Monthly Commentary - November 30, 2022
Chinese equities rebounded from one of their worst monthly performances in October to their best monthly performance since 1999. The rebound in prices and sentiment seems linked to signals and statements made by Xi Jinping’s government following the Party Congress which support the easing of zero-Covid restrictions in favor of “living with Covid” policies. Additionally, Xi announced in November his intension to reverse several policies related to the property market. During the month, Chinese real estate was the star performer followed by large platform companies within the communication services and consumer discretionary sectors.
Performance Contributors and Detractors
For the month ending November 30, 2022, China Fund, Inc. returned 30.60% while its benchmark, the MSCI China All Shares Index, returned 21.30%. From a sector perspective, the portfolio’s weight and stock selection within consumer discretionary and real estate contributed the most to the portfolio’s absolute and relative returns. On the other hand, the portfolio’s allocation and stock selection within industrial and information technology sectors detracted from relative performance.
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, contributed the most 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 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.
Conversely, Baosight, an IT company servicing the digital needs of steel companies and other industrial companies as well as Wuxi Lead, a battery equipment manufacturer selling products to battery makers such as CATL detracted from performance. These companies continue to be in secularly growing areas and should benefit from warmer and improving sentiment in the A-shares. A-shares stocks have not recovered as quickly given that it takes time to roll out relaxed COVID measures and in the meantime, domestic investor sentiment remains weak.
Looking ahead, we are encouraged by China’s pragmatic approach to easing its COVID policies. Our base case in not for an immediate end to zero-COVID restrictions but rather a gradual mix of policies which support the reopening of the Chinese economy which should continue to boost consumer activity and mobility. 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.