Monthly Commentary - September 2022
Market Environment
Chinese equities were extremely weak as a confluence of negative headlines including worries about a spillover of China’s real estate woes into its broader economy, lingering COVID restrictions and geopolitical tensions continued to weigh on its economy. China’s property market sentiment has been hit hard and continued to struggle as potential buyers and local government cast doubts on whether some financially distressed developers can finish and deliver their pre-sold homes on time.
Performance Contributors and Detractors
For the month ending September 30, 2022, China Fund, Inc. returned -13.59% while its benchmark, the MSCI China All Shares Index, returned -12.25%. From a sector perspective, allocation and stock selection within the real estate sector detracted the most from relative performance. The portfolio’s real estate holdings including CIFI, a property developer focused on building houses near the outer perimeter of tier-one cities, fell amid deepening market concerns about the outlook of the overall property market in China.
On the other hand, stock selection within consumer discretionary and industrials sectors contributed the most to relative performance. Among the portfolio’s industrial holdings, Shanghai International Airport, one of China’s major airports, was among the top contributors to relative performance. Although international travelers provide more revenue for the airport, it has benefited from pent up demand in domestic travel. And while international outbound tourism may be a few quarters away pending a more pragmatic approach to China’s zero-COVID policy, we expect Shanghai International Airport and duty-free operators to stand to beneficiaries of an eventual reopening of tourism activities.
Outlook
China’s second quarter results released in July continued to reflect a weak economy dealing with COVID lockdown issues. At the same time, the overhang from a weak property sector and geopolitical tensions continue to plague China’s equity market performance. While the property market continues to be weak, there are signs that the government is increasingly looking to loosen the very tight conditions, including supporting banks to provide financing to developers, and allowing certain developers to issue renminbi-denominated bonds. The larger unknown is geopolitics, including the how U.S. – China relations will pan out. But there have been signs of pragmatism in Beijing. In August, China resolved a long-running dispute with the U.S. Public Company Accounting Oversight Board (PACOB), and PACOB inspectors are now checking the accounting workbooks for Chinese companies listed in the U.S. As for China’s zero COVID policy, while it is difficult to predict an actual point in time where we might see the end of current strict COVID measures, we are cautiously optimistic that the Chinese government will return to a more pragmatic approach, which strikes a better balance between public health and the economy.