Chinese stocks dropped yet again on Wednesday, wiping out all their advances to date this year. Tensions are particularly high in the tech sector, with China reacting furiously in the face of a pending ban on shipments of chipmaking technology from Japan.
The dispute with Japan worsens squabbling in the chip sector that has also seen Micron Technology (MU) fail a cybersecurity review, as I outlined on Monday. That will bar it from selling chips to key customers in a market that normally accounts for around 15% of sales.
After Wednesday's decline of 1.4%, the CSI 300 index of the largest listings in Shanghai and Shenzhen is now down 0.7% year to date in 2023. In Hong Kong, the Hang Seng fell 1.6% Wednesday, and is now down 5.1% in 2023.
The declines in Chinese shares stand in stark contrast to Japanese stocks. In Tokyo, the broad-market Topix is up 15.2%, while the Nikkei 225 blue-chip index is up 19.3% and just off its 33-year high set on Monday.
Japan's trade ministry has released details of its chipmaking curbs, first announced on March 31 and that will affect 23 types of semiconductor technology. They're now due to go into effect on July 23. The move indicates that Japan, the United States and the Netherlands -- all major makers of chipmaking tech -- are presenting a united front in introducing export restrictions on exports of advanced chip technology to China.
China's commerce ministry, through a spokesperson, says Japan's action is an "abuse" of export-control measures and will "seriously damage the interests of both Chinese and Japanese companies."
China trotted out its familiar line that Japan "should immediately correct its wrong practices," language often slung at the United States or anyone that visits Taiwan. It didn't outline any countermeasures but says it "reserves the right" to do so.
Washington has lobbied heavily to get its democratic-nation allies on side, noting that advanced chips sold to China often find their way into the military complex. China has asked the World Trade Organization to study the measures, but it's not clear any WTO challenge would hold up.
I was talking with a buddy who works as a trader at a Chinese investment bank. He's Canadian Chinese, but says it's depressing to see how poorly Chinese stocks are performing, particularly in contrast with Japan. He doesn't see much chance for a recovery with geopolitical tensions still running high. The early optimism that took mainland Chinese and Hong Kong stocks to their highs this year in late January has also been dampened by the lackluster demand for exports in the West, as well as ongoing domestic fears about the stability of the property industry.
Concerns about the property market and local government finances are rising once again. Land sales traditionally fund many local governments, and the coffers are bare after the expensive attempt to achieve zero Covid. But Chinese President Xi Jinping warned, as he chaired a meeting Tuesday of the new Central Auditing Commission, that the Chinese Communist Party is going to ramp up its auditing of how local officials are using funds. It may target hidden or off-balance-sheet debt in particular, which could worsen the uncertainties surrounding the property sector.
Japanese stocks may be benefitting from Asia-allocated outflows from China, although the nature of the two markets is very different. Earnings have been strong in Japan this season, global institutional investors remain generally underweight the Tokyo market -- and it doesn't hurt that, as I noted last month, Warren Buffett has been buying the shares of the sogo shosha trading houses. He also scouted other investing ideas on his first trip to the Japan since 2011.
But with the Nikkei 225 having crossed the 31,000 mark for the first time since 1990, there's heated debate about how far this rally has to run. On the bullish side, the Bank of Japan is in no hurry to abandon the era of easy money under its new governor. On the bearish side, Japan's major exporters also suffer if global growth slows, and also look to China as a major market.
A straw poll by Reuters predicted the Nikkei 225, which tracks a similar industry set as the Dow, may remain range traded and stand at 30,000 by year's end. But there was a really wide range of forecasts and opinions from the 15 analysts. The Nikkei closed Wednesday at 30,683, levels last seen as Japan's asset bubble burst. The index was below 7,500 in financial-crisis-afflicted 2009, and the Nikkei is almost double the 16,500 level tested during the dip in March 2020.
East Asian markets followed through on Wednesday from Wall Street's losses the day before. But outside China, they have been stellar so far this year.
South Korea and Taiwan are the other star performers alongside Japan. Both are tech- and export-driven markets. In Seoul, the Kospi is up 15.4% in 2023, although it dipped 0.1% today. In Taipei, the Taiex is up 13.6%, after the minor 0.2% dip today.
One of the few spots of green on trader screens Wednesday came in New Zealand, where the Reserve Bank of New Zealand raised rates by 25 basis points to 5.5%, but surprised the market by announcing that it is now done with its rate-hike sequence. The S&P NZX All Index crept across the line for a 0.2% gain, meaning it's now up a rather symmetrical 2.3% in 2023.
New Zealand rates are now higher than those in the West, this latest increase taking them 25 basis points above the Fed's latest rate. The New Zealand dollar fell as the RBNZ said it would now pause after its most-aggressive rate-hike cycle since it introduced an official cash rate in 1999.
The Kiwi central has hiked 12 straight times, taking rates to their highest level since the financial crisis in 2008. But it now sees conditions improving, with inflation having fallen from the peak of 7.3% last June to 6.7% in the latest numbers. That's well above the central bank's target rate of around 2% but the monetary-policy committee said inflation pressures are easing, and noted that global economic growth is now weak.
