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Credit Suisse says regulatory risks are unlikely to stop China's tech companies from growing in 2021 - CNBC

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An investor looks at screens showing stock market movements at a securities company in Nanjing in China's eastern Jiangsu province on July 6, 2020.
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SINGAPORE — China's equity and bond markets are set to give investors progressively greater opportunities in 2021, according to Credit Suisse.

Chinese markets offer "high rates of growth at still attractive valuations," the Swiss investment bank said in its 2021 outlook report. The world's second-largest economy is predicted to be one of the few countries to register a positive GDP figure this year after bringing the coronavirus outbreak relatively under control.

Credit Suisse predicted China will record 2.2% growth for 2020, followed by a sharp jump to 7.1% in 2021.

China's growing tech sector

One of the main growth areas in China's markets is the technology sector, according to Ray Farris, chief investment officer for South Asia at Credit Suisse. China is "one of the few economies that has a credible and rapidly growing tech sector," Farris said on CNBC's "Street Signs Asia" on Wednesday."

The technology landscape in China is fiercely competitive, where established tech giants regularly fend off new rivals trying to take away chunks of their market share.

"Unlike in the United States, where tech has recently been seen as something of an alternative to value trades, if we look at the performance of China tech on announcements of positive news on vaccines, China tech's actually benefiting because in China, tech is very much a growth play," he added.

If I look at the recent regulatory actions, they appear to be somewhat sensible. And they don't appear to be anything that really is going to change this secular trend in the large tech companies in China, growing by gaining market share from offline.
Ray Farris
Credit Suisse

Value investing refers to a strategy of picking stocks that appear to be trading for less than their book value — essentially, they are said to be stocks that the market is underestimating.

Chinese tech companies are "stealing market share" from offline players in retail, health care, education and the like and that trend will continue, Farris explained. "So, stronger growth in China will just simply produce stronger growth in China's tech sector."

Some of the biggest Chinese tech names include Alibaba, Tencent, Baidu, and Meituan.

MSCI China earnings are expected to grow from 2% in 2020 to 21% in 2021, according to the Credit Suisse report. It added that strong earnings growth works to keep valuations relatively low.

Risks

Still, Farris highlighted several risks that China faces, starting with a resurgence in coronavirus infection cases.

"Another would be that U.S. policy turns even more aggressive with China and more disruptive than it has been. We think that's unlikely with a Biden administration," he said, adding that President-elect Joe Biden's approach would be more predictable and rules-based.

While regulatory pressure is also a risk, it is unlikely to derail growth in China's technology sector, according to Farris.

Earlier this month, Chinese regulators drafted a slew of new anti-monopoly laws that likely target the country's major internet companies — tech shares took a beating after the draft regulations were announced.

"If I look at the recent regulatory actions, they appear to be somewhat sensible. And they don't appear to be anything that really is going to change this secular trend in the large tech companies in China, growing by gaining market share from offline," Farris said, adding that the outlook remains optimistic.

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