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The Rise of China’s Chip Industry in the Face of U.S. and China Tensions

Recent geopolitical tensions between the U.S. and China have had a significant impact on how people feel about investing, especially in the technology and trade sectors. The rivalry between these two major countries has caused a lot of uncertainty for investors, and with the U.S. making it harder to invest in Chinese stocks, investors are facing a tough choice: Should they stay away or look into opportunities in China’s growing chip industry?

Some experts on Wall Street are suggesting that it might be smart to consider investing in Chinese chip companies, despite the current caution around Chinese stocks. The reason for this suggestion is straightforward: because the U.S. is making it tough for China to get the newest semiconductor technology, China has to rely on its own chip industry to survive. As a result, the Chinese government is pouring lots of money – over $100 billion – into building up local chip companies, and this could lead Chinese chip companies to eventually grow and become major players in the industry.

Wall Street analysts, like those from Barclays and Sanford C. Bernstein, are pointing to companies such as Naura Technology Group Co. and Hygon Information Technology Co. as potential winners. They believe that these companies could one day become as successful as well-known U.S. chip companies like Applied Materials Inc. and Advanced Micro Devices Inc (AMD).

Take Naura, for example. This company specializes in producing a wide array of equipment necessary for semiconductor manufacturing, and current expectations are that its sales in 2024 can witness a substantial increase of around 33%. Meanwhile, U.S. based Applied Materials Inc. is forecasted to experience a mere 1% rise in revenue during the same period.

Similarly, although Hygon has faced hurdles due to U.S. sanctions, it has demonstrated resilience by developing its own chip products. Impressively, Hygon’s shares listed in China have surged by 36% over the past year, closely mirroring the 40% gain of the Nasdaq 100 Index, and although it falls short of the 110% increase seen by its U.S. counterpart, Advanced Micro Devices Inc. (AMD), Hygon’s performance is still noteworthy. Furthermore, with China wanting to use more chips made locally in Chinese data centers, Hygon could benefit a lot from this plan.

Nonetheless, despite the optimistic outlook, it is important to acknowledge that reaching the goal of becoming mostly self-sufficient in semiconductor production by 2025 will not be easy for China. There are still many challenges ahead, including technical hurdles and the need to build a reliable network of suppliers and manufacturers.

Moreover, tensions between the U.S. and China, along with export restrictions on advanced chips, add more uncertainty to the mix. Companies like Huawei and Semiconductor Manufacturing International Corporation (SMIC) have already felt the effects of these measures, showing how interconnected the global chip industry is.

Ultimately, while there is potential for growth, those considering investing in Chinese chip companies should also take into account the geopolitical uncertainties, regulatory challenges, and technological barriers that may accompany such investments. Additionally, it is essential to maintain a long-term outlook, understanding that the rewards of this type of investment may require some time to materialize fully.

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