An End to Regulatory Risk in China’s Internet Sector | ETF Trends

Recent meetings of China’s Premier Li Qiang with heads of China’s largest internet companies bring to an end a long chapter of regulatory risk and crackdown in the sector. As one of the largest headwinds for investors in the last two years becomes a tailwind, consider the KraneShares CSI China Internet ETF (KWEB).

Premier Li met with a variety of executives from major tech companies this week, including Alibaba, ByteDance Ltd, and Meituan, reported Bloomberg. The meeting proved an overwhelmingly positive one, with government officials committing to increased transparency and predictable regulations in the future.

What’s more, the government made clear its support for the sector and encouraged the companies to do all they could to generate growth. China’s internet sector is home to its largest growth companies, and as such is “conducive to expanding demand and employment,” according to Premier Li, reported KraneShares in the China Last Night blog.

The government also requested feedback from the executives on how the government could best support their growth. While and PDD Holdings weren’t in attendance, they sent prepared statements contributing to the dialogue.

Smoothing the Way for More Sustainable Growth

Recent fines for Tencent and the Ant Group bring to a close the regulatory crackdown on the sector, according to authorities. That crackdown resulted in losses of over $1.1 trillion in market value for major Chinese tech companies, reported Economic Times. Valuations for many of the largest players still sit at greatly reduced levels despite strong business fundamentals.

Regulations worked to address a number of issues in the more fledgling tech industry. These included anti-monopolistic policies and data and privacy protection regulations. While harmful to companies in the short term, these regulations could help to pave a longer runway looking ahead and foster more sustainable growth.

“A sound development of the platform economy is very significant to investors too,” Zhou Hao, economist at Guotai Junan International, told ET. “Prudent development of platform firms is important to investors’ long-term valuation.”

Image source: China Last Night blog

Internet stocks already rallied on the announcement of Ant Group’s fine and the end to the regulatory uncertainty in the sector. Major tech companies such as Tencent, Alibaba, and Meituan were some of the most traded overnight in Hong Kong, all making large gains.

Capturing Growth in China’s Internet Sector With KWEB

The KraneShares CSI China Internet ETF (KWEB) tracks the CSI Overseas China Internet Index. The index measures the performance of publicly traded companies outside of mainland China that operate within China’s internet and internet-related sectors. Tencent, Alibaba, and Meituan are the top three holdings of the fund as of July 11, 2023.

KWEB is down 3.51% YTD but crossed above its 200-day simple moving average (SMA) in trading today. It crossed back above its 50-day SMA on July 6, where it remains. Funds trending above both are considered within “buy” territory by investors and trend-followers.

The fund includes companies that develop and market internet software and services. It also tracks companies that provide retail or commercial services via the internet, and those that develop and market mobile software. Companies that manufacture entertainment and educational software for home use are included as well.

KWEB provides exposure to the Chinese internet equivalents of Google, Facebook, Amazon, and eBay. All are companies that benefit from China’s growing user base and growing middle class. The fund worked to convert all possible share classes over to Hong Kong shares instead of ADRs to protect investors from risk.

The ETF carries an expense ratio of 0.70% and has nearly $5 billion in AUM.

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