China Maintains Momentum as Others Slide

Liquidity turned out to be the Achilles' heel while interest rate hike was the kryptonite for the General Emerging Market (GEM) funds in the 2006 second quarter performance. ....

Morningstar Analysts 02 August, 2006 | 0:00
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China Maintains Momentum as Others Slide
Morningstar Editorial & Research Team | 2006-08-02

Liquidity turned out to be the Achilles' heel while interest rate hike was the kryptonite for the General Emerging Market (GEM) funds in the 2006 second quarter performance. Despite a splendid performance in the first quarter boosted by abundant liquidity and strong economic performance in the GEM, only China Equity maintained its momentum amid the mini-liquidity squeeze and the global rate hike.

While markets were waiting for better clarity on both inflation and monetary fronts before a rally could go on, China Equity fund remained in the spotlight which still showed a green ret

urn. With investors docking their money in the Money Market and Fixed Income for safe keeping to avoid volatility, India Equity was the instant victim in the liquidity squeeze. However, the recent pull-back of the GEM did not tarnish their accumulated returns over recent years. For the three-year trailing period through the end of June, Latin America Equity, India Equity and Emerging Europe Equity Category lead the rankings with 48.97 percent, 45.30 percent and 32.46 percent returns respectively. During the second quarter, the strongest performance of the GEM was found in the China Equity Category, which rose 2.40 percent.

Despite the People's Bank of China announcing austerity measures in late April, the overheated economy remained upbeat. Supported by strong and stable economic growth, capital market reforms, a growing institutional investor base and improving corporate governance, Moody's raised the China sovereign's outlook to 'positive' from 'stable' in early July. The strong current account position and continued build-up of foreign currency reserves provide strong buffers against unexpected exogenous shocks. The foreign reserve rose to record high of USD941billion in June due to the trade surplus, showing a big jump from USD818 billion in 2005. China's economic expansion accelerated to a 11.3 percent annual rate in the second quarter. The smooth transition in the stock conversion scheme also helped boost the market. IPOs, which had been suspended since May 2005 to facilitate the nontradable shares reform, have resumed in June 2006. The government intends to introduce a few selected H-shares and Red Chips to list in the domestic equity market. Following a successful IPO in Hong Kong that raised USD11.2 billion, Bank of China filed a prospectus on 5 June with the China Securities Regulatory Commission to offer up to 10 billion shares in the A-share market. Air China and Bank of Communications were also reported to have similar plans to raise funds in the A-share market. The iShare FTSE/Xinhua A50 China Tracker fund could face significant composition changes due to the nontradable shares reform and new A-share IPO offerings.

For the second quarter, the iShare FTSE/Xinhua A50 China Tracker fund topped the table with 26.44 percent gain. Followed with a 15 percent gap, the BOCHK Investment funds - China Golden Dragon trailed at 11.26 percent gain. For one-year return, the A50 China Tracker fund recorded a 59.45 percent return and the Hang Seng China Equity fund followed with a 54.35 percent return. The BOCHK Investment funds - China Golden Dragon came third with a 52.44 percent return.

Morningstar Editorial & Research Team can be reached at hksupport@asia.morningstar.com
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