September 2025
THE CIO’S PERSPECTIVE
The details of the agreement reached in London in June between US and Chinese negotiators remain to this day under wrap. However, the consequences of this agreement are now for anyone to see. Taken as a whole, exports by China of refined rare earth to the rest of the world have resumed: A total of 5577 metric tons were shipped out in July, up 75% over June, the highest level since January when the crackdown on rare earth exports started, and up 5.7% from the volumes shipped in July 2024. Total volumes exported for the first seven months are down 15% YoY, which does not look like a big drop. But digging into the details of these exports broken down into each of the 17 rare earth elements, the picture is completely different.
For those rare earth magnets used mainly in the automotive sector and with limited military applications, China has indeed resumed exports over the past two months after having alienated European and Indian car manufacturers that found themselves in the position of collateral victims of the US-China trade war. Given the reshaping of the world and the setting up of new alliances away from the United States, China certainly does not want to be seen as being hostile to the European Union and to India.
However, for those rare earth magnets used specifically for military applications, the Chinese export ban is still very much intact, and it remains China’s most critical bargaining chip. The main target is obviously the United States military contractors: exports from China of refined germanium (symbol Ge) was down 95% in June compared to January (no data published for July) while exports of refined antimony (symbol Sb) were only 74 tons in July, when such exports are typically over 1000 tons per month. Refined germanium is used in optic thermal imaging for night vision equipment used by military personnel. It is also critical to missiles guiding systems, with China holding an 82% global market share. Refined antimony is used in flame retardant equipment for firefighters and for the military as well as for military infrared detection equipment. China’s global market share for refined antimony is 85%.
Not surprisingly, China decided in August that it would stop publishing statistics about rare earth export quota altogether as the topic is now considered a matter of national security.
In return for a relaxation of export quotas for refined rare earth used in electric vehicles, the London agreement allowed Nvidia to resume the export of its H20 AI accelerator to China and for AMD its MI308 AI chip, to the discontent of the security hawks in Washington. But surprisingly, after obtaining the lifting of this export ban, the Chinese government asked all AI companies across China to refrain from buying such chips. It is believed that these chips can be used as spying tools. The Chinese government is also probably thinking that locally produced Huawei’s Ascend 910C chip is as performant as Nvidia’s H20.
For the first time this month we saw some noteworthy pushback against AI development. Both ChatGPT 5.0 and DeepSeek 3.1 were released in August, one American and one Chinese, and both were flops according to IT specialists who tested the products and ended up sharing their disappointment. We also learned about the fast-growing rebellion coming from Gen Z members against AI and its negative excesses. Such rebellion is largely expressed through Instagram and TikTok, where the word “clanker” is increasingly used to slander fake videos, AI generated songs and all other trash derived from AI technology. This is a phenomenon that needs to be closely monitored as we have significant direct and indirect exposure to the AI theme: If it was to grow out of control, it may well push the hyperscalers (Amazon, Meta, Alphabet, Microsoft, Oracle) into cutting their massive capex budgets which currently stand at an astounding combined USD381bn for this year (up from USD254bn last year), or 63% and 22% of their anticipated operating cash flow and sales, according to Jefferies.
The Chinese equity market is in a sweet spot at present. It has outperformed most markets in the world so far this year with volumes on the Hong Kong stock exchange more than doubling over last year. The “anti-involution” crackdown we discussed last month – forcing companies to stop excessive competition that destroys margins – is a clear positive for investors sentiment, even though there is evident downside risks to the economy and to GDP growth: fixed assets investments saw a 5.3% YoY sudden contraction in July, the worst print ever outside of the pandemic while manufacturing investments declined by 1.9% YoY in July following a 6.1% growth in June. Another market boost came from China’s stand against Trump’s policies. Finally, the recent message conveyed by Fed’s chairman Powell at Jackson Hole is also a positive given the impact forthcoming US interest rates cuts should have on the dollar index, and its mechanical consequence for emerging market equities.
