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China's red chips recapture allure

China fever once again is gripping fund managers with Asian portfolios.

After a spectacular fall from grace in the second half of 1997, China-related stocks are gradually becoming all the rage again in portfolios of stock mutual funds that focus on Asia and Hong Kong. During the past few months, some fund managers have doubled their holdings in red-chip stocks _ shares of Hong Kong companies with significant business interests on the mainland or strong mainland connections _ and in Class H shares, which are Hong Kong-listed mainland companies.

The China bullishness has caught on among money managers worldwide. In an April survey of Asia-based fund managers that run portfolios for United States as well as offshore investors, investment bank Merrill Lynch and polling organization Gallup found that bulls on China outnumbered bears by 48 percent. Just a month earlier, bears on China had outstripped bulls by 4 percent.

"In searching out more value, China has been the place to be," said Lisa Chow, fund manager at Guinness Flight Hambro Asia Ltd. and manager of the $15-million Guinness Flight Asia Fund. The fund she manages has about 20 percent of its assets in China-related stocks, she said, up from 10 percent in January and just 2 percent in July 1997. Chow also helps oversee several U.S.-registered Asia funds that have recently increased their China holdings, she said.

And the boosting isn't likely to stop yet. Many fund managers say they expect to continue adding to their funds' holdings of China-related stocks.

The resurgent interest is the latest about-face for a sector that has zigzagged sharply in the past 18 months. During the first half of 1997, prices of many China stocks skyrocketed, fueled in part by cheap acquisitions from mainland parent companies. But by August, as several Asian currencies began to depreciate and stock markets around the region wavered, fund managers began pulling out of China stocks. Their share prices crashed to earth. The Hang Seng China-Affiliated Corporations Index dropped 75 percent between the end of August and mid-January.

The change of heart since then has been triggered in part by a series of sweeping changes undertaken by the Chinese government. Reforms announced in March, just before the start of the annual meeting of the National People's Congress, included slashing the number of government and Communist Party officials by as much as half.

Optimism about China also has been fueled by the appointment last month of Zhu Rongji, China's economic czar, as prime minister. Zhu, who is credited with helping engineer a soft landing for China's economy several years ago, is viewed as more open to ideas from the West than his predecessors were.

"I'm certainly feeling more comfortable with China stocks after the National People's Congress," said Billy Chan, a director at LGT Asset Management Ltd. "The Chinese government is seen to be more proactive now." Chan said his company's $100-million GT Orient Fund has 15 percent of its assets in China-related shares, up from 10 percent in January.

Other fund managers are buying into China shares by default. With most Asian countries laid low by worries about corporate-debt levels and the painful road of reform ahead, China is regarded as one of the few spots in Asia in which to seek shelter from the storm during the next few months. Although economic growth is slowing amid worries that exports will be hit by newly cheap goods from neighboring countries, China still is expected to generate relatively robust economic and corporate-earnings growth in 1998.

Chung Man Wing, a fund manager at HSBC Asset Management Hong Kong Ltd., predicts that China's economy will grow 7 percent to 8 percent this year. Corporate earnings among China-related companies, he figures, will grow about 12 percent. That compares with the minimal economic growth and flat earnings he expects in Hong Kong. Mainland "China is one of the areas in Asia exhibiting decent growth prospects," Chung said.