Chinese equities rallied strongly across the board during the quarter. The market rally was initially due to a relatively quick resolution to the liquidity crunch in its financial system, which occurred toward the end of the first half of the year. By late summer, the Chinese stock market was further boosted by economic indicators released during the quarter that pointed to a broad-based recovery in economic growth. Also during the quarter, Chinese Premier Li Keqiang reiterated a growth target rate of 7.5% and maintained that this goal is achievable.
During the quarter, the Fund’s biggest contributor came from the information technology (IT) sector, followed by consumer discretionary, financials and consumer staples sectors. We have continued to position the portfolio to focus more on services-oriented industries such as IT software, education and health care. Among our positions in the IT sector, Internet-related companies demonstrated particularly strong performance during the quarter. In China, value creation from Internet-based businesses has been expanding from traditional advertising and online gaming to e-commerce, travel, social life services and financial services. This trend is accompanied by the fact that China now has the world’s largest Internet population, and is seeing dramatic growth in its smartphone subscribers. During the quarter, Sina and Tencent (HKSE:00700) were among the top contributors to performance. Sina (NASDAQ:SINA) is one of the largest online content providers in China and has been expanding its revenue base from the traditional online advertising to the monetization of its popular Weibo service—an online community platform akin to Twitter. Tencent is also using its status as the largest online instant messaging service provider to enter into gaming and e-commerce businesses, so far to great success.
On the negative side, China’s health care sector experienced some setbacks during the quarter. In our view, the negative impact was mainly due to state media exposure over certain corrupt practices among some pharmaceutical companies. We believe this should impact the health care sector over the short term, and further believe that the cleanup in the health care industry will benefit the sector’s stronger companies over the long term. Our positive outlook on the industry remains unchanged.
During the quarter, we rebuilt a position in New Oriental Education, a leading education service provider in China. We previously owned the company but exited it on concerns related to the overhang of an investigation by the U.S. Securities and Exchange Commission over its ownership structure. As that concern no longer exists, the market has refocused on New Oriental’s corporate fundamentals. We believe that management’s past execution has been strong and that the firm is well-positioned in the fast-growing Chinese education sector. On the other hand, we selectively trimmed our weighting in the property sector during the quarter.
There are clear signs that China’s economy is gradually bottoming out. In addition to the positive economic data in the third quarter, listed companies have also released guidance for overall stronger business operations in the second half of the year. Going forward, we expect to see more economic reform measures from China’s new leadership. The recent launch of the Shanghai Free Trade Zone is a good example of such reforms. It shows China’s determination to further open up its service sector industries. We will continue to follow the developments in the service industries in China and look for long-term investment opportunities to benefit from them.
The views and opinions in this commentary were current as of September 30, 2013. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund’s future investment intent.
Statements of fact are from sources considered reliable, but neither the Funds nor the Investment Advisor makes any representation or guarantee as to their completeness or accuracy. As of 9/30/2013, the securities mentioned comprised the Matthews China Fund in the following percentages: Sina Corp. 2.6%, Tencent Holdings, Ltd. 2.7% and New Oriental Education & Technology Group, Inc. 0.6%. Current and future portfolio holdings are subject to risk.
Performance and distribution figures discussed in any of the Manager Commentaries reflect that of the Investor Class Shares.