New US investment ban on China tech sparks concerns of retaliation

The latest long-awaited move in the tech war – a ban on technology investments in China, has US investors worried about potential retaliation and reduced purchases of American technology by Beijing.

The executive order to limit US investments in semiconductors and microelectronics, quantum computing, and certain artificial intelligence capabilities in China was signed by President Joe Biden on Wednesday. Aiming to protect national security and prevent US capital and expertise from aiding China's military modernization, the new measure is expected to be implemented next year.

China strongly criticized the decision. However, it hasn't yet taken any immediate actions in response.

While the market mostly shrugged off Biden's move to prohibit some US technology investments in China, US investors said they were worried Beijing would retaliate or pull back from buying American technology.

Biden’s executive order prohibits some new US investments in China in sensitive technologies including computer chips, while regulating others.

US investors were unfazed by the initial news, saying that the restrictions, at first blush, were more limited than feared and unlikely to extend to passive investments in public Chinese stocks. But several portfolio managers said the bigger worry was whether China would strike back, as it has in the past.

"Much depends on how China decides to react to that. The very significant technology war between the countries is a big negative and the administration seemed to be trying to make that announcement without making too many waves with China," said Rick Meckler, partner at Cherry Lane Investments in New Jersey.

The iShares MSCI China Exchange Traded Fund, one of the largest ETFs of US-listed China-based companies, finished up 0.7% on Thursday, while the rest of Wall Street finished flat.

In response to Biden's executive order, China's commerce ministry said it was "gravely concerned" and reserved the right to take counter-measures. Some China analysts said Beijing's options are limited and would unlikely escalate the matter.

Others, though, thought that view was too optimistic.

China in May targeted US chip maker Micron Technology after Washington imposed a series of export controls on American components and chipmaker tools to China, and the US has accused Beijing of penalizing other US companies amid growing tensions between the two global economic powerhouses.

"It is naïve to think that there won't be some type of retaliation from China," said Tom Plumb, CEO of mutual fund Plumb Funds. China could restrict exports of rare earths used in consumer electronics, electric vehicles, and other components, or target other US technology companies, Plumb said.


China hawks in Washington say American investors have transferred capital and valuable know-how to Chinese technology companies that could help advance Beijing's military capabilities. Beijing, for its part, has been seeking self-sufficiency in the intensifying tech disputes, which could also stem the flow of capital into US companies and markets.

"This is obviously going to put China in a position where they're going to try to reduce their dependency on any US company for higher levels of technology," said Plumb.

US private equity and venture capital investors, which have already pulled back from China, are likely to sit on the sidelines while they await more clarity on how the rules will be implemented, Reuters reported on Wednesday. Some portfolio investors are also reducing their exposure to China.

Michael Ashley Schulman, chief investment officer at Running Point Capital Advisors, said some clients had already asked for reduced or zero China exposure via stocks, bonds and ETFs.

"After the government's announcement, I suspect that we may receive a few more similar requests," he said.

Phillip Wool, a co-portfolio manager of Rayliant Quantamental China Equity ETF, said US-China tensions were causing investors to miss out on China’s growth.

"The bigger risk for investors is not allocating to a market where valuations are so low – relative to other equity markets and China’s own history – and where there are plenty of companies with strong fundamentals undergoing rapid growth."

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