IN THE NEWS

🇨🇳 Chinese Markets Soar On Reopening Speculation (Reuters) 

Explained:

• The Chinese yuan rose, and the Hang Seng index climbed 5.36% in its best week since 2011. Over $1 trillion of value was added to Chinese stocks as rumors fed hopes that the Chinese government may relax its strict Covid rules.
• There was also a Bloomberg report that U.S. inspections of Chinese company audits were completed more quickly than expected, raising hopes that the U.S. officials were satisfied with their findings.

Why it matters:

• One analyst said, “Any indication that some rules could be relaxed would be an immediate dose of grease in the jarring cogs of China’s economy.”
• A former Chinese disease control official told a closed-door conference that “substantial changes” to the country’s zero-Covid policy were likely within the next five to six months.
• Time will tell if the jump in Chinese shares is an example of ‘buying the rumor’ as changes to China’s tough Covid rules have not been officially announced.

📈 Value Investors Stage a Comeback (CNBC)

Explained:

• Value investors may feel increasingly vindicated as companies trading at cheaper valuations had a historic month of outperformance compared to growth stocks.
• Value investors buy stocks that appear underpriced based on fundamental analysis and trade for less than their intrinsic value.
• The Russell 1000 Value Index soared 10.1% in October, eclipsing its growth stock counterparts by 4.3%.

Why it matters:

• Value stocks have had a rough decade and have been largely stagnant, especially compared to high-flying technology growth stocks.
• Tech stocks have been beaten down this year due to rising rates, which makes borrowing more expensive and reduces the value of their future cash flows.
• “We continue to prefer U.S. large-cap value stocks, which should see continued support from higher interest rates,” said Solita Marcelli, chief investment officer at UBS Global Wealth Management.

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📖 READ: The White House’s comments on crypto mining, an annotated response by Nic Carter

THE MAIN STORY: THE CHIP WAR

Overview

One of the largest geopolitical escalations of the 21st century occurred recently, but it’s barely being discussed, or at least, not with any meaningful context.

And no, this isn’t related to the ongoing Russia-Ukraine war.

We’re actually referring to the Biden administration’s recent moves to handicap China’s economy and advanced tech industries via America’s influence over semiconductors.

These are the powerful, cutting-edge computer chips that power our world and enable everything from artificial intelligence (AI) to precise missile defense systems.

What to know

Jordan Schneider, a fellow at the Center for Strategic and International Studies, wrote an excellent piece called “Choking off China’s AI Access” that explores the impact of the U.S.’s new export controls on China.

Let’s go through why this matters and what it means for investors.

Schneider explains that “the Biden administration is trying to:

(1) Strangle the Chinese AI industry by choking off access to high-end AI chips

(2) Block China from designing AI chips domestically by choking off China’s access to U.S.-made chip design software

(3) Block China from manufacturing advanced chips by choking off access to U.S.-built semiconductor manufacturing equipment

(4) Block China from domestically producing semiconductor manufacturing equipment by choking off access to U.S.-built components.”

Breaking it down

Basically, there are varying degrees of sophistication when it comes to semiconductor chips.

Lagging-edge (older tech) chips are commonly used in cars, washing machines, smart refrigerators, etc. while cutting-edge chips are necessary to operate the most sophisticated new technologies, and of course, this makes them very important to companies and militaries globally.

Because the U.S. has failed previously to block the Chinese military from securing high-end chips, the Biden administration is now blocking access for the entire country. And it’s able to do this since American workers and companies dominate the space.

So, not only can these advanced chips not be sold to any entity in China, but Americans advising Chinese companies on how to build advanced chips will risk losing their citizenship if they continue to do so.

At the same time, Chinese firms will be further cut off from the software ecosystems offered by American companies like Nvidia (NVDA) that are necessary for designing/implementing these chips.

Beyond just software, Nvidia’s hardware accounts for 95 percent of AI chip sales in China.

Summary

He says, “In summary, the United States does not want China to have advanced AI computing and supercomputing facilities, so it has blocked them from purchasing the best AI chips, which are all American.

It does not want China designing its own AI chips, so it has blocked China from using the best chip design software (which is all American) to design high-end chips, and it has blocked chip manufacturing facilities worldwide from accepting entity-listed Chinese chip design firms (as well as any Chinese chip company building high-end chips) as customers.

Finally, the United States does not want China to have its own advanced chip manufacturing facilities, so it has blocked them from purchasing the necessary equipment, much of which is irreplaceably American.”

Takeaways

Schneider states further, “In weaponizing its dominant chokepoint positions in the global semiconductor value chain, the United States is exercising technological and geopolitical power on an incredible scale.”

The U.S. is also investing in its own capacities with the recently passed CHIPS and Science Act that commits $52.7 billion of government funds to domestic semiconductor research, development, and manufacturing.

Chinese tech companies, and its economy broadly, now face considerable obstacles to competitiveness with the U.S. if they cannot secure the chips necessary to advance in artificial intelligence and supercomputing which are sure to define the 21st century.

The recent moves from the Biden administration mark a significant escalation in the power struggle between the U.S. and China. Yet, China’s response remains unclear still, though the ramifications are substantial.

It’s worth watching to see how this story unfolds.

Dive deeper

To learn more, read Schneider’s insightful full write-up that has much more detail than we can provide.

And this free podcast from Bloomberg sheds light on the topic as well.

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