Macroeconomic Trends

KraneShares’ Xiaolin Chen Discusses Current Regulation Headlines and Trends in Krane ETFs

Welcome Xiaolin and thank you for being here. Why don’t we start by you telling us about KraneShares and what you do?

KraneShares is an asset manager focused on bringing innovative investment solutions in China to clients globally. We seek to provide innovative, first-to-market strategies based on the firm and its partners’ deep knowledge of investing in China. Our mission is to provide investors with strategies to capture China’s importance as an essential element of a well-designed investment portfolio. I’m based in London, where I manage the firm’s business outside of the United States and oversee efforts to solidify our thought leadership throughout the industry.

We have seen a lot of headline news regarding the China market – what are your thoughts on the current situation and how it impacts foreign investment?

We agree the scale of the regulations introduced by the Chinese regulators this year is unprecedented in many ways. The key thing to understand is the intention behind these implementations. In our opinion, they are designed to tackle issues that present potential threats to China’s long-term sustainable growth.

The concepts behind the newly introduced measures are not unique to China. The regulations intend to bring China more in line with developed market standards with a collective goal to benefit the end-users. The anti-trust, data security and after-school tutoring reforms should help China’s long-term goals of achieving a more prosperous society. The impacted companies will adopt and progress forward from here. We are optimistic about the outlook to these industries, as evidenced by the strong earnings released quarter over quarter this year despite the challenging headline news. We also see investors in the U.S. and Europe have stayed focused on the long-term investment horizon with China. We have seen strong inflows to our funds this year. We see that the short-term pain created by headline volatility may present an opportunity for long-term gains as many of our funds, particularly the KraneShares CSI China Internet UCITS ETF (KWEB), are trading at decade low valuations. When the dust settles, the market could surprise to the upside.

Given your extensive expertise in China capital markets, can you share something that investors tend to overlook or a misconception that you would like to correct?

During our broad discussion with clients globally, clients often tell us that they get their China exposure through funds with broader mandates – namely an E.M. or Asia ex-Japan Fund. It was a common practice; I’d say five years ago, but not anymore for a couple of reasons. Today, you have a wide range of available solutions across asset classes that offer you unique and targeted investment opportunities to allocate within a client’s portfolio. These solutions can range from beta access to sector-specific allocations, including thematic, trend-capturing funds, and fixed income and credit solutions. Investors can also segment China’s capital markets to access their precise area of interest, just like they can in developed markets. The investment toolkit available to the market today is more comprehensive than ever before.

The great strides that companies like ourselves at KraneShares have made have broadened the awareness of China’s capital markets and effectively removed the accessibility challenges of the past. Given the size of China’s economy and its impact on the global financial market, we believe it has achieved the scale and the importance necessary for it to be a stand-alone asset class in a client’s portfolio. 

What trends you are seeing within your product range right now?

China is pursuing a path of long-term sustainable development. Given that the digital economy contributes roughly 40% of China’s GDP growth1, the internet and technology will still be significant focus areas. However, local authorities will emphasize innovation, high-tech semiconductor manufacturing, healthcare, and the green economy.

For instance, the KraneShares ICBCCS SSE STAR Market 50 Index UCITS ETF (KSTR) fund we launched in June offers European Investors access to the newly minted STAR Board or the “Nasdaq of China.” The STAR Board is a board under the Shanghai Stock Exchange (SSE) with a singular goal of making China more self-sufficient in technology amidst uncertainty around the world and providing capital support to China’s leading companies in Science and Innovative technology. China’s President Xi Jinping initiated the STAR Market after the trade/tech war with the U.S. in 2018. The tension woke China up to the importance of self-sufficiency and becoming a leader in core technology areas. Some of the announced corporate policies come with the apparent goal of providing whatever resources are necessary to help a strategic company succeed. For instance, some of the hardware technology companies are exempt from corporate tax for ten years. These are the industries and investments that will continue to benefit from government policies in the decade to come.

Whenever we discuss ESG in China, investors’ eyes tend to widen. “What? China ESG is this for real?” they say. The answer is YES, a big yes. Not only are Chinese companies increasingly disclosing their ESG policies voluntarily, but now corporate boards are also becoming more diversified and internationalized. Social awareness is at the highest level, thanks to the urbanization we observed in China over the last 30 years. China now has the world’s largest e-commerce company, Alibaba. China also has the largest social network provider with over one billion daily active users, Tencent. ESG rankings tend to capture these types of companies. If there is one country in the world where highly rated ESG stocks are outperforming the broad market, it’s China today.

In closing, I would say: stay tuned to China, the world’s second-largest Equity and Fixed Income market. Allocate your portfolio to participate in the tremendous growth still to come and capitalize on the country’s economic importance to the world.


Citations

  1. Global Times, “US digital economy scale ranks first in the world, while China has the fastest development speed”. August 2, 2021.

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