By Emerald Yau, Head of Equity Index Product Management, Asia
The investment spotlight has shone on US-based mega technology companies like Apple, Microsoft and Google for the past few years. The same is finally happening on the other side of the globe. With China leading the world in terms of post pandemic recovery, the Chinese technology giants like Tencent and Meituan Dianping have started to grab more attention among global investors, evidenced by strong flows into top China technology funds since the second half of 2020.
Technology industry well-supported by government
The Technology industry has been rapidly evolving in China over the past decade, presenting investors with plenty of investment opportunities. One of the reasons for the industry’s swift development has been the government’s focus and dedicated investment. The recent US-China trade conflict was especially a wake-up call for China to accelerate its shift towards becoming more self-reliant in advanced, strategic technology.
China policymakers are determined to drive domestic technology advancement and innovation via investment. According to the fourteenth 5-year plan (2021-2025) released in early March, China aims to ramp up technology across various areas and increase research and development spending by 7% annually over the next five years to the end of 2025.
Semiconductor manufacturing capability, which currently lags behind the most advanced technology in the industry, is a key focus area. To that end, China’s policymakers established a massive state-backed fund to specifically invest in this critical area. Advanced manufacturing, digital platforms, computing, among other fields, are also benefiting from investment support.
Diversified set of growth opportunities
Along with the investment and development support, the world’s second largest economy is now home to a wide range of technology companies. The industry is getting increasingly diversified with now over 100 large- and mid-cap companies offering investors plenty of options should they decide to seek exposure to China’s leading innovators.
In fact, one can find fast-growing technology companies across the whole value chain—from upstream to downstream, hardware to software, cloud to infrastructure. Perhaps even more compelling is the fact that the growth of these homegrown companies is well-supported by a domestic market of 1.4 billion consumers.
The emerging innovators and global trendsetters
The vast domestic user base has made available a massive amount of valuable data, which is another key factor to China’s tech giants’ success, allowing them to emerge as some of the world’s most innovative and competitive technology companies. Some of these technology innovators then go on to become global trendsetters, with their successes being studied, adapted and replicated outside of China.
For example, Tencent—China’s internet giant—first released its mobile messaging app WeChat in 2011, but quickly evolved into a multi-purpose app combining a wide range of functions including social media, entertainment and mobile payment. WeChat now represents the most popular app in China with over 1.2 billion monthly active users, and Tencent has since set a trend for multi-purpose apps for the rest of the world.
Strong performance and high correlation with broader China equities
Just like any emerging market equities, investment into China technology is subject to higher volatility. However, the investors who can tolerate the risk have been rewarded with a higher return. Additionally, an index capping the exposure to the few dominating tech stocks can also help dampen the volatility.
The correlation between China technology stocks and broader China equities is relatively high at 86%. The recent spotlight on China tech suggests that there may be an increasing global investor demand for exposure to China’s growth trajectory via technology stocks.
The demand for China tech is likely a start of a secular trend—rather than a tactical allocation. The signals are clear: China is well on its way to becoming a global technology powerhouse. This well-supported, diversified set of innovators now represents a space that investors shall no longer ignore.
 Represents the 1-year correlation between FTSE China Index and FTSE China Index – Technology; data as of end March 2021. The 1-year correlation between FTSE China Index and FTSE China Incl A 25% Technology Capped Index was 89% over the same period.
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