Some of Trump’s China Trade War Tactics Are Smart, Some Are Not

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(Bloomberg Businessweek) -- The deterioration of U.S.-China relations continues apace. In the last month, the U.S. tightened rules to crack down on Huawei Technologies Co.’s semiconductor supply chain and added 33 Chinese companies to the U.S. Department of Commerce’s Entity List, which restricts access to U.S. technology.

President Trump doesn’t want to give China Inc. access to U.S. money, either. The Senate passed a bill that could block Chinese companies from listing on U.S. stock exchanges, while the president demanded that the main federal government’s pension fund not invest in Chinese stocks.

While the trade restrictions make sense, the investment moves don’t.

China didn’t retaliate for the trade restrictions immediately, for one reason: It has no bargaining power. It still relies heavily on chip imports, with only about 20% of the chips it uses made domestically. Last year, the country’s trade deficit on integrated circuits topped $200 billion, more than double the level of a decade earlier.

The new rules could hobble Beijing’s tech ambitions, which include spending about $1.4 trillion over the next six years rolling out everything from 5G to artificial intelligence. For instance, FiberHome Technologies Group, put on the Entity List on May 22, is a key fifth-generation network equipment provider in China. It’s already won 31% of 5G infrastructure contracts from China Mobile Ltd., China’s largest mobile carrier, data from brokerage CLSA Ltd. show. An additional 56% of China Mobile’s contracts have gone to Huawei. The new rules require any foreign chipmaker that uses U.S. technology to get a license before it can sell to Huawei. Taiwan Semiconductor Manufacturing Co., which makes chips for Huawei, reportedly has already halted new orders from Huawei, which now has to turn to less advanced manufacturers or even rival mobile chip designers at home.

On the other hand, forcing China Inc. to delist from U.S. exchanges is ineffective. At issue is China’s reluctance to allow the U.S. Public Company Accounting Oversight Board—an auditor of auditors set up after the Enron scandal—to inspect the accounts of its U.S.-listed companies. China has already put its refusal into law: Item 177 of its securities law, which took effect in March, says that overseas regulators can’t directly inspect companies or collect evidence on Chinese soil.

Beijing is desperate to lure its best tech companies home. As in the U.S., quality assets offering decent returns are becoming hard to find after years of low interest rates. Alibaba Group Holding Ltd.’s 1.3 trillion yuan ($182 billion) YuE Bao money market fund, for instance, offers only 1.55% yield, vs. 2.3% a year ago. Last month the government drastically loosened the bar for secondary listings, welcoming U.S.-listed midcaps that have a technological edge with open arms. Sending more quality companies back to China is a trap the U.S. shouldn’t fall into.
 
Ren is a columnist for Bloomberg Opinion.

©2020 Bloomberg L.P.

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