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Global Economics

China Funds Break from Inflation Woes

February was a good month for Chinese funds, but one expert says conservative investors should stick with bonds to beat inflation

All China open-end mutual fund categories posted gains in February, according to data from Lipper.

The equity category was up 1.2%, the mixed-asset aggressive category was up 1.04%, the mixed-asset flexible category up 1%, and the mixed-asset balanced fund category increased by 0.66%. All fund categories are still down performance-wise over a six-month period, however, reflecting concerns over the mainland's economic growth and how this affects inflation as well as a US-led global economic slowdown.

Qualified foreign institutional investor (QFII) funds posted an average decline of 1.26% in February, with the portfolios continuing to be affected by redemptions. The average loss of QFII funds over the last six months has reached 11.59%.

Only mainland investors and those with QFII quotas can invest in local yuan-denominated China A-shares. China launched the QFII programme in mid-2003 to allow approved foreign institutions to trade A-shares and bonds on the Shanghai and Shenzhen exchanges. The programme was part of the government's efforts to open China's capital market and ease controls on the capital account, under which the yuan isn't fully convertible.

In February, Lipper tracked data from 19 QFII funds and estimates that the total assets under management of those funds are around $6.66 billion. In January, Lipper tracked 20 QFII funds, which had $7.68 billion in assets.

Meanwhile, the Shanghai and Shenzhen 300, or CSI300, index posted an average return of 1.17%. The index, which tracks the performance of the top 300 stocks in Shanghai and Shenzhen in terms of market capitalisation, is widely used as a benchmark by fund managers who invest in the mainland's domestic stock market.

Reflecting the performance of markets outside China, qualified domestic institutional investor (QDII) funds posted an average return of 3.32%.

Zhou Liang, Shanghai-based head of research for China at Lipper, notes that the current global economic situation is quite similar to the stagflation of the 1970s.

"Though the emerging economies such as China and India still keep high growth, they are already suffering high inflation," he notes. "For China the slowdown of the world economy will decrease the demand for China products, dragging down the growth of GDP."

Zhou suggests that conservative investors should focus on bond funds to beat inflation. Aggressive investors, meanwhile, should decrease their position in A-Share funds and increasing their position in QDII funds. The lower valuation of overseas China stocks will provide excess return with the flow of capital, he says.

Average performance of fund groups in China in February:

Equity China +1.20

Mixed Asset CNY Aggressive +1.04%

Mixed Asset CNY Flexible +1.00%

Guaranteed +0.74%

Mixed Asset CNY Balanced +0.66%

Mixed Asset Other Conservative +0.65%

Bond CNY +0.49%

Money Market CNY +0.22%

Target Maturity +0.20%

Top performing QFII funds in February:

ING China A Share Fund P Class +1.84%

W.I.S.E.—CSI 300 China Tracker +0.76%

Hang Seng China A-Share Focus -0.12%

ABN Amro China A Share Fund -0.34%

PCA China Dragon A Share Equity A-1 Class C -1.01%

iShares FTSE/Xinhua A50 China Tracker -1.50%

Morgan Stanley China A Share Fund Inc -2.00%

JF China Pioneer A-Share -2.04%

Hang Seng China A-Share Focus A1 -2.21%

Nikko China A Share Fund 2 -3.61%

Nikko AM China A Stock Fund -3.64%

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