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One of Huawei’s booths at MWC Barcelona 2019.

Elizabeth Schulze | CNBC

China has plenty of ways it can make retaliate against the U.S. treatment of Huawei, and U.S. companies could feel the brunt of it.

Both the White House and Commerce Department Wednesday took actions against the telecom company, which would essentially ban it from selling technology in the U.S. market and also stop it from buying the Qualcomm chips it needs for its production. Huawei was put on the Commerce Department’s Entity List which would require companies to apply for a license to sell technology to Huawei, thus limiting its access to U.S. technology.

The U.S. may see the action against Huawei as a lever in its China trade negotiations, which have hit a rough spot and now could take several more months. China’s possible reactions range from encouraging boycotts of U.S. products; favoring other companies over American companies, and conducting nuisance regulatory enforcements and inspections.

China could also use the same tactics it might use if trade talks become more difficult or fall apart, such as limiting purchases of U.S. Treasurys or selling them or weakening its currency. The biggest holder of U.S. Treasurys, China recently reduced its holdings to the lowest level in two years.

Eurasia Group analysts said there’s only now a 15% chance of a deal by the time President Donald Trump and China President Xi Jinping meet at the G-20 meeting at the end of June. They see a 45% chance that negotiations will be extended, and 40% chance there will be no deal or truce.

Citigroup economists still expect a trade deal within the next couple of months, regardless of where Huawei stands. “This is consistent with our view that the tensions between the U.S. and China go beyond trade. What we thought before this event was these issues regarding the technology sector were mostly taken on a different path, so they’re not that tied to having a trade deal,” said Cesar Rojas, global economist at Citigroup.

Analysts speculated one of China’s first responses to the Huawei actions was to formally charge two Canadians Thursday with espionage. The two were arrested in December, and the charges against them were viewed as pay back for Canada’s help in the arrest of Huawei CFO Meng Wanzhou, who is fighting extradition to the U.S.

‘Mobilizing patriotic consumers’

In January, the U.S. charged Huawei and its Meng with wire fraud, obstructing justice, conspiring to launder money and violating the International Emergency Economic Powers Act by doing business with sanctioned Iran. Meng is the daughter of Hauwei’s founder and faces extradition to the U.S. The U.S. has also discouraged the adaption of Huawei technology in other countries, for fear its equipment is not secure and could be used for cyberespionage.

“There has been some signaling about maybe mobilizing patriotic consumers, so you could maybe see a boycott of U.S. products. That’s been pretty limited so far. That’s been the main response,” said Adam Segal, director of digital and cybersecurity at the Council on Foreign Relations.

He said Apple would be the most likely target because it’s products are sold directly to consumers, but China may not want to rev up consumers too much. “There is a worry that if you mobilize too much nationalist sentiment, that you can’t control it,” said Segal.

Segal said China could use anti-competition inspections on China-based operations of U.S. companies, as it did with Microsoft several years ago. “They could search your factory. At 5 o’clock in the morning, inspectors show up and demand to see your books,” he said.

China would likely move toward developing its own sources for chips. “It will reinforce the sentiment of the Chinese leadership that they have to double down on their own investment, longer term investing in AI, 5G, and all the other technologies that we’re worried about,” he said. 5G is essentially the next generation of mobile networking that should result in faster internet and allow users to conduct a whole new operations linking smart phones to more everyday tasks.

Analysts noted that Oracle is one company, now moving operations from China. It is reported to be laying off 900 people at its research center in Beijing.

“Oracle has a toe hold in China, and given the noise, that’s a smart move for them to take a step away,” said Dan Ives, managing director and technology analyst at Wedbush. He said Oracle can do business cheaper elsewhere because of the tariffs.

Ives said Apple is the company at most risk for retaliation, but China may not want to be too hard on Apple since it employes 1.4 million people there including at Foxconn. “But realistically, I think that could only impact 3 to 5% iPhone purchases in the country. That’s what i would call a pretty contained issue for Apple.”

Chip companies are even less at risk since they are not as vulnerable to consumer boycotts, he said. “There’s limited strategic moves China can do because Qualcomm on 5G is so integral on the smart phones, ” said Ives.

“Qualcomm is as integral to the Chinese smart phone market as Tiger Woods is to golf. It’s that intertwined. Micron and Skyworks are also key, especially Micron, but it also speaks to the semi food chain. China needs to handle that with kid gloves, if they went after it, it would have worse implications domestically that would far outweigh the benefits of retaliation..China knows that and that’s why the U.S. knows when it comes to Huawei, that they know that ‘s a card they could play,” Ives said.

