China ETFs: A Contrarian Opportunity?

Chinese markets and country-related exchange traded funds have taken a hit after Beijing’s regulatory crackdown on foreign-listed technology companies, but current events could also represent an opportunity for investors to diversify into the emerging market at a cheaper entry point.

Eddy Loh, senior investment strategist at Maybank Group Wealth Management, and Dave Wang, a portfolio manager at Nuvest Capital, argued that there may be some buying opportunities due to the lower valuations and because tech companies will remain key to the Chinese economy, the Wall Street Journal reports.

“This is definitely not the end of Chinese big tech,” Wang told the Wall Street Journal.

U.S.-listed Chinese stocks have been under pressure in recent sessions after China’s government launched a cybersecurity probe into the newly listed Didi Global Inc. and warned it would tighten rules for companies listing abroad. The latest regulatory scrutiny comes after a clampdown on China’s tech sector in response to anticompetitive behavior.

Chinese authorities are now revising rules on variable-interest entities, or VIEs. Chinese tech companies, like Alibaba and Didi, have capitalized on the corporate structures to get around restrictions that stopped foreign investments into Chinese companies engaged in technology, media, and other sensitive industries.

“When you have such uncertainty, it becomes a big issue,” Tan Eng Teck, a senior portfolio manager at Nikko Asset Management, told the Wall Street Journal.

Loh believes that the regulatory action will help push Chinese companies with American depository receipts (ADRs) to return back to mainland China or seek listings in Hong Kong, especially those in sectors that have access to sensitive data.

“The [Chinese] government has expressed concerns over the release of information and the implications of national security. It is an indication to the companies to please come back,” Loh added.

Investors who are interested in the long-term potential of the Chinese economy have a number of options to gain exposure to this market, including broad plays like the iShares MSCI China ETF (NASDAQ: MCHI), Xtrackers CSI 300 China A-Shares ETF (ASHR), and KraneShares Bosera MSCI China A Share ETF (KBA).

Additionally, investors can access China’s tech sector through targeted ETFs like the Invesco China Technology ETF (NYSEArca: CQQQ) and the KraneShares CSI China Internet Fund (NasdaqGM: KWEB).

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