Can China’s growth kickstart the Kraneshares CSI China Internet ETF?

The Kraneshares CSI China Internet ETF is struggling, despite the Chinese economy’s ongoing post-Covid recovery. The fund, which invests in Chinese internet-related companies, has dipped by 12% since the start of the year. However, it could turn a corner if China’s tech sector revives. Top holding Tencent recently reported positive quarterly results, though rival Alibaba missed expectations.

- Kraneshares CSI China Internet ETF falls nearly 12% this year, despite China’s Covid-battered economy seeing gradual recovery.

- Top holding Tencent posts positive revenues, but second holding Alibaba’s growth is sluggish.

- China predicted by IMF to be world leader for economic growth in 2023.

The Kraneshares CSI China Internet ETF [KWEB] offers exposure to China-based companies focused on internet-related technology. However, the fund, which tracks the CSI Overseas China Internet Index, has fallen 11.9% since the beginning of the year and is down 1.3% across the past 12 months.

Tight Covid restrictions, interest rate increases and regulatory crackdowns have weighed on the Chinese technology sector in the past couple of years. But, as inflation finally slows down and the Chinese government relaxes sector clampdowns, investors may be tempted back towards growth tech stocks.

China’s inflation rate fell to 0.1% in April 2023, the lowest rate since February 2021, according to figures from Trading Economics.

The fund offers exposure to firms “benefitting from increasing domestic consumption by China's growing middle class”, and gives access to Chinese internet companies including Tencent [0700.HK] and Alibaba [9988.HK], its top two holdings as of 19 May.

Hong Kong-based companies account for 67.1% of its regional exposure, while 31% of its holdings are based in the US.

Key players

Alibaba is the second-largest holding in the KWEB fund, with an 8.96% share of the portfolio.

Earlier this year it was announced that the leading Chinese tech company will split into six separate companies. Alibaba stock spiked 14.3% on 28 March, the day of the news, while KWEB crept up a somewhat more modest 4.3%.

The news also added $32bn to the company’s market cap within 24 hours, and led to £1bn-worth of investments in the KraneShares CSI China Internet ETF changing hands. Despite this, KWEB only saw £25m inflows on the day of the news, suggesting it may take more to inspire investor confidence in China-oriented ETFs. Last week, Alibaba reported quarterly revenue growth of 2%, lower than expected by Refinitiv analysts, while announcing plans to spin off its cloud-based business.

But the largest holding in the KWEB fund is ecommerce giant Tencent, with 12.05% of the portfolio.

Last week the WeChat owner announced positive earnings for its first quarter, reporting an 11% uptick in revenue, and exceeding forecasts by analysts polled by Refinitiv. However, the day following the news on 17 May, KWEB closed down 4.2%, suggesting the announcement failed to make a positive impact on the fund.

Outlook

China’s tech companies suffered in 2021 and 2022, amidst general stock market turmoil and China’s restrictive zero-Covid policy. However, since the government ended the policy last December, the Chinese economy has been in a state of recovery. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, in January indicated that the state’s clampdown on tech would also be ending, saying: “Next, we’ll promote healthy development of internet platforms.”

In early May, the International Monetary Fund predicted China will drive one-third of global growth in 2023. This has led to a more bullish outlook for China’s tech sector. Recent reports from Chinese internet firms “confirmed our view that earnings will continue to improve this year for the sector”, Jian Shi Cortesi, a fund manager at GAM Investment Management, told Bloomberg.

However, not all onlookers are as positive. In March, Martin Petch, Moody’s Investors Service senior credit officer and vice president, commented: “The government’s conservative growth target of 5% for 2023 recognises that the pickup in China’s growth continues to face headwinds.”