The pain for Huawei will clearly be greater than for U.S. suppliers. “Our assessment is Huawei, just like all large tech companies, remains highly dependent on a global supply chain, and possibly will experience a notable disruption without a continuous supply from the US. For suppliers, losses of Huawei may be mitigated by the gain of Huawei’s rivals, but short-term setbacks are hard to avoid,” Bernstein analysts wrote. Analysts believe Huawei has been stockpiling chips, and that could help it for awhile.

Eurasia Group analyst said since Trump reversed a similar action against Huawei rival, ZTE, last year, it may be that Huawei is permitted to buy some U.S. technology.

“It is still not clear the extent which the administration is using this as a new weapon in its campaign against Huawei (our preliminary take) or a negotiating tactic in trade talks,” the analysts wrote. They noted Huawei could be ultimately crippled and denied access to its hardware and software suppliers for moblie infrastructure and handsets.

“This would also quickly put at risk both the company itself and the networks of Huawei customers around the world, as the firm would be unable to upgrade software and conduct routine maintenance and hardware replacement. It would hit virtually all of Huawei’s products, including high-end smart phones, mobile infrastructure, data centers and cloud services, and have immediate global implications for any company utilizing Huawei’s products or services. European carriers, in particular, are likely to be affected quickly,” the Eurasia Group analysts noted.

Stocks of Qualcomm and other Huawei suppliers, Skyworks and Micron were all moving sharply lower on Thursday.

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China credit push to small firms falters in factory heartland

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Chinese employees working on an energy-saving bulb production line in Suining, Sichuan province, China.

STR | AFP | Getty Images

China’s campaign to boost loans to small firms was supposed to support the economy during its biggest slowdown in decades, but banks’ reluctance to lend has left exporters and manufacturers in its southern industrial belt struggling to pay the bills.

Despite prodding from Beijing, several bankers have told Reuters they have little appetite to lend to smaller companies due to the uncertain economic outlook, the U.S.-China trade war and a years-long drive to purge risks from the financial system.

That has chilled credit flows to private sector firms, undermining stimulus measures that were designed to cushion the impact of slowing demand.

In the southern city of Dongguan in Guangdong province, one of the country’s major manufacturing hubs, some small firms are moving production overseas in the face of operational and financing challenges.

“These days the most discussed topic — something that we always talk about in meetings — is whether we should move to Vietnam. Many of my clients have moved there, ” Li Jiajun, the chief financial officer at Guangdong LiShun Yuan Intelligent Automation, told Reuters.

LiShun, which makes paper box packaging machinery, lost financing from two of its four banks in the second quarter, halving its total credit line to 10 million yuan ($1.5 million).

One of those two banks — both are mid-sized — blamed its tighter lending policy on the first half’s economic climate, while the other said its local branch was banned from approving new loans due to a spike in bad debts, he said.

As a result, the company, which expects to generate 250 million yuan in revenue this year, is delaying orders worth nearly 20 million yuan following the cut and taking “defensive measures” — slashing its payroll by 40% and selling equity to raise funds.

“Government policy and implementation on the ground are still somehow disconnected. It’s not so easy — at least, I haven’t enjoyed much benefits so far,” Li said of China’s efforts to boost lending.

Tightened risk control

In China, the state sector has long absorbed the lion’s share of corporate lending from an industry dominated by government-controlled banks, forcing smaller borrowers across the country to rely on non-bank “shadow” lenders, which have been squeezed in the crackdown on financial risk.

Pedestrians pass by Chinese multinational banking company China Construction Bank Corporation (CCB) branch in Hong Kong.

Budrul Chukrut | LightRocket | Getty Images

“We are better than we used to be, but far from serving so many small companies in need,” Bao Jiehan, vice president of the Dongguan branch of China Construction Bank, the country’s second-largest lender, told Reuters.

Only 26% of China’s tax-paying businesses have bank loans, leaving “plenty of room” for banks to lend, a banking regulatory official said.

Financing is especially tough for exporters who have been squeezed by the trade war, as banks tighten scrutiny and impose stricter risk controls, bankers and companies said.

Chen Xiuxia, chairwoman of Guangzhou-based Choice International, said lenders have gradually halved its credit line to 30 million yuan since President Xi Jinping’s 2017 call for banks to curb financial risks.

