Jefferies: Semiconductor Import Deficit Widens, China's WFE Upcycle Not Over Yet
Claire Weston
China's wafer-fab equipment imports fell 12% year-on-year in May, but Jefferies argues the semiconductor trade deficit has widened to $99 billion year-to-date, exposing a growing domestic supply gap — the equipment upcycle is intact, with memory-driven capex recovery expected in H2 2026.
Imports are down — so why isn't the equipment cycle over?
May WFE imports dropped 12% YoY, but the decline was almost entirely in etch (−32%) and litho (−24%).
Deposition grew 12% YoY; ion implant grew 21%. This means → the market is not cooling across the board — a few categories are digesting last year's front-loaded purchases.
Jefferies attributes the short-term weakness to three factors: CXMT pulled forward memory-equipment orders in 2025; advanced-logic fabs did the same; grey-market lead times for key tools have stretched. In plain terms = demand hasn't disappeared — it was pulled into last year, and buyers are now waiting for policy signals.
Advanced packaging — why is it the smoothest growth lane right now?
Packaging equipment is the only major category with positive YTD growth, up 8%.
This reflects Huawei's "Tau" shrink law — a roadmap that uses advanced packaging instead of process-node shrinks to boost chip performance — which depends heavily on packaging capability, an area not subject to export controls.
This means → with advanced process nodes blocked, advanced packaging has shifted from a "supplementary option" to the practical main path for system-level performance gains. Jefferies expects this segment to show the strongest growth over the next 12–24 months.
Where is the equipment coming from — and why has Singapore overtaken Japan?
In the first five months of the year, Singapore captured a 25% share, overtaking Japan (23%) to become China's largest WFE import source for the first time. The Netherlands ranked third at 18%.
Japan and the Netherlands saw the steepest export declines to China, at −28% and −24% respectively. Singapore and Taiwan were the only two sources with positive growth, up 45% and 22%.
In plain terms = export restrictions are redrawing the equipment-supply map — traditional sources are shrinking while alternative channels are scaling up. Jefferies flags Singapore's share trajectory as a key indicator for tracking supply-path shifts.
Why has the semiconductor import deficit suddenly ballooned?
China's semiconductor imports surged 71% YoY in May, hitting a record high, driven by rapidly rising memory prices and growing demand for AI-related chips.
South Korea overtook Taiwan for the first time as China's largest semiconductor import source, accounting for 37% of the total — roughly $18 billion. May imports from Korea alone jumped 154% YoY.
Over the first five months of 2026, the semiconductor trade deficit rose 19% YoY to $99 billion, after holding essentially flat for the prior three years. This means → the domestic supply gap is widening again, not narrowing.
A wider deficit — what does it mean for equipment spending?
Jefferies' core logic chain: import gap widens → domestic supply falls short → the likelier mid-term outcome is capacity expansion, not reduced equipment purchases → this ultimately feeds through to higher WFE capex.
Three demand pillars underpin WFE capex: mature-node capacity (SRAM, PMIC, optical communications, power devices), sub-14nm advanced nodes (CPU, GPU, ADAS), and memory.
Whether memory capex recovers on schedule in H2 2026 is the key test for this logic chain. Jefferies maintains its full-year forecast of low-single-digit to mid-single-digit WFE capex growth.
Content is for reference only, not financial advice.