Trader's Guide: China Stocks in Focus as Yellen Visits China

(Bloomberg) - U.S. Treasury Secretary Janet Yellen's hypochondriac response to China's cheap exports is bound to increase pressure on Chinese makers of solar panels, electric cars and batteries.

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Major producers such as LONGi and BYD have struggled with domestic price competition or overcapacity so far this year, underperforming the MSCI China Index.

Yellen, who kicks off talks in Guangzhou on Friday, criticized the Asian nation's industrial policies, saying state subsidies distort global markets. With the White House hinting at possible tariffs, Yellen's exchanges on her second trip to China in nine months could be revelatory for investors in stocks in these Chinese sectors.

Christine Phillpotts, manager of the Emerging Markets Value Strategies investment group at Ariel Investments in New York, said geopolitical risks such as tariffs "are a big reason why we are seeing Chinese equity risk premiums at historically high levels We are seeing historically high risk premiums for Chinese equities," said Christine Phillpotts.

Read more about Yellen's Valuable Asset for China Trip: Insight into the Economy

Below is a guide to the affected industries and major stocks.

Solar Module Manufacturer

Record low prices and intensified scrutiny from major trading partners have hurt the valuations of China's solar makers. So far this year, shares of the world's largest producers, LONGi and Tiande, have fallen by around 13% and 16% respectively, while the MSCI China Index has fallen by 1% over the same period.

A report last month by the British National Environment Fund (BNEF) warned that even with the incentives provided by the Inflation Suppression Act signed by President Joe Biden's Armsmaster General, China's dominance of more than 90% of global solar cell production will continue to undermine the U.S.'s plans to build new plants.

In addition, speculation has grown in recent weeks that the Chinese government will take steps to maintain the industry's rapid growth in capacity. Yellen said Wednesday that she "doesn't want to rule out" ways to protect the U.S. clean-energy industry when asked if she planned to brief her U.S. counterparts on possible new trade barriers.

Read more Biden Sees Solar Subsidies Not Enough to Fight China

Electric Vehicles

According to a report by the Atlantic Council, Chinese exports of electric vehicles have surged by 15,001 TP3T in the past three years. The EU has been the main destination, and high tariffs (27.51 TP3T on Chinese auto imports) and local content requirements have prevented an influx of these products into the US.

China's exports to North America more than tripled to 7,687 vehicles in the first two months of this year, according to Chinese customs data compiled by Bloomberg. But that's only a fraction of the nearly 250,000 vehicles shipped globally. The Biden administration is offering tax breaks for U.S.-made electric vehicles.

Shares of BYD, China's largest electric car maker, have fallen nearly 8% in Hong Kong this year amid a fierce domestic price war and slowing market growth.In 2023, about 27% of the company's revenues came from exports.

Lithium Battery

Although China accounts for more than 80% of the world's lithium-ion battery capacity, the justification for a tariff on lithium batteries may be more difficult.

The current anti-dumping duty on batteries seems far-fetched because there is still a shortage of lithium-iron phosphate batteries in Europe," said Johnson Wan, director of automotive research at Jefferies, referring to lithium-iron phosphate batteries, which are cheaper than other widely used battery packs.

Contemporary Amperex Technology Co.

With Yellen's increased focus on Chinese manufacturers, the overproduction debate may be far from over. Some economists say that while there may be overcapacity in solar and batteries, China's electric car companies are simply more efficient.

"Signs of rising protectionism outside the U.S. are becoming more apparent, but may not be a major detriment in 2024," Goldman Sachs economist Andrew Tilton and others wrote in a March 15 report. They said the greater risks to China from potential tariffs and a cooling of global growth "may emerge in 2025 and beyond".

-This article was facilitated by Chiranjivi Chakraborty and Charlotte Yang.

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