Tariffs and sanctions haven’t yet hampered Chinese corporate bond markets too much. But escalating tensions between the US and China could reveal some cracks. We shine a light on which sectors and credits are most vulnerable.

We are more than two years into a long and bumpy period in US-China relations. From July 2018 through August 2020, the US imposed tariffs on US$550 billion worth of Chinese products. China countered with tariffs on US$185 billion worth of US goods.

Then, in late August, the US added 24 Chinese companies to its list of those banned from buying American goods, citing the companies’ alleged links to Chinese military projects. The US Department of Commerce banned mobile-app downloads of Chinese social media platforms TikTok and WeChat, to which China responded by announcing plans to sanction foreign entities that it considered to be harmful to its national interests.

Perhaps surprisingly, the US dam on China trade has not yet resulted in broad economic decoupling between the two countries. And, with one or two exceptions, credit spreads on Chinese corporate bonds haven’t been materially affected.

Because US-China tensions may escalate in the run-up to the US elections on November 3, we think caution is warranted.

Here’s where we see the risks to Chinese companies.

China Relies on US Technology

Sanctions are most likely to affect Chinese companies that are large purchasers of US products. In contrast, companies that are better integrated into global supply chains and the global financial system are less likely to be affected.

We regard three sectors of the Chinese credit market as key targets for US sanctions: technology companies, banks and state-owned enterprises (SOEs).

China relies on the US for most of its tech imports (Display).

Imports for nine kinds of technology as a share of total consumption.