• 
• 

Published on April 3, 2008

There was a scene in the '70s film called "Chinatown", in which a private detective played by Jack Nicholson had his nose sliced by a thug as he investigated corruption in a water company.

Similar pain is akin to what investors in China-related stocks and funds are experiencing. They knew that their noses led them down the right track but why the sharp pain now? As values keep plummeting, could experts have been wrong in being so upbeat about China? Should investors hold on, or bail out?

The negative sentiment has prompted TMB Asset Management to hold a seminar on investment in China later this month to quell any misconceptions.

"There have been quite a number of calls recently [from investors in the TMB China Equity Index Fund] to ask about the situation," said Jotika Savanananda, chief executive officer of TMBAM. There are reasons to be concerned as returns have dropped by 35.31 per cent since its launch in September last year.

It was unfortunate timing as the fund was launched just a month before Chinese stocks started a correction phase.

For the past 22 days, the Hong Kong-listed iShares FTSE/Xinhua A50 that tracks the FTSE/Xinhua A50 Index Fund, which is the TMB fund's feeder fund, has had a rolling volatility rate as high as 60 per cent. Its one-year volatility rate of close to 30 per cent is more typical of emerging markets.

The swing might look scary, but it is considered less worrying since A50 refers to the top 50 A-share companies with the largest market caps. The correction came amidst much-publicised record inflation that put pressure on both producers and consumers.

Since the Chinese government cut special tax rebates for more than 2,000 items, manufacturing costs have risen by between 14 per cent and 17 per cent, according to data from the American Chamber of Commerce in China.

The new labour law, introduced last year, stipulates mandatory pension and other benefits for workers, which has further put pressure on operational costs.

But not everyone sees gloom and doom. Remember books that predicted the "imminent collapse" of China that came out a few years back?

"The fundamentals are still very strong in China," said Jotika, and getting stronger, she added. More roads, airports and other logistical infrastructure are being built, she said.

"Various government policies - particularly on required deposit reserves for banks and exchange rates - have been put in place to cushion what seems to be a global slowdown.

Beijing has been encouraging manufacturers to move inland to provinces such as Sichuan and Hunan. China Daily, the state-owned newspaper, has even touted Anhui as the next Guangzhou. Such a move will ease pressure on coastal provinces and China's unbalanced demographics.

William Fung of Li & Fung told Business Week last month that inland property was still cheap. Easy to say for a company that does not own a square foot of factory space.

"The solution to high prices in China is more China," Fung said.

Jotika said that fund money circulating the globe right now, taking a detour into commodities, would eventually return to China - or at least emerging Asian markets.

Although past performance is no indicator of future success, it should be noted that the tracker fund has a 367-per-cent return since its inception in 2004. And if you look at the graph, the dip albeit steep, should soon be on the rise.

Ki Nan Tsui

The Nation