abrdn China Investment Company Limited 7
Strategic Report Governance Overview Portfolio Corporate Information Financial Statements
Market Environment
The Financial Year was marked by considerable market
volatility, with a sharp contrast between strong
performance in the first six months, followed by an
extended period of weakness in the second half. At the
beginning of the Financial Year, the central government’s
strict Covid policies hampered economic progress. As the
authorities pivoted to reliance on herd immunity, policies
were removed more quickly than expected. This
effectively brought to an end to the nationwide zero-
Covid policy. Share prices briefly surged on hopes of a big
increase in activity, fuelled by the knowledge that
considerable demand had built up during the Covid
lockdowns. However, the strength of the recovery proved
rather underwhelming and short-lived and company
reports began to indicate that the market had run ahead
of corporate fundamentals.
Other factors also began to influence sentiment. Among
them was the difficult global macroeconomic backdrop,
as many central banks tightened monetary policy as they
attempted to stem inflationary pressures. Added to this
was a flare-up in geopolitical tensions between the US and
China. At home, there were growing concerns about the
financial health of China’s domestic real estate sector.
Liquidity problems made life very difficult for some of the
heavily indebted property giants, epitomised by Country
Garden, one of the country’s top three developers, which
subsequently defaulted on an international bond. The high
level of debt held by local government was also a concern,
given the cost of servicing the debt and the fact that it is
not permitted to sell land.
As China’s economic recovery faltered, calls mounted for
central government measures to support demand.
Gradually some measures were implemented, but it
became clear government was hesitant to provide the
level of support investors expected, preferring to drip-feed
a range of small, targeted measures, as opposed to an
immediate and powerful boost.
The mood was lifted by a Politburo meeting in July when
the government indicated a significantly increased level of
economic support, aimed at improving the operating
environment for private enterprises and the platform
economy, boosting capital markets, and increasing
investor confidence. Other measures included support
aimed at the struggling property sector, including 1 trillion
yuan in planned government bond issuance for
infrastructure investment. Towards the end of the
Financial Year there were signs the medicine was
beginning to work, with third-quarter Gross Domestic
Product (“GDP”) better than expected.
If the global macroeconomic picture remains soft, more
support may well be necessary, especially in the real
estate sector. For investors, history suggests a patient,
long-term approach leads to the best returns and that is
likely to be the case once again in China.
Investment Themes
In constructing and managing the Company’s portfolio,
we employ a five-pronged thematic approach to
identifying companies which we believe will deliver
superior returns over the long-term. While this approach
will not prevent us from buying into a position where we
see fundamental value, we would expect most of the
holdings to benefit from one of the themes below:
Aspiration: We expect consumer companies to fare well
as China strives for a self-sufficient economic model.
Positioning goods and services as high-quality, in part to
gain pricing power is a powerful consumer trend. We
believe urbanisation and rising middle-class wealth will
drive demand for premium goods and services in the
long-run.
Digital: This theme is aligned with the government’s
objectives of localisation, improving productivity, lowering
costs, increasing innovation and helping to propel
economic growth. Our holdings in this segment are
primarily software-related names. Chinese companies
have historically performed strongly given their
knowledge of the domestic market and preference
for localisation in areas such as cybersecurity and
cloud services.
Green: This theme is set to benefit from government policy
on decarbonisation and net-zero emissions by 2060.
China dominates global manufacturing capacity for
renewable energy and storage, accounting for 90% of
solar and 75% of battery capacity and is well positioned to
benefit from the huge global investment required in
renewable energy and electricity storage. Other industries
also need to decarbonise, so we expect greater
investment in upgrading machinery and increasing
energy efficiency. Our holdings include solar wafer-
producers, component-makers, battery and related
component-makers and automation-related firms.
Health: This theme aligns with government policy
objectives to make healthcare cheaper and more
accessible. This is particularly relevant in view of China’s
rapidly ageing society. The portfolio is overweight in
healthcare services, including companies providing
innovative research and clinical trial services that seek to
bring high-quality therapies to market.
Investment Mana
ers Report