil-and-gas giant CNOOC (HK:0883) to work on the buildout of charging and battery-swapping infrastructure.

At the time of publication, McMillan own positions in NIO and XPEV.