China Escalates Chip War, Alibaba and Huawei Emerge as Winners

US-China Trade Tensions Simmer Post-Madrid

China and the US met in Madrid last weekend, with talks concluding on Tuesday, September 16. There was little fanfare despite US Treasury Secretary Scott Bessent and China’s chief trade negotiator Li Chenggang attending talks. The US and China agreed to a framework to transfer TikTok to US control. However, there was no progress toward a trade deal, leaving US tariffs in effect potentially through the remainder of the year.

US Treasury Secretary Bessent announced that the next round of talks would likely lead to another 90-day tariff truce. The current truce ends on November 10. China’s economy has buckled despite the trade war truce, with hefty US tariffs on Chinese goods affecting demand. An extension of the existing terms, agreed earlier this year in Geneva, could further impact the chances of Beijing achieving its 5% GDP growth target.

Cracks Emerge in China’s Economy

Key economic indicators highlighted worrying cracks in China’s economy. Exports slumped to a six-month low in August, rising just 4.4% year-on-year after surging 7.2% in July. Weakening external demand could exacerbate margin pressures, hurting the labor market and weighing on domestic demand.

Recent private sector PMI surveys have revealed two critical themes, pressuring Beijing to introduce fresh policy measures to bolster the economy. Private sector firms face intensifying competition amid rising costs. Firms are cutting selling prices, despite rising input costs, squeezing margins. Margin squeezes are forcing companies to cut staff to protect profitability.

Private sector firms cut staffing levels in August, with manufacturers reducing headcount for the fifth consecutive month. Notably, manufacturers reported weaker external demand for the fifth month in a row. Service sector firms also reported margin pressures, leading to job cuts.

Labor Market Concerns Mount

August’s job cuts pushed unemployment higher, weighing on private consumption. Unemployment rose from 5.2% in July to 5.3% in August, while retail sales increased 3.4% year-on-year (March: 6.4%). Crucially, youth unemployment (16-24 year-olds, excluding college students) increased from 17.8% in July to 18.9%, the highest level since December 2023. Unemployment among 25-29 year-olds rose from 6.9% to 7.2%.

Despite the doom and gloom, Goldman Sachs raised its 2025 growth forecast for China from 4.6% to 4.8%, edging closer to the 5% GDP growth target.

Why is Goldman Sachs upbeat about China’s economic outlook?

Analysts at the US banking giant likely expect Beijing to boost the economy with meaningful stimulus measures, targeting the labor and real estate markets. China’s growing presence in the AI space could be another consideration.

US tariffs and levies on transshipments through third countries have not deterred China from testing the Trump administration’s limits.

Beijing Escalates Proxy Trade War

On Wednesday, September 17, Beijing targeted US chip manufacturers, causing a market stir. CN Wire reported:

“China’s internet regulator has ordered the country’s largest tech firms to halt all purchases of Nvidia’s AI chips and cancel existing orders, as Beijing intensifies efforts to develop its domestic semiconductor industry and compete with the US. […] The ban is stricter than prior guidance, which targeted Nvidia’s H20 chip, also used widely for AI in China. Beijing is pushing Chinese tech companies to reduce reliance on Nvidia to achieve an independent semiconductor supply chain for AI competitiveness.”

Nvidia (NVDA) shares ended the Wednesday session down 2.62% compared with the Nasdaq Composite Index’s more modest 0.33% loss. The pullback underscored the potential impact of zero demand from China on earnings. Furthermore, China could introduce lower-cost chips and erode Nvidia’s global market share.

Brian Tycangco, editor at Stansberry Research, commented:

“That’s $100 Billion in lost market value following China’s move to halt NVDA chip purchases. A small amount in percentage terms. But it could be the prelude to worse things to come for the world’s most valuable company.”

Alibaba and Huawei – Contenders to Replace Nvidia

The chip ban opens the door for Chinese tech firms, including Alibaba (HK:9988), to dominate the domestic market. Alibaba reportedly closed a deal with China Unicom, the country’s second-largest wireless carrier, on September 17, to supply its T-Head AI chips.

According to CN Wire, Alibaba is investing 380 billion yuan ($53.5 billion) over three years in AI infrastructure to reduce reliance on Nvidia chips, which are banned in China.

Alibaba climbed 1.18% in early trading on Thursday, September 18, after the previous day’s 5.28% rally. Year-to-date (YTD), Alibaba has gained 98%, dwarfing Nvidia’s 26.8% YTD gain. On Thursday, September 18, Huawei announced plans to launch the Ascend 950PR chip in the fourth quarter of 2026, with further chip launches in Q4 2026, 2027, and 2028.

The US administration has potentially ‘poked the bear,’ escalating a proxy trade war. In July, the US rolled out tariffs on transshipments and recently pressured China’s key trading partners, including the EU, to hike tariffs to force Beijing into cutting Russian oil imports.

Mainland and Hong Kong Equities Rally

Despite concerns about the economy, Mainland equity markets have resumed their bullish run.

The CSI 300 and the Shanghai Composite Index have gained 15.8% and 16.07% YTD, outperforming the Nasdaq Composite Index (15.28%). Meanwhile, the Hang Seng Index leads the way, surging 34.08% YTD, as Mainland and overseas investor monies target Hong Kong-listed stocks focused on China.

However, downside risks remain. Trade talks, China’s housing market, squeezed margins, and a deteriorating labor market remain key concerns for traders.

An extended tariff truce and further weakening in demand may lead to more job losses, straining China’s household income. Lower income could weigh on domestic consumption, affecting risk appetite.

Conversely, meaningful policy support, aiming to revive the housing sector and a US-China trade deal, could boost sentiment. Lower tariffs may improve external demand and cool margin pressures. Widening margins could trigger job creation and lift domestic consumption.

The Road Ahead: Proxy Trade Wars and Stimulus

The economic outlook hinges on Beijing introducing fresh stimulus and securing a trade deal. A fair trade deal, easing margin pressures, could boost external demand and lift jobs, raising consumer confidence. On the other hand, failed talks, higher tariffs, and an escalation in the proxy trade war could further affect economic momentum.

Traders should closely track updates from President Trump’s talks with Chinese President Xi Jinping. Chinese economic data will also give insights into the effectiveness of Beijing’s current policy measures. Stimulus support may offer short-term relief, but lasting confidence relies on policymakers delivering effective domestic reforms amid rising trade tensions.

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