What happened
Shares of Chinese e-commerce and tech giants Alibaba Group Holding (BABA 2.38%) and JD.com (JD 1.72%), along with semiconductor foundry Taiwan Semiconductor Manufacturing (TSM +0.62%), were falling in Friday trading, down 3.8%, 5.8%, and 2.6%, respectively, as of 1:33 p.m. ET.
There wasn't much in the way of company-specific news today, as Alibaba gave back yesterday's gains, when the company reported better-than-expected earnings. But today's pullback seemed sector-wide across both semiconductor and China-related stocks.
This week, President Biden signed an executive order further limiting U.S. venture capital and private equity investment in China. Then at a fundraiser yesterday, Biden called China a "ticking time bomb." The combined events seemed to rankle investors in both Chinese stocks and China-sensitive stocks like TSMC to end the week.
NYSE: BABA
Key Data Points
So what
On Wednesday, President Biden signed an executive order that would ban new American venture-capital and private-equity investment in Chinese technology companies that could potentially produce next-gen military capabilities. These include semiconductors, artificial intelligence, and quantum computing companies, among others.
While the measure might be the correct course of action, the limitation on American investment has the potential to reduce revenue for certain American companies while also further limiting trade between the two nations.
In addition, at a fundraiser in Utah on Thursday, President Biden called China a "ticking time bomb," saying:
They have got some problems. That's not good because when bad folks have problems, they do bad things. ...China is a ticking time bomb. ...China is in trouble. China was growing at 8% a year to maintain growth. Now close to 2% a year.
According to China's official figures, growth in the second quarter was actually 4.5%, but it was only 0.8% sequentially, which would annualize to 3.2%. Still, Biden's overall point is true: China's economy has suffered from multiple headwinds, including the self-imposed crackdown on tech companies, the counterproductive zero-COVID policies of 2022, the bursting of its property bubble, and high youth unemployment.
In any case, the comments combined with this week's ban on investment seem to have cooled enthusiasm for Chinese stocks, especially American-listed companies such as Alibaba and JD.com. Besides economic headwinds, there could be renewed concern over technical factors involved in trading U.S.-listed Chinese stocks, should these companies fail to comply with U.S. accounting standards.
In addition, Biden's hinting at China potentially doing "bad things" likely brought up renewed fears over an invasion of Taiwan. The reunification with Taiwan has long been a central policy of the Chinese Communist Party.
While fears over an invasion have cooled in recent months, it was just one year ago that China performed joint military drills around the island following a visit to Taiwan last August by Rep. Nancy Pelosi, who was then speaker of the House.
If an invasion were ever to occur, that could be disastrous for the global economy, especially the semiconductor value chain and Taiwan Semiconductor Manufacturing (TSMC), which remains the world's largest chip foundry, with all of its most cutting-edge chip fabs within the country.
In fact, Warren Buffett mentioned TSMC's location as his prime reason for selling the stock last fall, shortly after he bought it during the summer of 2022.
Now what
Biden's comments yesterday perhaps served as a reminder of the risk overhanging some technology stocks and Chinese stocks generally. TSMC had been up as much as 40% this year, before a recent pullback has limited it to just 24% gains year to date.
Meanwhile, Chinese stocks have remained problematic throughout 2023. The much-hoped-for recovery after China lifted its zero-COVID posture last December seems to have sputtered out, and the stocks have generally underperformed after spiking toward the end of last year.
Overall, Chinese stocks may look quite cheap, especially compared with their American counterparts. However, geopolitical risks will continue to hang over China-related shares for the foreseeable future, meaning they could stay this cheap for quite a while.
