Monthly Commentary - April 2022
MARKET ENVIRONMENT
Chinese equities moved lower in April, and domestic A-shares were hit especially hard, as Omicron-induced lockdowns in Shanghai continued to limit residents› ability to go to work, shop and entertain. Sentiment fell further when partial lockdowns were extended to other major cities like Beijing and Hangzhou. In addition, China›s zero-Covid policy has caused analysts to downgrade earnings expectations for this calendar year—especially in goods and other consumption-based sectors. However, on a positive note, the Chinese government announced during the first period that they favor a 2022 GDP growth rate of “around 5.5%.” In our opinion, this was an important “stake in the ground” announcement. However, the worsening COVID-19 lockdown environment in China may increasingly make it difficult for China to reach these goals. We continue envision a battle between temporary lockdowns and stimulus to unfold. Regardless, we think the government will largely succeed in supporting the Chinese economy and that corporate earnings will remain some of the highest globally in 2022-23.
IT and health care sectors were the MSCI China All Shares Index›s worst performers followed by materials and industrials. Consumer staples proved relatively defensive as did communication services.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending April 30, 2022, The China Fund, Inc. returned -7.73% while its benchmark, the MSCI China All Shares Index, returned -6.26%. From a sector perspective, the Fund›s holdings within industrials and information technology detracted the most from relative performance. On the other hand, the Fund›s holdings in the consumer discretionary sector contributed the most to performance.
Turing to individual holdings, two performance detractors during the month include security trading and brokerage firm China Merchants Securities Co. and investment bank China International Capital Corp. Securities companies tend to be sensitive to market and trading sentiment and therefore underperformed during this period of market volatility. Longer term, we still view these companies as attractively priced businesses that would benefit from China›s deepening capital markets.
On the other hand, leading e-commerce company JD.com was the top contributor to relative performance. Weighed down earlier in the month by fears of negative business impacts due to additional cities undergoing zero-COVID lockdowns, the company›s stock price rebounded on anticipation of an easing of governmental regulations on internet platform companies.
OUTLOOK
Looking ahead, COVID lockdowns continue to put pressure on the economy and present a significant risk to economic growth in China this year. While there is still uncertainty in when these covid lockdown restrictions will end, we believe that these measures cannot go on indefinitely. So far in 2022, China has also seen less regulatory interventions and continues to provide more support to the private economy, and authorities have also recently pledged to allow widespread inspections of auditors› books, giving hope that a forced delisting of Chinese stocks from U.S. markets won›t materialize. When these headwinds subside, China, unlike the West, may find itself in a benign environment, with inflation under control, consumers ready to spend. Thus, relative to the rest of the world, China may stand out from its ability to grow and coupled with attractive valuations, continues to be a good investment destination for investors to consider.