China bulls bite bullet to stay hopeful

After I wrote a relatively bullish article on China-themed funds, I became the butt of many jokes among my colleagues.

In only a short few months, net asset values for most of these Chinese foreign-investment funds (FIFs) have plummeted at an astronomical rate. Many holders have seen their investments halved.

But my stance remains the same: Chinese investment is a good value in the medium and long term.

The main problem with Thai FIFs investing in China - or most equity FIFs here, for that matter - is timing. Take the United Greater China Fund, the feeder fund of the UOB Smart-Growth China Fund of UOB Asset Management (UOBAM). It has been around for more than a decade, and its 10-year return as of last month was about 11 per cent. Investors have been taking profits since two years ago, CEO Vana Bulbon said yesterday.

If you look at the graph, UOBAM's Thai fund invested in the Singaporean fund just as it started to dive.

The same goes for the China Equity Index Fund of TMB Asset Management (TMBAM). Last Friday, the company held a seminar to answer questions investors in its China fund had as they watched the net asset value drop to about Bt5. Managing director Jotika Savanananda was cornered by the seminar's host and forced to apologise for the fund's lacklustre performance.

But there is no reason to apologise. Investment is not some magic beanstalk that can grow perpetually.

The current climate of global stagflation has affected not only the developed economies, but also emerging markets.

Readers of financial newspapers may have noticed that aside from Tibet and poorly built schools in Sichuan province, China has been taking the heat over issues ranging from its governance to its control of the yuan.

For those who believe in economic fundamentals, UOBAM's Vana would assure you that China's fundamentals are strong. Jotika said the same thing earlier this year just as TMBAM's China Equity Index Fund started to correct itself.

Both believe in Beijing's desire to create 40 Shanghais. China's spending on infrastructure has been growing at 70 per cent a year, said Vana.

Correspondingly, statistics show copper imports have grown sixfold since 2003.

In only a few years, China has become the biggest consumer of timber, with demand reaching almost US$4 billion (Bt134 billion) two years ago and growing at 6 per cent a year, compared with about 1 per cent in the US.

And with the Chinese government's five-year development plan in place, Vana believes its $1-trillion trade surplus will be channelled to these mega-projects.

She said that with their standard of living constantly improving, Chinese are spending.

Questions of enforcement aside, China has already rolled out legislation since last year, such as the Partnership Enterprise Act and the Labour Contract Act, to apply some law and order to its overheating corporate sector.

The Chinese central bank's decision to raise the threshold for commercial-bank reserves has steadied businesses somewhat, Vana said.

"Look for signs when the Chinese government is able to take control of its inflation," she said. "Then you may start to buy."

That is, if you believe in the graph's upward thrust.

But for now, with inflation at an 11-year high, investors must be cautious.