August 2025
THE CIO’S PERSPECTIVE
When China introduced a new licensing process for the export of rare earth elements in April 2025 and later banned all exports of seven of them in retaliation for an escalating trade war with the United States, the impact didn’t take long to materialise. Several car manufacturers from Europe and the United States had to shut down production lines as their just-in-time supply chain of critical rare-earth based magnets did not provide for much inventory beyond a few days of production.
The US administration was quick to realise how damaging a Chinese export ban of critical refined rare earths such as dysprosium and terbium would be for the US auto, electronic and defense industries (rare earth magnets are used in the guiding systems of missiles and fighter jets). Today 94% of traction motors in cars use magnet-based technology. Yielding to the pressure coming from the US auto and defense industries, the US administration was quick to lift the ban on exports to China of US chip design software such as those developed by Cadence Design Systems and Synopsys. Even more high profile, AI chip designer Nvidia obtained the approval to resume the sale to China of its middle-of-the-range H20 Graphics Processing Units (GPU) that stands at the heart of China’s DeepSeek open-source AI model. In return, China temporarily lifted the ban on rare earth exports for only six months.
The deadline imposed by Trump on the Chinese to reach a new tariff framework was further extended for an undisclosed period, even though so-called “reciprocal agreements” were announced for all other countries. By playing its strongest card, China managed to lower the temperature that had built up in the past months between the two superpowers, at the risk of antagonising the European Union that saw its own auto industry fast becoming a collateral victim of the US-China trade escalation.
Like two big elephants facing each other and finally deciding to back off, we would not be surprised to see the endgame of the China-US tariff saga being a very diluted version of what had been first announced in April before tariffs escalated to 145% in a tic for tac pattern. Trump’s willingness to visit Beijing in October alongside his refusal to have Taiwan’s president land in the US to refuel his plane on his way to Central America certainly shows a significant softening of his stance towards China.
As a knee-jerk reaction to the sudden rare earth supply crisis, the Pentagon announced on 10th July that it had acquired a 15% stake in MP Materials which exploits a small and the only American rare earth mine, located in Mountain Pass, California, for $400m to fund the construction of a magnet factory, while Apple announced on 15th July that it would also chip in and inject $500m to build a rare-earth recycling facility. JP Morgan and Goldman Sachs will provide $1bn of extra financing. In other words, the US should be able to produce a small quantity of refined rare earth at some point in the future, but probably not before a couple of years. Metal experts who are closely following the situation are already talking about titanium, tungsten, beryllium and magnesium as being other weapons China could use if the trade relationship between the two countries was to heat up again.
Remaining in China where most of the action took place in July, a new buzz word appeared in the official statements issued by the government: the fight against “involution”. The sociological word “involution” when applied to the Chinese economy describes the cutthroat competition that has developed in the country among goods manufacturers as well as service providers within the platform economy.
We described last month how a BYD Dolphin Surf EV car sells in China at one fourth of the price it sells in the UK ($9,700 in China vs $34,100 in the UK). Of course, this is the result of import tariffs imposed by the UK, but it is also the impact of extreme competition that has developed among car manufacturers in China. With as many as 129 local brands selling EVs according to consultant AlixPartners, there is widespread overcapacity across the auto industry. It has resulted in auto manufacturers’ total profits falling by 12% YoY in the first five months of the year according to the National Bureau of Statistics, while the average profit per car dropped from RMB20,000 ($2800) in 2022 to RMB14,000 ($1950) at present, according to the China Passenger Car Association.
In the field of services, we decided to describe this month an example we came across of a bubble tea drink normally priced by a shopkeeper in China at CNY19 ($2.65). The drink is now subsidised up to CNY6.40 by the shopkeeper because of intense competition and because of the pressure imposed by the delivery platforms. In return those platforms which will deliver the drink to the customer (Meituan, Alibaba or JD.com) subsidise the bubble tea drink CNY9.60. In other words, the customer only pays CNY3 (instead of CNY19), while the shopkeeper only receives CNY12.60. But after paying the delivery fee and the platform commission, the shopkeeper is only left with CNY5.99, which barely covers the cost of the drink and its packaging. This heavily subsidised pricing mechanism now applies to the entire food and catering industry, from the mom-and-pop restaurant to fast food giants.
