China bans U.S. chip maker Micron for failed cybersecurity review

China Beige Book International Managing Director Shehzad Qazi joins Yahoo Finance Live to dissect the economic tensions between the U.S. and China as the semiconductor race heats up and China's latest restrictions on chip maker Micron.

Video transcript

- And a big story that we are following, US-China tensions escalating after China's move to ban Micron. Now shares of China's chip makers getting a boost on that headline. On Sunday, the Chinese government announced that companies handling sensitive information could not purchase microchips from US-based company Micron, China's government alleging that the chips pose a cybersecurity risks. Micron CFO Mark Murphy addressing the ban in a conference call this morning. Here's what he had to say.

MARK MURPHY: We will continue to cooperate with the CAC and are working to understand the details about their security concerns with Micron products. We remain unclear as to what security concerns exist, and we've had no complaints from customers on the security of our products.

- US chipmakers, a number of them under pressure today. Micron, one of the hardest hit they're closing off nearly a 3%. We want to bring in Shehzad Qazi. He's China Beige Book International Managing Director.

Shehzad, great to see you again. So this is just the latest in a series of tit-for-tat moves here between the US and China. Is this just the beginning? And what is the next couple of months, potentially look like?

SHEHZAD QAZI: Yeah, that's what everybody is asking now. In recent weeks, we've seen China really clamp down on a lot of foreign companies. And now this Micron decision comes out, which was somewhat expected.

I think we need to remember that as far as the technology space is concerned, Beijing's ability to retaliate in a tit-for-tat manner is vastly more limited. So I think the question is being asked, which companies come next? It may not necessarily be a tech company. It may just be a whole different industry that Beijing chooses to go after next when it retaliates to DC.

- Yeah, Shehzad, on that point, you look at how the Biden administration has handled this. I mean, we're coming just a day off of the G-7 wrapping up over in Japan. And we heard the world leaders talk about reducing their exposure to China at the same time, the President saying we're going to move towards more of a thawing between these tensions with China. I mean, it feels like we're getting a bit of mixed messages. On the one hand, economic pressure through some of these export controls and yet they also want to try and keep the conversation going, right?

SHEHZAD QAZI: Yeah. I think what's going on is that conversations that perhaps would have taken place had it not been for say the balloon crisis saga are being revived. And that's sort of being billed at as a thawing of relationship.

But the real question, of course, is what do the two sides really sit down and discuss? What is the point of negotiation or talking right now? And we'll see how much of it is substantive rather than just talking for the sake of talking.

- You mentioned the fact Shehzad that foreign businesses across a number of industries should be worried. How do you see that affecting foreign investment in China?

SHEHZAD QAZI: Look, Beijing is sending pretty bad signals to foreign investors. And this is supposed to be the year where they attract foreign investment according to the party leadership. So I think there's a lot of concern. As I said, executives are beginning to panic because there's a lack of clarity in terms of under what rules and protocols are certain companies being targeted and others being left alone. So bad news for foreign investors at the moment.

- Shehzad, you mentioned that China's very limited in terms of the leverage they have particularly around chips because they are so reliant on chip makers, not just from the US but from Europe as well. Do you have any insight on where their chip-making ability stands right now? We know they have been investing significantly. We know China wants to ramp up domestic production. How close are they?

SHEHZAD QAZI: Look, they're not very close at all, but that's exactly what they want to do is get to a place where they occupy that the cutting-edge technologies and the chips that today, the United States has the ability to restrict China and the Chinese military from accessing. They want to get to a place where they are producing the inputs, they're producing the equipment, and so on and so forth. But that is going to take a long time.

Now they've announced a big fund to start putting money towards this, to investing in acquiring that type of technology. This is going to be an uphill battle no doubt. But at the same time, I don't think we should convince, anybody should convince themselves here in the US that China will inevitably fail. It's very likely that they may succeed.

- And Shehzad, when it comes to China's recovery here, what that looks like given the fact that we're expected a massive new wave of COVID cases, given the fact that foreign companies might be pulling out or reducing their investment within the country, how significantly is that going to delay that recovery timeline?

SHEHZAD QAZI: Yeah, there are lots of concerns now around the Chinese recovery. So there was a lot of hype in the beginning about how quickly China could recover to begin with. That was misplaced.

But now I think what you're getting is some amounts of revenge spending coming back. The property market is doing all right, not great, of course. Manufacturing is looking like it's going to slow down in the second half of the year. So lots of headwinds are building up. Foreign investors getting scared off a little bit is only going to add to that pressure even though it may not be necessarily integral to the recovery story this year anyway.

- So, how big of a hit is that likely to be on Chinese economy? I mean, let's say what we've heard in terms of where things are moving, things are going to-- the activity is going to pick up going into the second half of the year. And yet you've got these foreign investors who are turning cautious. How big of a hit is that or will that be?

SHEHZAD QAZI: It's probably a far stronger impact next year and the year after because this is a bit of a longer-term play. And the real question has been, sure, you can get a great 2023 from China. The real thing is, what happens next year? What happens the year after 2023 may very well look like a head fake in a couple of years here. And for that story, foreign investors being scared away or shooed away is not a good thing.

- Shehzad Qazi, always great to get your perspective, at China Beige Book. Thanks so much.