What New China Semiconductor Restrictions Mean For US Investors

U.S.-listed Chinese stocks tumbled on Monday after the U.S. Department of Commerce announced a new set of rules restricting the sale of advanced computing semiconductors or related manufacturing equipment to China.

What Happened? On Friday, the Commerce Department announced a new set of export controls aimed at protecting U.S. national security and foreign policy interests. In addition to restricting U.S. sales of semiconductor technology to China, the new rules also require foreign companies to license American tools used to produce high-end chips sold to China.

“Such practice runs counter to the principle of fair competition and international trade rules,” Chinese Ministry of Foreign Affairs Spokesperson Mao Ning said in response to the new measures. As of now, China has not announced plans for any potential retaliatory measures.

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Why It's Important: Restrictions on trade between the U.S. and Chinese semiconductor companies dragged down the entire semiconductor group on Monday. The VanEck Semiconductor ETF SMH traded lower by 4.1%, while the iShares Semiconductor ETF SOXX was down 4.4%. Higher regulatory tensions between the U.S. and China also dragged down U.S.-listed Chinese stocks as a whole on Monday. The iShares China Large-Cap ETF FXI was down 3.1% in early trading.

Implications of the U.S. semiconductor crackdown could also extend outside the semiconductor group. In September, a group of U.S. senators called on the intelligence community to look into Apple, Inc. AAPL after the iPhone maker decided to procure 3D NAND memory chips from state-owned Chinese supplier Yangtze Memory Technologies Co. (YMTC).

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Bank of America analyst Vivek Arya said the primary focus of the new rules is not to ban shipments to China outright, but rather add a step of security to ensure the chips are not being used for military applications.

"The total impact on US semis will be within the 5%-10% range as we thought previously, since the majority of US chip shipments to China are for consumer smartphone (Oppo, Vivo, Xiaomi), PC (Lenovo) and networking (Huawei, ZTE) applications, and not for supercomputing," Arya said.

How To Play It: Arya said leading CPU producer Intel Corporation INTC will likely be among the hardest hit by the new restrictions. In addition, Arya said Lam Research Corporation LRCX is highly exposed to YMTC. He said NVIDIA Corporation NVDA artificial intelligence technology sales to China could be negatively impacted as well.

At the same time, Arya said U.S. memory technology companies Micron Technology, Inc. MU and Western Digital Corp WDC could be positioned to gain market share from China's YMTC.

Benzinga's Take: The new semiconductor regulations are just the latest blow to a beaten-down semiconductor group in 2022. However, with the SMH ETF now down 41.1% year-to-date, there are bound to be some excellent long-term buying opportunities out there for discerning semiconductor investors.