Market Review

 

Since the low point in September, Greater China equities have staged a significant recovery. The MSCI Golden Dragon Index was up by more than 8% in US dollar terms for October. In particular, energy companies led the rebound from their previously oversold levels; while defensive sectors, including telecom services and utilities, remained flat.

 

While the stock market advance surprised investors, the Chinese economy continued to slowdown. In contrast, stabilization seen in some key economic data has been comforting. For example, China's flash manufacturing PMI beat consensus in September, rising to 49.8, and remained unchanged in October. With respect to the services industry, tourism data and retail sales momentum were strong during Golden Week in China, a long holiday following the October 1 National Day, which demonstrated robust consumer spending in China. In terms of monetary policy, the People's Bank of China delivered a sixth interest rate cut which was accompanied by the final push to liberalize deposit rates. The market also welcomed other targeted easing measures, such as a reduction in the minimum down-payment for first home buyers and a tax cut on small car sales. As the month drew to a close, the fifth plenary session of China's Communist Party's Central Committee with respect to the 13 th Five Year Plan, was the focus for many investors. The plan reinforced the future direction of the economy being more innovative, balanced and environmentally-friendly. Policy details are expected to be released in the coming months, however key areas with policy support remain intact, including industrial automation, environmental protection and technology.

 

In comparison to China and Hong Kong's equity markets, the Taiwan market was less exciting during the month. The technology sector, especially Apple supply chain companies, lagged on concerns of a slowing global semiconductor cycle.

 

Fund Review

 

In absolute terms, October was a strong month for Greater China equities with previously oversold industries leading the way. For example, the energy sector returned 12% in US dollar terms; while many automobile manufacturers returned 15% - 20% after the announcement of the tax cut.

 

Under the relief rally, the Fund struggled to keep pace with the MSCI Golden Dragon Index ("the benchmark index”). The Fund's long term investment approach was the main cause of underperformance; with a focus on turnaround situations that often benefit from structural growth in a particular area. For example, the Fund has held one of the top detractors, Zhuzhou CSR, a railway component manufacturer, in the portfolio for multiple years. Despite the company's impressive long term performance, the stock struggled to rebound as investors traded oversold cyclicals. We believe the secular growth potential and strong track record of such companies will enable ongoing re-ratings and earnings growth; therefore we have maintained the positions. On the other hand, avoiding utility stocks with limited earnings growth potential paid off well during October. The rebound of many internet stocks, especially the industry leaders that are held in the Fund, also contributed positively to performance.

 

Key Transactions

 

Our positioning remains largely unchanged with the key transaction for the month being the initiation of Alibaba Group, the Amazon of China. We like the stock as a core internet name of China's e-commerce ecosystem. The stock's price has corrected by more than 30% since its initial public offering and we believe investors' concern about the slowing macro economy is overdone and the risk/return is quite favorable. We expect the rising monetization of Alibaba should lead to a re-acceleration of revenue growth.

 

Outlook

 

After the rebound of the Chinese equity market in October, many people questioned the sustainability of this recovery. There are still concerns over whether the extremely high volatility seen this summer will be repeated and cause another market crash, however we believe this is not likely. We also believe some of the reasons for the previous wave of market volatility, such as the surge in margin finance in the China A-share market, have eased and the pressure of forced selling is largely behind us.

 

The investment objective of the Fund is to achieve long-term capital appreciation. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China.

 

The Fund has an operating policy that the Fund will invest at least 80% of its assets in China companies. For this purpose, 'China companies' are (i) companies for which the principal securities trading market is in China; (ii) companies for which the principal securities trading market is outside of China or in companies organized outside of China, that in both cases derive at least 50% of their revenues from goods or services sold or produced, or have a least 50% of their assets in China; or (iii) companies organized in China. Under the policy, China means the People's Republic of China, including Hong Kong, and Taiwan. The Fund will provide its stockholders with at least 60 days' prior notice of any change to this policy.

 

Source: IDS GmbH - Analysis and Reporting Services, a subsidiary of Allianz SE.

 

 

 

Important Information:

 

Holdings are subject to change daily. The Fund seeks to achieve its objective through investment in the equity securities of companies and other entities with significant assets, investments, production activities, trading or other business interests in China or which derive a significant part of their revenue from China. Investing in non-U.S. securities entails additional risks, including political and economic risk and the risk of currency fluctuations, as well as lower liquidity. These risks, which can result in greater price volatility, will generally be enhanced in less diversified funds that concentrate investments in a particular geographic region.

 

The information contained herein has been obtained from sources believed to be reliable but Allianz Global Investors U.S. LLC and its affiliates do not warrant the information to be accurate, complete or reliable. The opinions expressed herein are subject to change at any time and without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Investors should consider the investment objectives, risks, charges and expenses of any mutual fund carefully before investing. This and other information is contained in the fund's annual and semiannual reports, proxy statement and other fund information, which may be obtained by contacting your financial advisor or visiting the fund's website at www.chinafundinc.com. This information is unaudited and is intended for informational purposes only. It is presented only to provide information on the Fund's holdings, performance and strategies. The Fund is a closed-end exchange traded management investment company. This material is presented only to provide information and is not intended for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. After the initial public offering by a closed-end fund, its shares can be purchased and sold on the open market through a stock exchange, where shares may trade at a premium or a discount. The market price of holdings is subject to change daily.

 

P/E is a ratio of security price to earnings per share. Typically, an undervalued security is characterized by a low P/E ratio, while an overvalued security is characterized by a high P/E ratio. P/B is a ratio of the current stock price to the book value. This is used to identify undervalued stocks. Dividend yield is the annual percentage of return earned by an investor on a common or preferred stock. The average dividend yield is the dividend rate divided by current share price.

 

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