The “common prosperity” plan

August was a roller coaster month for the MSCI China Index, as the market was continuously digesting non-stop regulatory crackdowns across multiple industries. The “common prosperity” theme advocated by the government, and the labelling of online gaming as “spiritual opium” by the state media added further concern to the market, resulting in the MSCI China Total Return Index declining as much as 8% at one stage, before rebounding to end the month flat.

Monthly Fund Commentary
22 Sep 2021

August was a roller coaster month for the MSCI China Index, as the market was continuously digesting non-stop regulatory crackdowns across multiple industries. The “common prosperity” theme advocated by the government, and the labelling of online gaming as “spiritual opium” by the state media added further concern to the market, resulting in the MSCI China Total Return Index declining as much as 8% at one stage, before rebounding to end the month flat.

The delta-driven resurgence of new COVID-19 cases, in addition to reported floods in China, further dampened economic activities. Service industries such as Catering, Hotels, Tourism and Offline Entertainment were impacted the most.

Activity indicators in July weakened and missed market expectations. The weakness was broad-based, from retail sales to export growth and reflected a combination of factors, such as floods in the Henan province and a resurgence of COVID-19 cases in Guangdong.

We expect the data to turn weaker still in the coming months following the news of a new wave of COVID-19 in Fujian, and weakened private investment on the back of tightening regulations. This said, more monetary easing from the government may be on the way to stabilise the economy.

In addition to the regulatory clampdown, President Xi’s common prosperity speech was yet another undesirable surprise to the market. The speech laid out China’s new direction to rebalance the economy towards labour and to tackle social inequality. The market did not react well as the ideology suggests a redistribution of wealth from high-income groups and highly profitable companies to the mass market. Tax and social welfare increases are likely.

There were no major surprises from the interim results of Internet companies following the earlier earnings cuts. The common theme from the results announcements was that bellwether companies all embraced common prosperity in their business outlook, either through increased investment or donations to funds.

Alibaba stated that government tax breaks for the Internet industry, which have been in place for a number of years, would start to dwindle. Currently, many Internet companies are qualified as key software enterprises and entitled to a 10% preferential tax rate. Alibaba expects its effective tax rate to rise from 8% to 20%.

The Sports industry is one of the few industries that remains supported by the government. In August, the government rolled out a new 5-year national mass fitness programme to promote public health. Sportswear stocks had a good run on the back of this news. Fundamentally, leading players such as Anta and Li Ning also reported better than expected interim results.

July’s nationwide property sales finally recorded the first YoY decline this year. We see this as the first positive sign for the sector. If this level of decline continues for a few more months, we are likely to see a policy reversal from the government.

The Strategic China Panda Fund edged up 0.3% during the month, slightly outperforming the market. Given the fluid situation in China, we will take a rather cautious stance in the near term.

As always, we invite investors and prospective investors, to get in touch if you would like to discuss the positions held in the portfolio or require further information.

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

The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 19/09/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.