China’s AI exposure gap may force investors to target Chinese stocks

Investors seeking exposure to artificial intelligence in emerging markets may need to narrow their focus to China, as broader emerging-market funds often exclude the country’s leading AI companies. According to Matthews Asia portfolio manager Andrew Mattock, traditional emerging-market strategies—such as the iShares MSCI Emerging Markets ETF (EEM)—fall short by excluding Chinese firms, which dominate the sector. The iShares MSCI China ETF (MCHI) also lacks a dedicated AI weighting, leaving investors with limited exposure to China’s AI-driven growth potential. Mattock, who oversees the Matthews China Fund (MCHFX), argues that a dedicated China-focused approach—such as his own fund—could provide better access to the country’s tech giants, including Tencent and Alibaba, which are among the largest players in AI and digital innovation. The Matthews China Fund has invested at least 80% of its assets in Chinese equities, though it has underperformed so far this year, declining about 4% as of Friday’s close. Meanwhile, the KraneShares CSI China Internet ETF (KWEB), which mirrors the top holdings of MCHFX, has fallen roughly 27% year-to-date, reflecting broader volatility in Chinese tech stocks. Some investors are adopting hedging strategies to mitigate risk, such as using options on ETFs like KWEB to limit downside exposure. This approach aligns with the recent trend of prominent figures, including billionaire hedge fund manager David Tepper, who has renewed interest in China’s economy by increasing allocations to Chinese assets. However, analysts caution that while China’s tech sector offers growth potential, its volatility remains a key consideration for long-term investors.