Behind The Tech Meltup: A One-Time Chinese Chip Buying Frenzy To Frontrun Export Curbs

It's not the first time the market has been fooled by a burst of Chinese chip buying (to frontrun US sanctions), and extrapolating a new golden age in semiconductors.

Last summer, both the Nasdaq and the SOX exploded higher after the March bank failures and peaked on August 1 before rolling over and tumbling to a 5 months low in October. August 1 was also the date that the FT reported what was really happening behind the scenes:

"China’s imports of semiconductor equipment have surged to record highs ahead of the implementation of export curbs by US allies. Chinese customs data shows the country’s chip production tool imports in June and July totalled nearly $5bn, up 70 per cent from $2.9bn in the same period last year.

Most of the imports came from the Netherlands and Japan, two countries that have imposed export restrictions on chipmaking equipment as they work with the US to slow China’s technological advancement.

The restrictions mean buyers of some tools will have to apply for licences from the Dutch and Japanese governments, raising concern among Chinese chipmakers. Japan started enforcing its restrictions on July 23, while the Dutch curbs will come into effect on September 1.

It wasn't just Europe: "China’s chip equipment purchases from other places, including Singapore and Taiwan, have also contributed to record imports from those countries."

Of course, just as it became clear that what was driving the supposed tech "renaissance" was not some paradigmatic, pervasive "AI" buying spree, but a one-time event, that's when tech peaked, with chip stocks unable to regain their August highs until year end.

And then... everything happened again, and so instead of calling last summer's euphoria a "one-time" event, it would be more accurate to call it what it was: a "two-time event".

Indeed, days after a bizarrely strong preannouncement by Taiwan chip giant TSMC arrested a tech rout and sent the Nasdaq (and S&P) to all time high, tech is once again flying. And yet, there is a strong sense of deja vu about all this...

Here's why: for those who missed it, last Wednesday TSMC soared premarket after signaling a return to “healthy growth” this year, adding to what Bloomberg called were "signs of recovery in the chip sector", even as profit actually fell again. But none of that mattered: what With AI as the main driver, the company said it sees revenue growing as much as 25%, similar to what it said last summer when there was a flood of chip buying.

However, just like last summer, we now learn that instead of some second wind in AI chip purchases, the culprit behind both the late-2023 tech meltup and the TSMC guidance bonanza was - you guessed it - China. As Bloomberg reports, China’s imports of chipmaking machines jumped late last year as firms ramped up investment in an attempt to get around US-led efforts to hobble the nation’s semiconductor industry.

Imports of the machinery used to make computer chips rose 14% in 2023 to almost $40 billion — the second largest amount by value on record in data going back to 2015, according to Bloomberg calculations based on official customs data. The increase came despite a 5.5% drop in total imports last year, underscoring the importance that the Chinese government and the nation’s chip industry have placed on becoming self-sufficient.

Chinese chip companies are rapidly investing in new semiconductor factories to try and advance the nation’s capabilities and get around export controls imposed by the US and its allies. Those curbs are making it harder for Chinese companies to get access to the machines needed to make the most powerful chips — and slowing the development of China’s high-tech sector, which is seen as a threat to the US.

But while the full-year number of China chip imports was clearly off the charts - as we already know - it's what happened in year end that sparked the latest leg of the meltup: 

In December, imports of lithography equipment from the Netherlands jumped almost 1,000% from a year earlier to $1.1 billion as firms rushed to buy ahead of the start of Dutch restrictions this month.

And there you have it: the burst in Chinese chip buying was nothing more than frontrunning of the latest round of draconian curbs, this time focusing on ASML.

Even before those curbs came into effect, Dutch company ASML Holding NV had canceled shipments of some of its top-of-the-line machines to China at the request of the US government, Bloomberg reported earlier this month. The cancellations came weeks before export bans on the high-end chipmaking equipment came into effect.

Translation:China's one- two-time chip buying burst is now over, and the hangover will follow, including an admission from TSMC in a few months it was terribly wrong with its euphoric forecast. Meanwhile, investors will continue buying tech stocks and lifting the chip sector, oblivious that both China and Europe are contracting and there is zero organic growth in semi demand, leaving only the US to play hot potato with the narrative that somehow the chatGPT algobot will change the world and every tech company will be spending tens of billions in capex to prepare for the coming AI golden age. Spoiler alert: watch as the market gets rugpulled when one after another Magnificent 7 company not only does not boost CapEx but cuts it - to save cash for buybacks - as the great AI myth crashes and burns.