The government reacted forcefully in July as this race to the bottom is fast becoming self-destructive for the Chinese economy, forcing companies to shut down and pushing unemployment up. One key indicator is industrial profits growth that remained negative at -4.3% YoY in June following a -9.1% YoY drop in May. In July the Price Law of 1998 was amended to specify and render illegal unfair trading practices such as undercutting competitors by selling below cost, monopolising markets or for platforms to discriminate against customers by manipulating selling prices. This was the right thing to do as the spiral of deflation had become a real issue for policy makers. The next thing we should expect are industry-wide crackdowns, Meituan, Alibaba, JD.com as well as the EV car manufacturers being prime targets, in our opinion.
The same fight against “involution” hit the pharmaceutical sector in a very positive way: Since 2018 local governments ran open tenders for pharmaceutical companies to bid for provincial multi-year contracts to supply hospitals with all kinds of drugs and consumables. Under a mechanism known as Group Purchasing Organisation (GPO), the lowest bidder took the lion’s share of the tendered contract (typically 80%). Even though this was tremendously beneficial to patients as the price of drugs was typically cut by 50% to 90%, it had a very detrimental impact on the research and development budgets of pharmaceutical companies. Now that China wants to become a global leader in innovative drugs, the pricing mechanism has changed. Starting from this month, aggressive bids will be looked at suspiciously and prices will no longer be the main factor for awarding contracts. This is great news for a pharmaceutical sector that went through a very tough time ever since GPO was launched.
WORDS FROM THE MANAGER
One of the highlights of the month was the release of the second quarter results of TSMC, the world’s largest semiconductor manufacturer which acts as a bellwether for the global IT industry. Driven by the surge in demand for AI chips (TSMC is the sole supplier of Nvidia’s advanced GPUs), quarterly sales rose by 39% YoY to USD30.1bn and profit rose by 61% YoY to USD13.5bn, or 7% above analysts’ expectations. Even more important was the outlook for the full year, with sales expected to increase by 30% in 2025 (the previous guidance was mid-twenties), including AI chips sales expected to double in 2025 and to grow by 45% every year over the next five years. These numbers are probably the most scrutinised indicators within the IT industry as TSMC has the widest birds eye view over the sector as it dominates the market both in terms of technology and production capacity. Its guidance is also well known for always being very conservative.
In July we added exposure to Chinese drugmakers Hengrui Pharmaceuticals and Akeso as the industry is fast transforming itself from being largely focused on generic drugs to becoming a strong player in the field of innovative drugs. The change in regulatory framework detailed above has also allowed the sector to invest in research and development, and to generate higher profit margins. There were 1250 new innovative drugs entering into development in China in 2024, catching up fast with the 1440 innovative drugs developed the same year in the US. It was only 160 ten years ago. Big pharma companies Merck, GSK, Pfizer, AstraZeneca and Roche have all acquired over the past months the right to market globally recently developed Chinese innovative drugs. A recent Bloomberg report highlighted that out of the 50 pharmaceutical companies that generated the largest number of innovative drugs candidates between 2020 and 2024, twenty of them were Chinese, compared with only five between 2016 and 2020.
During the month we decided to add to our Asia funds some exposure to India’s largest e-commerce platform Zomato (listed as Eternal) that controls 55% of the food delivery market and 40% of the fast-expanding quick commerce sector where groceries, essentials and convenience items are typically delivered in less than ten minutes. Meanwhile, we reduced our exposure to the three main Chinese e-commerce platforms Alibaba, Meituan and JD.com as the price war currently being fought through billions of RMB spent on subsidies will inevitably hurt their profits this year.
Tencent Music was added to our portfolios in July. It is the leading music streaming platform of China with 555m monthly active users as at the end of the first quarter. The growth of the company comes from the rising number of paying users and its low base compared to international peers: Tencent Music has a 22.2% ratio of paying subscribers whereas global leader Spotify which has 678m active users (with no presence in China) has a 39.5% ratio of paying users. Spotify has a 9% shareholding in Tencent Music.
