The Chinese economy has undergone impressive growth in recent years, particularly in the areas of technology and innovation. It has gradually shifted from being a low-end manufacturing base to an innovator, with notable achievements in 5G and photovoltaic technology.
However, this growth has been met with geopolitical risks, specifically the sanctions and export bans imposed by the United States on high-end chips to China. This has only made China more determined to pursue self-reliance and further intensify its efforts to innovate. The country recognizes the importance of maintaining a technological advantage in order to be a powerful nation on the world stage.
Investing in China requires a Top-down approach
Innovation in the West is heavily reliant on the private sector, but in China, the government plays a more significant role in fostering innovation through close cooperation with the private sector. The Chinese government’s influence also extends to directing the country’s trajectory and resource allocation. As such, understanding the Chinese government’s future plans is crucial for investors seeking to gain insights into potential investment opportunities.
In 2015, China laid out its “Made in China 2025” plan. The plan aims to transform China from being the world’s factory to becoming a global technological leader, and to achieve greater self-sufficiency while reducing its reliance on foreign technology. It laid out a roadmap for ten key advanced industries, including information technology, robotics, aerospace, and new energy vehicles, among others.
President Xi Jinping’s message during the 20th National Congress was clear with the message of achieving self-sufficiency in technology. One of the key objectives for 2035 was for China to join the ranks of the world’s most innovative countries, with great self-reliance and strength in science and technology.
The same message was echoed in the “Two Sessions” meeting. President Xi emphasized that China should ultimately rely on scientific and technological innovation in the face of fierce international competition.
It is without doubt that China is focused on technological advancement and investors may want to consider investing in China’s tech sector to align with its objective.
But what about the risks?
Investors are increasingly worried about the impact of tech regulations in China, which some see as hindering entrepreneurial growth and limiting opportunities for businesses to expand. A view that some see as bad for shareholders since many of the tech stock prices have fallen in the past two years.
It’s important for investors to recognize that China operates under a regulated economy, where regulations are a crucial aspect of governance. Rather than being viewed as a hindrance, such regulations should be seen as a necessary feature of the market. When undesirable behaviors emerge, China has shown a willingness to intervene and enforce regulations. This approach ultimately helps to enhance the long-term stability and viability of the tech industry, even if it may result in short-term market fluctuations.
Furthermore, it’s worth noting that the regulatory scrutiny in China has primarily impacted consumer-facing tech sectors such as social media, edtech, and ecommerce. However, there are numerous other promising Chinese tech companies operating in fields such as biotech, Internet of Things, electric vehicles, and robotics that have not been as affected by these regulations. As such, it’s important for investors to diversify their portfolios across various tech subsectors to reduce their risk.
While it is important for investors to be aware of the risks associated with investing in China, investors should also consider the potential risks of not investing in China and missing out on its growth potential. China is already the second-largest economy in the world and its growing global economic influence is projected to continue in the future. An allocation to China can serve as a hedge against its potential dominance.
As such, investors can consider well-diversified China tech ETFs in their portfolios, potentially capitalizing on the growth potential of China’s tech industry.
Where to find China’s Most Promising Tech Stocks?
The most promising and fastest-growing Chinese tech companies are listed on China’s ChiNext and STAR boards, which were established to stimulate innovation and growth in key tech sectors.
What is the ChiNext Board?
The ChiNext Market board was established in 2009 and is a subsidiary of the Shenzhen Stock Exchange. It focuses on innovative growth companies and startups.
What is the STAR Board?
The STAR board was launched in 2019 and is a subsidiary of the Shanghai Stock Exchange. Likewise, it focus on “innovative enterprises that align with national strategies”
Both the ChiNext and STAR boards were created with the aim to rival the Nasdaq exchange in the United States.
As of 10 March 2023, the ChiNext board had 1,241 listed stocks with a combined market value of 12 trillion Yuan, while the STAR board was home to 509 companies with a total market capitalization of 3 trillion Yuan.
These emerging markets represent the next stage of growth for the Chinese economy and offer opportunities for investors seeking to get in on the ground floor of China’s tech revolution.
The ChiNext board is home to several leading companies, including the world’s largest electric vehicle battery maker, Contemporary Amperex Technology (CATL), and Mindray, whose medical equipment played a crucial role in the fight against Covid-19.
