Chinese telecom stocks, which represent the value of industrial automation, were the best performers in the CSI 300 index of mainland Chinese large-cap stocks during February. As of February 20, the CSI 300 communications sub-index was up nearly 20% from its January 17 low.
The communications index has risen about 20% since January 2019, but that recovery appears to have bounced like a dead cat on the charts. However, a closer analysis shows that the rise in communication around the Lunar New Year holiday is significant.
Western telecommunications companies are consumer businesses. China provides key infrastructure for industrial automation in the form of dedicated broadband networks for industry, mining, and logistics. 5G networks offer high data capacity and low latency (very fast response to signals) and support a wide range of artificial intelligence applications.
High-speed cameras upload thousands of photos every minute of industrial machines and components on conveyor belts, automating preventive maintenance, quality control, and other functions. Machine learning algorithms analyze the uploaded data to identify defective parts, machinery that requires maintenance, and foreign objects in mining output and other features.
Additionally, wireless communication between industrial robots accelerates automated production optimization and supports quality control.
A statistical method called principal component decomposition delves into the factors that move the market. The first is overall market movements. This explains 64% of the daily variation in the large-cap A-share market sectoral index.
The second most important factor is Relative Movement of telecom stocks relative to other markets. This can be thought of as an investment versus consumption factor (positive for telecoms, negative for consumer staples and consumer discretionary stocks). The strong presence of this factor suggests that investors believe that high-tech investments provide disproportionate returns.
Over the past few days, the second principal component of the CSI 300 return, the “communications factor,” has shown its strongest value to date, rising three standard deviations above its long-term average on February 20th. This is an important move and suggests investors' confidence in the profitability of the tech sector is growing.
A combination of circumstances has kept stock valuations in China lower than in most major markets.
A U.S. boycott of high-end chip manufacturing technology and the most powerful AI chips designed by U.S. manufacturers is forcing China to replicate foreign products at significantly higher costs. In the most notable case, Semiconductor Manufacturing International Corporation (SMIC) used old lithography equipment that China was allowed to buy to make high-end 7-nanometer chips for smartphones and AI processors. did. The unit price for homemade chips is almost certainly much higher than in Western countries.
These costs, combined with the negative wealth effect of a weak real estate market, the Chinese government's continued regulatory pressure on internet companies, and sluggish global trade, resulted in a disastrous year for Chinese stocks. Indeed, S&P's performance has been exaggerated by the bubble in six AI stocks. The small-cap Russell 2000 index remains 20% below its all-time high.
The CSI 300 index of large-cap Chinese A stocks is trading at about one standard deviation below its three-year average, while the S&P 500 index is trading at one standard deviation above its three-year average.
China's consumer sector will continue to lag as the impact of falling real estate prices continues. High-tech industries will remain central to Beijing's economy, and the communications sector appears to be the clearest sign of improving investor expectations.