Back to the trade war issue, we saw Prime Minister Modi of India clearly upset by Trump’s decision to double tariffs on exports from his country to the US from 25% to 50% as “punishment” for buying Russian oil. Modi was even more upset that the European Union which buys large quantities of Russian oil refined in India and shipped to Rotterdam and Antwerp was not targeted. Nor was China, another large buyer of Russian oil. An article published in August in the Financial Times by Peter Navarro, senior counsellor to Donald Trump, was probably another nail in the coffin of US-India’s friendship. Navarro bluntly stated that India could only use the US dollars it earned from exporting goods to the US in whatever way the United States dictates, and no other. Modi’s reaction was to reach out in fast succession to Xi, Lula da Silva (who was hit by a similar doubling of tariffs on exports from Brazil to the US) and Putin to set up an anti-US coalition that may accelerate the reshaping of world trade.
Still in India, Modi’s decision to simplify and cut GST rates (or VAT as it is called in many countries) should be a boost to discretionary consumption. In essence, out of the five rates that currently exist (0%, 5%, 12%, 18% and 28%), Modi wants to get rid of the 12% and 28% rates and move the goods that fall under these rates to the lower rates of 5% and 18% respectively. Most impacted in a positive way will be sales of smaller cars (up to 1500cc), smaller motorbikes (up to 350cc), home appliances, cement, carbonated drinks and many other product categories. Analysts reckon this measure should cut fiscal revenues by 0.2% to 0.4% of GDP while reducing inflation by 50 to 60bps once passed. And this is where complexity starts: India being India, all states will need their local parliament to approve the decision. And that may not be an easy task as GST can be a very significant portion of tax revenues for some of them, such as Bihar (57%), Gujarat (51%) or Uttarakhand (47%).
The timing of Modi’s decision to stimulate the Indian economy through fiscal relaxation is probably related to the doubling of export tariffs to the US as much as it is the consequence of a slowdown in corporate growth that can be witnessed across all sectors. Sales growth in fiscal Q1 (ending June) for the Nifty index constituents was only 7% YoY, and earnings growth 7.9%. It has been the fifth consecutive quarter of single digit YoY growth. And that explains why the Indian market has underperformed the MSCI Emerging Market index over the past 12 months by the most it did in 15 years. We believe the fiscal stimulus described above alongside another 25bps rate cut expected in October will reinvigorate the Indian economy and should have a beneficial impact on the Indian equity market.
WORDS FROM THE MANAGER
Monthly Performance
The mood around Chinese equities has been euphoric over the past weeks, essentially driven by strong liquidity flows. It is a sentiment we had not seen for quite some time, and it is directly related to the “anti-involution” campaign launched in July as well as the strong stance the Chinese delegation has taken when negotiating in London with the American one. The outcome of these meetings went far beyond anything that market participants had been expecting, as we saw with the relaxation of exports to China of Nvidia H20’s graphics processing units (GPU).
Interim results published in August were another catalyst as numbers in general were good, most of the Chinese companies we own beating analysts’ estimates. In India where we also have significant exposure, quarterly results were in line, with no major surprise in either direction. Two bad sets of results to highlight in China and that were anticipated by the market related to the food delivery sector. The market leader Meituan fought back against the aggressive entry of JD.com into their space, both of them paying billions of RMB in cash subsidies to attract consumers orders. The price war led to a 51% YoY drop in profit in Q2 for JD.com, and a 97% YoY drop in profit for Meituan. This is precisely the type of corporate behaviour the anti-involution campaign is targeting.
In terms of market performance, one sector that underperformed significantly in August was the Chinese banking sector, and it has everything to do with the decline in fixed asset investments discussed in the previous section. For the first time ever, new RMB loans contracted month-on-month: -50bn RMB in July compared to +2240bn RMB in June. Focusing specifically on households – which are critical to assess domestic consumption – new short term loan demand was -383bn RMB while long term loan demand was -110bn RMB. For corporates, short term loan demand was -550bn RMB while long term demand was -260bn RMB. The latter number is an all-time low and the first negative print since April 2016. We reckon the negative corporate loan numbers are due to the anti-involution campaign as the government seems to be determined to crack down excessive competition. In other words, it is not a good time to add capacity and start a price war with competitors. As to households, sentiment is not improving as property prices and transaction volumes keep on dropping month after month. On the back of these negative loan growth numbers, we decided to cut our exposure to Chinese banks.
