China’s tech sector, once beleaguered and overlooked, is witnessing a world-beating rally with growing optimism surrounding the country’s tech stocks and its reversing fortunes after a tough year. In fact, these stocks look attractive given affordable valuations, strong sales data, and easing U.S.-China tensions.

Investors could tap the rebounding sector with the ETFs in the space. These include KraneShares CSI China Internet ETF (KWEB Quick QuoteKWEB - Free Report) , Invesco China Technology ETF (CQQQ Quick QuoteCQQQ - Free Report) , MSCI China Information Technology ETF and KraneShares CICC China 5G & Semiconductor Index ETF (KFVG Quick QuoteKFVG - Free Report) .

Inside the Rally 

Chinese tech stocks have been outperforming not only in their home market but also when compared to their American rivals. In the past week, the Hang Seng Tech Index in Hong Kong has outperformed the benchmark Hang Seng Index by the most since December. Moreover, the Nasdaq Golden Dragon China Index has beaten the broader Nasdaq Composite Index for three consecutive weeks for the first time since January. Both Hang Seng Tech and Nasdaq Golden Dragon indices have risen by at least 15% so far this month, outpacing the majority of equity indexes tracked by Bloomberg.

The outperformance was driven by optimism that the government will introduce new stimulus measures to secure the country's economic recovery. Potential measures include billions of dollars in new infrastructure spending and loosened rules that would encourage property investors to buy more homes. China's central bank also cut policy rates last week (read: China ETFs in Focus After Lower Borrowing Rates).

Additionally, China’s second-biggest online shopping event, the "6.18 promotional festival," has shown encouraging data, reinforcing the sentiment that Chinese consumers and e-commerce are back. Alibaba and JD.com (JD Quick QuoteJD - Free Report) , two major e-commerce giants, reported sales during the event that exceeded expectations, and Alibaba (BABA Quick QuoteBABA - Free Report) also noted a record number of vendors and a surge in daily users of short video.

Further, tech shares in China are trading near the cheapest value relative to their U.S. peers on record since 2006. Xiadong Bao, fund manager at Edmond de Rothschild Asset Management, stated, "China tech names were getting even cheaper after US tech’s AI rally in comparison."

If these weren’t enough, China’s economy has been recovering rapidly, with its consumer sector outpacing the overall economy. GDP expanded 4.5% in the first quarter, marking the highest growth since the first quarter of last year, as per data from China’s National Bureau of Statistics. Consumption, a major driving force of the domestic economy, picked up momentum in May, playing a stronger role in China’s economic growth. Retail spending rose 9.3% year over year to 18.76 trillion yuan ($2.6 trillion) in the first five months of the year, up 3.5 percentage points compared with that of the first quarter.

With an annual growth target of around 5%, the World Bank forecasts China's GDP to grow by 5.6% in 2023, driven by a rebound in consumer demand and steady infrastructure and manufacturing investment (read: 5 China ETFs to Tap as Economy Recovers).

ETFs to Tap

KraneShares CSI China Internet ETF (KWEB Quick QuoteKWEB - Free Report)

KraneShares CSI China Internet ETF provides concentrated exposure to China-based companies whose primary business, or businesses, is focused on Internet and Internet-related technology. KraneShares CSI China Internet ETF tracks the CSI China Overseas Internet Index and holds 32 securities in its basket, with a higher concentration on the top firms.

KraneShares CSI China Internet ETF has amassed $5.2 billion in its asset base and charges 69 bps in annual fees from investors. KWEB trades in an average daily volume of 17.7 million shares and currently has a Zacks ETF Rank #5 (Strong Sell) with a High risk outlook.

Invesco China Technology ETF (CQQQ Quick QuoteCQQQ - Free Report)

Invesco China Technology ETF follows the FTSE China Incl A 25% Technology Capped Index, which includes constituents of the FTSE China Index and FTSE China A Stock Connect Index that are classified as information technology securities, including China A-shares and China B-shares. It holds 131 stocks in its basket, with a higher concentration on the top three firms.

Invesco China Technology ETF manages an asset base of $902.1 million while charging 70 bps in fees per year. It trades in a volume of 108,000 shares per day on average and has a Zacks ETF Rank #5 with a High risk outlook (read: Time for China Tech ETFs Despite Mixed-Bag Earnings?).

MSCI China Information Technology ETF

MSCI China Information Technology ETF seeks to invest in large- and mid-capitalization segments of the MSCI China Index that are classified in the Information Technology Sector as per the Global Industry Classification System. It tracks the MSCI China Information Technology 10/50 Index and holds 118 stocks in its basket.

MSCI China Information Technology ETF has amassed $14 million in its asset base and trades in a volume of 1,000 shares a day on average. It charges 65 bps in annual fees.  

KraneShares CICC China 5G & Semiconductor Index ETF (KFVG Quick QuoteKFVG - Free Report)

KraneShares CICC China 5G & Semiconductor Index ETF follows the CICC China 5G and Semiconductor Leaders Index. The index is designed to track the performance of companies engaged in the 5G and semiconductor-related businesses, including 5G equipment, semiconductors, electronic components and big data centers.

With AUM of $14.2 million, KraneShares CICC China 5G & Semiconductor Index ETF charges 65 bps in annual fees and trades in an average daily volume of 2,000 shares.

Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.