Putting worries of a ‘hard landing’ in the rear view mirror, the Chinese economy is again pursuing a revival. Most of the economic indicators are coming ahead of expectations making China a lucrative investment proposition for the New Year.
In order to do this, it would be prudent to consider some high-flying Chinese sectors to make the most of a Chinese recovery. One such sector is Technology (read: China ETFs Jump on Government Reform Afterglow).
Despite the recent slowdown and financial woes, China’s technology sector is moving in the right direction. The country is a developing one and has ample room for expansion in the technology sector that will support its journey toward becoming a developed nation.
Internet penetration is still low in China though people are embracing e-commerce activities and PC sales are increasing, thus urging the nation to go for further technological advancements. To leverage this growing demand of the sector, China aims its technology sector contribution from 5% of GDP now to 8% in 2015 and 15% by 2020.
Closer Look at Chinese Technology Sector
Surge in e-retail: The major share of China’s tech revolution stems from the growing demand for e-retailing. As per the market researcher McKinsey & Company, China is now boasting the world’s second-largest e-retail market proclaiming a CAGR of more than 100% in revenues since 2003 (see Focus on These China ETFs for Outperformance).
The market researcher estimates that by 2020 China’s e-retailing market will be at par with the combined U.S., Japan, the UK, Germany, and France markets at present. E-commerce penetration has already exceeded the U.S.
China E-retailing accounted for $190 billion in sales in 2012 and will likely touch the $650 billion mark by 2020. The sites including PaiPai, Taobao, and Tmall have been gaining traction over the years and will continue to grow ahead with higher consumption.
Broadband – A Promising Business: In China, broadband penetration stands at 30% which considerably lags the U.S. market penetration of 68%. Also, Internet usage by the urban Chinese has increased 14% annually since 2000, with continued migration of the country’s rural population to the cities. Thus, still-low penetration and higher pent-up demand clearly explain why the sector has immense potential in the coming years.
A Huge Market for Smartphones: Rising smartphone demand is another corner of the tech-boom that China is currently enjoying thanks to the increased availability of low-end "Android" phones. China is presently accountable for 38% of global smartphone shipments. Apart from the U.S.-based giants, domestic companies are also striving hard to capitalize on this bullish momentum (read: Inside the Surging China Technology ETFs).
As per Gartner, China drew nearly half of the Android devices sold during Q3, with nine of the country’s top 10 Android vendors being Chinese companies. This is in fact giving Apple (AAPL) a run for its money.
Growing High-End Population: The well-off population is growing at a faster clip in China and is expected to reach one-fifth of its population by 2020. This would make technological advancement affordable to a significant portion of the population.
How to Play?
There are now some quality picks in the Chinese technology ETF space that can provide investors with outsized returns. Highlighted below are three choices that have stocks in Mainland China addressing a large chunk of the country’s tech users.
Guggenheim China Technology ETF (CQQQ) in Focus
Making an entry in December 2009, CQQQ has garnered more than $60.0 million of assets. The top 10 stocks make up about 60% of its 40-securities portfolio thus having higher concentration risks. Baidu (12.5%), Tencent (12.2%) and Lenovo (8.3%) occupy the top three positions (see Forget FXI: Try These China ETFs Instead).
The ETF charges 70 bps in fees a year and pays a dividend yield of 1.22%. The fund returned a stellar 52.5% in the YTD time frame (as of December 12, 2013). CQQQ holds a Zacks ETF Rank #3 (Hold).
Global X China Technology ETF (QQQC) in Focus
This fund also arrived in the space in December 2009 and generated $12.5 million in AUM invested in 27 securities. Top holdings comprise more than 55% of the fund with Baidu (9.34%), Tencent (9.27%) and Lenovo (8.94%) taking up the top three spots like in CQQQ.
The fund surged a handsome 45.8% in the year-to-date time frame. QQQC is a cheaper fund, charging 65% of expense ratio. QQQC carries a Zacks ETF Rank #3 (Hold).
CSI China Internet ETF (KWEB) in Focus
This one is a rather new ETF making its foray into the market on July 31 this year and accumulated more than $6.0 million in assets within such a short span. About 60% of 27-holdings portfolio is invested in the top 10 stocks. Tencent (10.6%), Baidu (9.8%) and QIHO 360 (7.2%) form the top three holdings. The fund added 18.7% so far this year. KWEB charges 68% of expense ratio a year.
All three above-mentioned China-Tech ETFs returned much higher than the broad China fund iShares China Large-Cap ETF (FXI - ETF report) which added just 11% over the two-year time frame. However, KWEB displayed only 4.5 months’ worth of performance history, so it is tough to draw huge conclusions right now (see China ETF Investing 101).
From the chart above, we can see that the Chinese Technology sector remained unscathed over the years and has braved the big issues like ‘hard landing’ and ‘taper’ concerns. The reason behind this is the huge untapped market in the tech-space of China.
Thus, whatever happens in the U.S. regarding bond tapers in the future and China’s overall policy, we believe that investors can count on steady growth in this sector and bet on further appreciation in this interesting market segment.
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