As China moves away from the largely state-controlled “old economy” of heavy industry and embraces the innovative and entrepreneurial “new economy” of technology, it has to come to terms with what the transition will do to its market environment and the political landscape, according to Gary Greenberg, head of emerging markets at Hermes Investment Management.
The Party is reluctant to loosen its grip on the market, but the growth of China’s sprawling internet and e-commerce giants may eventually have an impact on policy direction.
“The transition to a technology-led economy, which has happened in the US and other western economies largely without government intervention, has become an urgent matter of national policy in China,” Greenberg writes.
Tech giants and risk
China’s leading tech giants no longer need to copy from their western peers, but have established themselves as bona-fide innovators, Greenberg believes.
Alibaba is among the world leaders in e-commerce, both by size and scope of innovation. Tencent has surpassed its western peers in the reach and scope of its social media platform WeChat. China Mobile, in the meantime, has taken the lead on developing the new 5G mobile networks.
The promise of the Chinese tech giants is well known. Far fewer discussion is around the unique risks. For example, a clash between internet innovation and Chinese government ideology could result in downscaling of corporate ambitions.
Greenberg noted that even though not directly supported by the government, the tech leaders are not likely to face regulatory restrictions, unlike their peers Google or Facebook in the West, as long as they “play by the Party rules”.
The tech companies are also unique in that they have grown huge in a protected market — Facebook, Google and Twitter are banned in China. As these companies expand further into international markets and face strong foreign competition, the risk of missteps increases.
Many China equity funds hold large positions in Alibaba, Tencent, China Mobile and several other technology companies. Investors in these funds should be aware of concentration risk.
Mutual funds with more than 5% holdings in Alibaba, Tencent and China Mobile
| Alibaba holding | Tencent holding | China Mobile holding | |
| Invesco China Focus Equity | 10.4% | 10.1% | 8.4% |
| Invesco PRC Equity | 6.9% | 9.9% | 5.3% |
| BOCHK – NCB China Equity | 9.7% | 9.8% | 5.2% |
| Invesco – Asia Opportunities Equity | 6.2% | 7.0% | 6.1% |
Data: FE, 24 August 2017, funds registered for sale in Hong Kong or Singapore.
