Aurelia Butler

(Reuters) – A look at the day ahead in Asian markets.The big questions for investors in Asia this week are whether the rebound in sentiment towards China is sustained, and whether the Federal Reserve vindicates or cools the growing belief in markets that it will soon start cutting U.S. interest rates. The Fed decision and Chair Jerome Powell’s press conference on Thursday will dominate proceedings, and the biggest market-moving event in Asia is potentially the release of Chinese purchasing managers index data. The regional calendar also includes PMIs from across the continent, fourth-quarter GDP figures from Taiwan, Hong Kong and the Philippines, and the latest inflation figures from Indonesia and South Korea.Asian markets go into the week with their tails up. Bumper U.S. GDP data combined with surprisingly low inflation last week provided further evidence that the world’s largest economy is steering clear of recession and headed for a soft landing. This fueled a bullish burst of ‘risk on’ sentiment globally, while the positive reaction to China’s efforts to support its markets and economy added further local cheer.Beijing’s latest move came on Sunday, with the securities regulator saying it will fully suspend the lending of restricted shares effective from Monday. Figures on Saturday, meanwhile, showed that industrial profits in China are shrinking at their slowest rate since October 2022.China’s CSI 300 index of leading shares snapped a three-week losing streak and rose 2%, the Shanghai Composite jumped 2.75% for its best week since July, and the MSCI Asia ex-Japan index also snapped a three-week losing streak.Japan’s Nikkei 225 bucked the trend and ended lower – its biggest fall in seven weeks – but not before clocking a new 34-year high just shy of 37,000 points. It would not be a total surprise if profit-taking and position-squaring extended into this week.On the data front, China’s PMIs top the bill, providing the first glimpse into how Asia’s largest economy has started the year. The official manufacturing PMI is expected to remain in contractionary territory for a fourth month, according to a Reuters poll, although edging up to 49.3 from 49.0 in December. Manufacturing activity has been shrinking for most of the past year, underscoring the wider economy’s lackluster recovery from the pandemic and doubts over its trajectory.U.S. Treasury Secretary Janet Yellen said on Friday she doesn’t expect major spillovers from China’s economic travails. Beijing has taken steps to inject liquidity into the financial system and shore up the property sector, and markets have responded favorably, at least initially.There are no policy decisions in Asia this week, although the Bank of Japan on Wednesday sheds more light on its thinking when it releases the summary of board members’ opinions from its Jan. 22-23 policy meeting. Here are key developments that could provide more direction to markets on Monday: – New Zealand trade (December)- Singapore business expectations index (Q4)- Euro zone flash GDP estimate (Q4) (By Jamie McGeever; editing by Diane Craft) More

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is the author of ‘Chip War’, a professor at the Fletcher School, a nonresident senior fellow at the American Enterprise Institute and a partner at GreenmantleOn a recent quarterly earnings call, the chief executive of Semiconductor Manufacturing International Corporation, China’s leading chipmaker, predicted a “global supply glut” in the types of semiconductors his company produces. Simultaneously, he announced a $7.5bn increase in capital expenditure.It may defy business logic but, helped by generous subsidies, China’s chipmakers are ramping up production capacity despite concerns about oversupply. According to one consultancy, the country’s chip production capacity will grow by 60 per cent in the next three years, and could double over the next five. Since western restrictions on the exports of chipmaking equipment to China mean that it can’t produce the most advanced processor chips, much of this production will be of foundational processor chips, which are widely used in cars, household goods and consumer devices.No wonder trade policy officials are getting nervous that China may flood the market in certain types of chips. The chief executive of TSMC, the world-leading Taiwanese chipmaker, recently noted concern over excess capacity in foundational segments. Other chip CEOs privately say the same. The most pessimistic analysts see China’s investment in solar panels as an analogy, worrying that the country’s chipmaking investment will drive down prices — and western companies’ profits.Until recently, overcapacity risk was a topic of conversation only among economic bureaucrats and trade lawyers. Now, it has reached the highest levels of G7 policy debate. On January 8, Republican congressman Mike Gallagher called on the Biden administration to use tariffs if necessary to prevent China gaining “excessive leverage” over the world’s economy.Yet it is not clear which segments might see overcapacity. There are many types of foundational chips, produced in different fabrication plants, with different materials, by different companies. It isn’t guaranteed that Chinese companies will win market share in every sector. For example, the painful pandemic-era shortages have already induced some western automakers to sign long-run supply deals, so they are less likely to buy more from Chinese suppliers even if their prices are lower.Nevertheless, the US, European and Japanese governments are all debating potential responses to Chinese chip overcapacity. They face complex trade-offs. Tariffs are the usual tool for dealing with dumping, but the west doesn’t directly import large volumes of Chinese chips; they’re embedded inside finished devices. Foundational chips often constitute a tiny fraction of a product’s cost. Some companies don’t even know the origin of chips inside their components. Given the administrative complexity of tariffs, officials are exploring alternatives. One approach is to subsidise the use of non-Chinese chips, though this would require governments to find new funds.A second option is to limit the market access of specific Chinese companies. SMIC manufactured the sanctioned Huawei’s controversial 7nm smartphone processor in 2023, and the commerce department is formally investigating whether doing so violated US law. If so, China hawks in Congress will demand tough punishment (though western businesses that still work with SMIC will lobby for leniency).Finally, Chinese chips could simply be banned from “critical” use cases. Intelligence agencies already worry about malicious insertions and compromised chips. Anything from medical devices to electric vehicles might plausibly be considered critical infrastructure.Europeans look at the problem of overcapacity primarily through the lens of trade harm, not security, so they’ll reject any response they consider non-compliant with the rules of the World Trade Organization. China hawks in the US and Japan are more focused on the security implications. They had few concerns around de facto banning Huawei from telecom infrastructure and would follow suit with banning “untrustworthy” Chinese chips from critical sectors too.Yet blanket bans may not be necessary if western companies are deterred from buying Chinese chips. Gallagher has gone public with his concern over China’s subsidies, partly to push the Biden administration to act. But CEOs will also carefully parse Gallagher’s statements. The House of Representatives’ committee has already called executives from several large US chipmakers to testify over their ties to China. As governments ramp up investigations of potential overcapacity in China, companies elsewhere will realise that they, too, could be asked to explain the security implications of their reliance on cut-price Chinese chips.Video: The race for semiconductor supremacy | FT Film    More