How to play China’s tech crackdown and the potential winners

Bruce Liu, CEO of Esoterica Capital, chats with CNBC’s Arjun Kharpal at the annual East Tech West event in the Nansha district of Guangzhou, China on December 1, 2021. Liu set a framework for investing in Chinese tech companies as Beijing continues to tighten industry regulation.

Bruce Liu, CEO of Esoterica Capital, chats with CNBC’s Arjun Kharpal at the annual East Tech West event in the Nansha district of Guangzhou, China on December 1, 2021.

GUANGZHOU, China – Beijing’s regulatory crackdown has rocked the market, but a fund manager has crafted an investment framework to overcome the uncertainty.

China has tightened regulations in its domestic tech sector in many areas, from data protection to antitrust, over the past year. These swift moves caught international investors off guard, wiping out billions of dollars in the value of the country’s giants.

Bruce Liu, CEO of Esoterica Capital, said investors should adopt an approach that matches China’s goals of “common prosperity”, growing national champions, social responsibility and state-led investment. “Common prosperity” refers to Chinese President Xi Jinping’s pressure for moderate wealth for all.

Speaking at a panel discussion at CNBC’s annual East Tech West conference in southern China, Liu said “common prosperity” is not a “zero-sum game” and is about “actually making the pie bigger and better and fairer.” This could benefit several companies.

The investor says companies that operate the so-called lower-tier cities and low-income citizens in China, which he estimates at around 1 billion people, are expected to experience growth.

He said e-commerce company Pinduoduo, Kuaishou short video app, and Meituan food delivery service were key names to play this theme.

Pinduoduo and Kuaishou are very focused on exploiting users in rural areas of China, especially farmers. The two companies have sought to help farmers sell products on their platforms to users across China. Meituan has a group buying business that allows members of the same community or residential area to come together and buy goods wholesale at a reduced price. This is considered essential to attract low-income users to small Chinese towns.

“Those [companies] Lower-tier cities follow that are underserved. This is part of the central government’s master plan. It’s about making the pie bigger. It’s coming from lower-tier cities, ”Liu said in a separate interview on the sidelines of East Tech West.

“National Champions”

Liu said that China seeks to strengthen its national power and that this requires so-called national champions – companies representing innovation.

“We need companies like Alibaba, Tencent, Huawei, to be there to represent the best in technology,” Liu said, citing some of his favorite tech giants.

“They are still the benchmark for Chinese technology,” Liu added.

The investor said that beyond their core businesses, Alibaba and Tencent are investing in key areas of strategic priority for Beijing, including cloud computing and semiconductors.

Liu also advocated supporting companies related to areas in which China invests.

“China takes a top-down approach as opposed to a Western-style bottom-up approach to supporting national goals of, you know, big things like smart infrastructure, even semiconductors,” Liu said.

“Generalizations” on regulations

Tightening Chinese regulations was a key topic at CNBC’s East Tech West conference. In another discussion, Ben Harburg, managing partner at MSA Capital, said there were a lot of misinterpretations of regulatory measures.

“I think a lot of dangerous generalizations are made and misunderstandings are encouraged that affect the way they invest in this market. And like I say, that can drive valuations down for all of us,” Harburg said.

“The reality is that these companies are actually much healthier, and the framework for understanding regulation is much more predictable than what is adopted in many of these Western media sources.”

Liu said that many technology companies that were sold by investors are “all very cheap now.”

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