Despite a raging war in the Middle East, involving the US and Israel on one side and Iran on the other, shares of Chinese defence companies are trading with sharp cuts.
Iran and China share deep strategic ties involving oil and defence; however, multiple media reports suggest that the Chinese defence systems failed to prove effective against the strikes by the US and Israel on Iran, dampening investor sentiment around the Chinese defence stocks.
Since the start of the US-Iran war, HS China A Aerospace & Defence index has declined almost 12% in March, with most of its index constituents in the red. Some of the well-known Chinese defence stocks like AVIC Chengdu and XiAn Triangle Defense are down up to 18%. In the last one month, the constituents of the defence index are also trading lower, falling as much as 23%.
Among stock-specific actions, AVIC Chengdu shares have declined 12% so far in March. The company manufactures fighter jets like the J-16. Additionally, China Aerospace Times Electronics, a manufacturer of aerospace electronics and unmanned system equipment, has lost 13% during this period.
AVIC Shenyang’s share price is down 11% while Xi’an Triangle Defence stock has crashed 18% on a month-to-date basis.
Why are Chinese defence stocks falling?
Multiple reports have alleged arms-related links between China and Iran. While China has denied supplying anti-ship cruise missiles to Iran, US intelligence claims Beijing has supported Iran’s ballistic missile programme by training engineers and providing key components, according to a BBC report.
For years, China has positioned its weapons systems as cost-effective alternatives to Western defence equipment. However, recent reports suggest that some of these systems may not have performed as expected during “Operation Fury” launched by the United States. An NDTV report indicated that the HQ-9B air defence system—recently acquired by Iran to strengthen its capabilities—may have underperformed in real combat conditions.
If Iranian defence systems influenced by Chinese technology are seen as ineffective against US and Israeli forces, it could weigh on the perceptions of other countries evaluating Chinese-made military hardware. This has pushed the high-flying Chinese defence stocks lower.
Battlefield performance carries geopolitical consequences. Back in 1982, Israeli fighters destroyed more than 60 Syrian aircraft supplied by the Soviet Union without losing a single plane, which then dented Moscow’s reputation as an arms supplier. Chinese defence companies face a similar risk.
Additionally, the weakness in the broader Chinese stock market amid the spike in crude oil prices, along with profit taking following multibagger returns over the last year, is also weighing on the defence counters.
Disclaimer: This story is for educational purposes only. We advise investors to check with certified experts before making any investment decisions.
