Monthly Commentary - July 2022
Chinese equities were extremely weak in July as a confluence of negative headlines helped reverse the previous month’s gains as investors worried about a spillover of China real estate woes into its broader economy, lingering COVID restrictions and fines on select Chinese internet companies. In addition, in late July, a group of four companies were added to the SEC’s listed of potential de-listings from U.S. exchanges, and news that U.S. House Speaker Nancy Pelosi may visit Taiwan added to investor nervousness.
PERFORMANCE, CONTRIBUTORS AND DETRACTORS
For the month ending July 31, 2022, China Fund, Inc. returned -12.17% while its benchmark, the MSCI China All Shares Index, returned -8.01%. From a sector perspective, industrials and communications services were the best performing sectors relative to the benchmark, while our allocation and stock selection within real estate and consumer discretionary sectors detracted the most from relative performance.
Turning to individual holdings, Sungrow Power Supply Company, a solar component manufacturer, was the top contributor to the Fund’s absolute and relative performance during the month. The company is benefiting from renewable energy growth and China’s plan to be carbon neutral by 2060 has promoted significant volume expansion opportunities across the solar chain. Sungrow has strong product offerings in the high-end inverter space and strong execution by management has grown the company’s global market share considerably over the past decade. Additionally, there is further opportunity to expand Sungrow’s total addressable market as the energy storage system market grows. A detractor among individual stocks was Alibaba Group, the largest e-commerce platform in China with enterprise services such as cloud computing. The stock suffered amid pullback linked to continued weak sentiment on platform companies. However, with more disciplined investment plans compared to the past, the large Chinese internet companies, including Alibaba, are increasingly generating positive free cash flow, and their balance sheet is flushed with high level of net cash.
China’s second quarter results released in July were weak but were caused by short-term, Omicron-mitigation policies, not by structural faults. Large scale lockdowns seem a lot less probable as the government continues to become more pragmatic. COVID controls have been relaxed in recent weeks, and economic activity has begun to recover and should be boosted further by significant monetary and fiscal policy easing. Further, the party will likely do what they can to improve economic conditions ahead of the party meeting at the end of the year. While sentiment towards growth globally remain tepid, we continue to believe the significantly lower valuations might warrant a re-interest in this category as well. We remain cautiously optimistic that in the second half of this year, the conditions in China will continue to improve.