The market resumed its downward trend in September, with the MSCI China Total Return Index declining 5%. In addition to lingering regulatory concerns, investors are beginning to dwell on the possibility of contagion risk from the Evergrande situation as more developers reportedly run into a liquidity crunch.
Anticipation of earlier than expected US tapering also unnerved the market with US government bond yields trending higher. Power shortages and the repeated resurgence of COVID-19 delta variant cases across a number of provinces, particularly in Fujian, further dampened market sentiment. Sector-wise, Renewable Energy and Biotech stocks outperformed, while Macau Gaming and Sportswear stocks underperformed the market.
The regulatory crackdown has continued to spread across industries and markets. Macau Gaming and the HK Property sector were the latest casualties last month. The Macau government released a public gaming consultation regarding the tightening of gaming laws, whilst news reported that HK Property companies were asked by Beijing to resolve the housing supply shortage in HK.
The property market in China is not in a good place. Nationwide property sales in September dropped over 30% YoY. It was the third consecutive month to record a YoY decline and it continues to widen month by month.
Evergrande’s woes are evolving into systemic risk as more developers begin to experience a liquidity crisis. A frozen offshore bond market has made it very difficult for developers to refinance, further reinforcing a vicious cycle. As much as the sector is heading into the biggest crisis of all time, we are finally seeing early signs of easing from the government.
The PBOC (The People’s Bank of China) sent a positive signal to the market by injecting liquidity into the financial system and changing its policy tone to support the healthy development of the property market. We expect a relaxation of property measures to follow in the near future.
August macro data remained weak. The PMI was reported at 50.1, barely above the expansion threshold of 50, while retail sales growth saw a sharp deceleration to 2.5% from 8.5% in July. CPI and export growth were the only positive readings from the data. Inflation remained in check with the CPI trending down further to 0.8%, while export growth re-accelerated to 15.7%.
Since August, local governments hasten to meet their energy intensity reduction targets by year-end by implementing power rationing in multiple provinces. This is likely to add further pressure to industrial activities in the near term, let alone the impact on the economy brought by regulatory crackdowns and repeated resurgence of COVID-19 waves.
The Strategic China Panda Fund returned -5.5% in September. We topped up the weighting of market leaders with strong balance sheets in the Property sector as they remain confident of achieving positive earnings growth in the next two years whilst trading at distressed valuations.
We are of the view that they are well-positioned to ride through this cycle and emerge as long-term winners. Potential policy easing should serve as a re-rating catalyst in the near term.
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.
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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 15/10/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.