Impact of US sanctions on China state and tech firms
US sanctions target Chinese companies ranging from state-owned enterprises (SOEs) to chip foundries, pressuring their credits. Chinese entities identified by the US Department of Defense as military-related remain at risk of being added to the investment-sanctions list. The new US restrictions on China's access to advanced chips look likely to hinder that country's goal of achieving 70% self-sufficiency in semiconductors by 2025.
US chip curbs raise hurdle, press hurdle, pressure Asian chipmakers' bonds
The US' new curbs on China's access to American technology, including advanced chips used in AI, HPC and production equipment, might lengthen the sector's downcycle and pressure semiconductor firms' dollar bonds. TSMC and SK Hynix could see their bonds strengthen vs. peers, thanks to their advanced technology and robust demand from AI, HPC and automotives.Impact on TSMC mitigated by advanced nodesSales of TSMC's advanced chips to Chinese clients could be curtailed under the new US restrictions, which now cover semiconductors produced using American technologies. TSMC, as one of the three most advanced chipmakers with combined global market share of 53%, produces most of the advanced chips using its 7nm and 5nm processes.
We estimate that 12% of TSMC's 1H sales could be exposed to China's AI and supercomputer-chip demand. Although orders for these 7nm and 5nm chips could fall in the near term, the loss might be offset by products that could be shipped below the threshold (i.e. above 16nm). Competition risk from Chinese foundries could ease under the new restrictions, which supports TSMC's Aa3/AA- ratings as the leader in advanced technology amid robust demand from AI, HPC and automotives in the long term.
Advanced-node chips vs. Maturing demand
Memory chip sector might see easing competition
US chip export curbs now extend to memory chips, which increases concerns about potential disruption to South Korean suppliers such as SK Hynix and Samsung, even though the former received a one-year waiver on chip-equipment restrictions for its China-based facilities. There's uncertainty among foreign fabs, and those that fail to receive a license could face difficulty in buying advanced tools to upgrade their equipment.
The current landscape, with Samsung, SK Hynix and Micron dominating the DRAM sector, is unlikely to change, we believe. The supply threat from Chinese NAND producer Yangtze Memory Technologies (YMT) could decline as the company could face capacity and technological disruption after it was added to the US unverified list; this might benefit the fragmented NAND sector. - Cecilia Chan
NAND global market share
Biden could be under pressure to sanction more Chinese companies
Some China state-owned enterprise bonds could face rising risks after the US Department of Defense on Oct. 5 added ChemChina and other SOEs to its list of Chinese military companies in accordance with Section 1260H. This could pressure the Biden administration to add back ChemChina under E.O. 14032, leading to US investment sanctions.
Sanction uncertainty creates investment overhang
Key recent additions by Section 1260H included ChemChina, which is one of the largest dollar debt issuers in China, and CRRC, one of the world's biggest suppliers of rail-transit equipment, which is listed on the Hong Kong exchange. ChemChina was initially sanctioned by the Trump administration under E.O. 13959 in November 2020, but was removed by the Biden administration-issued E.O. 14032 in June 2021. The US Executive Office tasks the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury to implement the order's capital-market restrictions.
ChemChina’s spreads have recently widened, likely due to bondholders' fears it will be sanctioned again as US investors subject to E.O. 14032 would have to divest their holdings, adding selling pressure.
-- Cecilia Chan
Key recent additions by section 1260H
