China Sector Analysis: Information Technology

For years, China has focused on moving its industries up the global value chain, including the development of a robust domestic Information Technology (IT) sector. China’s supportive government policies, along with its massive domestic market of 1bn internet users and 882mn smartphone users have given domestic IT firms room to flourish.1,2 China’s rapid advances in next-generation fields like 5G, mobile payments, e-commerce and artificial intelligence have not gone unnoticed by the international community. Other countries are increasingly attentive to the meteoric rise of China’s Information Technology firms, as they seek to protect their own domestic high tech industries from China’s growing competitiveness.

As an installment in an ongoing series about 11 major economic sectors in China, this piece will examine the Chinese Information Technology sector, which is tracked by the Global X MSCI China Information Technology ETF (CHIK).

Key Stats

Economic output from Telecommunications, Software and Information Technology in 2020 was $587.4bn, according to the Chinese Ministry of Statistics. Value added by the sector grew by an impressive 16.9% last year despite the fact that COVID-19 led to low or negative growth rates for several other sectors. Prior to the pandemic, growth was 18.7% in 2019, only 1.8% higher than 2020’s figures, showing the resilience of this sector amid a difficult global economic environment.3,4

American Depositary Receipts (ADRs) are stocks of Chinese companies listed on American stock exchanges. A shares are listed on domestic stock exchanges in China and have been historically difficult to access. P Chips are stocks of companies operating in China, listed in Hong Kong, and incorporated in the Cayman or British Virgin Islands. Red Chips are stocks of companies based in China, incorporated abroad, and listed in Hong Kong. H shares are stocks of companies incorporated in China and listed in Hong Kong.

Background on the Information Technology Sector in China

Perhaps no city better captures the quick ascent of China’s Information Technology center than Shenzhen. In 1980, Deng Xiaoping established a Special Economic Zone (SEZ) in Shenzhen, which at the time was a small city surrounded by underdeveloped villages near the Hong Kong border. As an SEZ, Shenzhen was granted unique privileges of relaxed price controls, foreign direct investment and other capitalist market policies unprecedented since the founding of the PRC in 1949. Shenzhen is now a bustling metropolis that boasts a GDP of $429 billion, or approximately 3% of China’s GDP, and is home to tech giants like Tencent, Huawei, ZTE and drone-maker DJI. About 90% of the world’s electronics come from Shenzhen.5

In 1991, there were only 261 patent applications in the Shenzhen SEZ. By 2019, that number skyrocketed about a thousand times to 261,502.

Shenzhen is not the only innovative city in China often compared to Silicon Valley. Shortly before the founding of the Shenzhen SEZ, a cluster of private tech enterprises began to emerge in an area of Beijing known as Zhongguancun.6 The area became known for its crowded electronics markets and the tech giants that it nurtured; Lenovo, JD.com, Kuaishou, Baidu, Bytedance, Didi, Xiaomi and Meituan all have roots in Zhongguancun. Zhongguancun and Shenzhen are both important to the Chinese tech industry and worth paying attention to.

The IT sector consists of several industries, each with their own drivers and features.

  • ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS

The largest industry group is electronic equipment, representing over one third of the sector. China’s extensive supply chains, fixed capital investment, and low cost of labor has made it a prime destination for the manufacturing of electronic equipment, instruments and components. China exported approximately $1.4 trillion in electronic equipment and computers in 2019.7 In response to growing demand from emerging technologies like 5G and electric vehicles, in February 2021 the Ministry of Industry and Information Technology announced a plan to achieve $322.35bn in total electronic components sales and develop 15 electronic component companies with revenue over the $1.5bn mark by 2023.8

SUB-INDUSTRY LEADERS: Sunny Optical, Kingboard, AAC Technologies

  • SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT

The third largest industry group is semiconductors and semiconductor equipment, which makes up 18% of the sector. One of the major themes in the Chinese semiconductor industry is the need to establish self-sufficiency. China imports upwards of $300bn in semiconductors every year and lacks the technological expertise needed to fulfill its own domestic need for advanced semiconductors.9 Through policy initiatives like Made in China 2025, the Chinese government has been trying to close the technology gap between local companies and well-established companies in the US, South Korea, Taiwan and Japan. Most of China’s investment into the semiconductor industry on the national level is carried out through the National Integrated Circuit Industry Investment Fund, which was established in 2014 with $21.2bn in capital, around $14.2bn of which went into semiconductor manufacturing by the end of 2019. In 2019, the Chinese government poured another $31.2bn into the fund to further stimulate investment in this strategic industry.10 In the 14th five-year plan, which was released in March 2021, China included third-generation semiconductor technology in a list of technologies it wants to support with scientific research programs.11 Out of the $1.4 trillion that the government plans to spend on the IT industry until 2025, roughly $155bn is earmarked for semiconductors.12 So far these initiatives have had limited success, but Beijing hopes to turn that around. US sanctions against Huawei in 2019 and against SMIC in 2020 underscore how the Chinese semiconductor industry is vulnerable to political risk.

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Disclosure: The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate ...

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