The Chinese stock market has seen a difficult two years. Starting with harsh regulatory crackdowns in late 2020, and then followed by strict Covid-19 lockdowns that saw entire cities grind to a standstill, the result was billions of dollars wiped off the books of China’s tech giants and once-promising enterprises.
However, things are headed for a change. China is attempting to navigate out of its economic troubles by dropping or reversing its pandemic-control policies. Authorities have also largely wrapped up their investigations in the tech sector, and are attempting to instil confidence and clarity by introducing new regulations.
These are positive changes — and certainly much needed — and make for good reasons to be optimistic about the reopening of the world’s second-largest economy. However, it’s not all smooth-sailing ahead. The country is still struggling with the rather abrupt reversal of its notorious zero-Covid policy, with consumption remaining depressed as a result.
Investors looking to get back into the Chinese tech sector would do well to tread with caution. Here’s why.
Tech sector remains under surveillance, although new regulations offer increased certainty
The foremost thing to understand about China’s tech sector is how the ruling party views it.
In contrast to the Western-style, free-form capitalism of Silicon Valley, where powerful businesses are seen as partners to be wooed, the Communist Party of China (CPC) has no qualms cracking down on what it deems to be a threat.
This was demonstrated when Jack Ma criticized Chinese financial regulations in a fateful speech on Oct 24, which the authorities read as an inclination to resist State control.
What followed was a swift and harsh crackdown on Jack Ma’s empire, starting with a suspension of Ant Group’s IPO and involving a USD2.8 billion (S$3.7 billion) record fine.
That was just the beginning. Chinese regulators went on to levy wide-sweeping antitrust allegations that saw the leaders of China’s tech sector subject to investigations and multi-million dollar fines.
All these culminated in a staggering 60.7 percent drop (at the time of writing) in the benchmark Golden Dragon China Index from its record high of Feb 19, 2021 — a situation that braver investors would recognize as a buying opportunity.
But is it really?
Well, analysts point to the new regulations and laws that have been introduced in the wake of the tech crackdowns, which offer greater certainty moving forward (they at least serve as guideposts, allowing tech players to better steer clear of such infractions).
This is widely seen as a gesture of reconciliation, whether because the CCP feels it has made its point, or because the authorities are eager for the tech sector to once again come to the aid of China’s faltering economy.
Recovery is on the books, but may struggle to take off initially
No matter the reason, Chinese tech stocks are believed to be poised for recovery in 2023, although initially at a much slower pace than pre-pandemic levels, where growth of 30 percent+ per quarter was the norm.
This is borne by the latest earnings reports from popular Chinese tech giants, including Tencent, Alibaba and JD.com, as follows:
| Q3 2022 | Earnings highlights |
|---|---|
| Tencent | Revenue: -1.6 percent yoy Income from operations: – 4.81 percent yoy |
| Alibaba | Revenue: +3 percent yoy Income from operations: +68 percent yoy |
| JD.com | Revenue: +11.4 percent yoy Income from operations: +334 percent yoy |
| Pinduoduo | Revenue: +65.09 percent yoy Income from operations: +387.68 percent yoy |
| Baidu | Revenue: +1.94 percent yoy Income from operations: +130.37 percent yoy |
| Meituan | Revenue: +28.89 percent yoy Income from operations: +110.7 percent yoy |
Which Chinese stocks should you focus on?
Five of the six Chinese tech stocks highlighted in the table above have posted strong earnings results for Q3 2022. Despite its lukewarm showing in the same period, Tencent is expected to soon pick up the slack in 2023.
These stocks make for popular picks among investors and analysts, so it may make sense to focus on them for the anticipated recovery.
However, those who prefer a less granular approach should look to broader-based Chinese tech ETFs for greater diversification while still being able to capture broader sector movements.
Here are three popular China tech ETFs to consider in 2023.
iShares Core MSCI China ETF
The iShares Core MSCI China ETF is heavily focused on China’s tech sector, with seven of its top 10 holdings made up of household names: Tencent, Alibaba. Meituan, JD.com, Baidu, Pinduoduo and Netease.
Other notable holdings in this fund include China Construction Bank, Ping An Insurance and biotech company, Biologics. Together, these 10 holdings make up nearly 42 percent of the entire portfolio.
Best of all, this ETF is cheap to own, with an expense ratio of just 0.2 percent.
iShares Hang Seng Tech ETF
Another popular China tech ETF is the iShare Hang Seng Tech ETF. This is a much more narrowly focused fund compared to the one above, being made up of only 30 holdings. It primarily tracks China tech stocks listed in Hong Kong.
Its top 10 holdings — making up approximately two-thirds of the fund by value — include Alibaba, Kuaishou, Tencent, Xiaomi, JD.com, Meituan, Netease, Baidu. JD Health and Semiconductor Manufacturing Intern.
This ETF charges just 0.25 percent in expense ratio.
ALSO READ: What is the best performing tech stock during the pandemic? (Hint: It’s not Zoom)
KraneShares SSE Star Market 50 Index ETF
The KraneShares SSE Star Market 50 Index ETF offers access to young and upcoming Chinese tech companies that are not normally available to foreign investors.
The fund value is relatively small, at USD 0.42 billion. True to its name, this ETF tracks a focused group of 51 different holdings at the time of writing.
The top 10 holdings in this fund — making up over 45 percent of fund value — include Trina Solar, Montage Technology, Western Superconducting, Kingsoft Office Software and Junshi Bio.
KraneShares SSE Star Market 50 Index ETF is more expensive than the other two ETFs, with an expense ratio of 0.88 percent.
Pick a reputable online brokerage to start investing in Chinese tech stocks
Whether you’re planning to compose your own mix of Chinese tech stocks, or looking to diversify your funds across popular ETFs, it’s crucial to pick a good online brokerage. Read our reviews of the top online brokerages and trading platforms in Singapore to find the best one for you.
This article was first published in ValueChampion.