Monthly Commentary - May 31, 2023

Monthly Commentary - May 31, 2023

Market Environment

Chinese equities turned decisively negative year to date after a massive rally in January. Market speculators have been disappointed by the “slow and steady” economic recovery. U.S. – China relations remain strained as China restricted its companies from buying chips from Micron, a U.S. company, citing national security risks. Negative sentiment also impacted Hong Kong-listed companies in May, especially small caps, while local A-share large caps suffered less, and A-share small caps were only slightly negative during the month. Within MSCI China All Shares sectors, real estate fell 15% in the month followed by weak consumer staples and materials. Utilities sector was hurt the least, down about 1%.

Performance Contributors and Detractors

For the month ending May 31, 2023, China Fund, Inc. returned -9.80% while its benchmark, the MSCI China All Shares Index, returned -7.93%. From a sector perspective, the portfolio’s allocation and stock selection in consumer discretionary and utilities as well as stock selection within financials detracted the most from relative performance. On the other hand, the portfolio’s allocation to materials, and allocation and stock selection within industrials and energy contributed the most to relative performance.

Turning to individual holdings, China’s largest food delivery service and internet platform company Meituan detracted the most from relative performance. While Meituan is a well held name in global portfolios, a risk off appetite towards China led to a selloff. While internet platform companies’ valuations have pulled back considerably, we believe they largely remain profitable and scale-oriented businesses.

On the other hand, A-share names including robotic components manufacturer Estun Automation, factory automation systems manufacturer Zhejiang Supon Technology, medical IVD equipment and reagent manufacturer Shenzhen New Industries were some of the only positive contributors to returns for the portfolio, albeit returns were still rather tepid. In general terms, during the May sell-off, Hong Kong-listed names in the portfolio were sold off more aggressively. Platform companies listed in Hong Kong were amongst the worst performers given weak sentiment towards Chinese equities.


China’s reopening remains bumpy with some sectors recovering ahead of others which has resulted in market concerns about the sustainability of earnings growth. We continue to monitor China’s property market developments as this is key in ensuring growth stability within the country. So far, a gradual, in-line property sector recovery has been seen on the ground, but we continue to monitor the pace of overall recovery. Industrial sector recovery has been weighed down by underperformance in the renewables sectors (EV/solar/wind) so far. We feel that investor sentiment has been overly bearish and believe these sectors continue to be a secular opportunity for growth and are key in China’s carbon neutrality transition. Platform companies in China continue to experience market sentiment volatility given varying geopolitical reactions. Increased liquidity and any hint of thawing of U.S. – China bilateral relations, combined with depressed valuations and a bottoming of corporate earnings, could form an aggregate catalyst for stock prices in the second half of the year.

Source: Brown Brothers Harriman & Co. Source for index data: MSCI

Past performance is not a guide to future returns. Investment returns are historical and do not guarantee future results. Investment returns reflect changes in net asset value and market price per share during each period and assumes that dividends and capital gains distributions, if any, were reinvested. The net asset value (NAV) percentages are not an indication of the performance of a shareholder›s investment in the Fund, which is based on market price. NAV performance includes the deduction of management fees and other expenses. Back to Fund Commentaries