China's economy has been experiencing a slowdown, with GDP growth in Q2 2024 reaching 4.7%, below expectations and slower than the previous quarter. In response, the People's Bank of China (PBOC) made a surprise move on July 22, cutting interest rates to boost the economy. The PBOC lowered its seven-day reverse repo rate by 10 basis points to 1.7%, and reduced the one-year and five-year loan prime rates (LPR) to 3.35% and 3.85%, respectively.
This move is expected to have a ripple effect across various sectors, with tech being a potential big winner. Chinese tech stocks have been struggling due to regulatory crackdowns and economic slowdowns, but increased liquidity and stimulus measures could give them a much-needed boost. The sector is still trading at a deep discount compared to its U.S. counterpart and to historical levels, making it an intriguing opportunity for investors willing to accept the heightened geopolitical risks.
That's where the KraneShares CSI China Internet ETF (KWEB) comes in. This ETF offers a unique chance to invest in a potential Chinese tech rebound with a portfolio that includes some of the country's top tech heavyweights. With Beijing's recent actions seemingly targeted toward revitalizing its top growth industries, KWEB is well-positioned to capitalize on any tech resurgence.
Rate Cuts and Tech Stocks
What does looser monetary policy mean for Chinese tech stocks? Quite a lot, potentially. These rate cuts are like rocket fuel for the economy, making borrowing cheaper and encouraging increased spending and investment. For tech companies, this could mean more capital for research and development, expansion plans, or even mergers and acquisitions.
But it's not just about the R&D, or even the M&A. When interest rates drop, investors often seek higher returns via growth-fueled stocks. As those same tech stocks that seemed too risky yesterday start to look a lot more appealing today, the overall impact of increased investment in the sector can drive up stock prices.
Moreover, lower rates tend to boost consumer spending. In a country where e-commerce is king and mobile payments are ubiquitous, increased consumer activity directly benefits many tech companies. Imagine waves of additional consumers shopping on Alibaba (BABA) or JD.com (JD), or using services like Meituan for food delivery.
And Beijing knows tech is a key driver of growth. Earlier this year, the PBOC set up a $69 billion re-lending program specifically aimed at tech companies. This initiative is designed to provide low-cost loans to tech firms, helping them innovate and expand.
As those funds start to flow through the sector, it could be a game-changer for the Chinese internet companies that KWEB tracks - and the possibility of similar initiatives by the PBOC to help tech companies access cheaper capital could also be supportive of growth.
Overview of KWEB
The KraneShares CSI China Internet ETF (KWEB) offers investors a unique opportunity to tap into China's internet sector. It manages an impressive $4.80 billion in assets, underscoring its size and popularity with investors seeking exposure to the Chinese tech investment landscape. With average volume of over 16 million shares, KWEB is highly liquid, and also has an active options market.
KWEB has given up 12.3% over the past 52 weeks, and the exchange-traded fund (ETF) is down by nearly half over the last three years. Since setting a 52-week low in January, KWEB has gained about 17%, but the shares have also retreated 19% from May's YTD highs. All things considered, that's a YTD return of about 2% to the downside. In other words, holding shares of KWEB isn't necessarily for the faint of heart.
KWEB's strategy is straightforward yet effective: it tracks the CSI Overseas China Internet Index, focusing on China-based companies in the internet and related sectors. This approach allows investors to gain exposure to both U.S. and Hong Kong-listed shares of Chinese internet giants, providing a diversified yet concentrated portfolio.
Speaking of portfolios, KWEB's top holdings include some of the biggest names in Chinese tech. Tencent Holdings (TCEHY) leads with 10.22%, followed by Alibaba Group (BABA) at 9.72%. Other major players in the mix are Temu parent company PDD Holdings (PDD) at 8.06%, Meituan at 7.30%, and JD.com (JD) at 5.64%. The list continues with NetEase (NTES) at 4.55%, Tencent Music Entertainment Group (TME) at 4.41%, Baidu (BIDU) at 4.01%, Trip.com Group (TCOM) at 3.90%, and KE Holdings (BEKE) at 3.84%. These top 10 holdings account for over 61% of the fund's total assets, indicating a focused bet on the sector's leading players.
For income-seeking investors, KWEB offers an annual dividend. The most recent payout was $0.46 per share, translating to a dividend yield of approximately 1.67%. While not a high-yield play, this dividend adds a welcome income component to the growth-oriented ETF.
Of course, these benefits come at a cost. KWEB's expense ratio is 0.69%, which - while not the lowest - is reasonable given the specialized exposure it provides to China's tech sector.
KWEB's strategy of offering exposure to both U.S. and Hong Kong-listed shares of Chinese internet companies is particularly noteworthy. This dual-listing approach provides flexibility and potentially reduces risk, allowing the fund to navigate regulatory challenges and market fluctuations more effectively.
Is KWEB a Good Bet on China Tech Stocks?
In summary, the KraneShares CSI China Internet ETF (KWEB) offers a compelling opportunity for investors looking to capitalize on a potential rebound in Chinese tech stocks. With significant assets under management, a strategic focus on leading Chinese internet companies, and the potential tailwinds from recent PBOC monetary easing, KWEB is well-positioned to benefit from any positive shifts in the market. That said, traders should be aware of the specific geopolitical risks here, and proceed with caution accordingly.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