On the positive side, we had excellent interim results from the internet sector (Tencent, Tencent Music, Kuaishou, Meitu, Trip.com), from auto supplier Fuyao Glass, from AI equipment supplier TFC Optical, and another stellar set of numbers from Pop Mart, the company behind the Labubu plush toy.
CHINA PORTFOLIO
La Francaise JKC China Equity saw its NAV per share rise by 6.7% in August when the MSCI China index rose by 4.2%.
The cash position of the fund stood at 4.0% at the end of the month.
The best performing companies of the portfolio in August were Suzhou TFC Optical, the supplier of equipment to Nvidia’s systems, up 84%, Pop Mart, the plush toy company that invaded the world with its Labubu doll, up 32%, Zhaojing Mining, the largest gold mining of China, up 23%, and Zijin Mining, the main copper mining company of China that also extracts gold, up 23%. The worst performers were food delivery company Meituan, down 16%, followed by banking heavy weights China Construction Bank, Bank of China and China Merchant Bank, down 6.3%, 5.2% and 5.1% respectively.
In August we reduced the exposure of the fund to Chinese banks following dismal credit growth numbers for the month of July, and we rotated the money into the healthcare and the online entertainment sectors that are both enjoying strong tailwinds. More specifically, on the entertainment front we increased our exposure to Tencent Music (the Chinese equivalent of Spotify), Kuaishou (the main video platform) and we introduced Damai Entertainment, the largest event ticketing platform that belongs to Alibaba. On the healthcare front, we added to Hengrui and Akeso, two pharmaceutical companies, while we introduced JD Health, an online drug distribution platform and Wuxi Apptec, the largest Chinese Contract Research and Manufacturing company for global pharmaceutical groups.
ASIA PORTFOLIO
La Francaise JKC Asia Equity saw its NAV per share rise by 3.6% in August when the MSCI Asia ex-Japan index rose by 1.1%.
The cash position of the fund stood at 2.7 % at the end of the month.
The best performers in August were Taiwanese testing equipment company Chroma ATE, up 35%, mining companies Zhaojin Mining and Zijin Mining, both up 23%, followed by Fuyao Glass, the automobile glass panel maker, up 22%. The worst performers were the Korean electronic microscope developer Park Systems, down 7.3%, Indian finance company Shriram Finance, down 7.3%, Chinese bank China Construction Bank, down 6.3% followed by Indian bank ICICI, down 5.4%.
In August, the fund reduced its exposure to Chinese banks and rotated into the Chinese pharmaceutical sector by adding Wuxi Apptec, the largest Contract Research, Development and Manufacturing company of China that has most global pharmaceutical companies as clients. The fund also increased its exposure to Tencent Music and Trip.com, the leading music streaming and the main travel booking platform of China.
In India, the fund increased its exposure to Eternal, better known by its flagship brand Zomato, the main food delivery platform of the country, and Mahindra and Mahindra, the auto manufacturer that leads the country in terms of transition towards electric vehicles.
ESG HIGHLIGHTS OF THE MONTH
In early August, the European Central Bank (ECB) announced it would integrate a “climate factor” into its collateral framework. This measure penalises assets with high exposure to climate-related transition risks by adjusting their value when used as collateral for central bank loans. The policy creates a crucial financial buffer against potential climate shocks and sends a powerful signal to markets that high-carbon assets are inherently riskier, promoting a shift toward more sustainable financial practices.
Across the Atlantic, the regulatory approach could not be more different. The U.S. Environmental Protection Agency (EPA) proposed rescinding the landmark 2009 Greenhouse Gas Endangerment Finding. This move would effectively dismantle the legal foundation for the federal government to regulate greenhouse gas emissions from major carbon-intensive industries, including the automotive and energy sectors.
In late August, China announced that it would impose absolute emissions caps in selected industries beginning in 2027, marking a major shift in the country’s approach to carbon regulation. The announcement also detailed a roadmap to expand its national carbon market into a fully established emissions trading scheme (ETS) by 2030. This builds on a prior commitment to broaden the market beyond the power sector to cover steel, cement, and aluminium—sectors that collectively account for approximately 60% of the country’s greenhouse gas emissions.
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