China Sector Report: Q3 2021

The Q3 2021 Global X China Sector Report can be viewed here. The report provides macro-level and sector-specific insights across the eleven major economic sectors in China’s equity market. For a broader look at Global X’s international funds, please see the latest International Report: Q3 2021.

Summary

In the third quarter of 2021, China’s GDP grew at a pace of 4.9% year-on-year, undershooting expectations.1 The combination of unexpected headwinds, regulatory moves and long-term policy shifts dragged slowed quarterly growth. In September, retail sales beat expectations and grew by 4.4%, in a positive sign amid a year of sluggish consumption recovery. Fixed asset investment in September came in slower than expected at 1.5% year-over-year (YoY), underscoring challenges in the Real Estate sector.2

In August, Delta variant cases in Nanjing Lukou Airport were quickly projected across the whole country, resulting in a tightening of domestic travel and partial lockdowns in some cities. Lingering anxiety over COVID depressed consumption recovery in Q1 and Q2, and the Nanjing outbreak had a chilling effect on consumption in Q3. The Delta headwinds were reflected in National Day travel and tourism revenue statistics at the beginning of Q4, which were stagnant compared to 2020.

Regulatory moves took markets by surprise yet again in Q3, contributing to a 20.53% fall for Consumer Discretionary. The Double Reduction Policy, which was part of July’s education crackdown, prohibits companies engaging in after-school tutoring for elementary and middle school students from obtaining financing through capital markets and compels them to register as nonprofit institutions. This cut deep into the education segment. At the same time, domestic travel restrictions resulting from the Nanjing outbreak frustrated companies in the travel and luxury segment.

Communication Services delivered returns of -25.33%. Some of the holdings in Communication Services have exposure to areas targeted by regulation, like Netease and Tencent which have video game operations. An article in a state-owned newspaper that referred to video games as “spiritual opium” was followed soon after by heavy restrictions which limit online gaming for minors to only three specific hours on weekends.

Given these challenges, just three of the eleven major economic sectors in China generated positive returns in Q3. Energy returned 27.30% amid rising commodity prices, while Utilities rose 23.81%. An ongoing coal shortage sent coal stocks within the Energy sector on a rally in September. Meanwhile, Communication Services and Consumer Discretionary performed the worst with returns of -25.33% and -20.53%, respectively. Increased scrutiny of regulatory risks contributed negatively to Chinese equities in general, while consumption and internet-based stocks suffered because of the aforementioned headwinds.

Source: Bloomberg, as of Sep 30, 2021

Performance shown is based on the NAVs of the underlying sector ETFs and does not guarantee future results. To view standard and most recent month-end performance of each of the funds, please click on the links available under “Related ETFs”.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Returns for periods greater than one year are annualized.

Dispersion Between China Sectors Increased Dramatically

Sector dispersion is the difference between the best and worst performing sectors in each country. The contrast in sector dispersion is stark. Whereas the US had a dispersion of around 7%, China had a dispersion of nearly 53%. In the case of China, while uniquely harsh regulations pulled down returns for certain segments of Communication Services and Consumer Discretionary, a shortage of both coal and power benefitted certain segments of Energy and Utilities, causing a wide range of returns.

Data points represent market price returns of the sector ETFs and the benchmark indexes, MSCI China (MXCN) and S&P 500. Average refers to a simple average of the individual sector returns of the MSCI China and MSCI China Sector Indexes, as well as the S&P 500 and S&P U.S. Select Sector Indexes.

How China Sector Performance Measured Up Against US Counterparts

In the chart below, we show performance of indexes that track China’s 11 GICS sectors, as well as their US sector index counterparts.

Performance shown is past performance and do not guarantee future results. Index returns are for illustrative purposes only and do not represent actual fund performance.

Related ETFs

Please click the fund names above for current fund holdings and important performance information. Holdings are subject to change.