CHINA PORTFOLIO
La Francaise JKC China Equity saw its NAV per share rise by 2.5% in July when the MSCI China index rose by 4.5%.
The cash position of the fund stood at 2.2% at the end of the month.
The best performers of the portfolio this month were two AI-related companies: Meitu, an app developer, and Suzhou TFC, a supplier of communication modules for Nvidia GPU-based servers gained 33.8% and 32.3% respectively. China Life was the third best performer, with a 20.8% gain, followed by Tencent, up 9.3%. The worst performers were Xiaomi, the mobile phone and EV manufacturer which lost 11.3% (after gaining 74% in the first six months of the year), Pop Mart which dropped by 7.7% (after tripling in the first six months), China Merchant Bank, down 7%, and BYD, the largest EV manufacturer which lost 5.8%.
In terms of trades, we added Akeso and Hengrui in the biopharmaceutical space, Kuaishou, a video platform, and Tencent Music in the internet space. At the same time we cut further our exposure to Pop Mart, the “Labubu” doll developer, to BYD and to the platform names Meituan, Alibaba and JD.com. We exited Nari Technology, the power grid automation equipment maker that failed to perform over the years we have owned it.
ASIA PORTFOLIO
La Francaise JKC Asia Equity saw its NAV per share rise by 0.7% in July when the MSCI Asia ex-Japan index rose by 2.3%.
The cash position of the fund stood at 2.3% at the end of the month.
The best performers in our Asia fund were the AI-based app developer Meitu which gained 33.8% and Samsung Electronics that finally started to perform after a year of misery, up 19.4% this month. Sheng Siong, the Singaporean supermarket chain gained 12.3% while Mediatek, the Taiwanese chip maker for wireless devices gained 9.6%.
In July the worst performing market across Asia was India, with the main Sensex and Nifty indices down 2.5%. Not surprisingly three out of the six worst performers in our portfolio were Indian (Cholamandalam down 11.6%, Shriram Finance down 10.8%, Bajaj Finance down 5.9%), alongside Xiaomi and China Merchant Bank in China, down 11.3% and 7% respectively, and SK Hynix in Korea, down 6.3% despite having published a stellar set of quarterly numbers alongside a bright outlook.
We added to the portfolio Akeso and Hengrui in the Chinese biopharmaceutical space, Eternal (better known under its trade name Zomato) in the Indian e-commerce space, and Tencent Music and Kuaishou in the Chinese internet space. We exited Dodla Dairy and CMS Info Systems in India, as well as JD.com in China as we wanted to reduce the fund’s exposure to the Chinese e-commerce space.
ESG HIGHLIGHTS OF THE MONTH
At the start of July, the European Commission unveiled a new proposed climate target, which seeks to cut the EU’s net greenhouse gas (GHG) emissions by 90% by 2040 relative to 1990 levels. This new proposal is set to amend the EU Climate Law, which was first adopted in 2021 and enshrined in legislation the EU’s objective of achieving climate neutrality by 2050. Besides this 2050 goal, the 2021 law also established a binding EU climate target: reducing net GHG by at least 55% by 2030 compared to 1990 levels.
Later in the same month, the European Commission also announced that it had adopted a set of “quick fix” amendments to the European Sustainability Reporting Standards (ESRS). These amendments delay the introduction of new requirements for large companies that are already reporting under the Corporate Sustainability Reporting Directive (CSRD). The move comes as the EU is in the midst of a major revision of the CSRD, with the aim of significantly lightening the sustainability reporting and regulatory load on companies.
In contrast, the China Securities Regulatory Commission (CSRC) strengthened ESG reporting requirements. Starting in July, under its revised disclosure rules, listed companies are mandated to publish sustainability reports. This represents the first time that ESG disclosures have become legally binding at the ministerial level, with requirements to align with exchange-specific guidelines and penalties for non-compliance.
Towards the end of July, during a high-level summit in Beijing, Chinese and EU leaders issued a joint climate statement ahead of COP30. While the agreement places emphasis on clean energy and green technology, it does not go so far as to commit to reducing coal use. Nevertheless, this partnership signals a positive step in global climate diplomacy, particularly at a time when U.S. leadership in this area seems to be lacking.
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