This year, China's technology sector has become a focal point of attention for both domestic and global investors, marking a transformative period in the nation's economic landscapeAs China navigates a crucial shift from traditional industries to emerging sectors, the country is simultaneously facing intensified global competition in the technology arenaIndustries such as renewable energy, semiconductors, biopharmaceuticals, and the digital economy have emerged as new engines for economic growth, positioning the country at the forefront of the next wave of technological innovationAmidst this dynamic environment, the Growth Enterprise Market (GEM) has solidified its reputation as the go-to platform for investors seeking exposure to innovative, high-growth companies in these sectors. 

The GEM, since its inception, has catered primarily to small and medium-sized enterprises (SMEs) that are heavily involved in high-tech industries and demonstrate significant growth potentialIt has become a critical mechanism for direct financing, helping these companies access capital that might otherwise be out of reachWith the introduction of the registration system, the market has further strengthened its role as a vital channel for supporting startups and fostering a healthy cycle of entry and exit, which is crucial for maintaining the vitality of the SME ecosystemThis has helped the GEM evolve into a thriving market for high-tech companies, with investors increasingly looking to it as a means of accessing the future of innovation.

The introduction of Exchange-Traded Funds (ETFs) that target top-performing companies in the technology space has provided investors with an effective tool for tapping into the growth potential of the GEMAmong the most significant developments has been the GEM 50 index, which tracks 50 of the largest and most liquid emerging tech stocks within the marketThis index has quickly become one of the most widely followed, with Huaxia Fund noting its status as a competitive broad-based index

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This performance is largely due to the index’s emphasis on high-yielding stocks, with its focus on the top tech performers within the GEM.

When looking at the performance of the GEM 50 index, it’s clear that the shift toward technology-focused growth is not just a theoretical trend but a reality driving returnsAs of late 2024, the GEM 50 index had risen by an impressive 44% since its growth trend began in September, closing the year with an annual return of 21%. This growth has been driven by the performance of its constituent equities, which represent a wide array of emerging industries, including electric equipment and renewable energy, pharmaceuticals and biotechnology, and non-bank financial servicesThese sectors align with China’s broader economic goals of transforming and modernizing its industrial base, with a focus on strategic industries that promise long-term growth.

Jin Zeyu, the fund manager for China Universal Asset Management’s GEM 50 ETF, has highlighted the index’s pronounced high-growth style, which is evidenced by the consistent and strong business performance and net profits of the companies it tracksThis growth significantly outpaces that of other broad-based indices in the A-share market, indicating that the GEM 50 index is particularly adept at capturing the rising star companies in China’s technology and innovation sectorsThe increasing weight of certain industries in the GEM 50 also reflects the broader changes within the marketFor instance, while the pharmaceutical and biotech sector was once a dominant force within the index, its influence has gradually waned in favor of sectors like non-bank financial services, communications, and computingThis evolution highlights a natural response to shifting industry trends and indicates a broadening of the index’s scope to include industries that are becoming increasingly important in China’s high-tech transition.

The rapid pace of technological evolution, particularly in artificial intelligence (AI), is expected to continue reshaping the composition of the GEM 50 index

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Jin Zeyu has forecasted that AI will drive the next wave of growth within the index, with companies from the Technology, Media, and Telecommunications (TMT) sector integrating AI advancements into their operationsAs AI continues to integrate with various aspects of business, these companies are likely to see a significant rise in market value, further strengthening the GEM 50 index’s position as a key barometer of emerging tech performance in China.

The emergence of new AI applications is not only a technological phenomenon but also a market-moving oneA case in point is DeepSeek, an AI-driven technology that has gained significant attention within the marketInvesco Great Wall Fund has pointed out that the introduction of DeepSeek and similar technologies has increased the competitive edge of Chinese tech firms, sparking greater investor interest in the A-share marketThe launch of AI-driven models and technologies is contributing to a growing sense of optimism among investors, with some analysts predicting a rise in short-term market risk appetite as investors continue to bet on the future potential of China’s technology sector.

For institutional investors, the emergence of AI and other technological innovations offers a chance to reassess key players in the GEM 50 index, particularly those in the advanced manufacturing sectors such as renewable energy, semiconductors, and construction machineryThese sectors are expected to experience a significant capacity cycle by 2025, offering lucrative opportunities for investors who are strategically positionedThe idea of identifying companies with a “deep moat”—that is, a sustainable competitive advantage—has become increasingly important as investors look for companies that can maintain their edge in an increasingly crowded market.

The continued rise of the GEM 50 index, coupled with favorable government policies and ongoing technological revolutions, suggests that the medium-to-long-term investment outlook for the Chinese market remains positive

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