24 Aug 2020
Posted in Business Fundamentals
Despite ban on apps, Chinese tech stocks continue to yield impressive returns, reveals GlobalData
Ban on apps and technology companies notwithstanding amidst the rising data breach concerns, the Chinese technology sector continues to yield impressive returns with domestic support, finds GlobalData, a leading data and analytics company.
The COVID-19 pandemic has disrupted the supply of critical raw materials, thus affecting the electronics value chain of the technology sector in China. In addition, economies such as the US and India have imposed a ban on Chinese apps, most notably, TikTok and WeChat. At the same time, Huawei 5G technology continues to be heavily scrutinized across different countries. However, in spite of all these roadblocks, the tech sector in China is witnessing growth owing to rising domestic demand.
Anindya Biswas, Company Profiles Analyst at GlobalData, says, “Despite warnings from the US of strict actions against Chinese apps, the NASDAQ listed Invesco China Technology ETF (CQQQ), a major index tracking the market performance of Chinese tech companies, reported a year-to-date (19 August 2020) return of 24.3%which was inching closer to Invesco QQQ ETF’s (QQQ), the US-equivalent of CQQQ (Invesco China Technology ETF), which registered a YTD return of 27.7%. Back in China, the Shenzhen listed tech-focused ChiNext Index reported an YTD return of 42.6%. The increment was mainly due to an increasing confidence within the investors as a result of the Chinese President’s new dual circulation policy*.”
CQQQ’s major stocks thrive on strong demand for their products and services. Tencent Holdings reported quarter-on-quarter revenue growth of 6.3% in Q2 2020, as a result of rise in the number of monthly active user accounts and growing spend in automobiles and consumer electronics. Other top players such as Baidu and NetEase reported growth of 15.5%, and 25.9%, respectively, in their quarterly revenues that further contributed to the market performance of CQQQ.
Despite the challenges posed by the COVID-19 pandemic, things continue to look up for the technology sector in China. Recent months saw Chinese companies such as Huawei, Xiaomi and Oppo replacing Samsung and Apple as top players in the global smartphone market. Multiple models, competitive pricing and domestic demand have been supportive factors.
Biswas concludes: “Although the US recently joined Australia, New Zealand, Vietnam, Taiwan and Norway the list of countries which reduced their dependency on Chinese technology, thereby depriving access to users’ data from these countries, traders and investors seem to be unperturbed as they lined up to invest in domestic market. However, the impact of inward re-orientation of the Chinese economy as a result of these roadblocks and the success of the country’s dual circulation to be seen in the long-run.”
*The dual circulation policy focuses on increasing domestic consumption and securing local supply chains for crucial sectors such as technology. This is to counter the challenges faced by the export sector due to the tariffs imposed on the Chinese goods by the US.