Date: 07/06/2023
Author: Mr. X
China tried to strike back at American sanctions yesterday. It imposed special export controls on gallium and germanium – critical minerals needed for clean energy, semiconductors, missile technology, and other uses. In short, China is trying to throw its weight around.
This is a direct response to America’s controls on semiconductor manufacturing chips. This was undoubtedly one of the Biden Administration’s most successful moves, prompting a manufacturing boom within the United States.
One of our favorite stocks around these parts, MP Materials Corp (MP), one of the few rare earth minerals companies that the United States government definitely has access to, surged in response to the news. MP was up 6% yesterday and rose even further in after-hours by another 3% or so.
It may be just getting started – Chinese state media said all this was just a “warning” to the United States.
But it may be China that needs to be concerned. What is likely to happen is that the United States is going to impose new sanctions, this time on AI. In response, China is trying to advance AI without using the most powerful chips. The result is most likely going to be inferior products.
There will still be costs on American companies. Nvidia (NVDA) has warned that additional American sanctions would inflict serious harm. “Over the long-term, restrictions prohibiting the sale of our datacenter GPUs to China, if implemented, would result in a permanent loss of opportunities for US industry to compete and lead in one of the world’s largest markets and impact on our future business and financial results,” said CFO Colette Kress. She said there wouldn’t be any “immediate material impact” – but then, why would she?
There are few signals that the United States will back down. NATO recently launched the largest wargame in its history, something almost certainly aimed at Russia and China. Meanwhile, China seems almost desperate in response, pleading for America to lift sanctions in response for military talks. China is also begging for an end to the war in Ukraine. It’s quite a contrast – while NATO expands and the United States keeps “finding” billions of dollars to send to Ukraine without end, China has not provided any military hardware to Russia, except from some paltry aid disguised as civilian equipment. China, in short, is terrified of American sanctions.
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China is facing other problems. China’s factory production was slower than expected in June. Business confidence in China hit an eight-month low. The Bank of China recently tried a stimulus program, but it did little to boost the economy.
Chinese graduates have been posting pictures of themselves lying on the ground or posing in trash cans to symbolize their despair about their future job prospects. “The issue of youth unemployment will likely continue for the next decade and continue to worsen in the short term,” said Liu Yuanchun, who has been tapped in the past as an advisor to the Chinese government on economic matters. “If not handled properly, it will spark other social problems beyond the economic arena, even becoming a trigger for political problems.”
In short, the bearish case for China is only intensifying. Yet that doesn’t mean there aren’t dangers. Decoupling between America and China is likely to play to America’s advantage more than China’s, but some American companies will suffering. More importantly, if pressed into a corner, China may be forced to seek foreign policy triumphs to compensate for domestic disappointments. If that occurs, look for another provocation around Taiwan – or perhaps China will finally give Russia the support it so desperately needs.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing
