China’s tech sector in focus

China’s most important annual political meeting of the year has now wrapped up and unveiled some important strategic directions for the Middle Kingdom.

The “Two Sessions” brings together China’s political elite and includes the top two national-level committees – the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC). The week-long event which is held in March every year had even greater significance this year as it marked the start of a new cycle of China’s Five-Year Plan (FYP) for 2021 to 2025. This year’s Two Sessions also formally introduced China’s longer-term vision for 2035 and the first steps the country will take to meet these objectives. Polices and legislations to tackle challenges ranging from economic recovery to the US rivalry were on the agenda.

One of the areas in spotlight is the push for independence of science and technology innovation, such as microchips and semiconductors. Sci-tech innovation goes hand in hand with research and development (R&D) – China has seen rapid expenditure on R&D in 2020 estimated at 2.4 trillion yuan (~372 billion US$) and is expected to grow 7% in the next five years, according to Xinhua. On the innovation front, China's ranking in the Global Innovation Index, released by the World Intellectual Property Organisation, rose from 29th in 2015¹to 14th in 2020².

The FYP proposes further expansion in sectors like AI, quantum computing, integrated circuits and 5G development. The tech cycle generally starts with technology equipment and hardware, followed by demand in software updates and evolution, and finally the “internet of things”, i.e. inter-connectivity of physical electronic devices. There are many potential investment opportunities in the growing IT sector, including both companies listed domestically and offshore, as China continues to invest in R&D over the next decade.

 - Cloud computing: Alibaba Cloud, the cloud computing arm of Chinese e-commerce giant Alibaba, achieved positive adjusted EBITDA in 4Q 2020 since its launch 11 years ago. This could be a signal that cloud infrastructure has gradually reached economies of scale, a solid foundation to drive digital transformation of manufacturing and production in the future.
 - Communication: the growth in 5G applications would accelerate in downstream sectors such as vehicle-to-everything, industrial internet-of-things, computer vision, and the consumption supply chain.
  - Semiconductors: with the global chips shortage, Chinese semiconductor producers might benefit and potentially be a catalyst for switching from imports to locally manufactured ones.

You can access the Chinese technology sector via our VanEck Vectors China New Economy ETF (CNEW). 


¹https://www.wipo.int/pressroom/en/articles/2015/article_0010.html
²https://www.wipo.int/edocs/pubdocs/en/wipo_pub_gii_2020.pdf