China is a technology powerhouse: how can you gain exposure?

China is closing the gap with the US in AI and leads the world in fields such as robotics and clean energy. How can investors take part in its technology boom while avoiding the more difficult parts of the Chinese economy?

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Chinese battery maker CATL says its newest pack could end range anxiety, offering as much as 1,500km from one charge. A five-minute top-up would add another 520km. BYD, another Chinese car company, has also unveiled a drone platform mounted on a vehicle. That could let an average Chinese EV driver travel from Beijing to Shanghai without recharging - and receive food deliveries along the route.

Chinese manufacturers are reshaping industries in ways that reflect the country's extraordinary drive to innovate. China now submits about four times as many patents as the US, putting it well ahead in patent activity. Its companies lead in fields including robotics, clean-energy technology, and electric vehicles (EVs), while competition with the US in artificial intelligence (AI) continues to intensify.

Yet China's conventional economic indicators remain grim. Retail sales have barely increased over the past 12 months, while the housing market continues to shrink and weigh on household wealth. Deflation still hangs over the economy. Some industries face severe oversupply, driven by inefficient government subsidies and trouble in major export markets such as the US.

Roderick Snell manages the Baillie Gifford Pacific Fund and invests directly in AI beneficiaries, including Mech-Mind (HK:9615), which makes 3D machine-vision systems - the equivalent of eyes for robots. He also backs companies in energy, resources, and construction, since AI and the electrification of Chinas economy are driving demand for power infrastructure and critical materials.

How can you invest in China?

For a relatively inexpensive way into China's stock market, investors could choose an index fund or exchange-traded fund (ETF). One example is the HSBC MSCI China UCITS ETF (LON:HCHA), which gives Alibaba and Tencent meaningful weightings. It also holds plenty of established companies from older parts of the economy, though. As of 30 September, technology made up only 11% of its assets; consumer and financial companies accounted for larger shares. The fund has fallen over the past 12 months, in line with the wider Chinese stock market.

Paul ONeill, Bentley Reid's chief investment officer, points to another option: "We own the Amundi Core MSCI China A Swap ETF (LON:C027). It tracks the MSCI China A index, which covers large and liquid A-shares listed in Shanghai and Shenzhen, priced in RMB." Its largest holdings include CATL and chipmaker Cambricon (SHANGHAI:688256). Alongside battery and AI hardware companies, the ETF holds banks, insurers and utilities.

"The top ten holdings make up only about 18.5% of the fund, which is spread across roughly 400 stocks," ONeill said.

Active funds can give investors a more focused stake in China's emerging innovation economy. Baillie Gifford Pacific puts 48% of its assets into technology, while its exposure to real estate and similar areas is negligible. Allianz China A-Shares Equity Fund, meanwhile, concentrates on industrial and technological advances created in China.

China's innovation story can stand alongside America's. In some industries, Chinese firms already lead globally, and the country is becoming a stronger competitor in fields such as AI. Investors have many ways to gain exposure to that growth without focusing on China's slower-moving legacy sectors.

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