Monthly Commentary - June 2022
MARKET ENVIRONMENT
Chinese equities were the global bright spot in June—both Hong Kong listed and local A-shares alike. Chinese fiscal and monetary support combined with more lenient zero-COVID policy implementation, a reduction of regulatory pressure on internet and platform monopolies as well as progress on real estate re-financing roadblocks provided a catalyst to market participants to scoop up cheap Chinese shares. The Chinese government seemingly becoming more pragmatic towards its zero COVID approach and has provided positive rhetoric and actions in support of greater mobility of its citizens allowing for normalcy in personal travel and consumption. Although the government’s announced 5.5% growth target may not be fully achieved, we believe the government will largely succeed in supporting its economy and that corporate earnings will remain some of the highest globally in 2022-23.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending June 30, 2022, The China Fund, Inc. returned 14.15% while its benchmark, the MSCI China All Shares Index, returned 7.90%. From a sector perspective, communications services and consumer discretionary were the best performing sectors relative to the benchmark, while our under allocation to the consumer staples sector slightly detracted from relative performance, though still posting positive absolute returns.
Turning to individual holdings, Pinduoduo, one of China's largest ecommerce platforms that started its businesses
with a focus on lower tier city, price sensitive consumers directly through its interactive shopping experience, once again was among the top contributors to the Fund’s absolute and relative performance. In light of the regulatory impact seen in the second half of 2021, more internet platform companies in China, including Pinduoduo, have begun to adapt to new regulations, including trying to set a path to profitability. We see more encouraging signs of monetization efforts and this, coupled with attractive valuations can potentially help the stocks to continue to recover. On the other hand, Giga Device Semiconductor, a leading MCU and Nor Flash manufacturer in China, detracted from performance. The stock sold off given concerns about the global semiconductor cycle and thus the worsening prospects for component prices.
OUTLOOK
The A-share market has recovered meaningfully since the end of April lows. It is uncertain if second quarter results (which will be weak given it will bake in the worst of the COVID lockdowns) might derail this recovery. However, we are cautiously optimistic that in the second half of this year, the conditions in China will continue to improve.
Large scale lockdowns seem a lot less probable as the government continues to become more pragmatic. Further, the party will likely do what they can to improve economic conditions ahead of the party meeting at the end of the year which may make it more likely that monetary and fiscal stimulus will be unleashed in the second half of this year. Sentiment towards growth globally remain tepid, but we believe the significantly lower valuations might warrant a re-interest in this category as well.