When it comes to China tech stocks, it’s a tale of two outlooks. Over the near term, the asset class could be challenged by multiple headwinds. Looking further out, the long-term outlook for this sector in the world’s second-largest economy remains compelling.
That dichotomy could highlight the utility of exchange traded funds such as the KraneShares Hang Seng TECH Index ETF (KTEC). KTEC, which follows the Hang Seng TECH Index, turns three years old in June. It also provides investors with exposure to the 30 largest, high-growth China tech names trading in Hong Kong.
KTEC’s focus on more established large-cap companies isn’t a guarantee of upside. However, it could prove advantageous at a time when global investors are concerned about debt, deflation, and demographics within the Chinese economy. China’s financial markets are still sensitive to default risk in the real estate market. Additionally, recent data indicates the country’s population – still the world’s largest – contracted is seen as cause for concern.
KTEC Offers Plenty of Potential
Undoubtedly, investors must pay attention to China’s deflationary and demographic trends as well as lingering default risk. However, those factors don’t obfuscate the long-term allure of China’s expansive technology sector.
“China has quickly emerged as one of the most important end demand markets for the global information and communication technology industry, accounting for 12% of market share in 2023 versus just 7% back in 2006,” noted Shawn Kim, Head of Morgan Stanley’s Asia Technology Research Team.
As noted above, China’s population experienced another year of decline in 2023. But it remains the largest country in the world by that metric. Combine that with a rising middle class and increased urbanization, and it is clear there are long-term factors that could support the upside of KTEC.
Those factors, among others, boost the case for Chinese tech stocks with consumer inroads as well as shares of companies that are suppliers to those manufacturers. Both groups are addressed in KTEC, confirming the ETF’s industry-level depth.
“This trend is fueled by China’s economic growth driving demand for IT infrastructure and China’s large population base driving demand for consumer electronics. China has also become the largest end demand market for the semiconductor industry, accounting for about 36 to 40% of global semiconductor revenues in the last decade,” added Kim. “As it aims to achieve self-sufficiency and semiconductor localization, China has been aggressively expanding its production capacity. It currently accounts for about 25% of global capacity.”
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