Cash flows into China investments

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Cash flows into China investments


Global investors are turning to investments in China amid the worsening global financial woes triggered by debt-stricken countries in Europe. They feel the U.S. market is not reliable either as the U.S. Federal Reserve maintains an overly careful approach to releasing liquidity.

China has showed its intention of maintaing growth as the Chinese central bank lowered its benchmark interest rate by 0.25 percentage points on June 7. The government said it is going to provide a total of 36.3 billion yuan ($5.7 billion) to consumers who purchase automobiles with engines less than 1.6 liters and energy-saving home appliances from this month. A tax reduction plan for corporations is scheduled to be carried out in the second half of the year.

According to the Chinese press this week, the People’s Bank of China ordered banks to resume giving loans with lower interest rates to people who buy their first residences. It is the second time that the central bank has decided to cut loan interest rates for consumers since 2010.

As China has gotten proactive in its economic policy, optimism is mounting about the Chinese economy. “The Chinese economy will see recovery in growth from the third quarter,” said an analyst of the Chinese market at JP Morgan.

Increasing attention is being drawn to Chinese funds, especially private equity funds investing in mainland China, which are less affected by movements in the global economy.

Foreigners are able to make investments in so-called “H shares,” shares of Chinese businesses listed on the Hong Kong Exchange. They can invest in mainland funds if they are granted the Qualified Foreign Institutional Investors (QFII) license by the Chinese government. About 10 Korean fund management companies have received the QFII and launched around 40 equity funds in the mainland.

Capital flows prove that investors are actually moving toward private funds in the mainland. In the last three months, a total of 1.37 trillion won ($1.18 billion) has been withdrawn from equity funds in other countries, and 500 billion won from H-share funds. During that period, 10 billion won was added to Chinese mainland funds. No other overseas funds have seen capital inflows recently. Shinhan BNP Paribas Asset Management launched a fund this week, whose yields rise as the Chinese economy picks up.

Mainland funds are said to guarantee high returns. According to Fn Guide, a financial information provider, the average return ratio of those funds was 4.8 percent this year. Domestic equity funds barely hit 1.6 percent.

“Stocks in mainland China are relatively less sensitive to increasing volatility in the global economy and external shocks,” said Choi Ki-hoon at Shinhan BNP Paribas. “Mainland funds are worth investing in considering potential growth in China.”

However, risks remain. Although the Chinese mainland economy is less susceptible to external uncertainties, the government’s efforts to boost the economy may not have much effect during a time of a global recession.

“China is the most promising market among the BRIC markets [referring to Brazil, Russia, India and China], but investments still need to be made carefully as volatility will be greater in the latter part of the year,” said Jang Chun-ha at Woori Investment & Securities.

By Ko Ran []

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