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2022 China Half-Year Review

The first half of 2022 was a difficult one for Chinese equities and thus also for our ACATIS QILIN Marco Polo Asia Fund.

China faces real challenges on several fronts, in particular:

  1. Unresolved Taiwan issue and China's response to Nancy Pelosi's visit

  2. Negative economic impact of sticking with the "zero Covid strategy” with its associated lockdowns and travel restrictions

  3. Real estate crisis that has not yet been overcome

  4. Upcoming presidential election in autumn and mounting tensions in the country

These challenges are substantial and are taken up by the international press. This has strengthened a picture that China is losing competitiveness in the international arena. However, the facts paint a different picture.

China's real GDP growth in 2022, at around 4.2%, will still be significantly higher than that of the US and the EU. China is already the export world champion and its export growth in the first half of 2022 was +13.2%, more than twice as high than that of the USA. The economic superiority of the trade balance is most obvious. China has a positive balance of +690 billion USD while the USA has a deficit of -861 billion USD.

Moreover, by international standards, China has much more room to cut current interest rates by almost 3%, while the West has to raise interest rates. The inflation rate in China is 2.5% compared to the EU and the USA at 8-10%. Likewise, the money supply M1 and M2 remain extremely low compared to the West. This means that the Chinese central bank still has significant degrees of freedom to further stimulate the economy.

An analysis of Chinese company data also shows that Chinese companies continue to grow profitably. As of August 25th, of this year, 2080 of 4777 A-shares have reported 1H results. Aggregate total revenues of these 2080 companies increased 10.8% year-on-year to 12.092 trillion Renminbi, and aggregate total net profit increased 9.5% year-on-year to 1.096 trillion Renminbi. For the first time, the Chinese companies on the Fortune 500 list are generating more sales than their American counterparts.

The perception of China's economic performance is the result of Western press reports. On the one hand, this drives the West to be reluctant to accept China's path to market and technology leadership, and not develop enough of its own strengths.

On the other hand, the negative sentiment of international investors leads to a decoupling of company valuations from the development of the real economy. Currently, with a P/E of 12, the valuations of Chinese companies are almost half of the S&P 500 and well below the average of the last 15 years.

Based on these considerations, we estimate the probability is high that China's capital market will recover. Accordingly, we maintain the significant China overweight in our Asia fund.

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