China equities started 2019 with a bang. The MSCI China Total Return index and CSI 300 index rallied 11.3% and 6.3% respectively. A long overdue rebound materialised as the Chinese government stepped up stimulus measures and positive progress was made on trade talks. The Renminbi gained 2.7% against the US dollar, reversing the depreciation trend of 2018. The US Fed’s benign outlook on interest rates and easing concerns on trade war both contributed to the strengthening of the currency. Sector wise, property, internet, healthcare and auto all performed well.
2018 GDP growth slowed to 6.6% from 6.8% the year before, meaning 4th quarter GDP growth was only 6.4%. December PMI also dipped below 50 to 49.4, which was lower than expected. China auto sales volume decreased 6% in 2018, the first time in over 20 years, while handset sales volume detracted 16%. Given the weakening macro trend, the government introduced more countercyclical measures to counter the growth slowdown. The People’s Bank of China (PBOC) announced a reserve requirement ratio (RRR) cut of 100 basis point to all banks. The Bank of China issued China’s first perpetual bond with the support of PBOC. This should have a positive impact on other banks seeking new channels to raise capital. The National Development and Reform Commission (NDRC) also indicated a subsidy plan in home appliance and auto industries to boost consumption, and in addition, the government unveiled tax cuts to SMEs. It was estimated that this could save SMEs Rmb200bn in tax a year.
The Investment Team continues to see progress in the US – China trade talks. After China officials met with a US delegation in early January, China’s Vice Premier Liu He headed to the US for another two-days of trade talks at the end of the month. Although no deal was concluded, the rhetoric from both sides was positive. The Team are hopeful that a trade deal will eventually be reached.
The Fund gained 9.2% in January, underperforming the benchmark by 1.9%. The large underweight in the internet sector, particularly the zero weighting in Alibaba, detracted from the overall performance. The Fund’s exposure to property, Macau gaming, banks and insurance were the top contributors during the month.
The views and statements contained herein are those of LBN Advisers Limited in their capacity as Investment Adviser to the Fund as of 13/02/19 and are based on internal research and modeling.