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Sep 23, 2025

Insights From ETFs: A Recovery in the Chinese Technology Sector with Artificial Intelligence as a Growth Driver

by Michael Huynh

The Macroeconomic Backdrop

In the last two decades, China’s economy has witnessed one of the strongest and longest streaks of growth in modern history. The country has transformed itself into a global superpower across different fronts, ranging from manufacturing to high-tech industries. However, the growth of the Chinese economy has been quite sluggish over the last few years, driven by a few negative macro factors such as a depressing housing market and a weak consumer spending environment. China also came out of the COVID-19 pandemic much more slowly than Western countries.

The Chinese government has applied various measures such as monetary stimulus and financial market support programs to stimulate not only the economy, but also the capital market. For example, earlier in 2025, some of the policies of the Chinese government were to guide banks to provide loans for publicly-traded companies to buy back their shares, therefore reducing the total shares outstanding (benefiting long-term shareholders) and providing liquidity for investors (improving the share price performance in the near term).

In effect, the government is trying to “boost” the share price of its publicly-traded securities by providing funds and encouraging public companies to return capital to shareholders. In addition, China has taken various methods to stabilize the stock market and to discourage short-selling.

These are unprecedented moves by the government.

The Macroeconomic Backdrop

In the last two decades, China’s economy has witnessed one of the strongest and longest streaks of growth in modern history. The country has transformed itself into a global superpower across different fronts, ranging from manufacturing to high-tech industries. However, the growth of the Chinese economy has been quite sluggish over the last few years, driven by a few negative macro factors such as a depressing housing market and a weak consumer spending environment. China also came out of the COVID-19 pandemic much more slowly than Western countries.

The Chinese government has applied various measures such as monetary stimulus and financial market support programs to stimulate not only the economy, but also the capital market. For example, earlier in 2025, some of the policies of the Chinese government were to guide banks to provide loans for publicly-traded companies to buy back their shares, therefore reducing the total shares outstanding (benefiting long-term shareholders) and providing liquidity for investors (improving the share price performance in the near term).

In effect, the government is trying to “boost” the share price of its publicly-traded securities by providing funds and encouraging public companies to return capital to shareholders. In addition, China has taken various methods to stabilize the stock market and to discourage short-selling.

These are unprecedented moves by the government. The last time the U.S. market experienced similar stimulus programs of this magnitude supported by the government was back in 2008 during the height of the financial crisis. For more than 15 years, the S&P 500 has turned into a secular bull market.

The Competitive Technology Sector

The result of these policies has been quite effective in stabilizing the market, and the Chinese market, especially the technology sector, has experienced a meaningful recovery year-to-date. As of August 2025, the Chinese technology industry, as a group, gained around 31% compared to the U.S., which was up 10% overall during the same period.

The growth story of the Chinese technology sector has been promising, with giants including Tencent, Alibaba, Baidu, BYD, PDD Holdings, etc. These companies have become global businesses that compete head-to-head with their American peers. On average, these companies not only grow faster, but also trade at cheaper valuations compared to the U.S. companies operating in the same industries.

Chinese equities, especially in the technology sector, have been trading at a meaningful discount to valuations compared to the U.S. tech sector, which is fueled by Artificial Intelligence (AI). We think Chinese tech companies have also been aggressively investing in AI, which is not being fully appreciated by investors. Especially with the emergence of DeepSeek AI, an AI research company providing large language models (LLMs) or social platform Douyin (the TikTok version in China), Chinese firms may just be as innovative and competitive as their U.S. counterparts. We don’t think investors should count Chinese tech companies in the race to AI dominance yet.

We think the prospect for Chinese technology equities has never been better than before. Despite a solid run so far, given the previously sizeable discount in valuation and a fully committed government that is trying to stabilize equity values and attract investors, we think this momentum will continue to last for some time, which may offer investors attractive prospective returns from here.

Here are a few Exchange-Traded Funds (ETFs) that give investors exposure to each sector mentioned above

iShares MSCI China ETF (MCHI)

The iShares MSCI China ETF (MCHI) has been a solid outperformer on a year-to-date basis. MCHI provided investors with a return of 34%, thanks to the nice recovery in the Chinese market driven by the effort of the Chinese government to stabilize investors’ sentiment.

MCHI was launched in 2011 and holds approximately $7.9 billion in Assets Under Management (AUM) that is invested in approximately 550 companies operating in various sectors across the Chinese economy. The two largest names in the portfolio are some of the largest technology firms in China, including Tencent Holdings (TCEHY) at 17.9%, and Alibaba Group (BABA) at 9.7%.

The fund carries a Management Expense Ratio (MER) of 0.59%, and currently offers an annual distribution of 2.5%.

Invesco China Technology ETF (CQQQ)

The Invesco China Technology ETF (CQQQ) was created in 2009 to track the results of the FTSE China Technology Capped Index. CQQQ is a well-established ETF with an AUM of $1.4 billion and a MER of 0.65%. On average, CQQQ’s portfolio has a Forward P/E of 21.5x and Return on Equity (ROE) of 11.5%. The holdings are tilted towards large capitalization names with an average market cap of $85 billion.

Some of the top holdings include:

  • Tencent Holdings, the largest social media, gaming company in China (9.7%)
  • PDD Holdings, the parent company of e-commerce platform Temu (8.3%)
  • Kuaishou Technology, operates a live streaming, online marketing platform(6.59%)
  • Meituan, a direct “copycat” of Uber (6.4%)
  • Baidu, which provides a search function similar to Google (6.0%)

In terms of historical performance, despite a solid trailing twelve-month return of 40.9%, on a ten-year basis, CQQQ provides an annualized return of only around 3.7% due to the recent drastic drawdown of the Chinese technology sector.

KraneShares CSI China Internet ETF (KWEB)

KraneShares CSI China Internet ETF’s (KWEB) investment objective is to provide investors with exposure to Chinese-based companies that operate their businesses on the internet. The long-term goal is to capture growth opportunities that these companies are expected to attain as they continue to benefit from increasing domestic consumption of Chinaís growing middle class. These companies mostly replicate the successful business models of Western countries, such as Amazon, Google, Meta (formerly Facebook), etc. and customize themselves to fit with the Chinese demographic, which is still not as mature as the U.S. market.

KWEB is a well-established ETF with an AUM of $8.6 billion and charges an expense ratio of 0.70%. The ETF’s portfolio currently has 29 holdings, some of the largest holdings such as:

  • Tencent Holdings (TCEHY) at 10.8%
  • Alibaba Group (BABA) at 8.6%
  • PDD Holdings (PDD) at 7.7%
  • Meituan (MPNGY) at 5.9%
  • JD.com (JD) at 5.1%

KWEB’s portfolio has a quarterly trailing twelve-month dividend yield of 2.6%. As a group, KWEB’s portfolio is trading at 16.1 times Price/Earnings. The current valuation still represents a meaningful discount compared to the Dow Jones U.S. Internet Index, which is trading at 35.4 times. The discount valuation was even more drastic, considering that Chinese technology companies possess superior growth and profitability profiles. In addition, most of KWEB’s holdings are buying back shares aggressively to take advantage of the discount valuations.