Meanwhile, the STAR market is home to companies such as Semiconductor Manufacturing International Corporation (SMIC), China’s largest semiconductor foundry, and Transsion, the largest smartphone manufacturer by sales in Africa.
Why ChiNext and STAR may be a good addition for your investment portfolio
1) Stronger performance than broad China index
While the MSCI China is a popular index for tracking Chinese equities due to its inclusion of companies listed in various exchanges, such as US ADRs, H-Shares, and A-Shares, it has underperformed the tech-focused STAR and ChiNext indices in recent years.
Since the start of 2020, the MSCI China index has declined by 23%, while the ChiNext index has generated a total return of 32%, and the STAR index has generated a total return of 3%, both outpacing the broader China indices.
As the ChiNext and STAR indices include young and dynamic tech companies that are growing rapidly along with strong market expectations and valuations, investors can potentially capture higher investment returns by investing into these fast growing and innovative companies.
2) Better portfolio diversification
Diversification is a key strategy for making a portfolio more robust, but it’s not just about increasing the number of investments in the portfolio. It’s also important to ensure that the investments have low correlation with each other.
This is where the ChiNext and STAR indices can be helpful, as they have lower correlation with other major global indices.
Against the S&P 500 and MSCI World, the correlation between the ChiNext and STAR indices ranged between -0.022 and 0.049 and 0.009 to 0.025, respectively. As correlation is measured on a scale of -1 to 1, with 0 indicating no correlation, these relationships have very low correlations. This means that adding ChiNext and STAR investments to a portfolio can provide diversification benefits and potentially reduce overall portfolio risk.
For Singapore investors, the ChiNext and STAR indices can also help to diversify the risk of a local stock portfolio, with correlation to the Straits Times Index ranging between 0.021 and 0.245 for ChiNext and STAR50, respectively. By incorporating these indices into their investment strategy, investors can potentially improve their portfolio’s risk-return profile.
Currently, foreign retail investors are unable to purchase the stocks listed on the ChiNext and STAR boards since trading of these shares are limited to Institutional Professionals only.
However, investors may take a passive approach towards investing into ChiNext and STAR boards through exchange-traded funds (ETFs).
How to invest in China’s Tech Markets through SGX-Listed ETFs?
For Singaporean investors seeking direct access to the emerging tech markets of China, the Singapore Exchange (SGX) offers several options of ChiNEXT and STAR ETFs.
| China Tech ETF | Ticker | Currency | Management Fees | Remarks |
|---|---|---|---|---|
| UOBAM Ping An ChiNext ETF | CXS CXU | SGD USD | 0.5% | SRS Approved |
| CSOP CSI STAR and ChiNext 50 ETF | SCY | SGD | 0.89% | SRS Approved |
1) UOBAM Ping An ChiNext ETF
One option for investors looking to focus solely on the ChiNext board is the UOBAM Ping An ChiNext ETF. This ETF is traded in SGD or USD, giving investors a choice of the preferred currency other than CNY.
It is also approved for the Supplementary Retirement Scheme (SRS) should investors choose to utilize the SRS funds.
2) CSOP CSI STAR and ChiNext 50 Index ETF
For those who want exposure to both the ChiNext and STAR boards, the CSOP CSI STAR and ChiNext 50 Index ETF may be a suitable option. This ETF tracks the performance of the 50 largest companies listed on both the ChiNext and STAR boards and provides investors with the best of both worlds with just one ETF.
The good news is that this ETF is SRS approved too.
Overall, these SGX-listed ETFs offer a convenient and accessible means for investors to gain exposure to China’s fast-growing tech markets without the need to pick individual stocks.
Opportunities for Singaporean Investors
In summary, China’s ongoing commitment to developing its technology industry presents an attractive opportunity for investors seeking to benefit from this trend.
For investors in Singapore, the SGX-listed UOBAM Ping An ChiNext ETF (stock code: CXS) and the CSOP CSI STAR and ChiNext 50 Index ETF (stock code: SCY) provide a simple and accessible way to gain direct exposure to China’s emerging tech markets, offering well-diversified portfolios of leading tech companies listed on the ChiNext and STAR boards.
For investors who prefer a dollar cost averaging (DCA) approach, the 2 ETFs are also available under FSM One Regular Savings Plan.
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This article is sponsored by SGX. The opinions expressed in the article are solely those of the author and do not constitute financial advice or a recommendation. This advertisement has not been reviewed by the Monetary Authority of Singapore.