Already, major producers like Longi Green Energy Technology Co. and BYD Co. have underperformed the broader MSCI China Index this year as they struggle with domestic price competition or overcapacity.
Yellen, who kicks off talks in Guangzhou Friday, has criticized the Asian nation for its industrial policies, arguing state subsidies are distorting global markets. With the White House hinting at potential tariffs, Yellen’s exchanges during her second China trip in nine months may shed light on what lies ahead for equity investors in those Chinese sectors.
Geopolitical risk such as tariffs “is a big part of the reason that we’re seeing the equity risk premium in China at an all-time high,” said Christine Phillpotts, portfolio manager for emerging markets value strategy at Ariel Investments in New York.
Read more: Yellen Eyes Valuable Asset on China Trip: Insight on Economy
Here’s a guide to the affected sectors and the key stocks.
Solar-Module Makers
Record-low prices and intensified scrutiny from major trading partners have weighed on the valuations of Chinese solar manufacturers. Shares of Longi, the world’s biggest producer, and Trina Solar Co. have lost about 13% and 16%, respectively, this year. During the same period, the MSCI China Index shed 1%.
China’s dominance with over 90% of the global solar cell production will continue to threaten plans for new US factories even with incentives offered by President Joe Biden’s signature Inflation Reduction Act, a BNEF report warned last month.
Further, speculation has mounted in recent weeks that the Chinese government will take steps to maintain the industry’s rapid build-up of capacity. Yellen said Wednesday she “wouldn’t want to rule out” ways to protect the clean energy sectors in the US when asked if she plans to brief her counterparts on likely fresh trade barriers.
Read more: Biden Solar Subsidies Seen as Insufficient Against China
Electric Vehicles
China’s EV exports have surged more than 1,500% over the past three years, according to an Atlantic Council report. The European Union has been the primary destination, while high tariffs — 27.5% for auto imports from China — as well as local content requirements have prevented this influx from reaching the US.
Exports to North America more than tripled to 7,687 in the first two months of the year, according to Chinese customs data compiled by Bloomberg. Still, that’s just a fraction of the almost 250,000 vehicles shipped globally. The Biden administration has offered tax credits for US-made EVs.
Shares of BYD, China’s largest EV maker, have dropped nearly 8% this year in Hong Kong amid a fierce domestic price war and slowing market growth. It gets about 27% of revenue from exports in 2023.
Lithium Batteries
The case for duties on lithium batteries may be harder even as China accounts for more than 80% of the world’s production capacity in lithium-ion batteries.
“Anti-dumping on batteries seems pretty far-fetched at the moment as there’s still a shortage of LFP batteries in Europe,” said Johnson Wan, head of auto research at Jefferies, referring to lithium iron phosphate batteries, which are cheaper than other widely used power packs.
China’s Contemporary Amperex Technology Co., the world’s largest battery maker that supplies to almost every major automaker, has seen its shares climb 21% this year, handily beating benchmark Chinese indexes.
As Yellen zooms in on Chinese manufacturers, the debate about excess production could be far from conclusive. Some economists argue while overcapacity may be present in solar and batteries, China’s EV companies are just more efficient.
“Signs of increased protectionism beyond the US are growing, but will probably not be a major headwind in 2024,” Goldman Sachs economists including Andrew Tilton wrote in a March 15 note. Bigger risks for China from potential tariffs and cooling global growth “could emerge in 2025 and beyond,” they said.
–With assistance from Chiranjivi Chakraborty and Charlotte Yang.
More stories like this are available on bloomberg.com
©2024 Bloomberg L.P.
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Published: 05 Apr 2024, 06:28 AM IST