US sanction threat wipes 23% off the value of China's biggest chipmaker

The US Department of Defense and other US agencies are reportedly considering banning exports to Semiconductor Manufacturing International Corp. CNN's Sherisse Pham reports.

Posted: Sep 8, 2020 10:21 AM
Updated: Sep 8, 2020 10:21 AM

Shares in Chinese chipmaker SMIC plummeted nearly 23% in Hong Kong on Monday on fears that it could become the latest casualty of the US-China tech war.

The US Department of Defense and other US agencies are reportedly considering banning exports to Semiconductor Manufacturing International Corp., according to Reuters and other news outlets. The chipmaker could be added to a list of companies that the US government considers to be undermining American interests.

SMIC's relationship to the Chinese military is under scrutiny, according to the Reuters report, which cited an unnamed US official and two former officials briefed on the matter. The plunge in SMIC stock wiped 31 billion Hong Kong dollars ($4 billion) off its market value.

Companies on the US list face significant challenges obtaining vital technology because American firms are banned from selling to them without first obtaining a license to do so. Escalating restrictions on Chinese tech firm Huawei, which was added to the list last year, threaten to cripple its global business, for example.

The Department of Defense declined to comment on the reports. SMIC, China's biggest semiconductor maker, said on Monday that it was "in complete shock."

The company "manufactures semiconductors and provides services solely for civilian and commercial end-users and end-uses," SMIC said in a statement filed to the Hong Kong Stock Exchange. "We have no relationship with the Chinese military."

SMIC added that it is "open to sincere and transparent communication" with US government agencies "in hope of resolving potential misunderstandings."

Sanctions against SMIC would be the latest move in an ongoing battle between Washington and Beijing over who controls the technologies of the future.

In recent weeks, President Donald Trump has threatened to ban popular Chinese apps like TikTok, owned by ByteDance, and WeChat, owned by Tencent, from operating in the United States. He has ordered ByteDance to sell TikTok and suggested that the Treasury Department should get a cut of the deal. China responded by introducing new rules that could allow Beijing to veto any such deal.

In May, Washington restricted the ability of Huawei's chip design company to work with Taiwanese firm TSMC, the world's biggest contract manufacturer of semiconductors. Last month, it further cut off Huawei's access to other chipmaking companies. Most major semiconductor manufacturing companies, including TSMC and SMIC, rely on US machines and technology. Beijing pushed back on the restrictions, characterizing the United States as a "bully" that is abusing national power.

Sanctions on SMIC would hurt China's chipmaking ambitions. The country wants to build a cutting edge semiconductor manufacturing industry, but that takes a lot of time and a lot of money.

Adding SMIC to the trade blacklist would throw up "significant new barriers to China's semiconductor development," Paul Triolo, head of geotechnology at Eurasia Group, wrote in a note last week.

China has earmarked more than $200 billion trying to get the country's chip manufacturing industry to develop faster and more advanced semiconductors, according to Triolo.

"Yet it has so far achieved limited results," he said, adding that SMIC "remains three to five years behind industry leaders Intel, Samsung, and TSMC."

The global supply chain of semiconductors means that restrictions against Chinese companies often end up hurting US firms as well.

Sanctioning SMIC, for example, would also "further undercut the revenue of US semiconductor manufacturing equipment companies that supply Chinese manufacturers, sapping the funds available to be reinvested into the [research and development] necessary to develop subsequent generations of semiconductors and related manufacturing equipment," Triolo said.

In July, SMIC raised nearly $7 billion in a secondary listing on Shanghai's Star Market, China's answer to the Nasdaq. Shares popped more than 200% in their Shanghai debut, indicating Chinese investors were eager to buy into the country's leading chipmaker.

On Monday, shares in SMIC were hammered both in Hong Kong, where they plunged nearly 23%, and in Shanghai, where they fell more than 11%.

SMIC's Hong Kong-traded shares are still up more than 50% for the year. Shares in TSMC closed down 0.7% in Taiwan. Samsung stock rose 1.6% in Seoul.

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