Spies Like Us – Chinese Technology Sector Expanding

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Prior to joining Global X Funds, Alex Ashby lived and traveled extensively throughout Asia.  He currently manages a group of six ETFs covering the consumer, energy, financial, industrial, material, and technology sectors of the Chinese economy.  The Global X NASDAQ China Technology ETF (NASDAQ: QQQC) provides investors with exposure to technology companies in China and is designed to be a transparent, cost-efficient way to get access to the country's growing tech and social media sectors

Nick Slepko:  Counterintuitively, China Tech has been the least popular of your six China funds among investors.  Why is that?

Alex Ashby:  Investor interest in various sectors of the economy tends to fluctuate, and this holds true when looking at sector ETFs in China as well.  This sentiment can also change very quickly, so just because one sector may be out of favor at the moment does not mean that will always be the case.  Regarding the technology sector in China, I think it is an area where investors are less familiar with the local companies – they may have heard of companies like Baidu (NASDAQ: BIDU) and Lenovo (NASDAQOTH: LNVGY), but beyond these companies and a few other names they may not have a good grasp of how much the technology industry is expanding within China.  Many of the companies in [QQQC] operate primarily in China and have not developed as much of a global presence yet, but investors may also be underestimating the size of the market opportunity within China – and also the restrictions that make it harder for foreign competitors to penetrate.  To put the size a bit into perspective, China has over 500 million Internet users compared to just over 200 million in the US.  Even more importantly, the expansion potential in China is huge – the Internet penetration rate is only about 40% compared to 80% in the US.

Slepko:  Huawei [privately held and not included in the ETF] and ZTE have been in the news quite a bit and been punching bags for American politicians looking to get “tough on China.”  Are investors put off by rumors (true or not) that Chinese tech companies could be involved in espionage, or at least, that valuations and business will be impacted by politics.  Also, a company like Qihoo 360 (NYSE: QIHU), dominates the Chinese computer security market, but will perceptions of Chinese “in”-security crush any hope for them to expand their offerings outside of China?

Ashby:  I think that in most cases, investors generally prefer industries where there is less government involvement and regulation because it reduces a bit of the political uncertainty.  There are exceptions of course, but overall this sentiment seems pretty consistent.  I don’t think that espionage is the primary concern for investors looking at the technology sector in China, but rather that changes in government policy might affect how some of these companies operate.  This is also why we view the recent leadership change in China as so significant – these new leaders have the opportunity to increase transparency throughout the economy and implement the types of reforms that will help make these companies even more competitive.  Although it is a little early to tell, investors seem to think that the new leadership will implement some positive reforms in different areas of the economy.

As I mentioned briefly, one of the interesting things about technology and social media in China is that there are a lot of restrictions on foreign companies, so many of these local companies have an advantage within China.  In some ways, [QQQC] is a way to play the consumer angle, but also the development of China as a center for technology.  Companies like Lenovo are starting to gain significant market share outside the country and the company is becoming more of a recognizable name among consumers here in the US as well.

[continued in The Future of Chinese Technology – Social Manufacturing?]



Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool owns shares of Baidu. Motley Fool newsletter services recommend Baidu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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