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Huawei Ban Clouds Outlook for World's Growth Engine

Huawei Ban Clouds Outlook for World's Growth Engine

(Bloomberg) -- U.S. restrictions on China’s telecom giant Huawei threatens to snuff out a nascent recovery in semiconductor demand, a key driver of economic growth in technology powerhouses including South Korea and Taiwan.

China dominates purchases from Asian semiconductor exporters and bought 51% of their exports in 2017, according to analysis by Citigroup Inc. economists Jin-Wook Kim and Johanna Chua.

China and Hong Kong took 69% of South Korea’s chip shipments, 56% of Taiwan’s, 51% of Vietnam’s, 43% of Japan’s, and 39% of Malaysia’s exports, according to the Citi note. Citi’s Asia Semiconductor Leading Index "significantly stalled" in May having shown signs of recovery since January and could worsen from here if trade tensions deepen.

"In our view, China’s restocking efforts for electronic goods will likely weaken and be delayed if the tensions and the ban stay longer, which likely will hurt overall demand," they wrote.

Evidence of weaker demand was on display Tuesday. South Korean exports during the first 20 days of the month fell 11.7% from a year earlier, pointing to a sixth-straight full-month drop, driven by tumbling prices of semiconductors and falling exports to China, the country’s biggest export market.

Semiconductor shipments, which account for about a fifth of South Korea’s exports, fell 33%, while total exports to China dropped 16%.

"As trade wars hurt demand in the U.S. and China, Asian electronics manufacturers will feel considerable pain, in our view," Tieying Ma, an economist at DBS Group Holdings Ltd., wrote in a note.

If China buys more South Korean chips instead of U.S. ones, then it could offset some of the negative effects in Asia, Citi noted.

Huawei Ban Clouds Outlook for World's Growth Engine

The International Monetary Fund has estimated that the Asia Pacific region is the biggest driver of world economic growth.

“It seems that the trade war is increasingly showing signs of becoming a tech war," Seema Shah, senior global investment strategist at Principal Global Investors, said in emailed remarks. "The further this trend develops, the bigger the collateral damage will be – particularly in Asia and the U.S., but the ripple effect will be significant across the globe."

While regional growth in Asia will still benefit from Chinese stimulus over coming months, the spillover may not be as robust as some expected, according to Andrew Tilton, chief Asia Pacific economist at Goldman Sachs Group Inc. in Hong Kong.

Softer growth in China, the composition of its stimulus and growth leaning more to infrastructure and consumer spending, and the weakening technology cycle are all weighing on activity, Tilton wrote in a note.

"Nevertheless, we expect to see moderate growth improvement in much of the region" as the second quarter continues, he wrote.

--With assistance from Jungah Lee.

To contact the reporter on this story: Enda Curran in Hong Kong at ecurran8@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, James Mayger, Karthikeyan Sundaram

©2019 Bloomberg L.P.