There is a Chinese tech stock rally, but not in the places that foreign investors are used to looking for it.

High-tech manufacturing, including semiconductors, chip manufacturing equipment and batteries, led returns to the Shenzhen 300 Index this year, while popular Internet names lagged.

The Chart of the Day shows the Information Technology sub-index of the CSI 300 against the Hang Seng Tech Index during the past year.

This isn’t the kind of tech rally that US investors would have expected. Following the tech-stocks crash in the spring of 2000, US companies fled capital-intensive businesses in favor of software. The best-performing mainland Chinese stocks, though, are mostly high-tech manufacturers.

Naura Technology, which makes integrated circuits and lithium batteries, is the best performer in the CSI sub-index with 74% year-to-date gains. The speech recognition firm Iflytek came in second with a 46% year-to-date return, followed by Will Semiconductor, a manufacturer of chips and image sensors.

China’s crackdown on hoarding of personal data, monopolistic practices and network security standards clobbered the most popular Chinese Internet names, but the mainland tech stocks drew support from a trillion-dollar government R&D budget and aggressive investments in semiconductor manufacturing.

The mainland tech sector performed badly in 2020 as investors struggled to identify successful companies in the middle of a rush for government subsidies.

Half a dozen high-profile failures, including Wuhan Hongxin Semiconductor Manufacturing last year and Tsinghua Unigroup earlier this month, shook investor confidence in the sector.

Tsinghua, which bought the communications chip designer RDA Microelectronics and made a $23 billion bid for America’s Micron, was managed by a real estate mogul who coaxed the Chinese government into backing him.

The mainland tech sector’s strong performance in 2021, though, suggests that poorly-managed, subsidy-driven firms have been shaken out and the survivors are viable.

China’s drive for semiconductor self-sufficiency appears to be making progress. A number of industry experts believe that by late 2022, China will be self-sufficient in fabrication of 14 nanometer chips, the workhorse transistor gate width for most Fourth Industrial Revolution applications.

Most important, China is investing heavily in applications made possible by its rapid 5G buildout, including automated ports, self-programming networked robots, smart cities, telemedicine and autonomous vehicles.

The opportunities for innovative companies on the mainland afforded by the 5G buildout are enormous. The A-shares tech sector remains attractive.