Monthly Commentary - May 2022
Chinese equities posted positive returns in May amid the implementation of a series of economic revival programs including infrastructure and property stimulus, and the curtailing of rolling lockdowns in major cities freeing up movement of citizens allowing for a rebound in consumption and manufacturing. Chinese regulators continued during the month to ease regulatory pressure on large platform monopolies and have increased incentives for certain domestic industries. Lastly, we continue to look for progress in resolving the U.S. Chinese ADR delisting issue whereby the Chinese government may outline the conditions whereby U.S. regulators can examine the audit papers of U.S. listed Chinese companies.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending May 31, 2022, The China Fund, Inc. returned 2.99% while its benchmark, the MSCI China All Shares Index, returned 1.83%. From a sector perspective, industrials and information technology were the best performing sectors relative to the benchmark while the real estate sector and the portfolio’s zero exposure to energy and utilities sector detracted from relative performance.
Turning to individual holdings, Pinduoduo, China’s largest agriculture-focused technology platform that connects farmers and distributors with consumers directly through its interactive shopping experience contributed the most to the Fund’s absolute and relative performance. The company posted better-than-expected quarterly revenue, as more people shopped online due to a resurgence in COVID-19 cases in parts of the country. Platform companies in China continue to be dominant businesses and while there will be a moderation of growth, we do not think that regulations derail these businesses from growth entirely. The focus going forward will be on quality growth is a promising sign.
A detractor among individual stocks was Times China Holdings, a southern China focused developer which experienced weak performance. The real estate segment in China overall has also corrected down significantly from the valuation standpoint. However, given easing measures and a more supportive environment, we believe that this presents the opportunity for market consolidation over the longer term, and that leading regional players such as Times China should be able to grow market share under these conditions. Real estate opportunities in China are attractively valued and may offer high dividend yields making the risk-reward still favorable in our view.
Looking ahead, we continue to monitor geopolitical developments, the property market and how China manages its COVID policy. While geopolitics is hard to predict, the latter two present some opportunities as we head into a more supportive property market environment and an eventual end to COVID. It may take some time, but we believe China should be able to deliver on both these fronts. However, at this juncture, stock price movements have de-coupled from the fundamentals of the companies behind them. Therefore, this risk on sentiment is a real one that is hard to manage and control for. Hence, as investors, we believe patience is needed but the longer-term opportunity remains intact—China’s integration with the rest of the world and the scale of its economy is too big to ignore. At the same time, the equity markets continue to deepen. With the expanding breadth of companies, many of which have secular prospects, we believe there are many opportunities in China that stand to benefit from the country’s efforts at increased domestic self-sufficiency across a myriad of industries.