Fickle investors burden China's funds

By Charlie Zhu - Analysis

SHANGHAI (Reuters) - When Chinese civil servant Dai Wei recently made a down payment on a home in Shanghai, he used the profits from two hot mutual funds he bought two years ago.

While Dai, married with a daughter, is left with little cash, he is saving avidly to plough more money into fund products that have boomed on the back of China's 18-month stock market rally.

"Last week I bought another stock fund. I put in 6,000 yuan ($795). I will definitely buy more when I have money. I can easily get a 100 percent return by the 2008 Olympics," he said.

Dai is one of millions of individual Chinese investors pouring cash into the country's fund sector, where assets under management have ballooned to 2 trillion yuan ($265 billion) -- much of which was added over the past year -- as investors rush to tap the surging domestic stock market.

But feverish fund investment has started to make some fund industry executives worried.

They fear that retail investors -- who dominate the fund sector -- may flee as quickly as they flocked into funds if the stock market heads into a downturn.

"Investors' expectations for returns are high. There needs to be an education process," Steve Lee, chief executive of HSBC Jintrust Fund Management, HSBC Holdings Plc's (HSBA.L: Quote, Profile, Research, Stock Buzz) (0005.HK: Quote, Profile, Research, Stock Buzz) Chinese fund arm, told the Reuters China Century Summit, held at the Reuters office in Shanghai.

CRASH FEARS

Many fund managers believe China's A-share market bull run is far from over. But some see signs of overheating.

The Shanghai composite index .SSEC has quintupled since early 2006. A-shares trade at an average premium of 65 percent to their Hong Kong-listed counterparts (H-shares).

"Many fund management companies here would have to demonstrate their ability to perform in a bear market," said Gabriel Gondard, deputy chief investment officer of Shanghai-based Fortune SGAM Fund Management Co.

Fearing that a collapse in the A-share market would scare away fund investors, fund houses are aggressively pre-marketing new products that invest client money overseas under the Qualified Domestic Institutional Investor (QDII) scheme.

"If we only focus on just one market, it will be hugely risky for our clients as well as the company itself," Mandy Wang, chief executive of China International Fund Management, JPMorgan's (JPM.N: Quote, Profile, Research, Stock Buzz) China asset management venture said at the summit.

Chinese fund firms are the envy of their overseas peers as the industry's explosive growth brings hefty profits. A new fund in China can easily raise 10 billion yuan or more within hours.

China's more than 50 fund houses raked in combined fee income of 8.5 billion yuan in the first half, quadruple the figure from the year-ago period, local media said.  Continued...