Google’s Clash with China Places Chinese Tech ETFs in Spotlight

Google (GOOG) set off a frenzy on internet message boards and in the human rights community earlier this week when the search engine giant announced in a blog post that it had been the target of a “highly sophisticated and targeted attack on our corporate infrastructure originating from China” that was apparently carried out with the goal of accessing email accounts of Chinese human rights activists. Google has repeatedly clashed with the Chinese government in the past, but the most recent incident appears to have pushed the relationship to a tipping point. Google announced that it is “no longer willing to continue censoring our results on Google.cn” and acknowledged the possibility of shutting down its site (and potentially office) in China.

The Chinese government responded saying that it welcomed global Internet companies as long as they obey laws that restrict their content. “The Chinese government administers the Internet according to law and we have explicit stipulations over what content can be spread on the Internet,” said Foreign Ministry spokeswoman Jiang Yu at a regular briefing in Beijing. The rigid statement seemingly shuts the door on the notion of allowing unfiltered Google results to appear in China and paves the way for the end of the company’s Chinese site. “Google.cn is toast,” said Duncan Clark, chairman of a telecommunications and Internet consulting company in Beijing to Bloomberg. “Just keep pressing refresh on your browser and see what happens.”

Known in Internet circles as “The Great Firewall of China,” search results on Google.cn have historically been filtered to exclude any results concerning the Tiananmen Square protests of 1989, sites supporting the independence movements of Tibet and Taiwan or the Falun Gong movement, and other information perceived to be harmful to the People’s Republic of China (PRC).

If Google and the Chinese government fail to reach an agreement of filtered results (as appears increasingly likely), one of the biggest winners would seem to be Baidu, which would essentially be handed control of the Chinese search engine market if Google decides to exit the market. Even if the issue is resolved, the increasingly heated conflicts between the U.S.-based Google and the Chinese government could raise concerns among advertisers about the long-term future for the site.

China Tech ETFs In Focus

Boosted by a jump in Baidu (BIDU) shares, ETFs focusing on the technology sector in China have surged in recent sessions. Sector-specific China investing is a relatively new concept, but has become instantly popular with investors looking to target their exposure to what may soon be the world’s largest economy. Currently, there are two options for gaining exposure to the tech sector in China: Claymore’s China Tech ETF (CQQQ) and Global X’s China Technology ETF (CHIB). While these ETFs are similar in many ways, there are some key differences:

• Underlying Indexes: CQQQ is linked to the AlphaShares China Technology Index, while CHIB is based on the S-BOX China Technology Index.
• Baidu Weighting: As of January 13, Baidu accounted for about 4.8% of CHIB’s assets and 7.3% of CQQQ.
• Expense Ratio: CHIB is slightly more cost efficient, charging 0.65% compared to 0.70% for CQQQ.
• Component Companies: Both ETFs are relatively concentrated: CQQQ has about 33 individual holdings while CHIB has about 27.

These funds could see some big movements as the drama between Google and Beijing plays out. While the potential short-term boost to Baidu and other Google competitors in China (such as Ali Baba) may be attractive, the confrontation also highlights the potential for government intervention to stifle the growth of tech companies (both foreign and domestic) operating in China and demonstrates some of the risk characteristics associated with any investment in China.

Disclosure: No positions at time of writing.