Monthly Commentary - October 2022
Market Environment
Chinese equities continued to be weak in October. During the month, geopolitical headwinds combined with disappointing announcements post the Chinese National party Congress weighed on markets. The Biden administration announced fresh restrictions upon U.S. companies and select trading partners from providing semi-conductor technology to China which caused analysts to handicap the trickle-down effects and potential retaliation. In addition, with lingering COVID restrictions, markets were disappointed that there were no announcements were made to China's zero-COVID policies while at the same time announcing changes to the Politburo Standing Committee which seemed to imply further consolidation of power in favor of Xi Jinping.
Performance Contributors and Detractors
For the month ending October 31, 2022, China Fund, Inc. returned -12.55% while its benchmark, the MSCI China All Shares Index, returned -13.52%. From a sector perspective, the portfolio's consumer discretionary sector detracted the most from relative performance. On the other hand, the portfolio's allocation and stock selection within industrial and information technology sectors contributed the most to relative performance.
Turning to individual holdings, internet platform companies such as JD.com, Meituan and Alibaba Group Holdings all corrected down in the month of October, following the confluence of bad macroeconomic and geopolitical news. These are well held names in global portfolios and a risk off appetite towards China led to a selloff in these names given likely global portfolio risk off appetites in China.
Conversely, opportunities in localization plays such as Shenzhen New Industries Biomedical Engineering did well in October as the market positively viewed these opportunities given rising geopolitical tensions. Shenzhen New Industries, an in vitro diagnostics (IVD) equipment and reagent provider, was the top contributor to performance. The company's products facilitate lab testing efforts in China's hospitals and pharmaceutical industries. Beijing Kingsoft Office Software, a domestic provider of computer operating systems software, was another contributor to performance. Both companies stand to gain market share in industries that are still dominant by foreign firms.
Outlook
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. Relief of China's zero-COVID policy would likely unleash more activity on the consumption side as much of the economy has felt the brunt of the country's zero-COVID policy. Given the weaker performance of some sectors this year, valuations in China are quite attractive in a global context. We remain focused on the longer-term fundamentals of the domestic growth engine and believe there are many opportunities in China. Over the longer term, we believe that company fundamentals and attractive valuations can overcome the headwinds of negative headlines and rhetoric.