New China AI-Chip Rules

Micron reports earnings Wednesday, and it’s already under pressure due to the Chinese ban on their chips. However, today, the market received more bearish news from the Biden administration.

Biden Administration Considers a Ban on AI-Related Chips to China

• The Biden administration is considering new restrictions on exports of AI chips to China.
• The Commerce Department may stop shipments of chips made by Nvidia and other chip makers to China and other countries without a license.
• The move is part of final rules expanding export control measures announced in October.
• The restrictions could further limit China’s ability to develop its AI capabilities.
• Nvidia had previously responded to restrictions by creating a version of its AI chips called the A800 for the Chinese market.
• The new restrictions would ban the sale of even A800 chips without a license.
• The administration is also considering restricting cloud service leasing to Chinese AI companies.
• The timing of the rule’s rollout is uncertain, but it may be after Treasury Secretary Janet Yellen’s visit to China in early July.
• The discussions on restrictions follow concerns about the national security implications of AI technology.
• The Commerce Department implemented export control measures on advanced semiconductors and chip-making machinery in October.
• The U.S. has been working with the Netherlands and Japan to unify the list of controlled items.
• Chip makers from South Korea and Taiwan may be allowed to continue operating in China.
• The Biden administration is also considering an executive order to restrict U.S. investment in China and other geopolitical rivals.

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What Happened to Semi Stocks the Last Time?

The last time the market got news of an AI chip ban, the entire SMH took it on the chin.

The SMH, Micron, and NVDA all fell -17.10%, -8.35%, and -18.04% respectively over a short period following the most recent ban on the chips. At that time, stocks were at a considerably lower valuation than they are currently.

Additionally, Citi, which considers Micron stock a buy, has said that it expects Micron to miss F3Q23 consensus and guide F4Q23 below consensus given the China ban and other developments. In other words, Citi thinks Micron is a buy, but it isn’t a tomorrow buy. This was before the news broke about Biden’s new potential ban.

Update, June 29th: How Micron and the Chips Performed

In a move that was unquestionably bullish, Micron’s CEO called “a bottom” in the memory chip market, with his company beating earnings handily. They did not miss or guide-down as Citi had predicted. Additionally, following the news of Biden’s potential ban, most chip stocks recovered nicely, ultimately ending the week higher across the board.

When the market can take bad news in stride, that’s a sign that bulls have conviction. They’re buying dips, they’re staying in positions, they’re allocating new money into the market. If you’re a bull, this reaction should make you very, very happy.