How to play China’s tech crackdown and the potential winners, according to one investor

GUANGZHOU, China — Beijing’s regulatory crackdown sent jitters through the market, but one fund manager has come up with an investment framework to navigate the uncertainty.

China has tightened regulation on its domestic tech sector in many areas, from data protection to antitrust, over the past year. The swift moves have caught international investors off guard, wiping billions of dollars off the value of the country’s giants.

Bruce Liu, CEO of Esoterica Capital, said investors should take an approach that syncs with China’s goals of “common prosperity,” growing national champions, social responsibility and state-led investment. “Common prosperity” refers Chinese President Xi Jinping’s push for moderate wealth for all.

During a panel discussion at CNBC’s annual East Tech West conference in south China, Liu said “common prosperity” is not a “zero-sum game” and it’s “actually about growing the pie bigger, and the slice is better and more fairly.” That could benefit several companies.

The investor says that companies tapping into so-called lower tier cities and lower income citizens in China, which he estimates to be around 1 billion people, should see growth.

He said e-commerce company Pinduoduo, short video app Kuaishou and food delivery service Meituan are key names to play this theme.

Pinduoduo and Kuaishou are very focused on tapping into users in rural areas of China, particularly farmers. Both companies have sought to help farmers sell goods on their platforms to users across China. Meituan has a so-called group buying business which allows members of the same residential community or area to group together and buy goods in bulk at a discount. This is seen as key to attracting lower-income users in smaller Chinese cities.

“These [companies] are following the lower-tier cities that are underserved. This fits into the blueprint of central government. It is about getting the pie larger. That is coming from lower-tier cities,” Liu said, in a separate interview on the sidelines of East Tech West.

Liu said that China is looking to boost its national power and that requires so-called national champions — companies representing innovation.

“We need companies like Alibaba, Tencent, Huawei, to be there to represent the top notch of technologies,” Liu said, naming some of his favored tech giants.

“They are still the benchmark for Chinese tech,” Liu added.

The investor said that beyond their core businesses, both Alibaba and Tencent are investing in key areas of strategic priority for Beijing including cloud computing and semiconductors.

Liu also advocated backing companies that tie in with areas that China is investing into.

“China is taking a top-down approach, versus in a Western style, bottom-up approach to support national goals of, you know, important things like smart infrastructure, even semiconductors,” Liu said.

China’s regulatory tightening was a key theme of CNBC’s East Tech West conference. During another discussion, Ben Harburg, managing partner at MSA Capital, said there are a lot of misinterpretations of regulatory moves.

“I think a lot of dangerous generalizations are being made, and misunderstandings promoted, that are affecting the way they invest in this market. And so as I say, that can drive down valuations for all of us,” Harburg said.

“The reality is that these businesses are actually much healthier, and that the framework for understanding regulation is far more predictable than is being espoused in a lot of these Western media sources.”

Liu said many of the technology companies that have been sold off by investors are “all very cheap now.”