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Is the Time Ripe to Buy Beaten-Down China ETFs?

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The Chinese markets have had a really tough time lately due to regulatory scrutiny on various sectors, mainly the all-important technology space. In April, technology giant Alibaba incurred a record $2.8 billion fine after a probe found that it had abused its dominant market position for years, as quoted on a BBC article.

In July, Tencent was asked to end its exclusive music licensing deals with record labels around the world. Also in July, some of the country's biggest online platforms — Kuaishou, Tencent's messaging tool QQ, Alibaba's Taobao and Weibo — were ordered to eliminate unsuitable child-related content, the article indicated.

This has made the space a value zone. HSBC’s Herald van der Linde sees opportunities now to buy Chinese stocks “at reasonable valuations,” as quoted on CNBC. KraneShares CSI China Internet ETF (KWEB - Free Report) — one of the worst performers in the space — is off 35.4% this year. Fears of contagion over the debt-laden Chinese real estate developer Evergrande Group have also hit the Chinese equities hard this year.

Time to Buy on Bargain?

UBS said that China’s Internet stocks are a “buy” as regulatory fears may ease, per a CNBC article. Per HSBC, Chinese stocks are also relatively inexpensive as compared with peers in the U.S. and India. Also, the COVID situation has appeared to have cooled. Industrial profits in China surged 16.3% year over year in September, according to data released Thursday by the National Bureau of Statistics.

Goldman Sachs said investing in China is more challenging now, but the country isn’t “uninvestable.” Moe, chief Asia-Pacific equity strategist and co-head of Asia macro research at Goldman Sachs indicated that “hard technology areas” such as semiconductors, where Beijing wants to become independent in are good bets, as quoted on CNBC.

In March, China’s largest and most important chipmaker Semiconductor Manufacturing International Corporation announced that it was building a $2.35 billion factory in Shenzhen — the Silicon Valley of China. Other sectors that are promising include clean energy. Last year, Chinese President Xi Jinping announced plans for the country’s carbon emissions to begin declining by 2030, with the aim of reaching carbon neutrality by 2060, the article said.

No wonder, Venture capital investment in China grew in Q3 of 2021 from the prior quarter, bringing year-to-date totals to more than all of 2020, multiple data sources revealed, quoted on CNBC. KPMG China indicated that “healthtech, hardware, and consumer market solutions are still attracting quite significant levels of VC investment in China,” despite regulatory crackdown, the same article indicated.

Lastly, Chinese developers were faced with falling shares and bonds last week, creditors seizing assets and rating agencies offering more downgrades, ahead of a final debt payment deadline for China Evergrande Group on Oct 29. However, Evergrande finally made coupon payment before Friday deadline. This may result in a relief rally in the near term.

ETFs That May be Tapped

Global X MSCI China Industrials ETF (CHII - Free Report) – Up 12.89% YTD; Up 4% Past Month

KraneShares MSCI China Clean Technology Index ETF (KGRN - Free Report) – Up 10.1% YTD; Up 14% Past Month

VanEck Vectors ChinaAMC SME-ChiNext ETF (CNXT - Free Report) – Up 8.2% YTD; Up 6.4% Past Month

Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS - Free Report) – Up 13.8% YTD; Up 1.7% Past Month

KraneShares CICC China 5G & Semiconductor Index ETF(KFVG - Free Report) – Down 6.7% YTD; Up 2.5% Past Month