The prototype’s existence and capabilities remain unverified by independent sources. Nevertheless, market reaction suggests investors are taking the reports seriously.
EUV lithography can be considered a precision printer for computer chips, using extremely short wavelengths of light (extreme ultraviolet) to etch minute patterns onto silicon wafers. Typically, these patterns are in billionths of a meter, setting the stage for China to build cutting-edge computer chips.
Currently, ASML makes EUV machines, and export restrictions have blocked China from purchasing them, forcing Chinese manufacturers to build their own.
Crucially, China’s entry into the EUV lithography space can have ramifications for existing chip manufacturers and EUV machine suppliers. China could eventually sell machines and chips at a fraction of current market prices, impacting earnings for firms such as ASML and NVIDIA.
The latest developments also underscored China’s drive to become self-sufficient, a potential edge in future trade talks.
ASML shares slid 3.81% on Wednesday, December 17, with NVIDIA also ending the midweek session down 3.81%.
The bigger question: can Western chip companies justify their massive R&D spending and maintain their technological edge when China appears capable of matching these breakthroughs at a fraction of the cost? Wednesday’s session’s US tech sector sell-off suggests investors are having doubts.
Economic Headwinds, Policy, and Market Expectations
While China advances in the AI space, economic headwinds continue to challenge Beijing’s 5% GDP growth target for 2025. Crucially, domestic demand weakened sharply in November, while hopes for an end to the housing crisis faded as the fall in house prices accelerated.
Lawmakers recently pledged fiscal and monetary policy support to stabilize the labor market and boost domestic demand. However, the ongoing housing crisis and firms cutting prices to counter the effect of tariffs and competition expose the economy to waning consumer sentiment and spending.
Stabilizing the housing market, combating price wars, and incentivizing domestic consumption will likely be crucial for Beijing to achieve its GDP growth targets.
On Wednesday, December 17, Beijing City government reportedly summoned online platforms over property-related comments. According to CN Wire, Beijing called on platforms to take down misleading information.
For context, China’s house price index fell 2.4% year-on-year in November after a 2.2% drop in October. House prices had fallen at a slower pace for 12 months before November’s uptick.
Meanwhile, China’s Central Finance Office reportedly stated that expanding domestic demand topped next year’s policy priorities, calling for additional fiscal policy support.
Medium-Term: Cautiously Bullish Outlook Hinges on Policy Support
November’s loss of economic momentum underscored the pressing need for policy measures aimed at boosting consumer sentiment and spending. Effective measures, coupled with improving external demand, would support a bullish medium- to longer-term outlook for Mainland China-listed stocks.
Crucially, China’s advancements in the tech space contribute to the bullish outlook, with Mainland equity markets likely to benefit from rotation from Western stocks hovering near record highs.
The Hang Seng Index is down 5.44% in the fourth quarter, potentially snapping a three-quarter winning streak. Despite the Q4 pullback, the Hang Seng Index is up 26.54% year-to-date (YTD). Meanwhile, the CSI 300 has gained 15.64% YTD after falling a modest 1.95% in the current quarter.
In contrast, the Nasdaq Composite Index is up 0.15% in Q4, despite pulling back from October’s all-time high of 24,020. While the Nasdaq hovers close to its all-time high, the CSI 300 sits at the 4,550 level, well below its 2021 record high of 5,931.
Technical Signals Favor Lower Short-Term CSI 300 Levels
Bearish fundamentals align with technical indicators for the CSI 300. Looking at the daily chart, the CSI 300 traded below its 50-day EMA, while holding above the 200-day EMA. The EMAs signaled a bearish near-term but bullish longer-term outlook.
Failure to break above the 50-day EMA would expose the 4,500 resistance level. A sustained fall through 4,500 would bring the 4,365 support level and the September low of 4,328 into play. Crucially, a drop below 4,365 would pave the way to the 200-day EMA, invalidating the bullish medium-term outlook.