Her efforts to secure more lending have not succeeded so far, with banks demanding heavy collateral and many non-bank lenders shut down.

“De-leveraging is aimed at the financial system but businesses like us are hit as a knock-on effect,” said Chen, whose company exports goods like air conditioners and cars to Africa and expects to generate $100 million in revenue this year.

Luo Zhiquan, chairman of Dongguan Gowin Import & Export, is trying to obtain a 5 million yuan loan using an office building as collateral to add to his 10 million yuan credit line. His bank will only lend 50% of the property’s value.

That was due to strict bank risk control over wobbling exporters amid the U.S.-China trade war. Gowin, which trades for 200 local manufacturers, saw its annual order value drop by 10 percent this year due to a 50 percent plunge in exports by his clients to U.S. buyers.

“Some banks just do not want to do business with trading companies anymore,” said Luo, recalling what a Dongguan-based rural commercial bank told him when stopping his credit line.

Flock of geese

Chinese policymakers are calling on the Big Five state banks to be “lead geese in the flock” in the push to boost lending.

Outstanding bank loans issued to small firms rose 21% on-year to 10.3 trillion yuan at end-May, driven mostly by the Big Five, which have extended more credit at cheaper rates.

In April, China’s State Council set a target requiring the Big Five to increase such loans by 30% this year and cut their rates by 1 percentage point.

In Guangdong, CCB said it has hiked small business lending by 45% to 97.1 billion yuan in the first half of 2019.

Its main strategy is to increase the numbers of borrowers while reducing the average loan per company to rein in risk, bankers said. The average amount is 630,000 yuan for the bank’s 140,000 small business loan borrowers in Guangdong, said Liu Lele, vice head of small business lending at CCB Guangdong.

In the past, most small business loans averaged 10-20 million yuan per borrower, said Bao of CCB Dongguan.

Small business loans are priced at 5.3% on average, from 6% last year, said Liu, following the government’s April mandate requiring the Big Five to cut small firms’ financing costs.

Overall the Big Five’s lending to small business rose 23.7% in the first five months, while their average interest rate decreased by 0.65 percentage point to 4.79%.

“We are trying to break even. Profit is very thin, definitely less than 1%,” said Liu, who hopes to adopt a more market-oriented approach to pricing loans in the future.

Although analysts see risks to banks’ profitability and asset quality from the government’s lending drive, state bankers say this is not an immediate concern for big banks and regulators who have set a higher tolerance for small firms’ bad loans.

Some smaller-sized banks, however, are more conservative in their lending.

“We are still going through de-leveraging and structural changes of the economy,” said a senior executive at a lender based in northern China that is active in Dongguan.

“In an economic downturn, banks’ risk appetite is low.”

Weakening demand

At the same time, some small companies’ appetite to borrow has diminished as economic prospects dim.

Engineers assemble intelligent robots at Chuangze Intelligent Robot Co., Ltd. on April 29, 2019 in Rizhao, Shandong Province of China.

Zhang Jingang | Visual China Group | Getty Images

Guangdong Songqing Intelligent Technology, an industrial robotics maker, has cut this year’s sales target as clients delay purchase orders in a wait-and-see approach, chairman Xiao Yongxiang told Reuters. Last year, the company closed its low-end mechanical arm business as demand shrank.

Xiao said he wants to raise 20 million yuan by selling equity to pay back half of his bank loans and ease the pressure from 120,000 yuan in monthly interest repayments.

Several bankers across China told Reuters that loan demand from qualified borrowers has weakened this year.

“Clients tell me labor costs and rent are high, trade frictions are hurting exports, their profits are getting thinner and thinner, and it’s just getting harder and harder to do business,” said Sun Shanming, vice general manager of the small business lending department of CCB’s Guangzhou branch.

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US-China trade, oil, currencies in focus

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Stocks in Asia Pacific were set to trade mixed on Wednesday following developments on the U.S.-China trade front.

Futures pointed to a higher open for the Nikkei 225 in Japan, with the Nikkei futures contract in Chicago at 21,680, as compared to the index’s last close at 21,620.88.

Shares in Australia, on the other hand, were set to see opening declines. The SPI futures contract was at 6,691.0, as compared to the S&P/ASX 200’s last close at 6,724.60.

In corporate news, Japan’s Mitsubishi Motor is set to release its earnings for the first quarter later on Wednesday.

