Monthly Commentary - August 31, 2023
Market Environment
China equities posted some of the
weakest results among major global markets in August as weak housing data
alongside lackluster manufacturing results kept a dark cloud over the Chinese
economy while putting more pressure on consumer sentiment. While markets seem
intent to remain volatile, the central government has announced a flurry of
policies in the last six weeks including measures to boost private investment,
measures to ease mortgage requirements to spur housing demand, measures to
boost foreign direct investment, policy to ease pressure and create refinancing
options for property developers and incentives for banks to ease consumer
credit restrictions and lower borrowing rates on mortgages. In addition,
geopolitical engagement between U.S. and Chinese leaders continued as the
Chinese government welcomed Commerce Secretary Gina Raimondo to advance talks
between the superpowers on topics of trade. Published accomplishments from the
visit are focused on re-opening lines of communication between the two countries
to resolve problematic issues surrounding trade and intellectual property.
Performance Contributors and Detractors
For the month ending August
31, 2023, China Fund, Inc. returned -8.59% while its benchmark, the MSCI China
All Shares Index, returned -8.60%. From a sector perspective, the portfolio's stock
selection within consumer staples and utilities detracted the most from
relative performance, while stock selection within real estate and
communication services contributed the most to 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, was the top contributor to both absolute and relative performance.
The company›s platform has been growing faster than peers and has also
experienced continued strong momentum of delivering monetization of the business
model. On
the other hand, JD.com
was the biggest detractor during the month. The e-Commerce platform has
generated concerns overs its growth prospects and has been weighted down by
China's muted recovery.
Outlook
Property
market struggles continue to be present and negative news flow has resulted in
continued volatile performance in this space. We continue to monitor this
segment of the market closely as China's pace of economic recovery is broadly
still dependent on a functioning property market. Looking ahead, the earnings story should benefit from easier
comparables with the second half of 2022. We expect earnings to continue to be
a catalyst. However, given weak sentiment, China needs to deliver a very strong
set of earnings to re-rate in a meaningful way, and we remain more cautious on
that front and expect only a gradual recovery ahead. Sentiment on the ground
remains weak, which could call for more supportive policies. At the same time,
we continue to see more companies delivering on monetization and increased room
for shareholder return as more companies consider buybacks and dividends.
Geopolitics remain a relevant concern, and unfortunately, does not offer much
optimism at the moment, leading to continued volatile market conditions.