When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity. – John F. Kennedy
We all know China is a mess right now, but stocks are stocks. Momentum is momentum. Overreaction is overreaction. There is a price for everything and a trade for those nimble enough. Despite broader risks, there might be a very short-term trade in China Tech, although admittedly it’s very risky right here and right now. With that said, let’s take a look at the Invesco China Technology ETF (NYSEARCA:CQQQ).
Understanding the Invesco China Technology ETF
CQQQ is an exchange-traded fund managed by Invesco, a leading global investment management company. The fund specifically targets the Chinese technology sector, offering investors an opportunity to gain exposure to the dynamic Chinese tech industry. CQQQ is based on the FTSE China Incl, A 25% Technology Capped Index. This index encompasses 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.
This fund’s investment strategy makes it a potential alternative to the better-known KraneShares CSI China Internet ETF (KWEB). While KWEB primarily targets the Chinese internet sector, CQQQ offers a broader exposure to the entire Chinese tech industry. If we look at CQQQ relative to KWEB, we can see that it’s actually underperformed pretty substantially. The trend is intact, yes, but perhaps there will be a juncture in the near-term where this underperformance on a relative basis reverses.
CQQQ’s portfolio primarily consists of Chinese technology companies’ A-shares and B-shares, providing lower sensitivity to potentially delisting fears. These companies span a wide range of sub-sectors within the broader technology industry, including information technology, communication services, and consumer discretionary.
Note that Tencent makes up nearly 10% of the portfolio, leaving the fund open to some degree of idiosyncratic risk despite its overall sector diversification. It’s worth noting that CQQQ does not hold positions in some prominent U.S.-listed Chinese tech companies, such as Alibaba (BABA) and JD.com (JD).
The Chinese Tech Industry: A Rising Powerhouse
China has firmly established itself as a global technology powerhouse over the past decade. It has emerged as a leader in several technological fields, thanks to its vast domestic market, robust education system, and substantial government support for tech innovation. The country has been churning out engineering graduates at a rapid pace, significantly contributing to the tech workforce. This, coupled with the government’s push for self-sufficiency in technology, has spurred a wave of innovation and growth in the Chinese tech sector.
The Potential Risks: Geopolitical Considerations
The primary risk stems from geopolitical tensions between China and the U.S., which could impact Chinese tech companies’ access to crucial technological inputs such as high-end semiconductors. Furthermore, the recent regulatory crackdown by the Chinese government on its tech sector is problematic. These regulatory measures, aimed at curbing anti-competitive practices and enhancing data security, could potentially impact the profitability and growth prospects of Chinese tech companies.
The bottom line here is simple. The Invesco China Technology ETF (CQQQ) is a good proxy for the burgeoning Chinese tech sector. However, the potential geopolitical and regulatory risks underscore the longer term problem of investing here. For a trade maybe this can work, but for an allocation I remain long-term skeptical.
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