‘The worst is over’ Tech investors are bullish on investing in China again

KEY POINTS

  • Tech investors are optimistic about China as the country pledges to boost the economy and regulatory headwinds abate.
  • “I do think that they’re going to do everything they can to try to spur the economic growth. It would be very surprising if there were other wide ranging regulations that came out to deter that, because it would be sending a very opposite signal,” said Chibo Tang of Gobi Partners.
  • But still, Quest Ventures’ James Tan said smart investors realized they “cannot put all of their eggs in one basket.”

Tourists watch dragon dance to celebrate Chinese New Year, the Year of the Rabbit, at a tourist attraction on January 30, 2023 in Kunming, Yunnan Province of China.

Liu Ranyang | China News Service | Getty Images

Tech investors say the worst is over as China reopens and exits its zero-Covid policy.

“I think the government has a clear signal about what they hope to do this year in terms of gross domestic product growth, jobs and domestic consumption,” said Chibo Tang, managing partner at Gobi Partners, which invests in early-stage tech and media companies in China.

In December, the Chinese government pledged to raise domestic consumption and boost growth in 2023. China’s economy grew just 3% in 2022 – far below the official target − weighed down by tough Covid restrictions and a property market slump.

“There will be pent-up consumption in China. There might be some inflation because of this but overall, the outlook should be optimistic,” said Tay Choon Chong, managing partner of Vertex Ventures China.

The firm raised nearly $500 million for a new China tech fund set to close by early this year — more than earlier plans for $400 million.

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“When we raised the fund last year, it was in the midst of [China’s] political changes but we are optimistic because we see that the government will be focusing on economic development, and that is the basis,” said Tay.

“China has all the ingredients for successful investments,” said Tay, adding that China has a talent pool made up of “educated, hungry and hardworking people.”

Tech companies see government support

Investors are not worried of new challenges on the regulatory front.

Beijing recently granted access to a U.S. accounting watchdog, helping to resolve an audit dispute that threatened to delist Chinese companies from U.S. exchanges. China also resumed license approvals for imported games and approved a new capital injection into a major fintech company.

“If there’s any caution, it will be because of the potential of new Covid strains and not potential government crackdown or regulatory constraints because that was already happening before Covid,” said James Tan, managing partner at Singapore-based Quest Ventures.

Morgan Stanley said in a report that China’s Central Economic Work Conference explicitly promoted the role of platform companies in leading economic growth and creating employment opportunities.

“This suggests Big Tech regulation has entered an institutionalized and stable stage, and we don’t expect new, aggressive measures any longer,” the report said.

Gobi’s Tang said, “I do think that they’re going to do everything they can to try to spur the economic growth. It would be very surprising if there were other wide ranging regulations that came out to deter that, because it would be sending a very opposite signal.”

Chinese tech stocks have surged this year with Alibaba soaring 19%, Tencent jumping 18%, Baidu gaining 26% and NetEase up 21%, as of Monday’s close.

“We haven’t recommended to get into Internet names for a long time, between January 2021 and all the way until December 2022, especially with skepticism around the Internet sector,” said Laura Wang, managing director and chief China equity strategist for Morgan Stanley, in an interview with CNBC on Jan. 17.

We’re getting even more bullish on Chinese stocks, says Morgan Stanley

“But we believe now is the time to get back in there. The Internet sector actually has very high correlation with the general momentum of consumption pickup in China and we know that that is about to happen post-covid recovery,” said Wang.

More investments in strategic areas

Quest Ventures’ Tan said what happened in China highlights the importance of diversification.

For example, iPhone maker Apple is diversifying its supply chain out of China, following Covid lockdowns and worker protests at its Zhengzhou plant which delayed production.

“With the doors now open, smart investors realize that they cannot put all of their eggs in one basket,” said Tan.

“I think we will see a lot more investments in key new areas strategic to China such as quantum computing, artificial intelligence and semiconductors, because the investments that need to go into the semiconductor industry is necessarily huge,” said Tan.

The Netherlands and Japan – two of the world’s largest advanced semiconductor equipment makers – are expected to join the U.S. in restricting exports of some chipmaking machinery to China, Bloomberg reported.

“There’s still a lot to catch up [in semiconductor tech] for China. China doesn’t have a lot of semiconductor [manufacturing] equipment and it’s also very high tech content. But China will embark on its own ways to develop and catch up,” said Tay, adding that Vertex has been investing in semiconductor, IT design and cloud computing companies.

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