Chinese Regulations Prompt Investors to Switch Industries

With regulations having hit internet and tech stocks in China hard, overseas investors have been reallocating in droves to industries they believe to be safe from the regulatory hammer. Those industries and sectors fall largely in high-tech manufacturing as well as renewable energy, according to the Wall Street Journal.

China markets have seen lots of action in the past month. Onshore A-shares are down 3.2% according to an MSCI index that tracks the mainland stocks, while the broader MSCI China Index, which includes offshore securities like internet giants Tencent Holdings Ltd. and Alibaba Group Holding Ltd., are down 12%.

Stepping into the positive movement spotlight are Chinese indexes that track semiconductor makers, electric vehicle (EV) companies, and new energy, all showing between 4% and 18% growth in July. With continued government support from Beijing in these sectors, investors are hopeful that these industries will continue to perform going forward.

The regulations purportedly come as part of President Xi Jinping’s prioritizing of economic, social, and national-security issues, according to the WSJ. Others, such as Vikas Pershad, a portfolio manager at M&G Investments in Singapore, believe that China is attempting to reallocate the capital flowing into the country away from the internet sector and into those sectors that are pushing to help make the country self-reliant.

“They are trying to reach a new equilibrium because it seems capital flows were not in line with long-term, top-down priorities,” he said. This includes an announcement by the Communist Party’s top decision-making body in July that the country should accelerate the manufacture and development of new-energy vehicles (new EVs), as well as pushing for a generalized self-sufficiency in domestic manufacturing.

Automotive company BYD Co., battery maker Contemporary Amperex Technology Co, and the country’s largest chip maker, Semiconductor Manufacturing International Corp. have all seen their stocks outperform this year, driven by the EV boom happening in China.

Additionally, China’s solar panel manufacturers and component producers are reaping the rewards of the global shift to renewable energy. They collectively make up a vast majority of the industry’s supply chain, and with cost advantages that make them extremely marketable on the wider global stage, investors are taking note. “The growth opportunity is quite structural,” said Evan Li, HSBC Global Research’s head of power, utilities, renewables, and environment for Asia Pacific.

‘KARS’ and ‘KGRN’ Give Exposure to Supported Sectors

The KraneShares Electric Vehicles and Future Mobility ETF (NYSE: KARS) invests in BYD and many of the leaders in the electric vehicle industry in China.

KARS measures the performance of the Bloomberg Electric Vehicles Index, which tracks the industry holistically, including exposure to electric vehicle manufacturers, electric vehicle components, batteries, hydrogen fuel cells, and the raw materials utilized in the synthesis of producing parts for electric vehicles.

The index has strict qualification criteria: companies must be part of the Bloomberg World Equity Aggregate Index, have a minimum free float market cap of $500 million, and have a 90-day average daily traded value of $5 million.

KARS has an expense ratio of 0.72% and has $256 million in assets under management.

The KraneShares MSCI China Clean Technology Index ETF (KGRN) capitalizes on investing in clean technology in China’s booming economy.

KGRN tracks the MSCI China IMI Environment 10/40 Index and is based on five clean technology themes: alternative energy, energy efficiency, green building, sustainable water, and pollution prevention.

KGRN has an expense ratio of 0.79% and has $197 million in assets under management.

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