Chinese optical chip stocks extend rout amid fears of potential US curbs

Recent concerns regarding potential US trade restrictions on advanced optical transceivers for data centers have triggered a sharp decline in Chinese semiconductor stocks, extending an ongoing downward trend in the artificial intelligence supply chain. On Friday, shares of key optical chip manufacturers continued their descent for a second consecutive day, despite assurances from larger suppliers.

The CSI 300 Index, a key benchmark for China's benchmark, fell 1.3% by midday, marking its lowest level since August last year. Upstream laser chip suppliers were hit the hardest, with losses exceeding those of downstream optical transceiver manufacturers.

In Shanghai, Yuanjie Semiconductor Technology saw its shares plummet by 6.5% on Friday, following a 20% daily-limit decline on Thursday. Similarly, Everbright Photonics fell 5.4% after a 20% limit-down decrease the previous day. Dongshan Precision in Shenzhen dropped 3.4% on Friday after hitting a 10% daily decline limit the day before, while Shijia Photons on the Shanghai Stock Exchange rose 3.4% after a 17.4% loss the prior session.

The market turbulence was sparked by a research note from Morgan Stanley, published on October 1, which warned that the US Federal Communications Commission (FCC) could impose restrictions on Chinese-made optical transceivers as early as this month. The report highlighted that any potential measures would likely target next-generation 3.2-terabit-per-second (3.2T) products. Optical transceivers are essential components in AI data centers, facilitating high-speed data transmission between servers and computing equipment.

Washington may consider a regulatory approach permitting Chinese-made optical transceivers into the US market if at least 65% of their bill-of-materials (BOM) value originates from American companies, according to Morgan Stanley. In August, reports emerged suggesting that the US might restrict Chinese optical transceivers, although the FCC's finalized rules in September did not explicitly target these products.

Major Chinese suppliers attempted to allay investor concerns by emphasizing that any potential US measures would have limited impact on their near-term operations. Dongshan Precision, for instance, stated that the hypothetical 65% US-content requirement was based on market speculation and not official policy. The company noted that optical chips constituted no more than 10% of its transceivers' total BOM costs, suggesting it had ample flexibility to adjust its supply chain.

Similarly, Everbright Photonics representative told a Chinese news outlet that commercial production of 3.2T optical transceivers was not expected until 2028 or 2029, implying that current market demand for 800G and 1.6T products would mitigate the immediate impact of any restrictions targeting next-generation modules.