VI Fund - The Global House of Cards

Dear Partners,

The current markets continue to face much volatility and turmoil in both the Chinese and American markets since our last newsletter issue. We’ll be sharing our thoughts on the current situation and how we are positioning our portfolio.


We previously mentioned that the key obstacles facing China would be:

  • Chinese developers defaulting issues
  • COVID returning with vengeance, and
  • Possibility of needing to face the consequences of taking advantage of the sanctions that the West has put on Russia and purchasing cheap Russian oil for themselves

Unfortunately, after a short recovery of the Chinese markets, these obstacles have been exacerbated. The markets which were rebounding strongly, have since started to take a step back as the issues above remain and investors are exercising more caution.

China Real Estate

It was recently reported that Chinese homebuyers are now refusing to pay mortgages due to the increasing delays in their construction projects by Chinese developers. Chinese bank shares and developer bonds have dipped in the wake of the boycott and construction firms are reportedly unable to pay their bills as the developers continue to default their payments.

House of Cards?

The Chinese developers’ defaulting issues are threatening to escalate and are likely to have a large impact on the whole value chain, which could impact a large majority of citizens.

One can say that the property market in China is their economy: the majority of the wealth of citizens is generally in properties (over 70% of China’s household wealth is in real estate). The general citizen might have owned a property to live in and have investments in a second or third property to store their wealth as real estate prices boomed for the past decades.

The notion that properties are a relatively risk-free investment further encouraged these behaviours, and has become crucial in China’s economic cycle:

The government sells land to developers as a form of revenue, and the developers in turn are a crucial cog in the economy, providing employment to many workers and the resulting supply chain. Citizens then purchase these large property projects via mortgages or savings. Seeing large profits from these, the developers were aggressive in raising funds to acquire more land for more projects, as the more they can do = the more profits they can earn.

All these are starting to unravel ever since China started to rein in the bubble in 2020 and the current situation is threatening to have a larger impact on the overall health of the economy.

China’s property sector’s output contracted for the fourth straight quarter by 7% and is currently the worst performing sector, contracting more than even hotels and restaurants which were hit by the COVID lockdowns. Home sales and property investments have dropped from a year ago by 23% and 9% respectively.

As house prices continue to decline with the loss of confidence in the asset, households will see their existing assets drop in value as well, causing a further loss of confidence if the government does not step in.

COVID returning with Vengeance

On 14th July, China reported a GDP growth of 0.4% in the second quarter as compared to the previous year, a result of the impact of COVID controls. Shanghai has just emerged from a two–month lockdown, and the lockdown has had disastrous impacts on supply chains. It was only recently when China was starting to resume normal business activity.

If we were to think we have seen the last of COVID, we are mistaken so far. Despite the general feeling of the world that COVID is no longer the fatal virus that we once believed, countries all around the world are seeing pandemic spikes keep coming back.

There are reports that new sub-variants of omicron have emerged, with a new wave of omicron BA.5 being the dominant variant in the US and Europe now. The true numbers are likely to be much higher than reported, as countries have scaled-down testing as compared to during the pandemic. There are suggestions that the virus is constantly mutating and might potentially evade antibodies from prior infections and vaccines.

An example much closer to home would be Singapore, whose reported cases are close to 10,000 despite the relaxing of reporting requirements, which leads us to believe the true number may be way more than the second wave that Singapore experienced. However, despite these, life appears to be back to pre-COVID times as we prepare to live with the virus.

The same, unfortunately, cannot be said the same for China. The new cases in China are now at the highest level since May and are threatening to climb, with authorities mentioning that the situation is severe. This may threaten the economic recovery that they were set to experience in the second half of the year, especially if they continue with the zero-COVID policy even though the signs are there that it is a matter of time before they must learn how to live with COVID.

Chinese Tensions

The situation remains tense between China and US as Russia continues its “conflict” in Ukraine due to their stance of China being “supportive” of Russia’s actions. Talks have since been arranged to clarify the air, and news of the tariffs possibly being lifted has slightly lifted the mood, although it will also be in US interests due to the ever-ballooning costs leading to inflation. Talks have been known to drag for months but having talks with clear goals is a positive step for their relationship, although anything can change.


With these threats expanding, we are still cautious about our fund.

It is likely that the government will not continue to let the property sector fail, and banks have already been instructed to help eligible property developers fund stalled real estate projects to address the main cause of the boycotts.

However, COVID is threatening to spread once again in China with the highest number of new cases since May, and the zero-COVID policy is threatening investors and spooking the markets once again on fears of another lockdown. On the bright side, Shanghai recorded only 33 cases on Friday (date?), with the rest of the 450 cases being outside the main 4 cities of Shanghai, Shenzhen, Beijing, and Guangzhou. We are actively monitoring the situation and will look to cut once there is a sign of any threat of lockdowns.

We are looking for opportunities as mentioned previously, mainly in Solar, Electronic Vehicles, Semiconductors, Infrastructure, and some small other industries, and nothing has changed. However, we have set tight limits for our positions and some of them have been triggered due to the volatile markets, which has resulted in us having a higher allocation in cash. We will be deploying them at an appropriate time.


The main headlines that have been revolving all week were the US Inflation numbers hitting 9.1% in June, the fastest since 1981. While the White House came out to mention that the numbers were steep beforehand, they tried to cushion the reaction of investors by highlighting that high energy and food prices have fallen significantly since then (as per the table below). This seemed to work, with the market accepting this and did not react despite the alarming figures.

This was a surprise – large spikes in inflation tend to lead to increased market volatility. Inflation erodes the value of companies’ future earnings or brings about higher prices for raw materials, labour, or inventory.

Although the declining prices are welcome, it is probably due to expectations that the Federal Reserves will increase interest rates to the point of tipping the economy into recession. If a recession comes, there will be lower demand for commodities as economies slow and spending decreases e.g. In a downturn –> construction slows down = less demand for copper in wiring and plumbing, leading to less demand for electronics. Energy prices are dropping as well, which can lead to lower transport fees, and in turn lower food prices.
However, the key issues remain – prices were soaring due to the lack of supply against heightened demand, and supply was made worse by the Russian-Ukraine war. The war does not look like it will end soon, with fresh attacks every day.


We believe that the market is currently behaving as though it has priced in a slowdown in economic activities, but should a recession occur (numbers will be out on 28th July), there still may be a correction coming. The earnings season over the next 6 weeks should prove useful in giving us more clues about the economy and the companies’ outlook and how they are positioning themselves for it.
With these glaring issues, there are lots of moving factors that can go wrong. Therefore, we are still cautious of the current market conditions since key issues remain.

Tho Jinliang | Investment Analyst
VI Fund Management Pte Ltd

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