The US dominates the tech sector, especially in semiconductors. Its interest in holding a competitive edge may be a factor behind the export controls and economic and trade sanctions that it has threatened or imposed on Chinese tech companies.
The US government also cites concern about the data security of millions of users of Chinese social media platforms as another factor in its curbs on TikTok and WeChat. The measures include pressure for TikTok to partner with US companies in a new, US-controlled entity.
The US government also seeks greater scrutiny of Chinese companies listed on US exchanges. To that end, it has demanded access to the audit working papers of internet companies listed on NASDAQ. China has resisted such moves, citing its own data security concerns.
Given what appears to be at stake for both sides, we expect Chinese technology companies to remain a key target of US sanctions for the foreseeable future. The extent to which individual companies will be affected will need to be assessed on a case-by-case basis.
This is important, as some companies may be able to withstand the pressure better than others. In the case of Chinese internet companies on NASDAQ, for example, a worst-case scenario might be that they are forced to delist from the exchange as a way of avoiding unwanted scrutiny from US authorities. This would result in credit investors having less visibility into their capital structures.
But many would have a Plan B option of listing on stock exchanges in China or Hong Kong. This could help mitigate concerns about visibility into capital structures, and credit investors might take additional comfort from the fact that Chinese corporate bonds tend to be well supported by domestic Chinese investors.
Banks and SOEs Are Harder Targets
Investors should also make case-by-case assessments when looking at the potential vulnerabilities of Chinese banks and SOEs, in our view. Generally, however, we regard these sectors as less sensitive to US sanctions than technology.
China’s banks on the mainland and in Hong Kong have become well integrated into the global trading system—a measure by which they far exceed banks from other countries sanctioned by the US (Display). In addition, Hong Kong banks have large US dollar exposures.