Here’s Why Chinese Shares Continue to Sink — And It’s Not the Trump Trade

Stocks in greater China continue to sink, with the Hong Kong market selling off hardest on Tuesday, and persistently in recent days.

The benchmark Hang Seng ended the day down 2.8% Tuesday, led by Chinese chipmakers and software companies. Hong Kong stocks remain up 18.2% for the year, but have sold off 14.1% since their peak in early October.

Tuesday is the first day that the Hong Kong market has closed below 20,000 since Beijing promised not only monetary support but also fiscal stimulus to support capital markets, and the economy. The Hang Seng finished Tuesday at 19,847, down from its October 7 stimulus-supported high close of 23,100.

China’s chief semiconductor hope, SMIC (HK:0981), was the chief culprit, down 8.0% in Hong Kong, where stocks trade far more freely and dramatically than their gated mainland counterparts.

SMIC also hit a high for the year on October 7, the same peak as the Hang Seng. But it has settled back 18.5% below that level, even though it offers the main domestic competition to Taiwan Semiconductor Manufacturing Co. TSM (TW:2330), the stock I selected as my top pick for the year heading into 2024.

It has delivered. Although TSMC gave up 3.2% in Taiwan trade Tuesday, it is up 77.1% so far this year. It is the world leader in the chip-foundry business, churning out the highest-power semiconductors for use in Artificial Intelligence (AI) and data-center servers.

TSMC has been directed to work harder to stem the supply of such chips to China. The company said on Monday that it would suspend shipments to AI-focused Chinese customers, after a TSMC chip was found inside a processor from Huawei, in contravention of U.S. export controls.

Chinese companies may have used third parties or shell companies to divert Taiwanese-made chips to customers inside the mainland. TSMC has suspended shipments to the chip designer that made the chip set found in the Huawei processor, Reuters reports.

Starting November 11, TSMC has told Chinese chip designers that it will suspend the supply to AI and graphics-processing unit customers of chips that are 7 nanometer in thickness or smaller. U.S. chip suppliers such as Nvidia NVDA and Advanced Micro Devices AMD also have to live by rules preventing them from supplying the highest-end chips to China.

SMIC delisted from Wall Street in 2019, as Chinese President Xi Jinping began to stress his theory of so-called “dual circulation.” That emphasizes self-sufficiency in key industries such as technology, and a push to boost the “circulation” of the domestic Chinese economy, to sit alongside the “circulation” of manufactured goods exported overseas.

That seemed like an excellent idea during the first presidency of Donald Trump, who sought to use tariffs to secure a favorable trade deal with China, and even more so under successor Joe Biden, who has used international diplomacy to cut off the supply of high-end semiconductors to China.

Those efforts are working. Analysts say it will take years for SMIC to catch up, and given the rate of advance in the chip industry – where technology advances faster and faster rather than in a steady progression – it may not be able to do so.

Indeed, TSMC has been gaining market share rather than losing it to competitors. It now corners 61.7% of the chip foundry market, vs. 54.1% at the start of this decade. SMIC’s share has risen, too, but from 4.5% to 5.7%, still a far cry from the industry giant.

China is concerned about the prospects for a second Trump term, given Trump’s pledge to raise import tariffs on Chinese goods to 60%. But the Beijing leadership has reportedly been gaming out since the spring how Trump’s return to the White House will affect China.

Beijing, according to U.S. security analysis, did not seek to influence the U.S. election one way or the other. It is confident that it can reach out to the Trump team both through son-in-law Jared Kushner, who proved a valuable envoy in Trump’s first term, as well as through Tesla TSLA chief Elon Musk. With Tesla’s factory in Shanghai supplying not only Asia but also Europe, Musk has maintained excellent relations with the Chinese leadership.

China on Friday concluded its weeklong meeting of the standing committee of the National People’s Congress, a summit intended to deliver “forceful” stimulus. But yet again, investors have been disappointed, the only concrete product being a C¥10 trillion (US$1.4 trillion) fiscal package to help local governments shift hidden debt out into the open, via special-purpose bonds.

This does resolve the issue of “hidden” debt, but it means official debt could rise by 25% or C¥10 trillion by 2028, according to ratings agency Standard & Poor’s. And it isn’t the kind of direct stimulus that investors have been seeking.

We’re hearing Tuesday that China plans to change the rules on home purchases in the biggest cities, by scrapping the size distinction between “ordinary” and “luxury” homes, and reducing the deed tax from some 3% to as little as 1%.

Again, these changes are tweaks of the rules, without doing anything to resolve the underlying problems with China’s property market, and the broader economy as a whole. China can find other destinations beyond the United States for its goods, so higher Trump tariffs are an issue, but not an insurmountable problem.

The inability to deliver on proper stimulus to kick start the housing market and restore investors and consumer confidence remains. And that’s a problem for the Chinese leadership to solve, no matter which U.S. president is in charge on the other side of the Pacific.