US investors concerned about retaliation risks from China after Biden’s tech curbs

US investors concerned about retaliation risks from China after Biden's tech curbs

Biden’s Move to Restrict U.S. Technology Investments in China Raises Concerns

Biden’s Move to Restrict U.S. Technology Investments in China

Aug 11 (ANBLE) – President Joe Biden’s recent executive order to restrict some U.S. technology investments in China has raised concerns among U.S. investors. While the initial reaction to the news has been relatively calm, investors fear that China may retaliate or reduce its purchases of American technology, which could have significant implications for the global market.

The executive order aims to safeguard national security and prevent U.S. capital and expertise from aiding China’s military modernization efforts. It prohibits certain new U.S. investments in China’s sensitive technologies, including computer chips, while imposing regulations on others. While some investors believe the restrictions are less severe than anticipated and unlikely to affect passive investments in public Chinese stocks, the greater concern lies in how China will respond.

“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.

China’s commerce ministry expressed grave concerns about Biden’s order and reserved the right to take counter-measures. Some analysts believe that China’s options are limited and that they are unlikely to escalate the matter. However, others have a more pessimistic view.

China has a track record of retaliating against U.S. actions. In May, it targeted American chip maker Micron Technology after the U.S. imposed export controls on key components and chipmaking tools. The U.S. has accused Beijing of penalizing other American companies in the midst of escalating tensions between the two economic powerhouses.

“It is naïve to think that there won’t be some type of retaliation from China,” said Tom Plumb, CEO of Plumb Funds. Plumb believes China may restrict the export of rare earth minerals, which are essential components in consumer electronics and electric vehicles. Additionally, he suggests that China could target other U.S. technology companies.

The Quest for Self-Sufficiency

Critics of Chinese technology companies argue that American investors have inadvertently aided Beijing’s military aspirations by providing capital and valuable know-how. In response, China has been pursuing self-sufficiency in the tech sector, both to enhance its military capabilities and reduce dependency on U.S. companies.

“This is obviously going to put China in a position where they’re going to try to reduce their dependency on any U.S. company for higher levels of technology,” said Plumb.

Private equity and venture capital investors, who have already scaled back their activities in China, are likely to remain cautious until there is more clarity about the implementation of the new rules. Some portfolio investors are also reducing their exposure to China.

Michael Ashley Schulman, Chief Investment Officer at Running Point Capital Advisors, revealed that some clients have already requested reduced or zero exposure to China across stocks, bonds, and ETFs. Schulman anticipates that more similar requests will follow in light of the government’s announcement.

Despite the growing tensions between the U.S. and China, some investors believe that staying away from the Chinese market means missing out on significant growth opportunities.

“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,” said Phillip Wool, co-portfolio manager of Rayliant Quantamental China Equity ETF.

Overall, Biden’s move to restrict U.S. technology investments in China has sparked concerns among U.S. investors. While the immediate impact may have been relatively muted, the possibility of retaliation and the potential disruption of the global technology supply chain loom over the market. As the tensions between the two economic powerhouses continue to escalate, investors are left pondering the risks and rewards of engaging with China’s rapidly growing market.