Is KraneShares CSI China Internet ETF finally back in business?

China’s economy has been slow to recover from the effects of the pandemic, but the government is seeking to reverse this. KraneShares’ tech-focused KWEB fund might yet benefit from new plans to support the technology industry, following two years of regulatory crackdowns.

• KraneShares CSI China Internet ETF up 8% as Politburo meeting discusses plans for economic recovery.
• End of the tech crackdown finally in sight for China’s biggest players.
• Jack Ma’s Ant Group IPO is potentially back on the table.

The KraneShares CSI China Internet ETF [KWEB] has leapt 7.8% in the last week, as China’s President Xi Jinping announced a pledge to boost the ailing economy, including measures intended to “actively expand domestic demand”, according to state news agency Xinhua.

The fund may also be benefitting from the easing of the crackdown Beijing had imposed on Chinese tech firms in the past two years. Recent fines issued to firms Tencent [0700.HK] and Ant Group, totalling more than $1bn, are seen as an indication that stringent regulatory measures are ending.

The KWEB fund offers exposure to Chinese internet companies offering services similar to those of Alphabet’s [GOOGL] Google, Meta’s [META] Facebook, Twitter, eBay [EBAY] and Amazon [AMZN], and tracks the CSI Overseas China Internet Index. The stocks included in the index are all listed either in the US (55.7%) or in Hong Kong (44.3%).

Positive sentiment for tech shares may also have been driven by speculation that an IPO for Jack Ma’s Ant Group is back on the table. The company’s stock market launch — anticipated to be the world’s biggest ever — had been scheduled for 2020 but was blocked by Xi Jinping’s administration.

Despite the recent uptick, KWEB is down 5.1% since the start of the year.

Alibaba holding onto Ant Group shares

The biggest holding in KWEB is ecommerce giant Alibaba [9988.HK] with a 9.09% weighting in the portfolio as of 28 July. Alibaba is up 13% year-to-date, and climbed 2.5% over the last week.

At its first quarter earnings in May, Alibaba announced revenues up 2% year-over-year to RMB208.2bn ($30.3bn), missing analyst expectations. Operating incomes fell by 9%, to RMB15.2bn ($2.2bn). The earnings were the first posted since Alibaba announced it was splitting into six separate divisions, including its cloud division.

Alibaba owns one-third of Ant Group, which was founded by Ma, and which recently announced that it plans to buy back up to 7.6% of its stock, worth $6bn. Alibaba said it would not be offloading its portion of Ant Group shares.

The second-largest holding in KWEB is Tencent Holdings [0700.HK], with a 8.93% weighting in the fund. Like Alibaba, the Chinese ecommerce leader saw its share price spike on 10 July on news that China’s regulatory crackdown might be lifting, following Ant Group’s $984m fine.

Tencent shares are up 2.7% in the last week.

More detailed plans needed for healthy Chinese growth?

The tech sector in China seems positioned for recovery following two years of tough regulations, which would be good news for the KraneShares CSI China Internet ETF.

The South China Morning Post last week reported that the government is looking to “roll out the red carpet” for big tech as it seeks to stimulate the economy, with several regions signing cooperation deals with Chinese internet companies.

On 26 July, Alibaba announced that it had become the first Chinese company to sign up to Meta’s open-source artificial intelligence (AI) model Llama, which could help the company to fulfill its own AI ambitions.

However, following last week’s Communist Party Politburo meeting, some commentators expressed concern that there was not more concrete detail to shore up the government’s economic ambitions, such as, for example, plans for tax cuts or increased wages. At present, China’s goal is for growth of 5% in 2023.

At CNN, 51 analysts offering a 12-month price target for BABA stock, Alibaba’s US listing, offer a median 12-month price target of $139.37, which would represent a 38.6% rise from its last close. The consensus among 59 analysts is to ‘buy’ BABA stock.

The median price target for TCEHY, Tencent’s US-listed share, is $57.49. Consensus among 59 analysts at CNN is to ‘buy’ the company’s shares.