Aggressive supporting measures in China

China stocks struggled in April as the Omicron outbreak continued to swipe through the country. Shanghai was the second city to be put under lockdown, following Shenzhen. The fact that Shanghai had to be locked down for more than a month with stringent movement restrictions, along with other cities, including Beijing and Zhengzhou, unnerved the market.

Market sentiment was further dampened by the US stock market riot as the US 10Yr Treasury yield spiked to nearly 3%, for the first time since 2018. The MSCI China Total Return Index and the CSI300 ended the month down 4.1% and 4.9% respectively.

The March macro data was as weak as expected because of the impact of COVID. PMI dipped below 50 and retail sales recorded -3.5% growth. Exports were the only highlight with a respectable 12.9% growth. The April data is set to nose-dive as more cities are put under lockdown. Q1 GDP growth was reported at 4.8% YoY.

We see downside risk in China’s GDP growth target of 5.5% for 2022. As much as the economy is seeing downside pressure, we see more aggressive support measures from policymakers.

The People’s Bank of China cut the reserve requirement ratio by 25bp in April. The Politburo meeting at the end of April also sent a positive message regarding the Property sector, which was followed by a 20bp mortgage rate cut in May.

News on the Internet sector remained mixed last month. On the one hand, there were early signs of stabilisation for online gaming with the regulator resuming video gaming licensing after an eight-month freeze. The regulator continued to scrutinise live streaming and online food delivery platforms.

The sale of property nationwide remains in decline because of the COVID disruption. We see the recent 20bp mortgage rate cut as a significant positive, as this is the first time the mortgage rate has been cut since the tightening cycle began. With more cities relaxing home purchase restrictions, we expect a strong resurgence of property sales as soon as Omicron is brought under control.

Automotive output was also dragged down by the COVID situation in the Yangtze River Delta region, which contributes significantly to China’s total automotive component output. Although some factories have resumed production, capacity utilisation remains low because of logistic disruption and component shortages. We expect the supply bottleneck to ease soon, as the Omicron outbreak is peaking out.

The Strategic China Panda Fund returned -4.6% in April, versus -4.1% for the benchmark. We added to the Internet sector on the back of a reasonable valuation following the de-rating. We remain hopeful of a second half recovery as the government steps up stimulus measures for the economy, while Omicron cases peak out.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

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The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 16/05/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.