Monthly Commentary - October 31, 2023

Monthly Commentary - October 31, 2023

Market Environment 

Chinese equities were negative in October, performing roughly in-line with broader emerging markets. During the month, signs of macro-economic stability continued alongside a steady cadence of policy announcements to support the broader economy. The government also eased fiscal deficit limits and pushed local governments to fulfill their bond issuance quotas to directly support infrastructure projects. In addition, there seems to be a thawing of U.S. — China geopolitical tensions as both sides acknowledge common ground during recent diplomatic visits. During the November Asia Pacific Economic Cooperation (APEC) meetings in San Francisco, President Biden is expected to host a bilateral meeting with Xi Jinping. In terms of markets, quarterly results of leading Chinese companies, especially large cap technology firms seem to be hinting towards upward surprises in terms of top line revenue and earnings. Lower stock prices are making index level valuations increasingly attractive as analysts continue to upgrade forward looking earnings expectations from this year's low base.

Performance Contributors and Detractors 

For the month ending September 30, 2023, China Fund, Inc. returned -5.49% while its benchmark, the MSCI China All Shares Index, returned -3.80%. From a sector perspective, health care contributed the most to returns, while financials detracted the most during the month. In terms of relative performance, while our overweight to consumer discretionary had a slight negative allocation effect, good stock selection within the sector resulted in a positive total effect versus the benchmark. On the other hand, stock selection within financials detracted the most from relative performance.  

Turning to individual holdings, pharmaceutical company Wuxi Biologics, was among the top performers given its relative defensiveness as one of China's health care names with larger foreign exposure. Anti-corruption efforts are currently underway in China's health care industry which makes companies with sizable domestic revenues more susceptible to any negative industry impact. Conversely, e-commerce and logistics company also detracted given a still weak earnings profile. We expect this year's consumer durable goods spending to remain challenged given last year's high base but feel that a lot of the pessimism is currently baked into the stock. 


China continues to be grinding its way through a slow economic recovery with continued challenges including a weak property market, weak global demand and weak business confidence. While the government has not offered any bazooka stimulus, more support for the property market was seen over the past few months. We believe the government continues to be in a position to support its economy further if needed.

Looking into the final couple of months of 2023, it is hard to see a major recovery in economic growth although comparables will be more favorable. We will look for the bottoming of the property market and increased efforts to boost business confidence. All in, things are not collapsing but we are mindful that major catalysts for recovery remain at bay given all of the above, and a still challenging geopolitical environment.