Global X China Tech ETF in the works

Global X is preparing to launch a China technology ETF, citing the country's shift from policy planning to delivery, stabilising fundamentals and depressed valuations, while also emphasising the critical nature of selective exposure.

Ahead of the launch of the Global X China Tech ETF (ASX: DRGN), the firm said the country's years of strategic investment in manufacturing capacity, digital infrastructure and research capabilities are now translating into "operational scale" across multiple sectors.

Global X noted that in semiconductors, China has repositioned its focus around "commercially viable technologies," accelerating investment in mature nodes, power chips and packing - components essential for electric vehicles (EVs) - industrial automation, and national infrastructure.

The firm said that since 2020, China has tripled its semiconductor capex, with spending stabilising above US$30 billion as its focus shifts from building capacity to scaling production. Despite "external pressure," it added, investment has continued to rise, targeting segments with immediate domestic demand and strategic relevance.

China's EV sector, which holds a 60% share of the global market, according to IC Insights, offers a parallel example, the firm said. It noted that carmaker BYD delivered more than three million vehicles in 2023 - well ahead of its rivals Tesla and Volkswagen.

"Beyond assembly, China's supply chain strength in batteries, power electronics and materials integration is positioning it at the centre of global EV production," Global X said.

Meanwhile, China's AI ecosystem is also emerging as a structural advantage, with the country holding a dominant 60% share of global AI patents, according to the firm.

The firm noted that inference costs for large-scale models are now more than 90% lower than in the US. This cost efficiency, it said, is enabling faster deployment across logistics, enterprise software and public infrastructure.

This doesn't represent progress in isolated verticals alone; rather, it reflects a coordinated transition across the innovation economy, which is moving to scaled commercialisation, Global X added.

Global X also noted that despite operational progress, investor sentiment towards China's innovation sectors remains cautious, with broader concerns around growth, regulation, and global positioning keeping multiples compressed even as company-level fundamentals stabilise.

The firm said valuations for China's top seven technology companies are trading at less than half the forward multiples of the US Magnificent Seven. Nevertheless, it noted that revenue growth is steady, margins are expanding, and cash flow resilience is emerging.

China's digital economy currently accounts for over 45% of its GDP and is forecast to exceed 55% by 2030. Global X argues that innovation leaders across semiconductors, automation and the AI ecosystem aren't peripheral to that growth, but central to productivity and modernisation.

"The dislocation between market perception and sector fundamentals presents an opportunity. Investors willing to focus on operational quality rather than headline noise are finding entry points at valuations not seen since the mid-2010s..." Global X said.

Global X's final rationale for investing in China's tech sector is the growing divergence within it. Legacy internet platforms and consumer discretionary technology companies are facing structural challenges, including slower user growth tighter regulatory oversight, and compressed margins, it said. In contrast, sectors aligned with national priorities, such as automation, advanced manufacturing, semiconductors, and AI, are expanding their economic footprint and strengthening their competitive advantages.

"This divergence is not temporary. It reflects a broader repositioning of China's economic model towards self-sufficiency, industrial modernisation and digital productivity," it said.

Global X said its new ETF offers targeted exposure to companies at the centre of China's next phase of innovation, tracking 20 A-share and H-share companies selected through growth, quality, and momentum factors.