China’s AI Chip Stocks Benefit From Nvidia Drama
6 Min. Read Time
Key News
Asian equities were lower as Nvidia’s Asia supply chain traded lower. As a result, Korea and Hong Kong underperformed, while Indonesia outperformed. Hong Kong’s AI hyperscalers took the brunt of the Nvidia fallout, as Alibaba fell -6.76% and Tencent fell -2.64%.
It is becoming clear that Alibaba helped finance Megaspeed to access Nvidia chips for its data centers in Southeast Asia. US chip export controls will likely be tightened to restrict China-based companies’ access to chips indirectly. At the same time, US chip-powered data centers in Southease Asia may limit China-based companies’ access to prevent indirect access.
I have two initial thoughts:
- Removing indirect demand from China from the US AI supply chain could be problematic. US demand might fill that hole, though it is hard to say, and Nvidia’s role at the center of US AI financing might, as well.
- The news kills the “AI race” narrative. Nvidia’s chips are beyond domestic chip makers’ capabilities. I’ve been skeptical of the race narrative; simply asking your favorite chatbot about US data center compuing capacity versus China's data center compute capacity. It will reveal a massive disparity. Maybe, the “race” narrative was driven by US companies attempting to build regulatory moats around their businesses and by the government increasing taxes and/or spending more money to regulate AI, in my opinion.
China’s AI chip companies were among the few bright spots in last night's trading, though Hong Kong-listed semiconducto stocks were dragged down, as the Hang Seng Tech Index closed below 4,000. Meanwhile, the Hang Seng Index remains just above 24,000. Mainland investors bought into the Hong Kong dip, buying a net $745 million worth of stocks and ETFs.
Giving a tailwind to domestic chip makers, foundry SMIC announced Q3 revenue +28.1% YoY to RMB 21.983B and YTD revenue +22.4% YoY to RMB 60.619 mm, while Q3 net profit +87.6% to RMB 2.847B and +91.6% to RMB 7.314B.
Mega-cap banks and liquor giant Kweichow Moutai were higher, which might be a sign of National Team intervention. Regardless, it was a risk-off day in both markets on poor breadth.
The domestic equity ETFs favored by China's "National Team", i.e. investment firms associated with sovereign wealth, had below-average volumes except for a STAR Board ETF, which gained +0.44% and exceeded the RMB 10 billion value traded level. While large and mega-cap-focused ETFs had below-average volumes, small- and mid-cap ETFs had average volumes, as did technology policy-focused Shenzhen and STAR Board ETFs.
MSCI released its pro-forma for the month-end index rebalance last night, which will require ETF and index fund managers to trade at the close on Monday, November 30th. Optical equipment maker Innolight fell -3.85% and will be added to the China, Emerging Markets, and All Country World indices, despite its Hong Kong share class. The US’ weight will be 63.7% of the All Country World. Within Emerging Markets, China’s weight will be 20.2% versus 20.4%, Taiwan 29% versus 28.9%, and Korea 18.5% versus 18.4%. It is worth noting that China will now be comprised of 541 stocks, versus Taiwan’s 73 and Korea’s 74.
Premier Li and the State Council met to discuss “strengthening a multi-level social security system and further weaving and strengthening the social security safety net”. The lack of a social safety net is a partial explanation for China’s high savings rate.
KE Holdings bought back 417,447 shares overnight.
Last Night's Performance
Last Night's Exchange Rates, Prices, & Yields
- CNY per USD 6.66 versus 6.67 yesterday
- CNY per EUR 7.39 versus 7.42 yesterday
- Yield on 10-Year Government Bond 1.60% versus 1.60% yesterday
- Yield on 10-Year China Development Bank Bond 1.71% versus 1.66% yesterday
- Copper Price -0.09%
- Steel Price -0.26%
