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

GUANGZHOU, China – Beijing’s regulatory downturn sent turmoil in the market, but a fund manager has come up with an investment framework to navigate the uncertainty.

China has tightened regulation of its domestic technology sector in many areas, from data protection to antitrust, over the past year. The swift measures have taken international investors by storm, wiping billions of dollars off the value of the country’s giants.

Bruce Liu, CEO of Esoterica Capital, said investors should take an approach that is in line with 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.

During a panel discussion at CNBC’s annual East Tech West conference in southern China, Liu said that “common prosperity” is not a “zero-sum game” and that it “is actually about growing the cake bigger, and the slice is better and fairer.” Several companies can benefit.

The investor says that companies that use so-called lower tier cities and lower income citizens in China, which he estimates to be around 1 billion people, should see growth.

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

Pinduoduo and Kuaishou are very focused on using users in rural areas of China, especially farmers. Both companies have sought to help farmers sell goods on their platforms to users across China. Meituan has a so-called group buying business that allows members of the same housing community or area to gather and buy goods in bulk at a discount. This is seen as the key to attracting lower-income users in smaller Chinese cities.

“These [companies] follows lower-level cities that are underserved. This fits into the plan of the central board. It’s about getting the cake bigger. It comes from lower-level cities, “Liu said in a separate interview on the sidelines of East Tech West.

Liu said that China wants to increase its national power and that it requires so-called national masters – companies that represent innovation.

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

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

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

Liu also advocated for companies affiliated with areas in which China invests.

“China is taking a top-down approach, versus a Western-style, bottom-up approach, to support national goals of, you know, important things like smart infrastructure, even semiconductors,” Liu said.

China’s regulatory tightening was a central theme at CNBC’s East Tech West conference. During another discussion, Ben Harburg, managing partner of MSA Capital, said that there are many misinterpretations of regulatory measures.

“I think a lot of dangerous generalizations are being made, and misconceptions are being made, that are affecting the way they are investing in this market. And as I say, it can drive down valuations for all of us,” Harburg said.

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

Liu said many of the technology companies that have been sold by investors are “all very cheap now.”