Vidya Rangeanathan, Samuel Shen

SHANGHAI, (Reuters) – Chinese stock market investors have been swapping large tech companies for smaller brands and luxurious brands in order to capitalize on the President Xi Jinping’s plan for economic common prosperity.

Xi’s motivation is to create a smaller gap between the poor and the wealthy in the second-largest country in the world.

However, the markets were rattled by authorities’ first policies, which introduced new restrictions on technology, property, and private tuition. This sent shares plummeting in these sectors.

Some active fund managers are avoiding China at the moment, but others see potential in an economy that aims to create a richer and more diverse middle class.

Chinese policymakers are “talking about how to move from a pear-shaped economy which is bottom heavy, top-light into an olive-shaped,” Ronald Chan, Hong Kong’s Asia head for equities, Manulife Investment Management, said. “They’re talking about the future of how they will split the pie.”

Chan stated that China is seeking common prosperity, which reflects its desire to be self-sufficient in technology and energy, and industry should move up the value chain. Chan bought Chinese solar energy firms while staying away from luxury spirits.

Manulife’s Greater China fund has also seen a reduction in holdings of tech giants like Alibaba According to public disclosures, Tencent has outperformed (NYSE:) in the past one year.

It is hard to gauge how large overall swings in investment have been, especially as passively managed funds keep looking for stock index heavyweights. However, market movements have been quite sharp.

China’s energy index is up more than 70% while China’s property sector has fallen over 10%.

Tech companies with “hard” products or components performed more well than ones that sell online.

This year’s plunge in the KraneShares CSI China Internet ETF is nearly 40%, with China’s startup board ChiNext up 13% and Shanghai’s heavily hardware-heavy STAR Market barely adjusting.

We’ve witnessed extreme sentiments about China. Do you think it will return to Maoism or is it becoming more investable? Are they able to make it profitable? said William Sterling, global strategist at GW&K Investment Management, which invests in emerging markets including China.

“It is very unlikely, even with the new policy initiatives, that the government would wish to eliminate the economic vitality that the country’s capitalist motor has generated.”

Sterling believes that China’s consumer stocks will be the best, though he is not interested in property companies or related industries such as steel and cement.

(For graphic on Winners vs losers under Common Prosperity – https://fingfx.thomsonreuters.com/gfx/mkt/zgvomrozyvd/MR.GOLD-OWNERSHIP%20-%20Winners%20and%20losers%20under%20China’s%20Common%20Prosperity%20initiative.png)

DIVERGING FORTUNES

Goldman Sachs (NYSE 🙂 selected 50 stocks that are “common prosperity”. These include green and renewable energy and hard technology.

The list also includes local brands like Li Ning and Xiaomi (OTC) as well as chip manufacturers Will Semiconductor or Hua Hong Semiconductor as well as green energy firms LONGIGreen Energy and Xinyi Solar.

Goldman suggests investors not to invest in sectors that are vulnerable to regulatory headwinds, such as luxury consume, high-data intensity soft tech, education and media.

Investors have already begun to invest in electric cars and chipmakers.

China Universal CSI New Energy Vehicle Industry Index ETF (AUM) has almost tripled to 9 billion yuan ($1.41Billion). The Guotai CES China Semiconductor Chips ETF, however, has experienced a nearly doubling in its AUM.

Societe Generale’s “common prosperity basket” includes 30 stocks. This includes companies like Anta Sports, China Tourism and Gree Electric as well as tech businesses such as Luxshare Precision or Nari Technology.

Medium-term “common prosperity” in China will boost the purchasing power of those with lower incomes. It will also benefit the services sector such as tourism and healthcare.

Investors will be better off if there is a well-regulated environment for business. This reduces vulnerabilities and ensures a steady growth path.

(For graphic on Small caps vs large caps under Common Prosperity – https://fingfx.thomsonreuters.com/gfx/mkt/akpezabxyvr/MR.GOLD-OWNERSHIP%20-%20China%20small%20caps%20outperform%20large%20caps%20this%20year.png)

($1 = 6.3999 renminbi)