Global Economics

No Relief for Chinese Shares


China's domestic equities market suffered last month after the Sichuan earthquake, which added to already mounting concerns about inflation

The Sichuan earthquake, which added to already mounting concerns about inflation, weighed heavily on China's domestic equities market last month, according to Lipper data.

Open-end China equity funds posted a loss of 7.0% on average last month, with the average January to May loss reaching 30%. Last month, mixed-asset aggressive, target maturity, and mixed-asset flexible portfolios declined more than 5% on average.

Fixed-income funds fared much better last month. Money market CNY and bond CNY portfolios rose an average of 0.25% and 0.19%, respectively.

Qualified domestic institutional investors (QDII) posted an average loss of 0.61% in May, but they outperformed all domestic classifications. However, the IPO of new QDII funds went from bad to worse, reflecting investors' cheerless outlook, according to Xav Feng, head of research for Taiwan and China at Lipper. The funds are down 12.72% year-to-date, performance-wise.

Qualified foreign institutional investors (QFII) posted an average loss of 7.29% in May, bringing its January to May average decline to 27.83%. All the QFII portfolios tracked by Lipper posted a loss last month.

Of the nine QFII portfolios that reported end-May AUM figures to Lipper, only two funds reported net inflows: PCA China Dragon A Share Equity A-1 Class C (with AUM up +15.58%) and JF China Pioneer A-Share (with AUM up +2.78%). The AUM of iShares FTSE/Xinhua A50 China Tracker and WISE-CSI 300 China Tracker fell 9.67% and 7.70%, respectively.

In total, the net assets of the 19 QFII funds tracked by Lipper declined $7.837 billion in May from $8.307 billion in April.

There are two types of QFII A funds: actively managed and passively managed. Only iShares FTSE/Xinhua A50 China Tracker and WISE-CSI 300 China Tracker are passively managed; they are also index-tracking and exchange-traded funds (ETFs). The average performance of the passively managed QFII funds was inferior to the actively managed ones in May; they were also more volatile, while with higher sharpe ratios for the recent one-year period.

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.

"China's earthquake fuelled inflationary expectations, but the overall economic impact of the disaster should be small because it was confined to a remote area. China's economy should continue to develop steadily without galloping inflation in 2008," Xav says. "However, the hour before the dawn is the darkest and investors' confidence is fragile. The China market is still in a downturn and is testing a market bottom."

Average performance of fund groups in China in May:

Money Market CNY +0.25%

Bond CNY +0.19%

Guaranteed -0.11%

Mixed Asset Other Conservative -1.93%

Mixed Asset CNY Balanced -3.94%

Mixed Asset CNY Flexible -5.21%

Target Maturity -5.47%

Mixed Asset CNY Aggressive -5.56%

Equity China -7.00%

Top performing QFII funds in May:

PCA China Dragon A Share Equity A-1 Class C -1.82%

Nikko AM China A Stock Fund -4.33%

Nikko China A Share Fund 2 -4.40%

APS China A Share -5.33%

Flexifund Equity China A I -5.44%

W.I.S.E. - CSI 300 China Tracker -8.30%

ING China A Share Fund P Class -8.30%

Hang Seng China A-Share Focus A1 -8.91%

Hang Seng China A-Share Focus -8.92%

JF China Pioneer A-Share -9.15%

Morgan Stanley China A Share Fund Inc -10.83%

iShares FTSE/Xinhua A50 China Tracker -11.73%


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