Invest in China's Tech Sector After IPO Reforms

Invest in China's Tech Sector After IPO Reforms


3 min read


How to Invest in China's Tech Sector After IPO Reforms

China's tech sector has been under pressure from various factors, such as the US-China trade war, the COVID-19 pandemic, and the regulatory crackdown on some of its biggest players. However, the recent reforms to the country's IPO system may offer new opportunities for investors who are interested in this dynamic and innovative market.

The China Securities Regulatory Commission (CSRC) has adopted a registration-based IPO system for the Shanghai and Shenzhen stock exchanges, which are the two largest in mainland China. This means that companies looking to list on these exchanges no longer need to get approval from the CSRC, but only need to comply with national laws and regulations. The exchanges themselves will grant approval based on disclosure and information quality. The CSRC will also no longer set the price of shares, which will be determined by the market, and the cap on IPO pricing that limited price fluctuations in the first few days of trading has been removed.

These reforms are expected to make the IPO process faster, more transparent, and more market-oriented. They may also encourage more tech companies to list in mainland China, rather than in other countries like the US or Hong Kong. According to PitchBook data, 61 VC-backed Chinese companies have gone public so far this year, raising over $45 billion. Some 39 listed in Q1, a decline of 22% from the previous quarter. However, with the new IPO system in place, this number may increase in the coming quarters.

For investors who want to invest in China's tech sector, this may mean more choices and opportunities. However, it also means more risks and challenges. The tech sector is highly competitive and fast-changing, and some companies may not be able to sustain their growth or profitability after going public. The regulatory environment is also uncertain and evolving, as the Chinese government seeks to balance innovation and social stability. Moreover, the geopolitical tensions between China and the US may affect the access and performance of Chinese tech companies in the global market.

Therefore, investors need to be cautious and selective when investing in China's tech sector. They need to do their due diligence on the companies they are interested in, and evaluate their business models, competitive advantages, growth prospects, financials, governance, and compliance. They also need to diversify their portfolio across different segments and stages of the tech sector, and monitor the market trends and policy changes that may affect their investments.

One possible way to invest in China's tech sector is through exchange-traded funds (ETFs) that track specific indices or themes related to this sector. For example, some ETFs focus on Chinese internet companies, artificial intelligence companies, biotechnology companies, or clean energy companies. These ETFs can provide exposure to a basket of stocks that represent different aspects of China's tech sector, without having to pick individual stocks. However, investors should also be aware of the fees, liquidity, tracking errors, and regulatory risks associated with these ETFs.

Another possible way to invest in China's tech sector is through venture capital (VC) funds that specialize in this sector. These funds can provide access to early-stage or growth-stage tech companies that have high potential but are not yet listed on public markets. These funds can also offer insights and guidance to help these companies grow and succeed. However, investors should also be aware of the high risks, long-term horizons, illiquidity, and lack of transparency associated with these funds.

In conclusion, China's tech sector is a dynamic and innovative market that offers many opportunities for investors who are willing to take risks and challenges. The recent reforms to the country's IPO system may make it easier for more tech companies to go public in mainland China, which may increase the choices and returns for investors. However, investors also need to be cautious and selective when investing in this sector, and use different strategies and tools to diversify their portfolio and mitigate their risks.