Asia-Pacific Market Indexes Chart

Overnight on Wall Street, the Dow Jones Industrial Average closed 177.29 points higher at 27,349.19, while the S&P 500 also gained 0.7% to finish its trading day at 3,005.47. The Nasdaq Composite added 0.6% to close at 8,251.40.

On the trade front, in-person trade negotiations between the U.S. and China will begin next week, sources told CNBC. They said White House officials are looking at a longer-term timeline.

Meanwhile, Boris Johnson is set to be the U.K.’s next prime minister after winning the ruling Conservative Party’s leadership race on Tuesday. Johnson has previously stated that the U.K. must leave the European Union by the October 31 deadline “do or die, come what may.”

The British pound last stood at $1.2432, after seeing a high of $1.248 yesterday.

“In our view, Johnson’s desire to push for Brexit, deal or no deal, increases the chance of an early general election and some possibly nasty GBP outcomes,” Rodrigo Catril, senior foreign exchange strategist at National Australia Bank, wrote in a note.

The U.S. dollar index, which tracks the greenback against a basket of its peers, was at 97.705 rising from levels below 97.5 yesterday.

The Japanese yen, widely viewed as a safe-haven currency, traded at 108.20 after weakening from levels below 108.0 yesterday. The Australian dollar was at $0.6993 after declining from levels above $0.702 in the previous session.

Here’s a look at some of the data set to be released in the day ahead:

  • Hong Kong: NagaCorp earnings
  • Japan: Leading index at 1:00 p.m. HK/SIN, Line earnings for the second quarter, Mitsubishi Motor earnings for the first quarter

— CNBC’s Fred Imbert contributed to this report.

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Snap earnings Q2 2019

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Snap shares surged more than 12% in after-hours trading on Tuesday after the app developer reported quarterly results that soared past analysts’ estimates.

The company, which is the maker of Snapchat, posted a slimmer-than-expected loss for the second quarter while exceeding expectations for user growth and revenue.

  • Loss per share: 6 cents vs. 10 cents forecast by Refinitiv
  • Revenue: $388 million vs. $359.7 million forecast by Refinitiv
  • Global daily active users (DAUs): 203 million vs. 192.4 million forecast by FactSet
  • ARPU: $1.91 vs. 1.84 forecast by Refinitiv

“The growth in our community, engagement, and revenue is the result of several transitions we completed over the past 18 months,” said Snap CEO Evan Spiegel in a statement. “We look forward to building on our momentum and making significant ongoing progress in each of these areas.”

Snap’s user base grew to 203 million daily active users. This was the second quarter in a row of growth for the company, which saw its user base shrink from 191 million daily users in the first quarter of 2018 to 188 million the following quarter.

The company reported revenue of $388 million for the second quarter, up 48% compared to a year prior. Notably, the company reported a gross margin of 46%, a vast increase from the 30% gross margin reported a year prior.

“We continue to make significant progress in driving down our underlying unit costs over time, including the cost to deliver a Snap, the cost to deliver an impression, and other key drivers of infrastructure costs,” said Snap Chief Financial Officer Derek Andersen in his prepared remarks.

After a rough 2018, Snap has bounced back in 2019. Its shares have rocketed more than 180% since hitting a record low of $4.99 on Dec. 21.

The stock climbed past $16.50 after the report. Should Snap’s stock open at this price on Wednesday it would be the highest since March 2018. The stock debuted at $17 in 2017.

The company said it expects third-quarter revenue of $410 million to $435 million, which is better than analysts expected. Snap also said it expects between 205 and 207 million daily users for the third quarter, ahead of the 195.5 million analysts expected, according to FactSet.

Snap’s turnaround has been driven by CEO Evan Spiegel’s decision to stop trying to attract all users and instead focus on the company’s core base of younger consumers. Advertisers have flocked to Snap largely because of its augmented reality technology, which has led to improved engagement with users by letting them experiment with selfies and group photos.

In 2019, Snap replicated the past success of its puppy face and rainbow lenses with a gender swap lens that showed users what they’d look like as a person of the opposite sex and a baby face lens that showed them as babies.

“The popularity of these Lenses drew millions of people into our rebuilt Android application, where they experienced the new and improved Snapchat that led to increased engagement,” Spiegel said in his prepared remarks to investors. “The enhancements we have made to our advertising business and self-serve platform meant that we were better able to monetize this increased engagement, leading to accelerating revenue growth.”

WATCH: Here’s how to see which apps have access to your Facebook data — and cut them off

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