News that China is easing its crackdown on the domestic technology sector could help boost the overall market and increase innovation in the world’s second largest economy.

Technology stocks still dominate the Chinese stock market despite recent pressure on their share prices linked to a rotation out of growth shares and Beijing’s tighter line on regulation.

More than 30% of the MSCI China index relates to a handful of names in the e-commerce and internet platform space, including Tencent (0700:HKG), Alibaba (9988:HKG), Meituan (3690:HKG), JD.com (9618:HKG), NetEase (9999:HKG) and Baidu (9888:HKG).

A report from the International Monetary Fund in June 2021 noted: ‘China has many of the ingredients that contribute to innovation – a large domestic market; high spending (2.4% of GDP) on research and development; millions of scientists, engineers and software developers graduating every year; and gradually improving intellectual property protection.’

A more supportive regulatory backdrop could help unlock these advantages and deliver a more innovative domestic economy.

While the MSCI Emerging Markets ex-China index has a decent allocation to tech, it has a more than 35% weighting towards financials and materials, industries which have dominated for a long time in the    developing world.

These two sectors combined make up less than 20% of the MSCI China index.

This outlook is part of a series being sponsored by Templeton Emerging Markets Investment Trust. For more information on the trust, visit here

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