Monthly Commentary - March 2022
MARKET ENVIRONMENT
Chinese equities were weak in March, especially consumer stocks. A spike in COVID cases and resulting policy enforced lockdowns, ADR delisting pressures, and investor worries that Russia-like sanctions could be implemented upon select Chinese companies all contributed to negative sentiment. During the month, the Chinese government announced that they favor a 2022 GDP growth rate of “around 5.5%.” In our opinion, this was an important “stake in the ground” announcement. Because of the significant lockdown pressure on consumption, GDP growth will need to be created elsewhere in the economy in order to reach the 5.5% growth target. We 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.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending March 31, 2022, The China Fund, Inc. returned -11.52% while its benchmark, the MSCI China All Shares Index, returned -8.31%. From a sector perspective, the Fund’s holdings within consumer discretionary and industrials detracted the most from relative performance. On the other hand, the Fund’s holdings in the materials 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, semiconductor equipment company Beijing Huafeng Test & Control Technology was the top contributor to performance. Given the continued geo-political tensions, the self-sufficiency drive in China continues to be a definite path for the country in its next stage of development. We believe Huafeng stands to benefit from market share gains in this industry where foreign firms are still very dominant in China.
OUTLOOK
Looking ahead, we expect that China’s zero-COVID policy will likely linger, especially over the next quarter, and we are watching the overhang closely as it puts pressure on consumer sentiment. At the same time, the property market continues to be weak, although there are signs that the government is increasingly in the camp of loosening the very tight conditions of the property market. Given these two pressures, we believe there is more support for monetary easing in the second half of 2022 as China’s key goal is still both economic and political stability.
The larger unknown is how U.S. – China relations will pan out. While we see China becoming more willing to make concessions, we have not quite seen the same level of openness from the U.S. This lack of ability to ascertain U.S. – China politics will be a risk that will unfortunately be hard to manage for. Elsewhere, results remain largely in-line with expectations and continued healthy pace of growth is seen, with some signs of margin erosion but managed relatively well. We remain more hopeful of an improvement in sentiment given still resilient earnings growth and an increased likelihood of policy easing ahead.