Rush to Chinese fund investments gets a red light

Posted on : 2007-10-18 12:13 KST Modified on : 2007-10-18 12:13 KST
Analysts advise consumers not to put their eggs all in one basket

Recently, a man in his 50s visited a local brokerage and asked to open a Chinese equity fund account in which he wanted to put as much as 200 million won. He said, “The money is needed in a year to pay for an apartment, but I want to put all of it on a Chinese equity fund.” Though a brokerage clerk advised him not to do it, he deposited his money into two funds, with 60 percent on a local equity fund and the rest on a BRICs product. A similar case was reported in another brokerage company when a customer asked to invest 25 million, which he borrowed from a bank to pay for a house he is going to rent, but the request was rejected by a company clerk.

With the Chinese economy expanding at breathtaking speed and its stock markets going up every day, an increasing number of local investors are rushing to jump on the bandwagon and open China-related fund accounts.

In October alone, Korean investors put additional 6.7 trillion won into Chinese equity funds, compared with a monthly increase of 257 billion won and 923 billion won reported in February and March, respectively.

By contrast, money bound for funds in Japan and in European countries has been on a steady decline since June and August. Park Hyun-cheol, an analyst at Merits Securities, said, “Money is moving fast to Chinese funds as return on investment there has soared more than 170 percent annually.”

Experts, however, express caution against an “all-in” investment in Chinese funds as the stock markets of the mainland have reached the bubble phase. The PER for the Shanghai composite index and the H index jumped to 55.5 and 30.3, compared with a global average of 14. The PER is the main gauge of how much stock prices have grown based on their ability to bring profits.

Lee Seok-jin, an analyst at Samsung Securities, said, “In 1929, just before the Great Depression, the Dow industrial average index saw its PER surge to 28. In the late 1980s, the PER of Japan’s stocks surged to 90. Currently, Chinese stocks are rapidly going up due to ample liquidity, but if that liquidity decreases, it could pop the bubble any time.”

Choi Hong, an analyst at ING Investment Management, said, “It is highly likely that the Chinese market is facing a crisis since many companies on the mainland lack transparency and a large part of the money invested there seems to have come from loans borrowed on poor credit.”

Banks, which sell most of the equity funds, have recently ordered their branches to advise their customers not to put all of their money in Chinese fund accounts. Kookmin Bank earlier this month directed all of its branches to advise customers against investing in China.

Experts cite diversified investment as one of the most important strategies. Jo Wan-jae, an analyst at Samsung Securities, said that it is better to consider such funds by investing not just in China but also in India and and the other BRICs countries of Brazil and Russia.

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