Annual Report 2019

INVESTMENT MANAGER’S DISCUSSION AND ANALYSIS (CONTINUED) China Merchants China Direct Investments Limited Annual Report 2019 28 REVIEW OF INVESTMENTS (CONTINUED) As of the end of 2019, the carrying value of the Fund’s interest in Xinhua Preschool Education was US$7.08 million, representing an increase of 39.10% over US$5.09 million at the end of last year. Xinhua Preschool Education sustained an unaudited net loss of RMB4.67 million for 2019, representing a decrease in the loss as compared to last year. As the result of a new policy on preschool education introduced in November 2018, the listing of private for-profit kindergartens has been restricted and the Nanning Education Bureau has slowed the approval process for the construction of private for-profit kindergartens. Xinhua Preschool Education is actively responding to the new policy by adjusting its strategies and adopting a greater focus on the stability of operations, pursuant to which sizable new developments will be considered only when there is more certainty in the industry with respect to the outlook for preschool education. Currently, Xinhua Preschool Education’s Xinhua Kindergarten in Hanlin Yujing, Nanning has begun trial operations, and Xinhua Kindergarten in Xingbin District, Laibin has commenced operations, and preparatory work for Xinhua Kindergarten in Port District, Fangchenggang have been moving forward. PROSPECTS The market, presently, is cautious about global economic development in 2020 and, in particular, pays attention to the ultimate impact of the novel coronavirus on the major global economies. In 2020, the China’s economy may still be exposed to downward risks with the possibility of further deterioration, mainly attributable to a few factors. In terms of external demand, manufacturing industries in developed economies are still in a downward cycle. The growth of fiscal revenue in China is under pressure, with little room for tax and fee reductions. The growth in real estate investment has been slowing. And, lastly, other factors, including the spread of the novel coronavirus, create a backdrop of uncertainty. Given that China’s economic growth in 2020 continues to show signs of slowing and its economic restructuring is in a critical period, it is expected that the operating results of the investment projects (mainly operating in China) held by the Fund will be impacted to a certain degree. The Central Economic Working Conference convened in December 2019 has identified that government policies in 2020 will closely follow the objective of building a prosperous society in a well-rounded way. They will uphold the general principle of growth and new development concept, while ensuring stability as well. They will also uphold supply-side structural reforms as a major objective, along with greater openness as an impetus to promote quality development. They will strive to complete the “three critical missions” and work well with the “six stabilities.” In particular, “stability” will be the first priority, with stability in growth and employment as core requirements. In addition, efforts will be made to push ahead with counter-cyclical adjustments and optimise the synergy, transmission and implementation mechanisms for fiscal, monetary and employment policies. They will also work aggressively to deepen reforms in the economic system with respect to state-owned assets, state-owned enterprises and fiscal and taxation systems, etc. As the country is still fighting hard against the novel coronavirus, it may be difficult to make a complete and accurate assessment of the impact of the epidemic on China’s economy. Given that China’s economy shows both resilience and great potential, its long-term economic outlook for prosperity has not changed and the potential for investment demand remains strong. As an example, the AI industry and new-type infrastructure construction will continue to receive greater support from government policies, as well as more attention from capital markets. With the advent of the big data era, along with improvements in algorithms and enhancements in the accuracy of unsupervised learning, AI may enter a period of rapid growth in which “big data + AI” will profoundly change the structure of traditional industries. It is here that the Fund will continue to seek out the best opportunities for investment.