Posted inAsset Class in Focus

Regulation a risk of investing in China tech

The tightening of regulations, particularly in online gaming and digital payments, is the top risk when investing in China's technology companies, according to Eric Mok, senior executive director at Franklin Templeton Investments.
Regulation a risk of investing in China tech

China’s internet firms have been actively searching for new growth drivers to diversify their business and sustain growth. Some of the large-cap players have developed new operations, such as digital payment platforms and mobile games to generate additional profits in their internet-focused business.

For instance, Tencent’s core business is the development of the social media platform and messenger app WeChat. However, it has been developing new offerings in mobile gaming, cloud technology, and even distribution of asset management products.

In June 2017, one of Tencent’s top-earning games was publicly criticised by the country’s official newspaper People’s Daily, citing the authorities’ concern about addiction among teenage gamers and advocating for stronger regulation of online game providers.

Implementation of such regulatory changes is the top risk investors in Chinese tech firms should take into account in the near term, Mok said at a media briefing in Hong Kong last week. Chinese government is also said to aim for closer control over broadly-held technology giants.

In addition, broader scrutiny of banks’ lending practices announced earlier this month, would also negatively impact tech firms, many of which have established digital payment platforms as their side business, he added.

In general, Mok still finds investing in Chinese tech companies attractive because of a robust growth outlook. But he said that companies with ambitions to expand outside of the country are more appealing.

“Some Chinese tech firms have become active in finding opportunities in the under-penetrated markets across Southeast Asian and African countries, where digital payment services and cloud technology are not as well-established as in China,” he said.

There are interesting opportunities in areas of technology with less regulatory risk but strong growth prospects, such as the electronic component makers, according to Mok. “Despite the slowdown in high-end smartphones sales, the sector of electronic component manufacturing remains very attractive,” he said. “[New] technologies applied on smartphones, such as face recognition and wireless charging, will drive the growth of these companies.”

He said although lower smartphone sale figures might affect short-term investment sentiment, the long-term growth remains positive.

Mok co-manages Templeton Asian Growth Fund, which invests 29.96% of its assets in China.

In the recent months, China’s tech giant Tencent became the major driver of the rally in Hong Kong’s stock market, pushing the local benchmark to record highs. Tencent was also one of the most widely-held companies in Asia equity portfolios.

Tencent’s 3-year performance against Hang Seng index

Source: FE, in USD


Mutual funds with more than 5% holdings in China’s tech giants


Alibaba Baidu Tencent
HS – China Equity 9.12% 6.47%


Nomura – China 9.07% 5.34% 9.71%
Parvest – Equity China 9.11% 5.12%


BOCHK – China Consumption Growth 10.00% 6.10%


BOCHK – China Equity 9.70% 5.40% 9.70%
BOCHK – NCB China Equity 10.70% 5.40%


Deutsche – Invest I Chinese Equities 9.50% 5.30% 9.70%
Robeco – Chinese Equities 9.95% 5.40%


Source: FE, funds registered for sale in Hong Kong or Singapore.

Part of the Mark Allen Group.